UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-18926
For the fiscal year ended November 30, 2002
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)
5900 S. Eastern Ave., Suite 104, Commerce, California 90040
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (323) 725-5516
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 r egistrant 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Act.) Yes [ ] No [ X ]
The aggregate value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 14, 2003 was $16,234,000.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant based on the closing price of
the registrant's common stock on the NASDAQ Stock Market, Inc. as of
May 31, 2002, the last business day of the registrant's most recently
completed second quarter, was $11,596,000 million.
As of March 14, 2003 14,901,264 shares of common stock were
outstanding.
Documents incorporated by reference: The information required by Part
III (Items 10, 11, 12 and 13) is incorporated by reference to the
Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A relating to the Registrant's 2003 annual meeting of
stockholders.
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters 24
Item 6. Selected Consolidated Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Result of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 42
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 43
PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management 43
Item 13. Certain Relationships and Related Transactions 43
Item 14. Controls and Procedures 43
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 43
Signatures 48
Certifications 48
FORWARD-LOOKING STATEMENTS. Statements contained in this Annual Report on
Form 10-K and in future filings with the Securities and Exchange Commission
(the "SEC"), in our press releases or in our other public or shareholder
communications that are not purely historical facts are forward-looking
statements. Statements looking forward in time are included in this Annual
Report on Form 10-K pursuant to the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include, without limitation, any statement that may predict, forecast,
indicate, or imply future results, performance, or achievements, and may
contain the words, "believe", "anticipate", "expect", "estimate", "intend",
"plan", "project", "will be", "will continue", "will likely result", and any
variations of such words with similar meanings. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that are difficult to predict, therefore, actual results may
differ materially from those expressed or forecasted in any such
forward-looking statements.
Factors that would cause or contribute o such differences include, but
are not limited to, the risk factors contained or referenced under the
headings "Business," "Risk Factors" and "Managements Discussion and Analysis
of Financial Condition and Results of Operations" set forth below. Innovo
Group Inc. ("IGI") and its subsidiaries (collectively, the "Company")operate
in a very competitive and rapidly changing environment. New risk factors can
arise and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained
in any forward-looking statements. Given these risks and uncertainties,
readers are cautioned not to place undue reliance on forward-looking
statements that only speak as of the date of this filing.
The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances occurring
after the date hereof or to reflect the occurrence of unanticipated events.
IGI's Internet address is www.innovogroup.com, and the Company maintains a
website at that address. The Company makes available on or through its
Internet website, without charge, its annual report on From 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports, and since December 18, 2001 those reports have been made available
on our website on the day such material was electronically filed with the
Securities and Exchange Commission or if not reasonably practical on that
day, on the first business day following electronic filing with the SEC. In
addition, any materials filed with the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549 or viewed on line at www.sec.gov. Information regarding the operation
of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.
PART I
ITEM 1. BUSINESS
Narrative Description of Business
The Company's principle business activity involves the design, development
and worldwide marketing of high quality consumer products for the apparel
and accessory markets. We sell our products to over 1,000 different retail
and private label customers and to distributors around the world. Retail
customers purchase finish goods directly from the Company and then sell the
product through their retail stores to the consumer marketplace. Private
label customers outsource the production and sourcing of their private label
products to the Company and then sell through their own distribution
channels. Distributors purchase finished goods directly from the Company
and then distribute to retailers in the international marketplace.
Additionally, the Company owns, operates and invests in real estate ventures
throughout the United States.
The Company operates its consumer products business through three
wholly-owned, operating subsidiaries, Innovo, Inc. ("Innovo"), Joe's Jeans,
Inc. ("Joe's), and Innovo Azteca Apparel, Inc. ("IAA") with Innovo and Joe's
having two wholly-owned operating subsidiaries, Innovo Hong Kong Limited
("IHK") and Joe's Jeans Japan, Inc. ("JJJ"), respectively. All of the
Company's products are manufactured by independent contractors located in
Los Angeles, Mexico and the Far East, including, Hong Kong, China, Korea,
Vietnam and India. The products are then distributed out of Los Angeles or
directly from the factory to the customer.
In April 2002, the Company entered into the real estate investment
business by purchasing limited partnership interests in 22 limited
partnerships that subsequently acquired limited partnerships in 28 apartment
buildings consisting of approximately 4,000 apartment units. The Company
also owns its former headquarters located in Springfield, TN, which it
currently leases to third parties. The Company operates its real estate
business through two wholly-owned operating subsidiaries: Leasall
Management, Inc. ("LMI") and Innovo Realty Inc. ("IRI").
The Company's headquarters and principal executive offices are located at
5900 S. Eastern Ave., Suite 104, Commerce, CA 90040 and its telephone number
at this location is (323) 725-5516. The Company also has operational
offices and/or showrooms in Los Angeles, New York, Knoxville, Mexico, Tokyo
and Hong Kong and third party showrooms in New York, Los Angeles and Paris.
Operating Segments
The Company's operations are comprised of two reportable segments: apparel
and accessory, with the operations of the Company's Joe's and IAA
subsidiaries representing the apparel segment and Innovo conducting business
in the accessory segment. Segment revenues are generated from the sale of
consumer products by Joe's, IAA and Innovo. The Company's corporate
activities are represented by the operations of IGI, the parent company, and
its real estate operations are conducted through the Company's LMI and IRI
subsidiaries. The Company's real estate operations do not currently require
a substantial allocation of the Company's resources and is not a significant
part of management's daily operational functions, and thus, the Company's
real estate operations are not currently defined as a distinct operating
segment but are classified as "other" along with the Company's other
corporate activities.
General Development of Business
Innovo, a Texas corporation, was formed in April 1987 to manufacture and
domestically distribute cut and sewn canvas and nylon consumer products for
the utility, craft, sports licensed and advertising specialty markets. In
1990, Innovo merged into Elorac Corporation, a "blank check" company, which
was renamed Innovo Group, Inc., a Delaware corporation. As used in this
Annual Report on Form 10-K, the terms "we", "us", "IGI", "our", and the
"Company" refer to Innovo Group Inc. and its subsidiaries and affiliates,
unless the context indicates otherwise.
In 1991, the Company acquired the business of NASCO, Inc. ("NASCO"), a
Tennessee corporation, a manufacturer, importer and distributor of
sports-licensed sports bags, backpacks, and other sporting goods, located
in Springfield, Tennessee. NASCO, subsequently renamed Spirco, Inc.
("Spirco"), was also engaged in the marketing of fundraising programs to
school and youth organizations. The fundraising programs involved the sale
of magazines, gift wraps, food items and seasonal gift items.
In 1992, the Company formed NASCO Products International, Inc. ("NPII"),
Tennessee corporation. NPII was formed to focus on the distribution of the
Company's accessory products in the international marketplace. NPII
currently does not currently have any business activities. See "Management
Discussion and Analysis of Financial Condition and Results of
Operations-Other Income."
In 1993, the Company sold the youth and school fundraising business of
Spirco to QSP, Inc. ("QSP"). Spirco had incurred significant trade debt
from the fiscal 1992 losses it incurred in marketing fundraising programs
and from liabilities incurred by NASCO prior to its acquisition by the
Company that were not disclosed at that time. On August 27, 1993, Spirco
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. IGI,
Innovo and NPII were not parties to the filing.
In 1994, the Company formed Leasall Management, Inc. ("LMI"), a Tennessee
corporation. Leasall acquired Spirco's equipment and plant and assumed the
related equipment and mortgage debt. Leasall still owns and leases to third
parties the plant purchased from Sprico, which served as the Company's
former headquarters in Springfield, TN. Subsequently, Spirco was merged
into IGI, resulting in IGI acquiring direct ownership in the remaining
assets Leasall did not purchase. Spirco claims, which had been guaranteed
by IGI, received full payment through the issuance of shares of IGI common
stock.
In the latter part of 1998, the Company closed its domestic manufacturing
and distribution facilities in Springfield, TN and relocated its corporate
headquarters, manufacturing and distribution facilities to Knoxville, TN.
The Company's closed the Springfield facility based on the Company's need
for a more suitable facility for its manufacturing needs and the Company's
need at the time for a more skilled labor force to meet the Company's
production requirements. Additionally, in 1998 the Company had brought in
additional investors and new management, and these individuals resided in
Knoxville, TN.
During fiscal 2000, the Company restructured its operations by closing its
domestic manufacturing and distribution facilities in Knoxville and
realigning the Company's operational structure to focus on sales and
marketing. The Company also raised additional working capital and
converted certain indebtedness to equity. The restructuring was undertaken
as a condition to the equity investment by Commerce Investment Group, LLC
("Commerce"), a strategic investment partner. In an effort to reduce product
costs and increase gross profit, the Company shifted manufacturing to
third-party foreign manufacturers, including Commerce's affiliates, and
outsourced distribution to Commerce's affiliates in an effort to increase
the effectiveness and capacity of the Company's distribution network. See
Note 1 "Business Description, Restructuring of Operations" to the Notes to
the Consolidated Financial Statements.
In March of 2001, the Company formed Joe's Jeans, Inc. ("Joe's"), a
Delaware corporation, to focus on the design, production and worldwide
marketing of high fashion apparel products bearing the "Joe's Jeans" brand.
See Note 3 "Acquisitions" to the Notes to the Consolidated Financial
Statements.
In August of 2001, the Company acquired Azteca Production International,
Inc.'s ("Azteca"), a Commerce affiliate, knit apparel division and formed
Innovo-Azteca Apparel, Inc. ("IAA"), a California corporation. IAA designs,
sources and markets a wide array of apparel products to the private label
and retail market. See Note 3 "Acquisitions" to the Notes to the
Consolidated Financial Statements.
In May 2002, the Company's Joe's subsidiary created Joe's Jeans Japan,
Inc. ("JJJ"), a Japanese corporation to facilitate the distribution of the
Joe's Jeans brand in the Japanese marketplace.
Furthermore, in May 2002, the Company's Innovo subsidiary created Innovo
Hong Kong Limited ("IHK"), a Hong Kong corporation. IHK was created to
assist the Company's accessory division with the design, development and
sourcing of accessory products out of the Far East.
In April 2002, the Company formed Innovo Realty, Inc. ("IRI"), a
California corporation, to facilitate an investment in real estate apartment
complexes located throughout the United States. See "Business-Investments."
Summary of Significant 2002 Developments
General Overview
The Company, in fiscal 2002, experienced a 219% increase in revenues as a
result of the Company's consumer products division's developing, sourcing
and distributing its product lines to its existing customer base as well as
to a growing new customer base. This combined with the Company's efforts
to manage its operating expenses has resulted in the Company showing a net
profit of $572,000 for fiscal 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion
of the Company's financial performance for fiscal 2002.
In the third quarter of 2002, IGI, the parent company, relocated its
corporate offices from Knoxville, TN to the Company's existing facilities in
Commerce, CA, just outside of Los Angeles. Commerce is an important center
of business in the apparel and accessory industries. The Company believes
the relocation was necessary to support the Company's future development in
the apparel and accessory business.
Accessory
Innovo. In fiscal 2002, the Company's Innovo subsidiary, which is focused
on the distribution of accessory products, grew its business significantly
compared to fiscal 2001. The growth is a result of Innovo's entry into the
private label marketplace and as a result of continued success with its
Bongo accessory product line and its craft business. Prior to fiscal 2002,
Innovo did not produce fashion accessory products for the private label
market. Consequently, Innovo experienced a growth of 114% in fiscal 2002
compared to fiscal 2001. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In May of 2002, Innovo established IHK to serve as a sourcing office in
Hong Kong. IHK is focused on the design, development and sourcing
accessory products for its parent company, Innovo.
Apparel
Joe's. In fiscal 2002, Joe's continued to establish domestic and
international brand recognition in the high-end fashion apparel industry.
As a result of increased brand recognition and heightened visibility, sales
of Joe's products increased by 504% from fiscal 2001. Joe's was formed in
February of 2001, thus fiscal 2002 results reflect Joe's first full
twelve-month cycle of business.
In May of 2002, Joe's created JJJ to market and distribute Joe's products
in the Japanese marketplace.
IAA. IAA, which was formed in August of 2001, grew its revenues by 292%
in fiscal 2002 compared to fiscal 2001. Fiscal 2002 results reflect IAA's
first full twelve-month cycle of business. The growth is primarily as a
result of an increase in revenues from IAA's private label division. In
fiscal 2002, IAA created a separate division to focus on the development of
branded product lines. IAA's branded products division has since entered
into licensing agreements with Mattel, Inc. for the licensing rights to the
Hot Wheels trademark for apparel and accessory products and with platinum
recording artist Lil Bow Wow for the right to produce apparel and accessory
products. Pursuant to both agreements, IAA has the right to sublicense the
accessory category to its affiliated subsidiary Innovo. See
"Business - Licensing Agreements."
Real Estate
IRI. On April 5, 2002, the Company through IRI, closed on a transaction
pursuant to which IRI purchased limited partner interests in 22 limited
partnerships. Subsequently, the limited partnerships purchased 28 apartment
buildings consisting of approximately 4,000 apartment units located in
various states throughout the United States. See "Business - Investments."
Principal Products and Revenue Sources
The Company's products are created and its revenues are derived through
its Innovo, IAA, and Joe's subsidiaries. Revenues generated by Innovo
represent sales in the accessory segment. The Company's Joe's and IAA
subsidiaries account for the Company's apparel segment revenues
The Company's net revenues by segment for the last three years are shown in
the table below:
2002 2001 2000
---- ---- ----
Accessories 41% 61% 100%
Apparel 59% 39% 0%
--- --- ---
100% 100% 100%
Accessory
Innovo, headquartered in Knoxville, TN, designs, develops and markets
accessory consumer products such as fashion handbags, purses, wallets,
backpacks, duffle bags, sports bags, belts, hats and scarves for department
stores, mass merchandisers, specialty chain stores and private label
customers. Additionally, Innovo markets craft products including tote bags
and aprons to mass merchandisers and craft specialty stores. Innovo's
products generally are accompanied by one of Innovo's own logos such as
Daily Denim, Tote Works and Test Tube, the brand of a private label customer
or the brand of a third party licensor such as Bongo. Innovo's revenues in
the accessory segment increased by 114% in fiscal 2002 compared to fiscal
2001. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In fiscal 2002, Innovo entered the private label accessory business. As
of November 30, 2002, Innovo produced private label products primarily for
American Eagle Outfitters, Inc. and Limited Brands, Inc.'s Express division.
Private label business accounted for approximately 26% of Innovo's gross
revenues in fiscal 2002. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Innovo anticipates continued
growth in the private label market as a result of Innovo's ability to
provide quality accessory products that are fashionably desirable at
competitive prices, however, there can be no assurances that Innovo will be
able to increase its market share in the private label business.
In fiscal 2002, Innovo's Bongo accessory product line experienced growing
demand in the retail marketplace. Gross revenues associated with the Bongo
Product line grew significantly in fiscal 2002 and represented approximately
28% of Innovo's total gross revenues in fiscal 2002. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In November 2002, Innovo solidified and extended its relationship with the
owner of the Bongo brand, by signing a four-year licensing agreement. The
agreement gives Innovo multi-year extension options based on certain
performance criteria for the bag and small PVC/leather goods categories. See
"Business - Licensing Agreements and Intellectual Property."
Innovo initially obtained the licensing rights to the Bongo trademark in
the second quarter of 2001. Innovo has since launched the Bongo line to
department stores and specialty stores across the United States, including
Sears, Roebuck & Co., Beall's, Inc., Hecht's, Foley's, Robinsons-May,
J. C. Penney Company, Inc., and Claire's Stores, Inc.
Innovo's IHK subsidiary is headquartered in Hong Kong and assists Innovo
with the development, design and sourcing of the products sold by Innovo to
its customers. IHK allows Innovo to minimize the amount of time required to
design, develop and source its products, thus allowing Innovo to react
quickly to changing markets conditions and to deliver its products in a
timely manner.
In fiscal 2002, Innovo experienced increased demand for its craft product
lines due to Innovo's ability to increase its business with its existing
customers such as Wal-Mart and Michaels Stores, Inc. and add additional
customers such as A.C. Moore Arts & Crafts. The Company's craft business
increased by approximately 62% in fiscal 2002, compared to fiscal 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following are the principal products that Innovo distributes in the
United States to the accessory and craft market:
FASHION ACCESSORY GENERAL ACCESSORIES CRAFT
Purses Travel and Tote bags Tote Bags
Hand Bags Waist Packs Adult and Children's Aprons
Duffle Bags Duffle Bags Christmas Stockings
Wallets Stadium Totes/Cushions Gourmet/BBQ Aprons
Beach Bags Insulated Lunch Bags
Tote Bags Soft Coolers
Pencil Cases
Backpacks
Waist Packs
Hats
Scarves
Apparel
Joe's. Joe's, headquartered in Commerce, CA, designs, develops, and markets
high-fashion apparel products under the "Joe's Jeans" brand. Joe's products
are typically part of a collection that includes pants, denim jeans, shirts,
sweaters, jackets and other apparel products. In fiscal 2002, Joe's focused
its efforts on establishing the Joes brand in both the domestic and
international marketplace by continuing to offer its customers and consumers a
fashion forward, quality product. In fiscal 2002, Joe's created JJJ in an
effort to establish the Joe's brand in the Japanese marketplace. Additionally,
in fiscal 2002, Joe's successfully entered the Canadian and European markets
through the use of international distributors.
Joe's believes that it has developed a strong customer base upon which Joe's
can grow its business going forward. Joe's products are sold in the United
States and abroad to upscale retailers and boutiques such as Barney's New
York, Inc., Bloomingdale's, Inc., Loehmann's, Inc., Nordstrom, Inc., Sak's
Fifth Avenue, Inc., Intermix and Fred Segal in the United States and other
complimentary retailers in the international market.
Joe's products are marketed to retailers through third party showrooms
located in New York, Los Angeles, and Paris and through its own showroom in
Tokyo. Joe's revenues increased by 504% in fiscal 2002, compared to fiscal
2001. Joe's did not have revenues in the international marketplace in
fiscal 2001. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Joe's product lines include, but are not limited to, the following:
WOMEN MEN
Denim Jeans Denim Jeans
Denim Skirts Knit Shirts
Denim Jackets
Knit Shirts
Sweaters
Hand Bags
IAA. IAA, which was formed in August 2001, focuses on marketing products
to the private label apparel market. IAA has since diversified and now
consists of two divisions, one focusing on the development of private label
business and the other on the development of branded apparel products.
Since establishing IAA's branded division, IAA has entered into licensing
agreements with Mattel, Inc. for the licensing rights to the Hot Wheels
trademark for apparel and accessory products and with platinum recording
artist Lil Bow Wow for the right to produce apparel and accessory products.
IAA entered into the agreement with Mattel in August of 2002 and IAA entered
into the agreement for the Lil Bow Wow license in October of 2002. Pursuant to
both agreements, IAA has the right to sublicense the accessory category to its
affiliated subsidiary Innovo. See "Business - Licensing Agreements and
Intellectual Property."
As of November 30, 2002, IAA's private label division primarily designed,
sourced and marketed denim jeans for J. Crew, Inc. and Target Corporation's
Mossimo division. IAA's revenues increased by 292% in fiscal 2002 compared to
fiscal 2001. IAA's branded division did not have any revenues in fiscal 2002.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
IAA's private label product lines primarily consist of knit tops and denim
bottoms for both the men's and women's market. The branded sportswear product
lines are focused around fashion oriented tops and bottoms. 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 Denim Jeans
Fleece Sweatshirts Velour Pants
Thermal Pullovers Sweat Suits
Velour Shirts
Sports Jersey's
Product Development and Sourcing
Accessory
Innovo. Innovo develops the designs and artwork for all products through
its in-house design staff. Innovo's fashion and licensed accessory products
are produced with the logos or other designs licensed from licensors or
produced bearing the Innovo's own private brands such as Test Tube and Tote
Works. See "Business-Licensing Agreements and Intellectual Property."
Innovo markets its craft products, without artwork, to be sold for finishing
by retail craft customers.
Innovo's craft products are purchased from Commerce, which manufactures
the Company's craft products in Mexico. Innovo is obligated, as defined in
the supply agreement with Commerce, to purchase all of its craft products
from Commerce through August 2004. In fiscal 2002, Innovo purchased
approximately $3.4 million of craft products from Commerce Investment Group.
See "Business Description-Restructuring of Operations" in the Notes to the
Consolidated Financials.
Innovo's sourcing office in Hong Kong, IHK, manages much of the design and
development of its products that are sourced out of the Far East. Innovo's
products are distributed out of Los Angeles through an agreement with an
affiliate of Commerce or the products may be shipped directly to Innovo's
customers located in the country of origin of the manufactured products. See
"Business Description-Restructuring of Operations" in the Notes to the
Consolidated Financials.
Innovo obtains its fashion accessory products from overseas suppliers
located mainly in China through short term manufacturing agreements. 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. See "Business-Import and Import
Restrictions."
With Innovo primarily utilizing overseas contractors that employ
production facilities located in China the products manufactured for Innovo
are subject to export quotas and other restrictions imposed 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 2003 that most if not all of Innovo's sales will be imported
products that are subject to United States import quotas, inspection or
duties. See "Business--Import and Import Restrictions."
Apparel
Joe's. Joe's product development is managed internally by a team of
designers led by Joe Dahan, which are responsible for the creation,
development and coordination of the product group offerings within each
collection. Joe's typically develops four collections per year for spring,
summer, fall and holiday, with certain basic styles being offered
throughout the year. Joe Dahan is an instrumental part of Joe's design
process. A loss of Joe Dahan could potentially have a material adverse
impact on Joe's. In the event of the loss of Joe Dahan, Joe's believes it
could find alternative sources for the development and design of Joe's
products, although there can be no assurances. See "Risk Factors-- The
loss of the services of Mr. Joe Dahan could have a material adverse effect
on Joe's business."
Joe's products are sourced through Commerce, or from domestic contractors
generally located in the Los Angeles area. Joe's is not contractually
obligated to purchase its products from Commerce. Joe's staff, however,
controls the production schedules in order to ensure quality and timely
deliveries. Commerce is responsible for the acquisition of the raw
materials necessary for the production of Joe's goods. In the event that
Commerce is unable to acquire the necessary raw materials, Joe's believes
that there are alternative sources from which the raw materials could be
acquired. The Company is currently reviewing the option of sourcing
products from international sources and/or directly sourcing the products
from domestic suppliers. During fiscal 2002, Joe's purchased approximately
$6.1 million of goods from Commerce. See "Certain Relationships and
Related Transactions-Commerce Investment Group."
While Joe's believes that there are currently alternative sources from
which to outsource the production of Joe's products, in the event the
economic climate or other factors resulted in significant reduction in the
number of local contractors in the Los Angeles area, Joe's business could
be negatively impacted. At this time, Joe's believes that it would be able
to find alternative sources for the production of its products if this was
to occur, however, no assurances can be given that a transition could be
completed without a disruption to Joe's business.
IAA. IAA's private label product development is managed by IAA's
internal design and merchandising staff or in conjunction with the design
teams of the customer. IAA's products are sourced from Mexico through
independent contractors, through Commerce or through independent overseas
contractors. During fiscal 2002, IAA purchased approximately $6.1 million
of goods from Commerce. See "Certain Relationships and Related
Transactions-Commerce Investment Group."
IAA's branded division's products are developed by its in-house design
team or through the use of outside freelance designers. IAA's branded
division will be sourcing a majority of its products out of Mexico and the
Far East, including countries such as China, South Korea, Vietnam and
India. IAA's purchases in the international markets will be subject to the
risks associated with the importation of these type products. See
"Business-Import and Import Restrictions."
The Company relies on Commerce and its affiliates' ability to source and
supply the Company's products. The Company expects its reliance on Commerce
to decrease in the future as the Company begins to purchase more of its
products from third party suppliers. During 2002, the Company purchased
approximately $15.6 million or 63% of its products from Commerce.
The Company generally purchases its products in U.S. dollars. However, as
a result of using overseas suppliers, the cost of these products may be
affected by changes in the value of the relevant currencies. See "Risk
Factors -- Our business is exposed to domestic and foreign currency
fluctuations."
Notwithstanding the supply agreement for craft products with Commerce,
the Company does not have any long-term supply agreements with independent
overseas contractors, but believes that there are a number of overseas and
domestic contractors that could fulfill the Company's requirements. See
"Business Description-Restructured Operations" in Notes to the Consolidated
Financials.
While the Company attempts to mitigate its exposure to manufacturing, the
use of independent contractors does reduce the Company's control over
production and delivery and exposes the Company to the other usual risks of
sourcing products from independent suppliers. The Company's transactions
with its foreign manufacturers and suppliers are subject to the risks of
doing business abroad. Imports into the United States are affected by,
among other things, the cost of transportation and the imposition of import
duties and restrictions. The United States and the countries in which our
products are manufactured may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing
quotas, duty or tariff levels, which could affect our operations and our
ability to import products at current or increased levels. We cannot
predict the likelihood or frequency of any such events occurring. See
"Business-Import and Import Restrictions."
Licensing Agreements and Intellectual Property
Accessory
Innovo. On March 26, 2001, Innovo entered into a two-year exclusive
licensing agreement with Candies, Inc. ("Candies") pursuant to which
Innovo obtained the right to design, manufacture and distribute bags and
small leather/PVC goods bearing the Bongo trademark. According to the
original terms of the licensing agreement, the license was to expire on
March 31, 2003. However, in November 2002, Innovo signed a four-year
agreement effective April 1, 2003 with Candies to extend the term of the
licensing agreement. The extended agreement offers Innovo the potential
for multi-year extensions tied to certain performance criteria.
Innovo pays Candies a five percent royalty and a two percent advertising
fee on the net sales of Innovo's goods bearing the Bongo trademark. In
accordance with the terms of the agreement, Innovo has the exclusive right
to sell, market, distribute, advertise and promote the Bongo products in
the United States, including its territories and possessions, Mexico,
Central and South America and Canada. Candies has the right to terminate
the agreement in the event Innovo breaches any material terms of the
agreement.
Innovo's collegiate sports-licensed accessory products display logos
insignias, names, or slogans licensed from the various collegiate
licensors. Innovo holds licenses for the use of the logos and names of
over 130 colleges for various products. Each of the collegiate licensing
agreements grants Innovo either an exclusive or non-exclusive license for
use in connection with specific products and/or specific territories. The
agreements are generally for a twelve to twenty-four month period and
generally call for Innovo to pay an eight percent royalty on goods sold
bearing the marks.
Innovo had entered into a licensing agreement with Major League
Baseball, which expired on December 31, 2002. Subsequently, Innovo has
reached a verbal agreement with Major League Baseball for an additional
twelve-month extension period for bag related products. While Innovo is
in the process of formally memorializing the agreement, there are no
guarantees that Innovo will be able to enter into a written agreement
with Major League Baseball. According to the terms of the understanding
between Innovo and Major League Baseball, Innovo is to pay an eleven
percent royalty on products sold bearing Major League Baseball logos with
Innovo having the right to sell the products to concession, club retail
outlets and premium customers in the United States.
While Innovo is continuing to develop products bearing the sport
licenses, Innovo is placing more time and resources towards developing
more fashion oriented product lines that the Company believes will have
greater potential in the marketplace.
Innovo's craft 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" and "Toteworks."
Apparel
Joe's. In February 2001, the Company's Joe's 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 upon there
being no material default at the end of each period. Additionally,
pursuant to the terms of the agreements, Joe Dahan is to receive a three
percent royalty on the net revenues of Joe's. See "Employees-Executive
Officers."
IAA. IAA has entered into a five-year licensing agreement with Mattel,
Inc. to produce Hot Wheels branded adult apparel and accessories in the
United States, Canada and Puerto Rico. Under the terms of the license
agreement, IAA will produce apparel and accessory products targeted to
men and women in the junior and contemporary markets. The products lines
will include active wear, sweatshirts and pants, outerwear, t-shirts,
"baby tee's" for women, headwear, bags, backpacks and totes, which will
be emblazoned with the familiar Hot Wheelsflame logo.
The product line, to be released in 2003, will also include items
sporting the Hot Wheels 35th Anniversary logo, as a part of the brand's
celebratory campaign for the year. IAA may terminate the agreement in
any year by paying the remaining balance of that year's minimum royalty
guarantees plus the subsequent years minimum royalty guarantees.
Royalties paid by IAA earned in excess of the minimum royalty
requirements for any one given year, may be credited towards the
shortfall amount of the minimum required royalties in any subsequent
period during the term of the licensing agreement.
According to the terms of the agreement, IAA has the right to
sublicense the accessory product's category to Innovo. The agreement
calls for a royalty rate of seven percent royalty and a two percent
advertising fee on the net sales of goods bearing the Hot Wheels
trademark. In the event IAA defaults upon any material terms of the
agreement, the Licensor shall have the right to terminate the agreement.
On August 1, 2002, IAA entered into an exclusive 42-month worldwide
agreement for the Lil Bow Wow license, granting IAA the right to produce
and market products bearing the mark and likeness of the popular stage
and screen performer. The IAA division plans to create and market a wide
range of apparel and coordinating accessories for boys and girls. The
license agreement between IAA, Bravado International Group, the agency
with the master licensing rights to Lil Bow Wow, and LBW Entertainment,
Inc. calls for the performer to make at least one public appearance every
six months during the term of the agreement to promote the Lil Bow Wow
products, as well as use his best efforts to promote and market these
products on a daily basis.
Additional terms of the license agreement allows IAA to market boys and
girls products bearing the Lil Bow Wow brand to all distribution
channels, the right of first refusal on all other Lil Bow Wow related
product categories during the term of the license agreement, and the
right of first of refusal on proposed transactions by the licensor with
third parties upon the expiration of the agreement. The agreement calls
for IAA to pay an eight percent royalty on the nets sales of goods
bearing Lil Bow Wow related marks. In the event IAA defaults upon any
material terms of the agreement, the Licensor shall have the right to
terminate the agreement. Furthermore, IAA has the right to sublicense
the accessory product's category to Innovo.
The following sets forth certain information concerning the license
agreements currently held by the Company:
Licensor Types of Products Geographical Minimum Expiration
Areas Royalties
Colleges/logos of Tote, lunch, shoe and United States $8,000 Varying
approximately 130 laundry bags, stadium expiration dates
colleges seat cushions, sports bags over 12 to 24
and backpacks month period
Major League Tote, lunch, shoe and United States N/A 12/31/02-12
Baseball laundry bags, stadium month verbal
seat cushions, sports bags extension
Candies, Inc. Bags, belts, small North & South $312,500 prior 3/31/07
(Bongo) leather/pvc goods America and U.S. to expiration
Territories
Bravado Apparel and accessories United States $75,000 prior 02/01/06
International to 01/31/05
Group, Inc.
(Lil Bow Wow)
Mattel, Inc. Apparel and accessories United States, $1,050,000 12/31/07
(Hot Wheels) Canada, Puerto
Rico
JD Design Apparel and accessories Worldwide N/A 02/11/2031
The Company 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. As we continue to expand our business in
the international marketplace, our trademarks or the trademarks we license
may not be able to be adequately protected. See "Risk Factors -- Our
trademark and other intellectual property rights may not be adequately
protected outside the United States."
The Company believes that it is in substantial compliance with the terms of
all material licenses, excluding the sports licenses previously held by the
Company's Nasco Products International, Inc.'s ("NPII") for international
markets. Historically, the Company has accrued for what it deems to be the
reasonable expense or obligation associated with these licensing agreements
in the event the Company could not successfully negotiate a reasonable
settlement with certain international licensors. During 2002, the Company
determined that it was no longer necessary to accrue for the potential
liability associated with its NPII subsidiary's prior licensing agreements in
the international marketplace because of the lack of any material discussions
or contact with the licensors over the last three fiscal years. Consequently,
Innovo reversed the accrual which the Company had previously reserved for the
potential liability associated with Nasco Products International, Inc.'s
licenses in the international licenses. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations."
Customers
Accessory
Innovo. During fiscal 2002, Innovo sold products to a mix of mass
merchandisers, department stores, craft chain stores and other retail
accounts. Innovo estimates that its products are carried by over 500
customers in over 4,000 retail outlets in the United States. Additionally,
in fiscal 2002, Innovo began to sell its products to private label
customers.
In marketing Innovo's products, Innovo 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 success rate our customers have had with our products. Generally,
Innovo's accounts are serviced by Innovo's sales personnel working with
marketing organizations that have sales representatives that are
compensated on a commission basis. Innovo's New York City showroom is used
to showcase all product lines developed by Innovo and to help facilitate
sales for all accounts.
In fiscal 2002, Innovo sold its products to private label customers such
as American Eagle Outfitters and Limited Brands, Inc.'s Express division.
Innovo currently sells it products to retailers such as Wal-Mart, Inc.,
A.C. Moore Arts & Crafts, Joannes, Inc., Michaels Stores, Inc.,
Sears, Roebuck & Co., 579, Stores, Beall's, Inc., Hecht's, Foley's,
Robinson-May, J. C. Penney Company, Inc., Claire's Stores, Inc. and The Wet
Seal, Inc.
For fiscal 2002, Innovo's three largest customers accounted for
approximately 54% of its total gross revenues. The loss of any of these
three customers would have a material adverse effect on Innovo.
Joe's. Joe's products are sold to consumers through high-end department
stores and boutiques located throughout the world. For Joe's domestic
sales, Joe's has entered into sales agreements with third party showrooms
where retailers review the latest collections offered by Joe's and place
orders. Subsequently, the showrooms provide Joe's with purchase orders
from the retailers. Joe's then distributes the products from its Los
Angeles distribution facility. Joe's currently has domestic agreements
with showrooms in Los Angeles and New York and these showrooms have
representatives throughout the United States.
Joe's products are sold in Japan through its subsidiary Joe's Jeans
Japan. Joe's Jeans Japan operates a company-operated showroom in Tokyo
through which Joe's products are sold to retailers. Additionally, Joe's is
currently selling its products in Europe and Canada through distributors
who purchase the product directly from Joe's and then distribute the
product in to the local markets. Revenues generated by Joes Jeans Japan
represented approximately 21% of Joe's total net revenue in fiscal 2002.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company currently sells to domestic retailers such as Barney's New
York, Saks Fifth Ave, Inc., Bloomingdale's, Inc., Macy's, Inc., Intermix,
Fred Segal and Loehmann's and in Japan to retailers such as Sanei
International, Interplanet, Free's Shops, Isetan, Mitsukoshi New York
Runway and Barney's New York.
The Joe's Jeans website (www.joesjeans.com) has been built to advance
the brand's image and to allow consumers to review the latest collection
of products. Joe's currently uses both online and print advertising to
create brand awareness with customers as well as consumers.
For fiscal 2002, Joe's five largest customers accounted for
approximately 18% of its total gross revenues.
IAA. IAA develops apparel products for the private label and branded
product markets. IAA currently distributes its private label products
primarily to Target Corporation's Mossimo division and J. Crew, Inc.
IAA is currently relying on these customers for a majority of its
business.
During fiscal 2002, sales to J. Crew, Inc. and Target Corporation
represented approximately 34% and 21%, respectively, of the total gross
revenues of IAA. The Company is focused on broadening IAA's customer
base within the private label markets.
The Company does not enter into long-term agreements with any of its
customers. Instead, it receives individual purchase order commitments
from its customers. A decision by the controlling owner of a group of
stores or any other significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to
decrease the amount of merchandise purchased from the Company, or to
change their manner of doing business with the Company, could have a
material adverse effect on our financial condition and results of
operations. See "Risk Factors--A substantial portion of our net sales
and gross profit is derived from a small number of large customers."
The Company's business has historically been seasonal by nature.
While the Company believes that as a result of its growing product
lines and expanding business model its business should be less seasonal
in future periods, a majority of the Company's revenues are generated
during the Company's third and fourth quarters. See
"Business-Seasonality of Business and Working Capital."
Seasonality of Business and Working Capital
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in sales and net earnings.
Historically, a significant amount of the Company's net sales and a
majority of its net earnings have been realized during the third and
fourth quarter. In the second quarter in order to prepare for peak
sales that occur during the third quarter, the Company builds inventory
levels, which results in higher liquidity needs as compared to the
other quarters in the fiscal year. If sales were materially different
from seasonal norms during the third quarter, the Company's annual
operating results could be materially affected. Accordingly, results
for the individual quarters are not necessarily indicative of the
results to be expected for the entire year.
The Company is anticipating a significant increase in organic growth
during 2003. The Company believes that it could be necessary to obtain
additional working capital in order to meet the operational needs
associated with such growth. The Company believes that it will address
these needs by increasing the availability of funds offered to the
Company under its financing agreements with CIT Group, Inc. ("CIT") or
other financial institutions. Nonetheless, the Company may be required
to obtain additional capital through debt or equity financing. See
"Managements Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources."
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.
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 November
30, 2002, there were no significant backlogs.
Competition
The industries in which the Company operates are fragmented and
highly competitive in the United States and on a worldwide basis. We
compete against a large number of marketing products similar to
ours. 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 segments 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. Furthermore, the intense
competition and the rapid changes in consumer preferences constitute
significant risk factors in our operations. As the Company expands
globally, it continues to encounter additional sources of
competition. See "Risk Factors--We face intense competition in the
worldwide apparel and accessory industry."
Imports and Import Restrictions
The Company's transactions with its foreign manufacturers and
suppliers are subject to the risks of doing business abroad.
Imports into the United States are affected by, among other things,
the cost of transportation and the imposition of import duties and
restrictions. The countries in which the Company's products might
be manufactured may, from time to time, impose new quotas, duties,
tariffs or other restrictions, or adjust presently prevailing
quotas, duty or tariff levels, which could affect the Company's
operations and its ability to import products at current or
increased levels. The Company cannot predict the likelihood or
frequency of any such events occurring. The enactment of any
additional duties, quotas or restrictions could result in increases
in the cost of our products generally and might adversely affect
our sales and profitability.
The Company's import operations are subject to constraints
imposed by bilateral textile agreements between the United States
and a number of foreign countries, including Hong Kong, China,
Taiwan and Korea. These agreements impose quotas on the amount and
type of goods that can be imported into the United States from
these countries. Such agreements also allow the United States to
impose, at any time, restraints on the importation of categories
of merchandise that, under the terms of the agreements, are
not subject to specified limits. The Company's imported products
are also subject to United States customs duties and, in the
ordinary course of business, the Company is from time to time
subject to claims by the United States Customs Service for duties
and other charges.
The Company monitors duty, tariff and quota-related developments
and continually seeks to minimize its potential exposure to quota-
related risks through, among other measures, geographical
diversification of its manufacturing sources, the maintenance of
overseas offices, allocation of overseas production to merchandise
categories where more quota is available and shifts of production
among countries and manufacturers.
Because the Company's foreign manufacturers are located at
greater geographic distances from the Company than its domestic
manufacturers, the Company is generally required to allow greater
lead time for foreign orders, which reduces the Company's
manufacturing flexibility. Foreign imports are also affected
by the high cost of transportation into the United States.
In addition to the factors outlined above, the Company's future
import operations may be adversely affected by political
instability resulting in the disruption of trade from exporting
countries, any significant fluctuation in the value of the dollar
against foreign currencies and restrictions on the transfer of
funds.
Employees
As of March 13, 2003 the Company had 71 fulltime employees. IGI
accounted for 3 of the employees, Innovo employed 19 individuals,
including 5 individuals in Innovo's New York showroom, Joe's
employed 30 individuals out of its Los Angeles office and 5 in
Japan, and IAA employed 9 individuals.
Investments
Real Estate
IRI. IRI, the Company's real-estate investment subsidiary
headquartered in Commerce, CA, has invested in 22 limited
partnerships. On April 5, 2002, the Company issued 195,295 shares
of its cumulative, non-convertible preferred stock with an 8%
coupon ("Preferred Shares"), having a stated redemption value at
$100 per share (approximately $19.5 million), to IRI in exchange
for all 1,000 shares of IRI's capital stock. On that same day,
IRI acquired a 30% limited partner interest in each of 22 separate
limited partnerships (collectively, the "Limited Partnerships") in
exchange for the Preferred Shares.
Simultaneous with the acquisition by IRI of its interests in the
Limited Partnerships, the Limited Partnerships acquired 28
apartment complexes at various locations throughout the United
States consisting of approximately 4,000 apartment units (the
"Properties"). The aggregate purchase price of the Properties
was $98,079,000. The Limited Partnerships were organized for the
sole purpose of purchasing the Properties. The Preferred Shares
were transferred by the IRI to the sellers of the Properties in
partial payment of the purchase price of the Properties. The
allocation of the Preferred Shares among the Limited Partnership
was based on the number of Preferred Shares applied to the
purchase price of the Property acquired by such Limited
Partnership. The allocation of Preferred Shares was based on the
contract price of the Property plus costs associated with the
transaction (e.g. attorney's fees, real estate tax prorations,
etc.), less the loan amount, less the cash from the limited
partner, less the buyer's deposit. The partners in each of the
partnerships are: (i) IRI with a 30% limited partnership interest,
(ii) Metra Capital, LLC with a 69% limited partnership interest
and (iii) a 1% general partner which is unique to each
partnership.
Each Limited Partnership owns different Properties.
Approximately 20% of the $98,079,000 aggregate sellers in
partial payment of the purchase price. The balance of the
purchase price was funded by Metra Capital, LLC and by financing
provided by Bank of America. The Bank of America Financing is in
the approximate amount of $81,000,000 and is secured by the
Properties, but neither the Company nor IRI have any obligations
under that financing. None of the Company's Board Members or
executive officers participated in the transaction. However, Mr.
Hubert Guez and Mr. Joseph Mizachi, both of whom are affiliates
of the Company due to their 10% ownership or more of Company
common stock, were investors in the partnerships.
The Preferred Shares 8% coupon is funded entirely and solely
through partnership distributions received by the Company from
cash flows generated by the operation and sale of the Properties.
If sufficient funds are not available for the payment of a full
quarterly 8% coupon, then partial payments shall be made to the
extent funds are available. Unpaid dividends accrue. Partnership
distribution amounts remaining after the payment of all accrued
dividends must be used by the Company to redeem outstanding
Preferred Shares. The Preferred Shares have a redemption price
of $100 per share. In the event that the partnership
distributions received by the Company are insufficient to cover
the 8% coupon or the redeem Preferred Shares, the Company will
have no obligation to cover any shortcomings so long as all
distributions from the partnership are properly applied to the
payment of dividends and the redemption of Preferred Shares. If,
after all of the Properties are sold and the proceeds of the sale
of the Properties and cash flow derived from such Properties have
either been applied to the payment of the 8% coupon and the
redemption of Preferred Shares or deposited into the sinking fund
for that purpose, and the total amount of funds remaining in the
Sinking Fund is insufficient to pay the full 8% coupon and the
full Redemption Price for all then outstanding Preferred Shares,
then the Company (or IRI) shall pay $1.00 in total into the
Sinking Fund and the Redemption Price shall be adjusted so that
it equals (x) the total amount in the sinking fund available for
distribution, minus (y) all direct costs of maintaining the
Sinking Fund and making distributions therefrom, divided by (z)
the number of then outstanding Preferred Shares. The adjusted
Redemption Price shall be and shall represent full and final
payment for the redemption of all Preferred Shares.
IRI receives partnership distributions on the occurrence of
Capital Events (property sales) and, quarterly "cash flow"
distributions. Partnership distributions are made in descending
priority with first priority going to the Metra Partners, then
to Third Millennium Partners, LLC, an entity controlled by Mr.
Joseph Mizrachi, then to IRI until all capital has been returned
and certain specified returns are achieved. Thereafter
distributions are divided 70% to the Metra partners and 30% to
IRI. According to the original terms of the transaction, IRI is
entitled to receive a sub-managemen fees equal to 1% of the
gross annual revenues from the Properties, plus an additional
incentive management fee equal to 1% of the gross annual revenue
less administrative costs, entity maintenance costs, third party
professional fees, travel costs, costs of property studies, etc.
to the extent that there is excess cash flow (i.e., cash
remaining after payment of debt service, all other amounts due
in connection with the mortgage and all property expenses then
due and payable, including, the 1% of gross annual revenues the
IRI is to receive. In an effort to simplify the amounts owed
under the Sub Asset Management Fee agreement, the parties to the
sub-asset management fee agreement have agreed to a quarterly
payment of $85,000 as satisfaction of amounts owed to IRI under
the sub-asset management fee agreement. Neither IRI nor the
Company have any obligation to apply any fees paid to IRI or the
Company under the sub-asset management fee agreement to the
payment of the 8% coupon or the redemption of Preferred Shares.
The Company has not given accounting recognition to the value
of its investment in the Limited Partnerships, because the
Company has determined that the asset is contingent and will
only have value to the extent that cash flow from the operations
of the properties or from the sale of underlying assets is in
excess of the 8% coupon and redemption of the Preferred Shares.
The Company is obligated to pay the 8% coupon and redeem the
Preferred Shares from its partnership distributions, prior to
the Company being able to recover the underlying value of its
investment. Additionally, the Company has determined that the
Preferred Shares will not be accounted for as a component of
equity as the shares are redeemable outside of the Company's
control. No value has been ascribed to the Preferred Shares for
financial reporting purposes as the Company is obligated to pay
the 8% coupon or redeem the shares only if the Company receives
cash flow from the Limited Partnerships adequate to make the
payments. The Company has included the quarterly management fee
paid to IRI in other income using the accrual basis of
accounting.
Executive Officers
Samuel J. (Jay) Furrow, Jr., who is 29 years of age, is
currently the Chief Executive Officer, Chief Operating Officer
and acting Chief Financial Officer of the Company. Mr. Furrow
became the Company's Vice-President for Corporate Development
and In-House Counsel in August 1998 and a Director in January
1999. Mr. Furrow served as President from December 2000 until
July 2002, when he became Chief Executive Officer. 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. Mr. Furrow has a J.D degree from
Southern Methodist University School of Law and has a B.S.
degree from Vanderbilt University. See "Risk Factors-- The
loss of the services of key personnel could have a material
adverse effect on our business."
Patricia Anderson, who is 43 years of age, is currently the
President of the Company. Ms. Anderson has been a Director of
the Company since August 1990, President of the Company from
August 1990 through December 2000 and since July 2002, and
President of the Company's Innovo, Inc. subsidiary since she
founded that company in 1987. From August 1990 until August
1997, Ms. Anderson was also the Chairman and Chief Executive
Officer of the Company, and she once again served as Chief
Executive Officer from December 2000 through July 2002. See
"Risk Factors-- The loss of the services of key personnel could
have a material adverse effect on our business."
The Company does not currently have an employment agreement
with Mr. Furrow or Ms. Anderson. The Company, upon the creation
of Joe's in March of 2001, entered into an employment agreement
with Joe Dahan. According to the terms of the agreement
Mr. Dahan shall serve as President of the Joe's division and be
paid an annual salary of $100,000. The agreement renews
annually unless either party gives 60 days written notice prior
to the annual renewal date of its intention to terminate the
employment agreement. The agreement also provides for a grant
of qualified stock option under the Company's stock option plan
for the purchase of an aggregate of two hundred and fifty
thousand shares of common stock of the Company at an exercise
price of one dollar per share. The option grant has a term of
4 years and vests in equal percentages monthly over a 24-month
period.
Financial Information about Geographical Areas
See Note 15 "Segment Disclosures -Operations by Geographic
Area" in the Notes to Consolidated Financial Statements.
Risk Factors
The following risk factors should be read carefully in
connection with evaluating our business and the
forward-looking statements contained in this Annual Report.
Any of the following risks could materially adversely affect
our business, our operating results, our financial condition
and the actual outcome of matters as to which forward-looking
statements are made in this Report.
The loss of the services of key personnel could have a
material adverse effect on our business.
Our executive officers have substantial experience and
expertise in our business and have made significant
contributions to our growth and success. The unexpected loss
of services of one or more of these individuals could also
adversely affect us. We are currently not protected by a
material amount of key-man or similar life insurance covering
any of our executive officers.
A substantial portion of our net sales and gross profit is
derived from a small number of large customers.
Our ten largest customers accounted for approximately 52%
of our gross sales during fiscal 2002. We do not enter into
long-term agreements with any of our customers. Instead, we
enter into a number of individual purchase order commitments
with our customers. A decision by the controlling owner of a
group of stores or any other significant customer, whether
motivated by competitive conditions, financial difficulties
or otherwise, to decrease the amount of merchandise purchased
from us, or to change their manner of doing business with us,
could have a material adverse effect on our financial
condition and results of operations.
The Company's business could be negatively impacted by the
financial instability of our customers.
We sell our product primarily to retail, private label and
distribution companies around the world based on
pre-qualified payment terms. Financial difficulties of a
customer could cause us to curtail business with that
customer. We may also assume more credit risk relating to
that customer's receivables. Our inability to collect on our
trade accounts receivable from any one of these customers
could have a material adverse effect on our business or
financial condition.
Our business could suffer as a result of manufacturer's
inability to produce our goods on time and to our
specifications.
We do not own or operate any manufacturing facilities and
therefore depend upon independent third parties for the
manufacture of all of our products. Our products are
manufactured to our specifications by both domestic and
international manufacturers. During fiscal 2002,
approximately 24%, of our products were manufactured in the
United States and approximately 76% of our products were
manufactured in foreign countries. The inability of a
manufacturer to ship orders of our products in a timely
manner or to meet our quality standards could cause us to
miss the delivery date requirements of our customers for
those items, which could result in cancellation of orders,
refusal to accept deliveries or a reduction in purchase
prices, any of which could have a material adverse effect
on our financial condition and results of operations.
The loss of the services of Mr. Joe Dahan could have a
material adverse effect on Joe's business.
Mr. Joe Dahan's leadership in the design, marketing and
operational areas of Joe's has been a critical element of
Joe's success. The loss of his services, or any negative
market or industry perception arising from his loss, could
have a material adverse effect on our business. We are
currently not protected by a material amount of key-man or
similar life insurance covering Mr. Dahan or any of our
other executive officers. We have entered into employment
agreements with Mr. Dahan. See "Business-Executive
Officers."
Our business could suffer if we need to replace
manufacturers.
We compete with other companies for the production
capacity of our manufacturers and import quota capacity.
Some of these competitors have greater financia and other
resources than we have, and thus may have an advantage in
the competition for production and import quota capacity.
If we experience a significant increase in demand, or if
an existing manufacturer of ours must be replaced, we may
have to expand our third-party manufacturing capacity. We
cannot assure you that this additional capacity will be
available when required on terms that are acceptable to
us. We enter into a number of purchase order commitments
each season specifying a time for delivery, method of
payment, design and quality specifications and other
standard industry provisions, but do not have long-term
contracts with any manufacturer. None of the manufacturers
we use produces our products exclusively.
If a manufacturer of ours fails to use acceptable labor
practices, our business could suffer.
We require our independent manufacturers to operate in
compliance with applicable laws and regulations. While our
internal and vendor operating guidelines promote ethical
business practices and our staff periodically visits and
monitors the operations of our independent manufacturers,
we do not control these manufacturers or their labor
practices. The violation of labo r or other laws by an
independent manufacturer of ours, or by one of our
licensing partners, or the divergence of an independent
manufacturer's or licensing partner's labor practices from
those generally accepted as ethical in the United States,
could interrupt, or otherwise disrupt the shipment of
finished products to us or damage our reputation. Any of
these, in turn, could have a material adverse effect on
our financial condition and results of operations.
Our trademark and other intellectual property rights may
not be adequately protected outside the United States.
We believe that our trademarks, whether licensed or
owned by us, and other proprietary rights are important to
our success and our competitive position. In the course of
our international expansion, we may, however, experience
conflict with various third parties who acquire or claim
ownership rights in certain trademarks. We cannot assure
that the actions we have taken to establish and protect
these trademarks and other proprietary rights will be
adequate to prevent imitation of our products by others or
to prevent others from seeking to block sales of our
products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others
will not assert rights in, or ownership of, trademarks
and other proprietary rights of ours or that we will be
able to successfully resolve these types of conflicts to
our satisfaction. In addition, the laws of certain foreign
countries may not protect proprietary rights to the same
extent as do the laws of the United States. See
"Business - Licensing Agreement and Intellectual
Property."
We cannot assure the successful implementation of our
growth strategy.
As part of our growth strategy, we seek to expand our
geographic coverage, strategically acquiring select
licensees and enhancing our operations. We may have
difficulty hiring and retaining qualified key employees or
otherwise successfully managing the required expansion of
our infrastructure in Japan and other international
markets the Company may enter into. Furthermore, we cannot
assure you that we will be able to successfully integrate
the business of any licensee that we acquire into our own
business or achieve any expected cost savings or synergies
from such integration.
Our business is exposed to domestic and foreign currency
fluctuations.
We generally purchase our products in U.S. dollars.
However, we source most of our products overseas and, as
such, the cost of these products may be affected by
changes in the value of the relevant currencies. Changes
in currency exchange rates may also affect the relative
prices at which we and our foreign competitors sell
products in the same market. We currently do not hedge our
exposure to changes in foreign currency exchange rates. We
cannot assure you that foreign currency fluctuations will
not have a material adverse impact on our financial
condition and results of operations.
Our ability to conduct business in international markets
may be affected by legal, regulatory, political and
economic risks.
Our ability to capitalize on growth in new international
markets and to maintain the current level of operations in
our existing international markets is subject to risks
associated with international operations. These include:
- the burdens of complying with a variety of foreign laws
and regulations,
- unexpected changes in regulatory requirements, and
- new tariffs or other barriers to some international
markets.
We are also subject to general political and economic
risks associated with conducting international business,
including:
- political instability,
- changes in diplomatic and trade relationships, and
- general economic fluctuations in specific countries or
markets.
We cannot predict whether quotas, duties, taxes, or
other similar restrictions will be imposed by the United
States, the European Union, China, Japan, or other
countries upon the import or export of our products in
the future, or what effect any of these actions would
have on our business, financial condition or results of
operations. Changes in regulatory, geopolitical policies
and other factors may adversely affect our business in
the future or may require us to modify our current
business practices.
We face intense competition in the worldwide apparel
and accessory industry.
We face a variety of competitive challenges from other
domestic and foreign fashion-oriented apparel and
accessory producers, some of which may be significantly
larger and more diversified and have greater financial
and marketing resources than we have. We compete with
these companies primarily on the basis of:
- anticipating and responding to changing consumer
demands in a timely manner,
- maintaining favorable brand recognition,
- developing innovative, high-quality products in sizes,
colors and styles that appeal to consumers,
- appropriately pricing products,
- providing strong and effective marketing support,
- creating an acceptable value proposition for retail
customers,
- ensuring product availability and optimizing supply
chain efficiencies with manufacturers and retailers,
and
- obtaining sufficient retail floor space and effective
presentation of our products at retail.
The success of our business depends on our ability to
respond o constantly changing fashion trends and
consumer demands.
Our success depends in large part on our ability to
originate and define fashion product trends, as well as
to anticipate, gauge and react to changing consumer
demands in a timely manner. Our products must appeal to a
broad range of consumers whose preferences cannot be
predicted with certainty and are subject to rapid change.
We cannot assure that we will be able to continue to
develop appealing styles or successfully meet constantly
changing consumer demands in the future. In addition, we
cannot assure you that any new products or brands that we
introduce will be successfully received by consumers. Any
failure on our part to anticipate, identify and respond
effectively to changing consumer demands and fashion
trends could adversely the acceptance of our products and
leave us with a substantial amount of unsold inventory or
missed opportunities. If that occurs, we may be forced to
rely on markdowns or promotional sales to dispose of
excess, slow-moving inventory, which may harm our
business. At the same time, our focus on tight management
of inventory may result, from time to time, in our not
having an adequate supply of products to meet consumer
demand and cause us to lose sales.
A downturn in the economy may affect consumer purchases
of discretionary items, which could adversely affect our
sales.
The industries in which we operate are cyclical. Many
factors affect the level of consumer spending in the
apparel, accessories and craft industries, including,
among others:
- general business conditions,
- interest rates,
- the availability of consumer credit,
- taxation, and
- consumer confidence in future economic conditions.
Consumer purchases of discretionary items, including
accessory and apparel products, including our products,
may decline during recessionary periods and also may
decline at other times when disposable income is lower.
A downturn in the economies in which we sell our
products, whether in the United States or abroad, may
adversely affect our sales.
Our business could suffer as a result of
consolidation, restructurings and other ownership
changes in the retail industry.
In recent years, the retail industry has experienced
consolidation and other ownership changes. Some of our
customers have operated under the protection of the
federal bankruptcy laws. While to date these changes in
the retail industry have not had a material adverse
effect on our business or financial condition, our
business could be materially affected by these changes
in the future.
Terrorist attacks and the possibility of wider armed
conflict may have an adverse effect on our business and
operating results.
Terrorist attacks and other acts of violence or war,
such as those that took place on September 11, 2001,
could have a material adverse effect on our business
and operating results. There can be no assurance that
there will not be further terrorist attacks against the
United States or its businesses or interests. The
adverse effects that such violent acts and threats of
future attacks could have on the U.S. economy could
similarly have a material adverse effect on our
business and results of operations. Finally, further
terrorist acts could cause the United States to enter
into a wider armed conflict which could further impact
our business and operating results.
Impact of potential future acquisitions
From time to time, the Company has pursued, and may
continue to pursue, acquisitions. If one or more
acquisitions results in the Company becoming
substantially more leveraged on a consolidated basis,
the Company's flexibility in responding to adverse
changes in economic, business or market conditions may
be adversely affected.
We are subject to risks inherent in ownership of real
estate.
Real estate cash flows and values are affected by a
number of factors, including changes in the general
economic climate, local, regional or national
conditions (such as an oversupply of communities or a
reduction in rental demand in a specific area), the
quality and philosophy of management, competition from
\other available properties and the ability to provide
adequate property maintenance and insurance and to
control operating costs. Real estate cash flows and
values are also affected by such factors as government
regulations, including zoning, usage and tax laws,
interest rate levels, the availability of financing,
property tax rates, utility expenses, potential
liability under environmental and other laws and
changes in environmental and other laws. Although we
seek to minimize these risks through our market
research and property management capabilities, they
cannot be totally eliminated.
Real estate investments are relatively illiquid and
we may not be able to sell properties when
appropriate.
Equity real estate investments are relatively illiquid,
which may tend to limit our ability to react promptly to
changes in economic or other market conditions. Our
ability to dispose of assets in the future will depend on
prevailing economic and market conditions.
Changes in laws may result in increased cost.
We may not be able to pass on increased costs
resulting from increases in real estate taxes, income
taxes or other governmental requirements directly to
our residents. Substantial increases in rents, as a
result of those increased costs, may affect the
ability of a resident to pay rent, causing increased
vacancy. Changes in laws increasing potential
liability for environmental conditions or increasing
the restrictions on discharges or other environmental
conditions may result in significant unanticipated
expenditures.
Compliance with environmental regulations may be
costly.
We must comply with certain environmental and health
and safety laws and regulations related to the
ownership, operation, development and acquisition of
apartments. Under those laws and regulations, we may
be liable for, among other things, the costs of
removal or remediation of certain hazardous
substances, including asbestos-related liability. Those
laws and regulations often impose liability without
regard to fault.
Compliance or failure to comply with laws requiring
access to the Company's properties or investments by
disabled persons could result in substantial cost.
The Americans with Disabilities Act, the Fair
Housing Act of 1988 and other federal, state and local
laws generally require that public accommodations be
made accessible to disabled persons. Noncompliance
could result in the imposition of fines by the
government or the award of damages to private
litigants. These laws may require the Company to
modify its existing properties. These laws may also
restrict renovations by requiring improved access to
such buildings by disabled persons or may require the
Company to add other structural features that increase
construction costs. Legislation or regulations adopted
in the future may impose further burdens or
restrictions on the Company with respect
ascertain the costs of compliance with these laws,
which may be substantial.
Unfavorable changes in apartment markets and
economic conditions could adversely affect occupancy
levels and rental rates.
Market and economic conditions in the various
metropolitan areas of the United States where the
Company's has made real estate investments or has real
estate operations may significantly affect occupancy
levels and rental rates and therefore profitability.
Factors that may adversely affect these conditions
include the following:
- the economic climate, which may be adversely
impacted by a reduction in jobs, industry slowdowns
and other factors;
- local conditions, such as oversupply of, or reduced
demand for, apartment homes;
- a future economic downturn that simultaneously
affects one or more of the Company's geographic
markets or declines in household formation;
- rent control or stabilization laws, or other laws
regulating rental housing, which could prevent the
Company from raising rents to offset increases in
operating costs; and
- competition from other available apartments and
other housing alternatives and changes in market
rental rates.
Any of these factors could adversely affect the
Company's ability to achieve desired operating
results from its communities.
Possible difficulty of selling apartment
communities could limit the company's operational
and financial results.
Market conditions could change and purchasers may
not be willing to pay acceptable prices for the
apartment complexes the Company has invested in if
the properties were to be put up for sale. This
could negatively effect the Company's anticipated
results from its real estate investment and
operations.
ITEM 2. PROPERTIES
The Company's Tennessee sales and marketing
headquarters is located in approximately 5,000
square feet of office space located near downtown
Knoxville, TN. 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. See "Certain
relationships and related transactions-New Facility
Lease Arrangements."
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 Commerce with a reasonable allocation being
allotted to the Company depending upon the amount of
space used by the Company. See "Certain
relationships and related transactions-Commerce
Investment Group."
The Company currently leases office space for its
Innovo accessory showroom in New York City on an
annual basis. The Company pays $5,504 a month for
the property.
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 in the United States.
The Company's Joe's Jeans Japan subsidiary
currently rents two offices spaces located in Tokyo,
Japan. One of the spaces serves as JJJ's operational
office and the other is used as a showroom to market
Joe's products. JJJ currently pays approximately
$6,000 per month with 90-day termination provisions.
The Company's previous headquarters and
manufacturing facilities were located in
Springfield, TN. The Springfield facilities are
currently owned by LMI. 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.
The Springfield facilities are currently being
leased to third party tenants with approximately 17%
of the facilities being leased as of November 30,
2002, totaling $2,646 on a monthly basis. During
2002, the Company made several capital improvements
to the Springfield facility, including but not
limited to, putting a new roof on the facility.
While the rental income during the year decreased as
a result of the renovations, the Company is
anticipating an increase in demand for rental space
within the facility.
In fiscal 2002, the Company broadened its real
estate operations. On April 5, 2002, the Company
through IRI, closed on a transaction pursuant to
which IRI purchased limited partner interests in 22
limited partnerships. Subsequently, the limited
partnerships purchased 28 apartment buildings
consisting of approximately 4,000 apartment units
located in various states throughout the United
States. See "Business - Investments."
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
(a) The Company held its annual shareholder meeting
on November 12, 2002.
At the annual shareholders meeting, all nominated
directors were re-elected for one (1) yea r terms
with the following totals:
In Favor Opposed Withheld
Sam Furrow 11,083,657 0 6,839
Pat Anderson 11,085,467 0 5,029
Jay Furrow 11,085,457 0 5,039
Daniel Page 11,084,151 0 6,345
Marc Crossman 11,084,332 0 6,164
Dr. John Looney 11,085,482 0 5,014
The second and final item of business brought forth
for shareholder approval was the ratification of the
appointment of Ernst & Young, LLP as the independent
auditors for the fiscal year ending November 30, 2002.
The tallied votes for the proposal were:
In Favor Opposed Withheld
11,083,944 4,252 2,300
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 2002 High Low
First Quarter $2.67 $1.63
Second Quarter 2.25 1.43
Third Quarter 3.09 1.85
Fourth Quarter 4.00 2.40
Fiscal 2001 High Low
First Quarter $1.16 $0.81
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
As of February 27, 2003, there were approximately
3,000 record holders of the Common Stock. 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, of 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.
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.
IRI, the Company's real-estate investment subsidiary
headquartered in Commerce, CA, has invested in 22
limited partnerships. On April 5, 2002, the Company
issued 195,295 shares of its cumulative, non-convertible
preferred stock with an 8% coupon ("Preferred Shares"),
having a stated redemption value at $100 per share
(approximately $19.5 million), to IRI in exchange for
all 1,000 shares of IRI's capital stock. On that same
day, IRI acquired a 30% limited partner interest in each
of 22 separate limited partnerships (collectively, the
"Limited Partnerships") from the sellers (the "Sellers")
in exchange for the Preferred Shares. Simultaneous with
the acquisition by IRI of its interests in the Limited
Partnerships, the Limited Partnerships acquired 28
apartment complexes at various locations throughout the
United States consisting of approximately 4,000
apartment units. See "Business-Investments."
The Company has not registered the Preferred Shares and
the Preferred Shares will not be registered under the
Federal Securities Act of 1933, as amended (the "1933
Act"), on the ground that this transaction is exempt
from such registration under Section 4(2) thereof as
part of an issue not involving a public offering and
applicable state securities laws.
The Sellers have represented to the Company that it
purchased the Preferred Shares for the Sellers' own
account, with the intention of holding the Preferred
Shares for investment and not with the intention of
participating, directly or indirectly, in any resale or
distribution of the Preferred Shares. The Preferred
Shares were offered and sold to the Sellers in reliance
upon exemptions from registration under the 1933 Act.
The Sellers have represented to the Company that they
are an "Accredited Investor," as that term is defined in
Rule 501(a) of Regulation D under said Act.
The information required by Part II, Item 5 relating
to Equity Compensation Plans is incorporated herein by
reference to our definitive proxy statements to be filed
pursuant to Regulation 14A relating to our 2003 annual
meeting of stockholders.
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
11/30/02 12/01/01 11/30/00 11/30/99 11/30/98
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Net Sales $ 29,609 $ 9,292 $ 5,767 $ 10,837 $ 6,790
Costs of Goods Sold 19,839 6,333 5,195 6,252 4,493
------- ------- ------- ------- -------
Gross Profit 9,770 2,959 572 4,585 2,297
Operating Expenses (3) 8,581 3,358 5,113 5,688 4,203
------- ------- ------- ------- -------
Income (Loss) from Operations 1,189 (399) (4,541) (1,103) (1,906)
Interest Expense (538) (211) (446) (517) (503)
Other Income (Expense) 61 81 (69) 280 142
------- ------- ------- ------- -------
Income (Loss) Before Income Taxes 712 (529) (5,056) (1,340) (2,267)
Income Taxes 140 89 -- -- --
------- ------- ------- ------- -------
Income (Loss) from Continuing
Operations 572 (618) (5,056) (1,340) (2,267)
Discontinued Operations(1) -- -- -- (1) (1,747)
Extraordinary Item (2) -- -- (1,095) 0 0
------- ------- ------- ------- -------
Net Income (Loss) 572 (618) $(6,151) $(1,341) $(4,014)
------- ------- ------- ------- -------
Income (Loss) per share from
Continuing Operations
Basic $0.04 $(0.04) $(0.62) $(0.22) $(0.49)
Diluted $0.04 $(0.04) $(0.62) $(0.22) $(0.49)
Weighted Average Shares Outstanding
Basic 14,856 14,315 8,163 5,984 4,618
Diluted 16,109 14,315 8,163 5,984 4,618
Balance Sheet Data:
Total Assets $15,143 $10,247 $7,416 $6,222 $7,232
Long-Term Debt 3,387 4,225 1,340 2,054 2,604
Stockholders' Equity 5,068 4,519 3,758 1,730 1,722
(1) The amount for 1998 represents the operations of
Thimble Square. Thimble Square's operations were
discontinued during the fourth fiscal quarter of 1998.
(2) Represents the loss from the early extinguishments
of debt in 2000.
(3) Amount includes a $300,000 impairment write down of
long-term assets in 1998 and a $145,000 impairment write
down of long-term assets in 1999 as well as $293,000
related to the termination of a capital lease and
$100,000 for the settlement of a lawsuit in 1999, and a
$600,000 impairment write down of long-term assets in
2000.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion and analysis contains
statements that maybe considered forward-looking. These
statements contain a number of risks and uncertainties
as discussed here, under the heading "Forward-Looking
Statements" and in Item I of this Form 10-K that could
cause actual results to differ materially. Additionally,
this discussion and analysis should be read in
conjunction with the financial statements and related
notes and the other financial information included
elsewhere in this Form 10-K.
Results of Operations
The following table sets forth certain statement of
operations data for the years indicated (in thousands):
Years Ended
(in thousands)
11/30/02 12/01/01 $ Change % Change
-------- -------- -------- --------
Net Sales $ 29,609 $ 9,292 $ 20,317 219
Costs of Goods Sold 19,839 6,333 13,506 213
------- ------- ------- ---
Gross Profit 9,770 2,959 6,811 230
Selling, General &
Administrative 8,325 3,191 5,136 161
Depreciation & Amortization 256 167 87 52
------- ------- ------- ---
Income (Loss) from Operations 1,189 (399) 1,588 (A)
Interest Expense (538) (211) (327) 155
Other Income (expense) 61 81 (20) (25)
------- ------- ------- ---
Income (Loss) Before Income Taxes 712 (529) 1,241 (A)
Income Taxes 140 89 51 57
------- ------- ------- ---
Net Income (Loss) $ 572 $ (618) $ 1,190 (A)
(A) Not Meaningful
Comparison of Fiscal Year Ended November 30, 2002, to
Fiscal Year Ended December 1, 2001 Overview
In 2002, the Company significantly increased its revenues
and returned to profitability. The Company experienced
strong growth in all three of its main consumer products
operating subsidiaries and moved forward in its efforts to
strengthen its presence in the apparel market.
The Company's accessory division, Innovo, Inc.,
experienced an increase in sales largely as a result of its
efforts to enter into the private label business, continued
growth from the Bongo product line and an increase from
Innovo's legacy craft division. In 2002, Innovo focused on
strengthening its sourcing capabilities through the
establishment of Innovo Hong Kong Li ited ("IHK"). IHK
should assist Innovo in continuing to be able to offer its
customers quality products at a competitive price.
During 2002, the Company's Joe's subsidiary continued to
experience strong demand for its product lines on a
world-wide basis. In May of 2002, Joe's established JJJ to
distribute its products in the Japanese market.
Additionally, the Company began to distribute its products
in Europe and Canada.
The Company's IAA subsidiary increased its revenues
in fiscal 2002 mainly as a result of its ability to grow
its business with its private label customers such as
Target Corporation and J. Crew, Inc. During the period,
the IAA subsidiary formed a second division to focus on the
creation and building of branded product lines. In
furtherance of this objective, the IAA branded division
obtained the licensing rights to the Hot Wheel brand from
Mattel, Inc. and to Lil Bow Wow from Bravado International
Group, the agency with the master licensing rights to Lil
Bow Wow, and LBW Entertainment, Inc.
The Company's net income for fiscal 2002 was $572,000, or
$0.04 per share compared to a loss of $618,000 or $0.04 per
share for fiscal 2001. The Company generated a net income
in fiscal 2002 as compared to a net loss in fiscal 2001 as
a result of the Company's ability to significantly increase
its revenues, maintain its gross margins and to reasonably
control its increase in expenses.
Reportable Segments
During fiscal 2002 and fiscal 2001, the Company operated
in two segments, accessories and apparel. The 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 Company's
real estate operations and corporate activities are
categorized under "other." The operating segments have been
classified based upon the nature of their respective
operations, customer base and the nature of the products
sold.
The following table sets forth certain statement of
operations data by segment for the years indicated (in
thousands):
November 30, 2002 Accessories Apparel Other (A) Total
----------- ------- -------- -----
(in thousands)
Revenues, net $ 12,072 $ 17,537 $ - $ 29,609
Gross profit 3,502 6,268 - 9,770
Depreciation and amortization 21 183 52 256
Interest expense 140 339 59 538
December 1, 2001 Accessories Apparel Other (A) Total
----------- ------- -------- -----
(in thousands)
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
2002 to 2001 Accessories Apparel Other (A)
$ Change % Change $ Change % Change $ Change % Change
------- ------- ------- ------- ------- -------
Revenues, net $ 6,430 114 $ 13,887 380 $ - -
Gross profit 1,751 100 5,060 419 - -
Depreciation and amortization (24) (53) 148 423 (35) (40)
Interest expense 108 338 260 329 (41) (41)
(A) Other includes corporate expenses and assets and
expenses related to real estate operations.
Operating Revenues
Net revenues for the year ended November 30, 2002
increased to $29,609,000 or 219% from $9,292,000 in fiscal
2001. During the period, the Company experienced a
significant increase in sales from its three main operating
subsidiaries, Innovo operating in the accessory segment and
Joe's and IAA operating in the apparel segment.
Accessory
Innovo. The Company's accessory business, conducted by
Innovo, increased its net revenues to $12,072,000 in fiscal
2002 compared to $5,642,000 in fiscal 2001, a 114%
increase. Innovo's gross sales for fiscal 2002 were
$12,216,000. The increase is a result of the Company's
entry into the private label accessory business, increased
demand for Innovo's craft products and higher sales from
Innovo's Bongo accessory product line.
Innovo's accessory craft business increased as a result
of Innovo's ability to sell a greater amount of its
existing products as well as new products to its existing
customers and to new craft customers. In fiscal 2002,
Innovo focused upon increasing the quality of its craft
products and improving the marketing strategy associated
with the Innovo's craft products. Innovo's craft business
gross revenues increased to $4,577,449 in fiscal 2002
compared to $2,830,949 in fiscal 2001 representing a 62%
increase in gross revenues. Innovo's craft business
represented approximately 37% of Innovo's total gross
revenues for fiscal 2002.
Innovo's Bongo product line experienced an increase in
sales partly as a result of fiscal 2002 being Innovo's
first full twelve month cycle of business with the Bongo
product line. Additionally, Innovo's customers have
generally been successful in selling the Bongo product line
at the retail level to consumers as a result of Innovo's
ability to develop fashionably desirable products at
competitive prices. This trend has allowed Innovo to
establish the Bongo product line as a stable and desirable
product line for its customers thus giving Innovo the
opportunity to market the Bongo line to new customers.
Gross sales generated by the Bongo product line of
$3,101,000 epresented approximately 25% of Innovo's total
gross revenues for fiscal 2002.
Innovo began selling its products to private label
customers in fiscal 2002. Innovo's two main private label
customers as of November 30, 2002 were American Eagle
Outfitters, Inc. and Limited Brands, Inc.'s Express
division. Innovo is currently working on products for
additional private label customers and believes that its
private label business will play an important role in
Innovo's growth strategy going forward. Innovo's private
label business gross revenues of $3,218,000 represented
approximately 26% of Innovo's gross revenues for fiscal
2002.
Apparel
Joe's. Joe's operates under the Company's apparel
segment. During fiscal 2002, Joe's net revenues increased
to $9,179,000 compared to $1,519,000 in fiscal 2001, an
increase of 504%. Joe's was formed in February 2001, thus
making fiscal 2002 Joe's first full twelve-month business
cycle. Joe's 2002 product mix consisted primarily of
women's denim based jeans, skirts and jackets and men's
denim jeans. During 2002, denim products, in general, sold
well at the retail level and Joe's was able to capitalize
on this demand. Joe's is continuing to diversify its
product offerings to meet the changing trends in the high
fashion apparel markets and believes, although there can be
no assurances, that its 2003 product line is designed to
meet the current fashion trends and the expectations of its
customers and the consumer.
During fiscal 2002, Joe's experienced increase demand in
both the domestic and international marketplaces. In
regards to domestic sales, Joe's net revenues increased by
approximately 319% to approximately $6,371,000 in fiscal
2002 compared to fiscal 2001. This increase is primarily a
result of the maturity and development of the Joe's brands
in the marketplace. Joe's continues to attract customer
and consumer awareness as a result of its design and
quality characteristics. The ability of Joe's customers to
successfully sell Joe's products to its customers (the
consumer) eventually determines the ability of Joe's to
market its products to its customer base management
believes. Management believes the desirability of products
bearing the Joe's brand and the characteristics associated
therewith are resulting in increased demand from Joe's
customers.
In fiscal 2002, Joe's expanded into the international
marketplace through the formation of Joe's Jeans Japan,
Inc. ("JJJ") and through the use of international
distributors. JJJ is headquartered in Tokyo, Japan where
the Company operates a showroom and operational offices.
During fiscal 2002, net sales by JJJ of $1,902,000
represented approximately 21% of Joe's total net revenues.
Additionally, Joe's marketed its products in Europe and
Canada through the use of international distributors who
purchase Joe's products and then distributed the product to
retailers in the distributor's local markets. Sales in the
international market, excluding sales by JJJ, represented
approximately 10% of Joe's total revenues for fiscal 2002.
IAA. IAA, which operates under the Company's apparel
segment, increased its net revenues to $8,358,000 in fiscal
2002 compared to fiscal 2001, representing an increase of
approximately 292%. IAA was formed in August 2002 pursuant
to the acquisition of a division of Azteca, thus fiscal
2002 represents IAA's first full twelve-month business
cycle. See Note 1 "Acquisitions" in the Notes to the
Consolidated Financials. The increase in revenues is
largely a result of an increase in sales of IAA's private
label apparel products its two main customers, J. Crew,
Inc. and Target Corporations Mossimo division. IAA's
products in fiscal 2002 primarily consisted of denim jeans
and knit shirts. IAA is currently working towards
expanding its private label customer base in an attempt to
reduce its reliance on a limited number of customers.
In fiscal 2002, with IAA's private label business
representing one division, IAA created a second division to
focus on the development of branded products. To further
its branded division's business, IAA has entered into
licensing agreements with Mattel, Inc. for the licensing
rights to develop, market and distribute apparel and
accessory products bearing the Hot Wheels trademark.
Additionally, IAA has entered into a licensing agreement
for the creation of apparel and accessory products bearing
the likeness of Lil Bow Wow the multi platinum recording
artist. See "Business-Licensing Agreements and
Intellectual Property." During fiscal 2002, IAA's branded
division did not have any revenues.
Gross Margin
The Company's gross margin increased from 32% in fiscal
2001 to 33% in fiscal 2002.
Accessory
Innovo. The Company's accessory segment's gross margin
decreased from approximately 31% in fiscal 2001 to 29% in
fiscal 2002. Innovo's gross margin is largely a function
of Innovo's product mix for the given period, however,
during the period Innovo's gross margin was negatively
impacted from the west coast dock strike. As a result of
the west coast dock strike, Innovo was obligated to incur
increased airfreight and was required to give customer
discounts as a result of the late shipment of products.
Innovo's product categories have historically had a gross
margin in the thirty percent range, with some product
categories being higher and some lower. Innovo's branded
product have traditionally experienced higher margin than
its craft and private label business, which usually have
similar gross margins.
Apparel
Joe's. Joe's gross margins decreased from 57% in fiscal
2001 to 50% in fiscal 2002. The decrease reflects an
increase in sales in the international marketplace, which
are often sold at a discount. Additionally, Joe's gross
margin was negatively impacted as a result of an increase
in cost for some of the more fashion oriented products in
Joe's product line. In an effort to maintain high margins,
Joe's usually attempts to pass the higher cost of certain
goods to its customer by charging a higher sales price for
such products.
IAA. IAA's gross margins increased in fiscal 2002 to 20%
from 16% in fiscal 2001. IAA's sales in fiscal 2002
primarily consisted of denim jeans and knit shirts to
private label customers. The increase in gross margins is
a result of IAA being able to purchase its products at a
lower cost and/or sell the products at a higher price.
IAA's sales to its private label customers usually have
lower margins than the sales of the Company's other
divisions. It is anticipated that IAA's branded division
will experience higher gross margins than its private label
business as a result of IAA's ability to obtain higher
prices for its branded apparel products.
The increase in IAA margins offset decreases in other
subsidiaries resulting in an overall increase in the
collective margin. The Company's collective gross margin
may fluctuate in future periods based upon which segments
operating subsidiary and operating division accounts for a
larger percentage of sales.
Selling, General and Administrative Expense
The Company's selling, general and administrative
("SG&A") expenses increased in 2002 by approximately 161%
from $3,191,000 in 2001 to $8,325,000 in 2002. The increase
in SG&A expenses is largely a result of an increase in
expenses to support the Company's revenues growth during
the period. During the period the Company incurred a
notable increase in wages, advertising, travel,
professional fees, sales shows and other expenses related
to the Company's revenue growth.
Accessory
Innovo. Innovo's SG&A expenses increased by
approximately 111% to $2,963,000 in fiscal 2002 compared to
fiscal 2001. Innovo's increase in SG&A expenses is largely
attributable to expenses which were necessary to support or
associated with Innovo's increase in revenues. During
fiscal 2002, Innovo's wages increased by approximately 103%
to $842,000 as Innovo added staff members at its
headquarters in Knoxville and to its showroom in New York
City. Additionally, Innovo's wages increased from the
addition of employees at Innovo's sourcing office IHK in
Hong Kong. Innovo's commission expense increased by 132%
to $292,000 during the period due to the increase in
commission based revenues.
Royalties expense for fiscal 2002 increased by 215% to
$270,000 mainly in response to the increase in the sales of
Bongo related products and the royalty expense associated
therewith. Innovo's distribution costs also increased by
approximately 50% during the period as a result of the
expense associated with distributing a greater amount of
product.
Nasco Products International, Inc.
The Company's accessory business in the international
marketplace had previously been conducted through the
ompany's Nasco Products International, Inc. ("NPII"). NPII
had international licensing rights for certain sports and
character related trademarks. NPII sold accessory products
primarily in Europe bearing the trademarks. In 1999, NPII
ceased operations in the international accessory market.
At such time, NPII was in disagreement with certain
licensors in regards to the terms and royalty commitments
under the licensing agreements. In 1999, NPII accrued
$104,000 against the potential liability associated with
the agreements. In fiscal 2002, NPII reversed into SG&A
expense the accrual due to the fact there has not been
material activity in regards to the agreements over the
last three fiscal years. See "Business--Licensing Agreement
and Intellectual Properties."
Apparel
Joe's. With fiscal 2002 being Joe's irst twelve-month
cycle of business, its SG&A expenses increased
significantly during the period compared to the prior year.
Joe's results for fiscal 2002 also include the additional
expenses associated with the operation of JJJ. Joe's SG&A
expenses increased by approximately 425% to $3,245,000 in
fiscal 2002 compared to $618,000 in fiscal 2001. Joe's wage
expense increased significantly during fiscal 2002 as a
result of the increase in staff to support Joe's growth.
With Joe's royalty and commission expense being a function
of Joe's revenues, these expenses increased substantially
in fiscal 2002 as a result of Joe's increasing revenues.
During fiscal 2002 as part of Joe's marketing campaign,
Joe's participated in numerous sales shows and advertised
the Joe's brand in national print publications. As a result
in fiscal 2002 Joe's sales show expense increased by 232%
to $166,000 and its advertising expenses increased by 294%
to $264,000 compared to fiscal 2001. Joe's factoring
expense increased to $41,000 in fiscal 2002 in response to
the increase in the number of receivables Joe's factored.
IAA. IAA's SG&A expenses in fiscal 2002 increased to
$761,000 from $83,000 in fiscal 2001 a 817% increase. As
noted previously, fiscal 2002 was IAA's first full twelve-
month business cycle. IAA's wages increased in fiscal 2002
to $492,000 from $77,000 in fiscal 2001. During the period,
IAA had $46,000 of sales samples with no sales sample
expense in fiscal 2001. IAA's factor expense increased to
$130,000 in fiscal 2002 as a result of an increase in the
amount of receivables IAA factored and an extra factor fee
charged to IAA for the factoring of one of IAA's
significant customers. See "Liquidity and Capital
Resources" in Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Other
IGI. IGI, which reflects the corporate expenses of the
Company and operates under the "other" segment does not
have revenues. For fiscal 2002, IGI's expenses, excluding
interest, depreciation and amortization, increased by
approximately 17.4% to $1,375,000 compared to $1,171,000 in
fiscal 2001. The most notable increase in expense for IGI
is the increase in its professional fees and insurance
expenses. For fiscal 2002, IGI's professional fee's expense
increased approximately 49% compared to fiscal 2001. The
increase in professional fees is largely attributable to
additional legal and accounting fees. IGI's insurance
expense increased by 22% as a result of an increase in the
cost of the Company's Director and Officer insurance
and as a result of an increase in the cost of general
liability insurance for the Company's growing operations.
IGI's remaining expenses did not differ materially
compared to fiscal 2001.
IRI. During fiscal 2002, IRI had approximately $61,000
of professional fees which were represented in the SG&A
under the Company's other segment. These professional fees
were primarily associated with the formation of IRI and
professional fees necessary for the completion of the
investments made by IRI during the period. See "Business-
Investments."
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the Company
increased in fiscal 2002 to $256,000 from $167,000 in
fiscal 2001, an increase of 53%. The increase is primarily
attributable to IAA's amortization of the non-compete
agreement entered into in August 2001, pursuant to the
terms of the knit acquisition. The non-compete agreement
has been valued at $250,000 and is being amortized over two
years, based upon the term of the agreement. IAA's
amortization expense in fiscal 2001 was $35,000 compared to
$120,000 in fiscal 2002. See Note 3 "Acquisitions," in the
Notes to the Consolidated Financials.
The Company's combined deprecation expense totaled
$86,000, with LMI's depreciation of the Springfield
facility representing $40,000 of the depreciation total.
The remaining depreciation expense is associated with the
depreciation of small operational assets such as furniture,
fixtures, leasehold improvements, machinery and software.
Interest Expense
The Company's combined interest expense for the year
ended November 30, 2002 increased by approximately $327,000
to $538,000 compared to $211,000 fiscal 2001. The Company's
interest expense is primarily associated with its factoring
and inventory lines of credit, the knit acquisition
purchase note and the note associated with the Company's
former manufacturing facility and headquarters in
Springfield, TN. See "Business-Properties" and "Managements
Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources."
Accessory
Innovo. For fiscal 2001, Innovo's interest expense was
$139,000 compared to $33,000 in fiscal 2001. This
represents interest expense incurred from borrowings under
Innovo's factoring agreement and inventory line of credit.
See "Managements Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital
Resources."
Apparel
Joe's. Joe's interest expense for fiscal 2002 was
approximately $29,000 as a result of the fact that Joe's
does not factor all of its receivables and thus does not
borrow against these receivables under its factoring
agreement and carries these receivables as "house
accounts." Joe's interest expense does include borrowings
under its inventory line of credit. See "Managements
Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources."
IAA. IAA's interest expense increased significantly
during fiscal 2002 as a result of IAA factoring a vast
majority of its receivables and then borrowing funds
against these receivables. See "Managements Discussion
and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources "Additionally,
IAA's interest expense increased as a result of interest
payments associated with the knit acquisition note which
was issued as part of the purchase of the knit division
from Azteca and the creation of IAA. See Note 3,
"Acquisitions" in the Notes to the Consolidated
Financials.
For fiscal 2002, IAA's interest expense increased by
approximately 377% to $310,000 compared to fiscal 2001.
Other Income
The Company had other income of $61,000 in fiscal 2002
compared to other income of $81,000 in fiscal 2001.
LMI. The decrease in income is largely attributable to
a $90,000 expense the Company's LMI subsidiary incurred as
a result of repair expenses associated with the Company's
former manufacturing facility and headquarters in
Springfield, TN. See "Business--Properties." During fiscal
2002, LMI's operational expenses did not change
materially. LMI's main operational expenses are
maintenance and taxes. However, during the year, LMI made
significant renovations to the Springfield facility that
totaled approximately $425,000 of which $335,000 was
capitalized and $90,000 was expensed during fiscal 2002.
LMI operations are part of the Company's "other" segment
of business.
IRI. Other Income in fiscal 2002 includes $173,000 of
income from a management fee the IRI receives pursuant to
an investment the Company made through its IRI subsidiary
in the second quarter of 2002. See "Business-Investments."
IRI, which operates under the Company's "other" business
segment was formed during fiscal 2002 and thus did not
have operations during fiscal 2001. During fiscal 2002,
IRI had approximately $61,000 of professional fees which
were represented in the SG&A expense under the Company's
other segment. These professional fees were primarily
associated with the formation of IRI and professional fees
necessary for the completion of the investments made by
IRI during the period. See "Business-Investments."
The remaining other income is primarily associated with
rental income generated from tenants who are occupying the
Company's former manufacturing facility located in
Springfield, TN.
Net Income
The Company's net income of $572,000 for fiscal 2002
compared to a net loss of $618,000 in fiscal 2001. The
Company's profitability is largely attributable to the
significant increase revenues in fiscal 2002 compared to
fiscal 2001 and the Company's ability to maintain its
gross margins during fiscal 2002. The Company's expenses
increased significantly in fiscal 2002, however, the
Company' higher gross profit offset the increase in
revenues, resulting in net income for the period.
Results of Operations
The following table sets forth certain statement of
operations data for the years indicated:
Years Ended
(in thousands)
$ %
12/01/01 11/30/00 Change Change
-------- -------- ------ ------
Net Sales $ 9,292 $ 5,767 $3,525 61
Costs of Goods Sold 6,333 5,195 1,138 22
-------- -------- ------ ------
Gross Profit 2,959 572 2,387 417
Selling, General &
Administrative 3,191 4,147 (956) (23)
Write down of long-term assets -- 600 (A) (A)
Other -- 116 (A) (A)
Depreciation & Amortization 167 250 (83) (33)
-------- ------- ------ -----
Income (Loss) from Operations (399) (4,541) 4,142 91
Interest Expense (211) (446) (235) (53)
Other Income (expense) 81 (69) 150 (A)
-------- ------- ------ -----
Income (Loss) Before Income
Taxes and extraordinary item (529) (5,056) 4,527 90
Income Taxes 89 -- 89 (A)
-------- ------- ------ -----
Income (Loss) before
extraordinary item (618) (5,056) 4,438 88
-------- ------- ------ -----
Extraordinary Item -- (1,095) (A) (A)
-------- ------- ------ -----
Net Income (Loss) $ (618) $(6,151) $5,533 90
(A) Not Meaningful
Reportable Segments
During fiscal 2001, the Company operated in two segments,
accessories and apparel. The 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 Company's real estate operations and
corporate activities are categorized under "other." 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, domestic and international, based on the business
activities from which they earned revenues or incurred
expenses. During 2000, the Company significantly reduced
its international sales efforts and ceased to operate under
the international segment in 2001. Both of the segments,
however, were in the accessory business. Therefore, the
following discussion will compare the domestic and
international segments for 2000 with the accessory segment
for 2001.
The following table sets forth certain statement of
operations data by segment for the years indicated (in
thousands):
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
(A) Other includes corporate expenses and assets and
expenses related to real estate investments.
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
Accessories
(Domestic &
2001 to 2000 International) Apparel Other (A)
------------- ---------- -----------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
Revenues, net $ (125) (2.2) $ 3,650 (B) $ - -
Gross profit 1,179 206 1,208 (B) - -
Depreciation and amortization (205) (455) 35 (B) 87 100
Interest expense (414) (1,294) 79 (B) 100 100
(B) Not Meaningful
Comparison of Fiscal Year Ended December 1, 2001 to
Fiscal Year Ended November 30, 2000
During Fiscal 2001, the Company began operations in the
apparel segment. With the additional revenues from the
Company's apparel segment, net revenues for the year ended
December 1, 2001 increased by $3,525,000 or 61.1% from
$5,767,000 in 2000 to $9,292,000 in 2001. While sales for
the Company's accessory segment remained flat in 2001.
Accessory
Innovo. The Company's accessory segment had revenue of
approximately $5,642,000 in fiscal 2001 compared to
$5,767,000 in fiscal 2000. During fiscal 2000, the Company
implemented significant changes to the Company's operations
including the restructuring of the Company's manufacturing
and distribution operations. Consequently, with a majority
of the Company's resources and efforts during fiscal 2000
focused on completing the corporate restructuring, the
Company's revenues decreased in fiscal 2001. The decrease
is primarily attributable to the Company's limited
manufacturing and marketing capacity during the period.
See Note 1 "Restructuring of Operations" in the Notes to
the Consolidated Financials.
Apparel
During fiscal 2001, the Company entered into the apparel
business through the acquisition of the licensing rights
to the Joe's Jeans label from JD Design, LLC and through
the acquisition of the knit division of Azteca Production
International, Inc. See Note 3 "Acquisitions" in the Notes
to the Consolidated Financials. The Company's apparel
segment accounted for combined sales of $3,650,000 in
fiscal 2001.
Joe's. Since the acquisitions of the licensing rights
in February of 2001, Joe's Jeans sales for the period
totaled $1,520,000. During fiscal 2001, Joe's primarily
sold denim jeans to high-end department stores and
boutiques located in the United States.
IAA. IAA's revenues since August of 2001, totaled
$2,130,000. IAA's main product categories in fiscal 2001
were denim jeans and knit tops, which IAA sold to private
label customers.
Gross Margin
The Company's gross margin percentage increased from 10%
in fiscal 2000 to 32% in fiscal 2001.
Accessory
Innovo. Innovo's gross margin for fiscal 2000 was
approximately 10%. During fiscal 2000, the Company closed
its domestic manufacturing and distribution facilities in
Knoxville, TN, which produced and distributed products for
the Company's accessory segment of business conducted by
Innovo. As a result, in fiscal 2000, Innovo incurred a
$300,000 inventory adjustment for liquidated inventory
thus increasing Innovo's cost of goods. Furthermore, as a
result of closing its manufacturing and distribution
operations, Innovo wrote off $250,000 of capitalized
overhead that was associated with its production facility
and the manufacturing process. The impact of these
adjustments significantly reduced Innovo's gross margin in
fiscal 2000. In fiscal 2001, Innovo's gross margin was
approximately 32%, more in line with its historical gross
margins.
Apparel
IAA. IAA's gross margins were approximately 16% in
fiscal 2001. IAA primarily provides products to private
label apparel customers and its gross margins for fiscal
2001 were in line with industry norms for the private
label industry.
Joe's. Joe's gross margins in fiscal 2001 were
approximately 57%. Joe's did not have operations in fiscal
2000.
Selling General and Administrative Expenses
The Company's SG&A expenses decreased in 2001 by 23%
from $4,147,000 in 2000 to $3,191,000 in 2001. The change
in SG&A expense resulted primarily from the Company's
restructuring efforts taken in fiscal 2001. See Note 1
"Business Description-Restructuring of Operations" to the
Notes to the Consolidated Financial Statements. Additional
savings resulted from the Company's restructuring and
reduction in headcount, which commenced in 2000 and ended
in 2001.
Depreciation and Amortization
The Company's 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
The Company's 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. See Note 3 "Acquisitions" in
the Notes to the Consolidated Financials.
Other Income
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 $13,000, 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 real estate property owned by the Company in Lake
Worth, FL.
Net Loss
The Company's losses decreased from $6,151,000 in
fiscal 2000 to a loss of $618,000 for fiscal 2001. The
decrease is primarily a function of the increase in
revenues the Company experienced in fiscall 2001, the
return of the Company's gross margins to levels
consistent with its historical gross margins and the
decrease in expenses associated with the Company's
restructuring efforts during fiscal 2000. See Note 1
"Business Description--Restructuring of Operations" in
the Notes to the Consolidated Financials. 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, trade payables credit from vendors
and related parties and borrowings from the factoring of
accounts receivables.
Cash generated from operating activities during fiscal
2002 was $1,504,000 compared to a cash use in operations
of $632,000 in fiscal 2001. The increase is a result of
an increase in accounts receivable of $1,490,000 and a
$3,330,000 increase in inventory purchases offset by
current liability increases of $1,742,000, related party
increases of $3,440,000 and net income of $572,000. Cash
generated by operating activities funded the purchase of
additional property, plant and equipment expenditures and
the repayment of the current principal payments
associated with the Company's long-term debt.
In fiscal 2000, cash used in operating activities was
$632,000 for the year ended December 1, 2001 compared to
$4,598,000 in fiscal 2000. 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.
Cash used in operating activities was $4,598,000
resulting primarily from the Company's net loss, an
increase in inventory of $1,375,000 offset by decreases
in accounts receivables $566,000 and a decrease in
accounts payable and accrued expenses of $282,000.
The Company has experienced operating losses and
negative cash flows from operations during the years
ended December 1, 2001 and November 30, 2000. The Company
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 management and from
members of the Board of Directors, and conducted equity
financing through private placements. See Notes 11, 14
and 17 in the Notes to the Consolidated Financials for a
further discussion of the financing arrangements.
The Company relied on the following primary sources to
fund operations during fiscal 2002:
- A financing agreement with CIT Group, Inc. ("CIT")
- Cash reserves
- Trade payables credit with its domestic and
international suppliers
- Trade payables credit from related parties
On June 1, 2000, the Company, through its three main
operating subsidiaries, Joe's, Innovo, and IAA, entered
into a financing agreement with CIT for the factoring of
the Company's accounts receivables. Pursuant to the terms
of the agreements the Company, at its option, can sell
its accounts receivables to CIT and then borrow up to 85%
of the amount factored against the receivables on a
non-recourse basis, provided that CIT approves the
receivables 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 agreements call
for a 0.8% factoring fee on invoices factored with CIT
and a per annum rate equal to the greater of the Chase
prime rate plus 0.25% on funds borrowed against the
factored receivables or 6.5% per annum.
In August 2002, Joe's and Innovo amended their
factoring agreements with CIT to include an inventory
based line of credit. According to the terms of the
agreements, amounts loaned against inventory are to bear
an interest rate equal to the greater of the Chase prime
rate plus 0.75% or 6.5% per annum. The Company is
currently restricted in regards to how much CIT will loan
against the inventory. The restrictions currently limit
the amount Joe's and Innovo can borrow against its
inventory at $400,000 for each subsidiary.
As of November 30, 2002, the Company had borrowed the
maximum amount available to the Company under the
inventory line from CIT. 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 agreements with CIT expire on June
1, 2003. The Company believes that it will be able to
renew the agreements with CIT or will be able to find
similar financing with another financing organization on
similar terms. The Company is currently reviewing its
cash requirements and availability on the factoring lines
with CIT.
Based on the Company's anticipated internal growth in
2003, the Company believes that it will be necessary to
obtain additional working capital sources in order to
meet the operational needs associated with such growth.
The Company believes that it will address these needs by
increasing the availability of funds offered to the
Company under its financing agreements with CIT or other
financial institutions. The Company is currently seeking
additional working capital if it can be obtained at
suitable terms. 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 that may result in the Company
raising additional capital through debt or equity
financing. The Company believes that the relatively
moderate rate of inflation over the past few years has
not had a significant impact on the Company's revenues or
profitability.
Crossman Loan
On February 7, 2003 the Company entered into a loan
agreement with Marc Crossman, a member of the Company's
Board of Directors. The loan was funded in two phases
of $250,000 each on February 7, 2003 and February 13,
2003 for an aggregate loan value of $500,000. In the
event of default, each phase is collateralized by
125,000 shares of the Company's common stock as well as
a general claim on the assets of the Company,
subordinate to existing lenders. Each phase matures six
months and one day from the date of its respective
funding, at which point the principal amount and any
accrued interest is due in full. The loan carries an 8%
annualized interest rate with interest due on a monthly
basis. The loan may be repaid by the Company at any
time during the term of the loan without penalty.
Further, the Company has the option to extend the term
of the loan for an additional period of six months and
one day at anytime before maturity. The disinterested
directors of the Company approved the loan from
Mr. Crossman.
Long-Term Debt
Long-term debt consists of the following (in
thousands):
2002 2001
---- ----
First mortgage loan on Springfield
property $ 558 $ 625
Promissory note to Azteca 786 1,000
Promissory note to Azteca 2,043 2,600
----- -----
Total long-term debt 3,387 4,225
Less current maturities 756 845
----- -----
$2,631 $3,380
----- -----
----- -----
The first mortgage loan is collateralized by a first
deed of trust on real property in Springfield, TN (with
a carrying value of $1,220,000 at November 30, 2002),
and by an assignment of key-man life insurance on the
President of the Company, Pat Anderson, 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% at
November 30, 2002 and December 1, 2001) 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, NPII, and the
President of the Company, Pat Anderson, have also agreed
to act as guarantors for the obligations under the loan
agreement. See Note 9 "Long Term Debt" in the Notes to
the Consolidated Financial Statements.
In connection with the acquisition of the knit
division from Azteca, the Company issued promissory
notes in the face amounts of $1.0 million and $2.6
million, which 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. See Note 3 "Acquisitions" in the Notes to the
Consolidated Financials.
The $1.0 million note was subject to adjustment in the
event that the sales of the knit division did not reach
$10.0 million during the 18-month term following the
closing of the Acquisition. The principal amount was to
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. For the
18-month period following the closing of the knit
acquisition, nets sales for the knit division exceeded
the $10 million threshold.
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. As of
November 30, 2002, the Company has not elected to defer
any payments due under the promissory notes.
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).
The following table sets forth the Company's
contractual obligations and commercial commitments as
of November 30, 2002:
CONTRACTUAL PAYMENTS DUE BY PERIOD
OBLIGATIONAL
Total Less than 1-3 years 4-5 After 5
1 year years years
Long Term Debt $3,387 $ 756 $1,700 $ 884 $ 86
Operating Leases 662 138 239 285 --
Other Long Term 1,394 71 898 425 --
Obligations-Minimum
Royalties
Critical Accounting Policies
Management's discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted
in the United States of America. The preparation of these
financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis,
the Company evaluates estimates, including those related to
returns, discounts, bad debts, inventories, intangible
assets, income taxes, and contingencies and litigation. The
Company bases its estimates on historical experience and on
various other assumptions that are believed to be
reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying
values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting
policies affect our more significant judgments and
estimates used in the preparation of our consolidated
financial statements. For a further discussion on the
application of these and other accounting policies, see
Note 2 "Critical Accounting Policies" to the Notes to the
Consolidated Financials.
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 November 30, 2002 and December 1,
2001, 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, 2002, 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 $588,000 and $172,000 for the year ended
November 30, 2002 and December 1, 2001, respectively, and
are included in selling, general and administrative
expenses.
Accounts Receivable-Allowance for Returns, Discounts and
Bad Debts
The Company evaluates the collectibility of accounts
receivable and chargebacks (disputes from the customer)
based upon a combination of factors. In circumstances
where the Company is aware of a specific customer's
inability to meet its financial obligations (e.g.,
bankruptcy filings, substantial downgrading of credit
sources), a specific reserve for bad debts is taken against
amounts due to reduce the net recognized receivable to the
amount reasonably expected to be collected. For all other
customers, the Company recognizes reserves for bad debts
and chargebacks based on the Company's historical
collection experience. If collection experience
deteriorates (i.e., an unexpected material adverse change
in a major customer's ability to meet its financial
obligations to the Company), the estimates of the
recoverability of amounts due us could be reduced by a
material amount.
As of November 30, 2002, the balance in the allowance for
returns, discounts and bad debts reserves was $383,000,
compared to $164,000 at December 1, 2001.
Inventory
The Company's inventories are valued at the lower of cost
or market. Under certain market conditions, estimates and
judgments regarding the valuation of inventory are employed
by the Company to properly value inventory.
Valuation of Long-lived and Intangible Assets and Goodwill
The Company assesses the impairment of identifiable
intangibles, long-lived assets and goodwill whenever events
or changes in circumstances indicate that the carrying
value may not be recoverable. Factors considered important
that could trigger an impairment review include the
following:
a significant underperformance relative to expected
historical or projected future operating results;
a significant change in the manner of the use of the
acquired asset or the strategy for the overall business;
or
a significant negative industry or economic trend.
When the Company determines that the carrying value of
intangibles, long-lived assets and goodwill may not be
recoverable based upon the existence of one or more of the
above indicators of impairment, the Company will measure
any impairment based on a projected discounted cash flow
method using a discount rate determined by our management.
No impairment indicators existed as of November 30, 2002.
In 2002, the Statement of Financial Accounting Standards
(SFAS) No. 142 "Goodwill and Other Intangible Assets,"
became effective. This statement establishes financial
accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. The Company adopted SFAS No. 142
beginning with the first quarter of 2002. SFAS No. 142
requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but, instead,
tested at least annually for impairment while intangible
assets that have finite useful lives continue to be
amortized over their respective useful lives. Accordingly,
the Company has not amortized goodwill.
SFAS No. 142 requires that goodwill and other intangibles
be tested for impairment using a two-step process. The
first step is to determine the fair value of the reporting
unit, which may be calculated using a discounted cash flow
methodology, and compare this value to its carrying value.
If the fair value exceeds the carrying value, no further
work is required and no impairment loss would be
recognized. The second step is an allocation of the fair
value of the reporting unit to all of the reporting unit's
assets and liabilities under a hypothetical purchase price
allocation.
Income Taxes
As part of the process of preparing the Company's
consolidated financial statements, management is required
to estimate income taxes in each of the jurisdictions in
which it operates. The process involves estimating actual
current tax expense along with assessing temporary
differences resulting from differing treatment of items for
book and tax purposes. These timing differences result in
deferred tax assets and liabilities, which are included in
the Company's consolidated balance sheet. Management
records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be
realized. Management has considered future taxable income
and ongoing tax planning strategies in assessing the need
for the valuation allowance. Increases in the valuation
allowance result in additional expense to be reflected
within the tax provision in the consolidated statement of
income. Reserves are also estimated for ongoing audits
regarding Federal, state and international issues that are
currently unresolved. The Company routinely monitors the
potential impact of these situations and believes that it
is properly reserved.
Contingencies
The Company accounts for contingencies in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies". SFAS No. 5 requires that
the Company record an estimated loss from a loss
contingency when information available prior to issuance of
the Company's financial statements indicates that it is
probable that an asset has been impaired or a liability has
been incurred at the date of the financial statements and
the amount of the loss can be reasonably estimated.
Accounting for contingencies such as legal and income tax
matters requires management to use judgment. Many of these
legal and tax contingencies can take years to be resolved.
Generally, as the time period increases over which the
uncertainties are resolved, the likelihood of changes to
the estimate of the ultimate outcome increases. Management
believes that the accruals for these matters are adequate.
New Accounting Pronouncements
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This
Statement rescinds or modifies existing authoritative
pronouncements including FASB Statement No. 4 "Reporting
Gains and Losses from Extinguishment of Debt." As a result
of the issuance of SFAS No. 145, gains and losses from
extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in
Opinion 30. "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." Applying the provisions of Opinion 30
will distinguish transactions that are part of an entity's
recurring operations from those that are unusual or
infrequent or that meet the criteria for classification as
an extraordinary item. The provisions of this Statement
related to the rescission of Statement 4 shall be applied
in fiscal years beginning after May 15, 2002. Any gain or
loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not
meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application
of the provisions of this Statement related to the
rescission of Statement 4 is encouraged. Innovo is
currently evaluating the impact that this statement may
have on any potential future extinguishments of debt. Upon
adoption of SFAS No. 145, Innovo will reclassify items
previously reported as extraordinary items as a component
of operating income on the accompanying statements of
income.
During 2002, the FASB issued SFAS No. 148, "Accounting
for Stock Based Compensation -Transaction and Disclosure,
an amendment to FASB Statement No. 123." This Statement
requires more extensive interim disclosure related to stock
based compensation for all companies and for companies that
elect to use the fair value method for employee stock
compensation, permits additional transition methods. This
statement is effective for fiscal years ending after
December 15, 2002, with early adoption regarding annual
disclosure encouraged. Innovo is currently evaluating the
impact of adoption of this standard.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (Statement No.
146). Under Statement No. 146, it addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are
effective for exit or disposal activities that are
initiated after December 31, 2002, with early application
encouraged. The Company will adopt Statement No. 146 in the
first quarter of 2003 and do not expect the adoption to
have a material effect on its results of operations,
financial position or cash flows.
In December 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation-
Transition and Disclosure" (SFAS 148), which amends SFAS
No. 123, "Accounting for Stock-Based Compensation".
Statement 148 provides alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements
of Statement 123 to require more prominent and more
frequent disclosures in financial statements about the
effects of stock-based compensation. The transition
guidance and annual disclosure provisions of Statement 148
are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are
effective for financial reports containing financial
statements for interim periods beginning after
December 15, 2002. The Company does not plan on changing
its method of accounting for stock-based employee
compensation and will comply with the new disclosure
requirements beginning with its annual report and Form
10-K for the year ending November 29, 2003. 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 is exposed to certain market risks arising
from transactions in the normal course of its business,
and from debt incurred in connection with the knit
acquisition. See Note 3 "Acquisitions" in the Notes to the
Consolidated Financials . Such risk is principally
associated with interest rate and foreign exchange
fluctuations, as well as changes in the Company's credit
standing.
Interest Rate Risk
The Company's long-term debt bears a fixed interest
rate. However, because the Company's obligations under
its receivable and inventory financing agreements bear
interest at floating rates (primarily JPMorgan Chase prime
rate), the Company is sensitive to changes in prevailing
interest rates. A 10% increase or decrease in market
interest rates that affect the Company's financial
instruments would have a material impact on earning or
cash flows during the next fiscal year.
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions,
including firm commitments and anticipated contracts,
denominated in a currency other than an entity's
functional currency, and from foreign-denominated revenues
translated into U.S. dollars. Our primary foreign currency
exposures relate to the Joe's Jeans Japan subsidiary and
resulting Yen Investments. The Company believes that a
10.0% adverse change in the Yen rate in respect to the US
dollar would not have a material impact on earning or cash
flows during the next fiscal year because of the
relatively small size of the subsidiary compared to the
rest of the Company.
The Company generally purchases its products in U.S.
dollars. However, the Company sources most of its products
overseas and, as such, the cost of these products may be
affected by changes in the value of the relevant
currencies. Changes in currency exchange rates may also
affect the relative prices at which the Company and its
foreign competitors sell products in the same market. The
Company currently does not hedge its exposure to changes
in foreign currency exchange rates. The Company cannot
assure that foreign currency fluctuations will not have a
material adverse impact on the Company's financial
condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS
See "Item 15. 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 DISCLOSURES
Not applicable
PART III
The information required by Part III (Item 10-Directors
and Executive Officers, Item 11-Excecutive Compensation,
Item 12-Security Ownership of Certain Beneficial Owners
and Management and Item 13-Certain Relationships and
Related Transactions) is incorporated herein by reference
to our definitive proxy statement to be filed pursuant to
Regulation 14A relating to our 2003 annual meeting of
stockholders.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer/chief financial officer,
after evaluating the effectiveness of the Company's
"disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-
14(c)) as of a date (the "Evaluation Date") within 90
days before the filing date of this annual report, have
concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to
ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by
others within those entities.
(b) Changes in internal controls. There were no
significant changes in our internal controls or to our
knowledge, in other factors that could significantly
affect our disclosure controls and procedures subsequent
to the Evaluation Date.
PART IV
ITEM 15. 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 page 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 inancial statements or the related
notes thereto.
(b) Reports on Form 8-K
None
(c) Exhibits
Exhibit
Number Description Reference 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)*
4.2 Certificate of Resolution of Designation, Preferences and
Other Rights, $100 Redeemable 8% Cumulative Preferred
Stock, Series A dated April 4, 2002
4.3 Amendment to Certificate of Resolution of Designation,
Preferences and Other Rights, $100 Redeemable 8%
Cumulative Preferred Stock, Series A, dated April 14, 2002.
10.1 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* 11.48(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)
10.58 Promissory Note dated October 29, 1999 between Innovo Group
Inc. and Samuel J. Furrow* 10.58(17)
10.59 Promissory Note dated November 22, 1999 between Innovo Group
Inc. and Samuel J. Furrow* 10.59(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 Agreement* 10.72(18)
10.73 Fifth of Amended and Restated Certificate of Incorporation of
Registrant* 10.73(22)
10.74 Mizrachi Group Stock Purchase Agreement* 10.74(22)
10.75 Mizrachi Group Investor Rights Agreement* 10.75(22)
10.76 Mizrachi Group Warrant Agreement A* 10.76(22)
10.77 Mizrachi Group Warrant Agreement B* 10.77(22)
10.78 Mizrachi Group Transaction Disclosure Schedule* 10.78(22)
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)
10.85 Form of Investment Letter* 10.85(23)
10.86 Form of Limited Partnership Agreement* 10.86(23)
10.87 Form of Sub-Asset Management Agreement* 10.87(23)
10.88 Distribution of Cash Flow and Capital Events Proceeds Letter
Agreement dated April 5, 2002, by and between Innovo Realty,
Inc., Innovo Group Inc., Income Opportunity Realty Investors,
Inc., Transcontinental Realty Investors, Inc., American Realty
Investors, Inc., and Metra Capital, LLC* 10.88(23)
10.89 Distribution of Capital Events Letter Agreement dated April 5,
2002, by and between Metra Capital, LLC, Innovo Realty, Inc.,
Innovo Group Inc., Income Opportunity Realty Investors, Inc.,
Transcontinental Realty Investors, Inc., and American Realty
Investors, Inc.* 10.89(23)
10.90 Reimbursement of Legal Fees Letter Agreement dated April 5,
2002, by and between Innovo Realty, Inc., Innovo Group Inc.,
Income Opportunity Realty Investors, Inc., Transcontinental
Realty Investors, Inc., American Realty Investors, Inc., and
Third Millennium Partners, LLC* 10.90(23)
10.91 Short Form Licensing Agreement with Mattel for Hot Wheel
License 10.91
10.92 Bongo License Agreement Extension 10.92
10.93 License Agreement for Lil Bow Wow Trademark 10.93
10.94 Canadian Distribution Agreement with Sophistowear 10.94
21 Subsidiaries of the Registrant* 21 (13)
23.1 Consent of Ernst & Young, LLP
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
(22) Annual Report on Form 10-K of Innovo Group Inc. (file
0-18926) for the year ended November 30, 2001.
(23) Quarterly Report on Form 10-Q of Innovo Group Inc.
(file 0-18926) dated July 25, 2002.
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/ Samuel J. Furrow, Jr.
--------------------------
Samuel J. Furrow, Jr.
Chief Executive Officer
March 17, 2003
KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints
Samuel J. Furrow, Jr., his or her attorney-in-fact, each
with the power of substitution for him or any and all
capacities, to sign any amendments to this Annual Report
on Form 10-K and to file the same with exhibits thereto
and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorney-in-fact, or his or
her substitutes, may do or cause to be done by virtue
hereof.
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/ Samuel J. Furrow, Jr. March 17, 2003
-------------------------
Samuel J. Furrow, Jr.
Chief Executive Office, Chief Operating
Officer, Acting Chief Financial Officer
and Director (Principal Executive
Officer and Principal Accounting
Officer)
/s/ Patricia Anderson March 17, 2003
---------------------
Patricia Anderson
President and Director
/s/Samuel J. Furrow, Sr. March 17, 2003
------------------------
Samuel J. Furrow, Sr.
Chairman of the Board and Director
/s/ Marc B. Crossman March 17, 2003
--------------------
Marc B. Crossman
Director
/s/ Daniel Page March 17, 2003
---------------
Daniel Page
Director
/s/ Dr. John Looney March 17, 2003
-------------------
Dr. John Looney
Director
Form of Certification Required by Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934
CERTIFICATION BY SAMUEL JOSEPH FURROW, JR. AS CHIEF
EXECUTIVE OFFICER
I, Samuel Joseph Furrow, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of
Innovo Group Inc.;
2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or
omit to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with
respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements,
and other financial information included in this
annual report, fairly present in all material respects
the financial condition, results of operations and
cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I
are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee
of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I
have indicated in this annual report whether or not
there were significant changes in internal controls or
in other factors that could significantly affect
internal controls subsequent to the date of our most
recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003
/s/ Samuel Joseph Furrow, Jr.
-----------------------------
Samuel Joseph Furrow, Jr.
Chief Executive Officer
Form of Certification Required by Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934
CERTIFICATION BY SAMUEL JOSEPH FURROW, JR. AS ACTING
CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER)
I, Samuel Joseph Furrow, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of
Innovo Group Inc.;
2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or
omit to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with
respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements,
and other financial information included in this
annual report, fairly present in all material respects
the financial condition, results of operations and
cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I
are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee
of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I
have indicated in this annual report whether or not
there were significant changes in internal controls
or in other factors that could significantly affect
internal controls subsequent to the date of our most
recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
/s/ Samuel Joseph Furrow
------------------------
Samuel Joseph Furrow, Jr.
Acting Chief Financial Officer
(Principal Accounting Officer)
Innovo Group and Subsidiaries
Index to Consolidated Financial Statements
Audited Financial Statements: Page
Report of Independent Auditors -
Ernst & Young LLP F-2
Consolidated Balance Sheets at
November 30, 2002 and December 1, 2001 F-3
Consolidated Statements of Operations
for the years ended November 30, 2002,
December 1, 2001, and November 30, 2000 F-4
Consolidated Statements of Stockholders'
Equity for the years ended November 30,
2002, December 1, 2001, and November 30,
2000 F-6
Consolidated Statements of Cash Flows for
the years ended November 30, 2002, and
December 1, 2001 F-8
Notes to Consolidated Financial Statements F-11
Schedule II - Valuation of Qualifying Accounts F-38
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 November 30,
2002 and December 1, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended
November 30, 2002. 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 November 30, 2002 and December 1, 2001 and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
November 30, 2002, 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
Los Angeles, California
February 4, 2003
Innovo Group Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
November 30 December 1
2002 2001
----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 222 $ 292
Accounts receivable and due from factor, net
of allowance for uncollectible accounts of
$383 (2002) and $164 (2001) 2,737 1,466
Inventories 5,710 2,410
Prepaid expenses and other assets 279 180
---------- ---------
Total current assets 8,948 4,348
Property, plant and equipment, net 1,419 973
Goodwill 4,271 4,271
Intangible assets, net 487 655
Other assets 18 -
---------- ---------
Total assets $ 15,143 $ 10,247
---------- ---------
---------- ---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,438 $ 697
Due to related parties 4,250 806
Current maturities of long-term debt 756 845
--------- ---------
Total current liabilities 7,444 2,348
Long-term debt, less current maturities 2,631 3,380
Commitments and contingencies
8% redeemable preferred stock, $0.10 par value:
Authorized shares - 5,000 Issued and outstanding
shares 193,976 (2002) and none (2001) - -
Stockholders' equity:
Common stock, $0.10 par value:
Authorized shares - 40,000 Issued and outstanding
shares - 14,901 (2002) and 14,921 (2001) 1,491 1,491
Additional paid-in capital 40,343 40,277
Accumulated deficit (33,507) (34,079)
Accumulated other comprehensive loss (19) -
Promissory note - officer (703) (703)
Treasury stock, 58,410 (2002) and 29,410 (2001) (2,537) (2,467)
---------- ---------
Total stockholders' equity 5,068 4,519
---------- ---------
Total liabilities and stockholders' equity $ 15,143 $ 10,247
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended
November 30 December 1 November 30
2002 2001 2000
----------- ---------- -----------
Net sales $ 29,609 $ 9,292 $ 5,767
Cost of goods sold 19,839 6,333 5,195
---------- --------- ----------
Gross profit 9,770 2,959 572
Operating expenses:
Selling, general and administrative 8,325 3,191 4,147
Restructuring and other charges:
Asset impairment - - 600
Other - - 116
Depreciation and amortization 256 167 250
---------- --------- ----------
8,581 3,358 5,113
---------- --------- ----------
Income (loss) from operations 1,189 (399) (4,541)
Interest expense (538) (211) (446)
Other income (expense), net 61 81 (69)
---------- ---------- -----------
Income (loss) before income taxes and
extraordinary item 712 (529) (5,056)
Income taxes 140 89 -
---------- ---------- -----------
Income (loss) before extraordinary item 572 (618) (5,056)
Loss on early extinguishments of debt - - (1,095)
---------- ----------- -----------
Net income (loss) $ 572 $ (618) $ (6,151)
---------- ----------- -----------
---------- ----------- -----------
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Operations (continued)
(In thousands, except per share data)
Year ended
November 30 December 1 November 30
2002 2001 2000
----------- ---------- -----------
Income (loss) per share - basic:
Income (loss) before extraordinary item $ 0.04 $ (0.04) $ (0.62)
Extraordinary item - - (0.13)
----------- ---------- -----------
Net income (loss) $ 0.04 $ (0.04) $ (0.75)
----------- ---------- -----------
----------- ---------- -----------
Income (loss) per share - diluted:
Income (loss) before extraordinary item $ 0.04 $ (0.04) $ (0.62)
Extraordinary item - - (0.13)
----------- ---------- -----------
Net income (loss) $ 0.04 $ (0.04) $ (0.75)
----------- ---------- -----------
----------- ---------- -----------
Weighted average shares outstanding:
Basic 14,856 14,315 8,163
----------- ---------- -----------
----------- ---------- -----------
Diluted 16,109 14,315 8,163
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except number of shares)
Accumulated
Additional Other Promissory Total
Common Stock Paid-In Accumulated Comprehensive Note Treasury Stockholders'
Shares Par Value Capital Deficit Loss Officer Stock Equity
------ --------- ------- ------- ---- ------- ----- ------
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
Net income - - - 572 - - - 572
Foreign Currency translation
adjustment - - - - (19) - - (19)
Comprehensive Income - - - - - - - 553
Common stock offering expenses - - (25) - - - - (25)
Expense associated with options and
warrants - - 91 - - - - 91
Cancelled shares (20,000) - - - - - - -
Treasury stock purchased - - - - - - (70) (70)
--------- ------- -------- -------- ---- ------- ------- -----
Balance, November 30, 2002 14,901,264 $ 1,491 $ 40,343 $(33,507) $ (19) $ (703) $(2,537) $5,068
--------- ------- -------- -------- ---- ------- ------- -----
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended
November 30 December 1 November 30
2002 2001 2000
----------- ---------- -----------
Operating activities
Net income (loss) $ 572 $ (618) $ (6,151)
Adjustment to reconcile net income (loss) to cash
provided by (used in) operating activities
Loss on early extinguishments of debt - - 1,095
Stock options and warrants issued for services 91 86 -
Loss on disposal of fixed assets 90 2 99
Depreciation and amortization 256 167 250
Asset impairment - - 600
Change in allowance for bad debt 219 128 (117)
Changes in current assets and liabilities:
Accounts receivable and due from factor (1,490) (882) 566
Inventories (3,300) 933 (1,375)
Prepaid expenses and other (117) (86) 45
Accounts payable and accrued expenses 1,742 (1,064) 282
Due to related parties 3,444 698 108
Other (3) 4 -
----------- ---------- ----------
Net cash provided by (used in) operating activities 1,504 (632) (4,598)
Investing activities
Capital expenditures (622) (61) (76)
Net proceeds from sale of fixed assets - 1,082 43
Purchase of Knit Division - (36) -
Proceeds from real estate investment, distributions
related to preferred stock 436 - -
Payment of distributions and redemptions related to
preferred stock (436) - -
----------- ----------- -----------
Cash provided by (used in) investing activities (622) 985 (33)
Financing activities
Additional borrowings $ - $ - $ 1,420
Repayments of notes payable and long-term debt (838) (1,164) (644)
Treasury stock purchases (70) (41) -
Proceeds from issuance of common stock, net (25) (35) 5,034
----------- ------------ -----------
Net cash (used in) provided by financing activities (933) (1,240) 5,810
----------- ------------ -----------
Effect of exchange rate changes on cash (19) - -
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents (70) (887) 1,179
Cash and cash equivalents, at beginning of year 292 1,179 -
----------- ------------ -----------
Cash and cash equivalents, at end of year $ 222 $ 292 $ 1,179
----------- ------------ -----------
----------- ------------ -----------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 519 $ 110 $ 415
Cash paid for taxes $ 28 $ - $ -
During fiscal 2002, the Company issued 195,295 shares of its
cumulative non-convertible preferred stock with an 8% coupon
in exchange for real estate partnership interests.
See accompanying notes.
1. Business Description
Innovo Group Inc.'s (the "Company") principle business
activity involves the design, development and worldwide
marketing of high quality consumer products for the apparel
and accessory markets. The Company operates its consumer
products business through three wholly-owned, operating
subsidiaries, Innovo, Inc. ("Innovo"), Joe's Jeans, Inc.
("Joe's), and Innovo Azteca Apparel, Inc. ("IAA") with
Innovo and Joe's having two wholly-owned operating
subsidiaries, Innovo Hong Kong Limited ("IHK") and Joe's
Jeans Japan, Inc. ("JJJ"), respectively. All of the
Company's products are manufactured by independent
contractors located in Los Angeles, Mexico and the Far East,
including, Hong Kong, China, Korea, Vietnam and India. The
products are then distributed out of Los Angeles or directly
from the factory to the customer.
In April 2002, the Company entered into the real estate
investment business by purchasing limited partnership
interests in 22 limited partnerships that subsequently
acquired limited partnerships in 28 apartment buildings
consisting of approximately 4,000 apartment units. The
Company also owns its former headquarters located in
Springfield, TN, which it currently leases to third parties.
The Company operates its real estate business through two
wholly-owned operating subsidiaries: Leasall Management,
Inc. ("LMI") and Innovo Realty Inc. ("IRI"). See "Real
Estate Transactions" to the Notes to the Consolidated
Financials.
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 2002 and 2001, the years ended
on November 30, 2002 and 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
supply and distribution agreements with Commerce.
These agreements provide for Commerce or its designated
affiliates to manufacture and supply specified craft
products to the Company at agreed upon prices. In addition,
Commerce provides distribution services to the Company for
its craft products 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 expired in
2002, were renewed for a two-year term ending 2004 and are
renewable thereafter for consecutive two-year terms unless
terminated by either party with 90 days notice. Purchases
of craft goods and distribution services during the initial
term were subject to a minimum of $3,000,000, which the
Company purchased from Commerce during the first term of
the agreement. See Note 14. No minimum obligation is
required for the renewal periods.
Pursuant to the Commerce transaction and related
agreements, the Company relocated its distribution
operations to Los Angeles, California, and transitioned
its craft manufacturing needs to Mexican production
facilities operated by an affiliate of Commerce. The
Company continues to maintain a sales and administrative
staff in Knoxville for the operations of the Innovo
subsidiary.
In addition to the foregoing, the Company also terminated
the operations of Nasco Products International, Inc.
("NPII") during fiscal 2000, which had been unprofitable
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 the 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, no accruals related to the
restructuring activities remained at November 30, 2002.
The Company has experienced operating losses and negative
cash flows from operations during the years ended December
1, 2001 and November 30, 2000. The Company 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).
During the year ended November 30, 2002, the Company had
net income and had sales growth that resulted from an
increase in Innovo's accessory business and the
acquisition of Joe's and IAA during the year ended
December 1, 2001.
The Company is anticipating a continued increase in
organic growth during 2003. The Company believes that it
may need to obtain additional working capital in order to
meet the operational needs associated with such growth.
The Company believes that it will address these needs by
increasing the availability of funds offered to the
Company under its financing agreements with CIT or other
financial institutions. Nonetheless, the Company may be
required to obtain additional capital through debt or
equity financing. See "Liquidity and Capital Resources"
in Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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.
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 and
title to the products transfers to the customers. Sales
returns must be approved by the Company and are typically
only allowed for damaged goods. Such returns have
historically not been material and are provided for at
the time the revenue is recognized.
Allowances for co-op and other advertising programs, when
based on a percentage of sales to a customer, have been
recorded as a reduction of gross sales.
Shipping and Handling Costs
The Company outsources its distribution functions 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 $588,000 and $172,000
for the year ended November 30, 2002, and December 1,
2001, respectively, and are included in selling, general
and administrative expenses.
Earnings (loss) Per Share
Net income (loss) per share has been computed in
accordance with Financial Accounting Standard Board
(FASB) Statement No. 128, "Earnings Per Share."
Comprehensive Income (loss)
Assets and liabilities of the Japan and Hong Kong
divisions are translated at the rate of exchange in
effect on the balance sheet date, income and expenses
are translated at the average rates of exchange
prevailing during the year. The functional currency in
which the Company transacts business is the Japanese yen
and Hong Kong dollar. Comprehensive income consists of
net income and foreign currency gains and losses
resulting from translation of assets and liabilities.
Advertising Costs
Advertising costs are expensed as incurred, except for
brochures and catalogues that are capitalized and
amortized over their expected period of future benefits.
Capitalized costs related to catalogues and brochures
are included in prepaid expenses and other current
assets. Advertising expenses included in selling,
general and administrative expenses were approximately
$287,000, $114,000 and $8,000 for the periods ended
November 30, 2002, December 1, 2001 and November 20,
2000, respectively.
Financial Instruments
The fair values of the Company's financial instruments
(consisting of cash, accounts receivable, accounts
payable 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. Management believes it
is not practicable to estimate the fair value of the
first mortgage loan as the loan has a fixed interest
rate secured by real property in Tennessee. 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 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 year ended November
30, 2000, the Company recorded an impairment charge of
$600,000, related to certain real and personal
properties.
In July 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and
reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, Intangible
Assets. The Company adopted SFAS No. 142 beginning with
the first quarter of 2002. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite
useful lives not be amortized but, instead, tested at
least annually for impairment while intangible assets
that have finite useful lives continue to be amortized
over their respective useful lives. Accordingly, the
Company has not amortized goodwill.
SFAS No. 142 requires that goodwill and other
intangibles be tested for impairment using a two-step
process. The first step is to determine the fair value
of the reporting unit, which may be calculated using a
discounted cash flow methodology, and compare this value
to its carrying value. If the fair value exceeds the
carrying value, no further work is required and no
impairment loss would be recognized. The second step is
an allocation of the fair value of the reporting unit to
all of the reporting unit's assets and liabilities under
a hypothetical purchase price allocation. Based on the
evaluation performed by the Company, there is no
impairment to be recorded at November 30, 2002.
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.
2. Summary of Significant Accounting Policies (continued)
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
November 30, 2002 and December 1, 2001, $1,652,000 and
$535,000, respectively of total non-factored accounts
receivables, (or 60% and 57%) were due from four
customers. The Company does not require collateral for
trade accounts receivable, and, therefore, is at risk
for up to $2,813,000 and $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 based upon the ageing of
outstanding balances and other account monitoring
analysis. Such losses have historically 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 is 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 April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This
Statement rescinds or modifies existing authoritative
pronouncements including FASB Statement No. 4 "Reporting
Gains and Losses from Extinguishment of Debt." As a
result of the issuance of SFAS No. 145, gains and losses
from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in
Opinion 30. "Reporting the Results of Operations-
eporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Applying the
provisions of Opinion 30 will distinguish transactions
that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item.
The provisions of this Statement related to the
rescission of Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does
not meet the criteria in Opinion 30 for classification
as an extraordinary item shall be reclassified. Early
application of the provisions of this Statement related
to the rescission of Statement 4 is encouraged. Innovo
is currently evaluating the impact that this statement
may have on any potential future extinguishments of
deb t. Upon adoption of SFAS No. 145, Innovo will
reclassify items previously reported as extraordinary
items as a component of operating income on the
accompanying statements of income.
2. Summary of Significant Accounting Policies (continued)
Recently Issued Financial Accounting Standards (continued)
During 2002, the FASB issued SFAS No. 148, "Accounting for
Stock Based Compensation -Transaction and Disclosure, an
amendment to FASB Statement No. 123." This Statement
requires more extensive interim disclosure related to
stock based compensation for all companies and for
companies that elect to use the fair value method for
employee stock compensation, permits additional transition
methods. This statement is effective for fiscal years
ending after December 15, 2002, with early adoption
regarding annual disclosure encouraged. Innovo is
currently evaluating the impact of adoption of this
standard.
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 does
not believe it will have a material impact on its
consolidated financial statements.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (Statement No.
146). Under Statement No. 146, it addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are
effective for exit or disposal activities that are
initiated after December 31, 2002, with early application
encouraged. The Company will adopt Statement No. 146 in
the first quarter of 2003 and does not expect the adoption
to have a material effect on its results of operations,
financial position or cash flows.
In December 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation-Transition and
Disclosure" (SFAS 148), which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". Statement 148
provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In addition, Statement
148 amends the disclosure requirements of Statement 123 to
require more prominent and more frequent disclosures in
financial statements about the effects of stock-based
compensation. The transition guidance and annual
disclosure provisions of Statement 148 are effective for
fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The
interim disclosure provisions are effective for financial
reports containing financial statements for interim
periods beginning after December 15, 2002. The Company
does not plan on changing its method of accounting for
stock-based employee compensation and will comply with the
new disclosure requirements beginning with its annual
report and Form 10-K for the year ending November 29,
2003. 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, the Company 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. Upon
the mutual agreement of both parties, the Company did not
complete the second phase of the acquisition prior to the
expiration date due to the Company's in ability to obtain
the necessary funding.
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 did 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 was to be reduced by an
amount equal to the sum of $1.5 million less 10% of the
et sales of the Knit Division during the 18-month period
following the closing date. The $10 million threshold was
met 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)
3. Acquisitions (continued)
Joe's Jeans License
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 for the fiscal years included
above.
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 and gross margin objectives are
reached, a warrant, with a four year term, granting JD
the right to purchase 250,000 shares of the Company's
common stock at a price of $1.00 per share. As of
November 30, 2002, the sales and gross margin objectives
had not been reached.
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
additional royalty amounts due in the event the Company
exceeds certain minimum sales and gross profit
thresholds. The Company recorded $277,000 and $46,000 in
royalty expense for the license in the years ended
November 30, 2002 and December 1, 2001, respectively.
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 that are 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.
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):
2002 2001
---- ----
Finished goods $ 5,741 $ 2,535
Raw materials 74 -
------- -------
5,815 2,535
Less allowance for
obsolescence and
slow moving items (105) (125)
------- -------
$ 5,710 $ 2,410
------- -------
------- -------
5. Real Estate Transaction
IRI, the Company's real-estate investment subsidiary
headquartered in Commerce, CA, has invested in 22 limited
partnerships. On April 5, 2002, the Company issued 195,295
shares of its cumulative, non-convertible preferred stock
with an 8% coupon ("Preferred Shares"), having a stated
redemption value at $100 per share (approximately $19.5
million), to IRI in exchange for all 1,000 shares of IRI's
capital stock. On that same day, IRI acquired a 30% limited
partner interest in each of 22 separate limited partnerships
(collectively, the "Limited Partnerships") in exchange for
the Preferred Shares.
Simultaneous with the acquisition by IRI of its interests in
the Limited Partnerships, the Limited Partnerships acquired
28 apartment complexes at various locations throughout the
United States consisting of approximately 4,000 apartment
units (the "Properties"). The aggregate purchase price of
the Properties was $98,079,000. The Limited Partnerships
were organized for the sole purpose of purchasing the
Properties. Th e Preferred Shares were transferred by the
IRI to the sellers of the Properties in partial payment of
the purchase price of the Properties. The allocation of the
Preferred Shares among the Limited Partnership was based on
the number of Preferred Shares applied to the purchase price
of the Property acquired by such Limited Partnership. The
allocation of Preferred Shares was based on the contract
price of the Property plus costs associated with the
transaction (e.g. attorney's fees, real estate tax
prorations, etc.), less the loan amount, less the cash from
the limited partner, less the buyer's deposit. The partners
in each of the partnerships are: (i) IRI with a 30% limited
partnership interest, (ii) Metra Capital, LLC with a 69%
limited partnership interest and (iii) a 1% general partner
which is unique to each partnership.
Each Limited Partnership owns different Properties.
Approximately 20% of the $98,079,000 aggregate purchase
price was paid by the transfer of Preferred Shares to the
sellers in partial payment of the purchase price. The
balance of the purchase price was funded by Metra Capital
LLC and by financing provided by Bank of America. The Bank
of America Financing is in the approximate amount of
$81,000,000 and is secured by the Properties, but neither
the Company nor IRI have any obligations under that
financing. None of the Company's Board Members or executive
officers participated in the transaction. However, Mr.
Hubert Guez and Mr. Joseph Mizachi, both of whom are
affiliates of the Company due to their 10% ownership or more
of Company common stock, were investors in the partnerships.
The Preferred Shares 8% coupon is funded entirely and solely
through partnership distributions received by the Company
from cash flows generated by the operation and sale of the
Properties. If sufficient funds are not available for the
payment of a full quarterly 8% coupon, then partial payments
shall be made to the extent funds are available. Unpaid
dividends accrue. Partnership distribution amounts remaining
after the payment of all accrued dividends must be used by
the Company to redeem outstanding Preferred Shares.
The Preferred Shares have a redemption price of $100 per
share. In the event that the partnership distributions
received by the Company are insufficient to cover the 8%
coupon or the redeem Preferred Shares, the Company will have
no obligation to cover any shortcomings so long as all
distributions from the partnership are properly applied to
the payment of dividends and the redemption of Preferred
Shares. If, after all of the Properties are sold and the
proceeds of the sale of the Properties and cash flow derived
from such Properties have either been applied to the payment
of the 8% coupon and the redemption of Preferred Shares or
deposited into the sinking fund for that purpose, and the
total amount of funds remaining in the Sinking Fund is
insufficient to pay the full 8% coupon and the full
Redemption Price for all then outstanding Preferred Shares,
then the Company (or IRI) shall pay $1.00 in total into the
Sinking Fund and the Redemption Price shall be adjusted so
that it equals (x) the total amount in the sinking fund
available for distribution, minus (y) all direct costs of
maintaining the Sinking Fund and making distributions
therefrom, divided by (z) the number of then outstanding
Preferred Shares. The adjusted Redemption Price shall be and
shall represent full and final payment for the redemption of
all Preferred Shares.
IRI receives partnership distributions on the occurrence of
Capital Events (property sales) and, quarterly "cash flow"
distributions. Partnership distributions are made in
descending priority with first priority going to the Metra
Capital, LLC, then to Third Millennium Partners, LLC, an
entity controlled by Mr. Joseph Mizrachi, then to IRI until
all capital has been returned and certain specified returns
are achieved. Thereafter distributions are divided 70% to
the Metra Capital, LLC and 30% to IRI. According to the
original terms of the transaction, IRI is entitled to
receive from Metra Management LLP a sub-management fees
equal to 1% of the gross annual revenues from the
Properties, plus an additional incentive management fee
equal to 1% of the gross annual revenue less administrative
costs, entity maintenance costs, third party professional
fees, travel costs, costs of property studies, etc. to the
extent that there is excess cash flow (i.e., cash remaining
after payment of debt service, all other amounts due in
connection with the mortgage and all property expenses then
due and payable, including, the 1% of gross annual revenues
the IRI is to receive. In an effort to simplify the amounts
owed under the Sub Asset Management Fee agreement, the
parties to the sub-asset management fee agreement have
agreed to a quarterly payment of $85,000 as satisfaction of
amounts owed to IRI under the sub-asset management fee
agreement. Neither IRI nor the Company have any obligation
to apply any fees paid to IRI or the Company under the sub-
asset management fee agreement to the payment of the 8%
coupon or the redemption of Preferred Shares.
The Company has not given accounting recognition to the
value of its investment in the Limited Partnerships, because
the Company has determined that the asset is contingent and
will only have value to the extent that cash flows from the
operations of the properties or from the sale of underlying
assets is in excess of the 8% coupon and redemption of the
Preferred Shares. The Company is obligated to pay the 8%
coupon and redeem the Preferred Shares from its partnership
distributions, prior to the Company being able to recover
the underlying value of its investment. Additionally, the
Company has determined that the Preferred Shares will not be
accounted for as a component of equity as the shares are
redeemable outside of the Company's control. No value has
been ascribed to the Preferred Shares for financial
reporting purposes as the Company is obligated to pay the 8%
coupon or redeem the shares only if the Company receives
cash flow from the Limited Partnerships adequate to make the
payments. The Company has included the quarterly management
fee paid to IRI in other income using the accrual basis of
accounting.
6. Accounts Receivable
Accounts receivable consist of the following (in thousands):
2002 2001
---- ----
Nonrecourse receivables assigned to factor,
net of advances $ 307 $ 681
Nonfactored accounts receivable 2,813 949
Allowance for customer credits and doubtful
accounts (383) (164)
----- -----
$2,737 $1,466
----- -----
----- -----
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 greater of the Chase prime rate plus 0.25%
or 6.5% on funds borrowed against the factored receivables.
6. Accounts Receivable (continued)
On August 20, 2002, the Company's Innovo and Joe's
subsidiaries each entered into amendments to their
respective factoring agreements which permit the
subsidiaries to obtain advances of up to 50% of the eligible
inventory, as defined, up to $400,000 each. According to the
terms of the agreements, amounts loaned against inventory
are to bear an interest rate equal to the greater of the
Chase prime rate plus 0.75% or 6.5% per annum.
7. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in
thousands):
Useful
Lives
(Years) 2002 2001
----- ---- ----
Building, land and improvements 8-38 $1,582 $1,248
Machinery and equipment 5-10 258 120
Furniture and fixtures 3-8 212 163
Transportation equipment 5 13 13
Leasehold improvements 5-8 14 4
----- -----
2,079 1,548
Less accumulated depreciation and
amortization (660) (575)
----- -----
Net property, plant and equipment $1,419 $ 973
----- -----
----- -----
Depreciation expense aggregated $86,000 and $88,000 for the
years ended November 30, 2002 and December 1, 2001.
8. Intangible Assets
Identifiable intangible assets resulting from acquisitions
consist of the following (in thousands):
2002 2001
---- ----
License rights, net of $88 and $40
accumulated amortization for 2002 and
2001, respectively $ 392 $ 440
Covenant not to compete, net of $155 and
$35 accumulated amortization for 2002
and 2001, respectively 95 215
---- ----
$ 487 $ 655
---- ----
---- ----
Amortization expense related to the licensing rights and
covenant not to compete total $168 and $75 for the years
ended November 30, 2002 and December 1, 2001, respectively.
Aggregate amortization expense will be approximately $143,
$48, $48, $48, $48 and $152 for fiscal years ending November
29, 2003 through November 30, 2007 and thereafter,
respectively.
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
2002 2001
---- ----
First mortgage loan on Springfield
property $ 558 $ 625
Promissory note to Azteca 786 1,000
Promissory note to Azteca 2,043 2,600
----- -----
Total long-term debt 3,387 4,225
Less current maturities 756 845
----- -----
$2,631 $3,380
----- -----
----- -----
The first mortgage loan is collateralized by a first deed
of trust on real property in Springfield, TN (with a
carrying value of $1,220,000 at November 30, 2002), 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% at
November 30, 2002 and December 1, 2001) 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
President, Pat Anderson, of the Company have also agreed
to act as guarantors for the obligations under the loan
agreement.
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, which 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 was subject to adjustment in the
event that the sales of the Knit Division did not reach
$10.0 million during the 18-month term following the
closing of the Acquisition. The principal amount was to 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. For the 18-month period
following the closing of the Knit Acquisition, nets sales
for the Knit Division exceeded the $10 million threshold.
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 a
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. As of
November 30, 2002, the Company has not elected to defer
any payments due under the promissory notes.
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).
9. Long-Term Debt (continued)
Principal maturities of long-term debt as of November 30,
2002 are as follows (in thousands):
2003 $ 756
2004 816
2005 884
2006 736
2007 109
Thereafter 86
-----
Total $3,387
-----
-----
10. Income Taxes
The provision (credit) for domestic and foreign income
taxes is as follows (in thousands):
Year Ended
November 30, December 1, November 30
2002 2001 2000
---- ---- ----
Current:
Federal $ - $ - $ -
State 94 89 -
Foreign 46 - -
------- ------ ------
140 89 -
Deferred:
Federal - - -
State - - -
Foreign - - -
------- ------ ------
Total $ 140 $ 89 $ -
------- ------ ------
------- ------ ------
The source of income (loss) before the provision for taxes
is as follows (in thousands):
Year Ended
November 30, December 1, November 30,
2002 2001 2000
------ ------ ------
Federal $ 599 $ (529) $(6,151)
Foreign 113 - -
------ ------ ------
Total $ 712 $ (529) $(6,151)
------ ------ ------
------ ------ ------
10. Income Taxes (continued)
Net deferred tax assets result from the following temporary
differences between the book and tax bases of assets and
liabilities at (in thousands):
2002 2001
------ ------
Deferred tax assets:
Allowance for doubtful accounts $ 102 $ 66
Inventory 310 87
Benefit of net operating loss
carryforwards 13,129 7,163
Capital loss carryfowards 280 -
Amortization of intangibles (77) -
Other 174 -
------- -----
Gross deferred tax assets 13,918 7,316
Valuation allowance (13,918) (7,316)
------- -----
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):
2002 2001 2000
---- ---- ----
Computed tax provision (benefit) at the
statutory rate 34% (34)% (34)%
State income tax 13 18 -
Foreign taxes in excess of statutory rate 2 - -
Utilization of unbenefitted net operating
loss carryforwards 45 - -
Change in valuation allowance 16 34 34
-- -- --
20% 18% -
-- -- --
-- -- --
The Company has consolidated net operating loss carryforwards
of approximately $38.6 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 that the Company may offset
through the year 2014 through the application of its net
operating loss carryforwards.
The Company has been under audit by the state of Tennessee
for the years 1994 through 1999. The Company believes it has
made adequate provision for taxes that may be due as a result
of the audit.
11. Stockholders' Equity
Private Placements and Stock Issuance
During fiscal 2002, the Company did not issue any shares of
common stock. During fiscal 2002, the Company issued
preferred shares in association with the purchase of limited
partnerships in certain real estate properties. See Note 4.
During 2001, in 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, provided certain
sales and gross margin targets are met.
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 were used to purchase inventory and services from
Commerce and its affiliates and to repay certain outstanding
debt. 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.
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. At November 30, 2002,
outstanding common stock warrants are as follows:
Exercise
Price Shares Issued Expiration
-------- ------ ------ ----------
$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
$0.90 20,000 December 2001 December 2005
$1.50 100,000 March 2001 March 2004
$2.00 100,000 March 2001 March 2004
$2.50 50,000 March 2001 March 2004
$2.75 100,000 May 2002 May 2004
$2.50 75,000 June 2002 May 2004
$3.00 75,000 June 2002 May 2004
----------
7,122,040
----------
----------
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 $0.73 per share using the
Black-Scholes method on the date of grant.
During 2002, the Company issued warrants to companies in
exchange for certain services. Warrants to purchase 100,000,
75,000 and 75,000 shares exercisable at $2.75, $2.50 and
$3.00 per share, respectively, which were vested on the date
of issuance and have a term of two years, were issued in
exchange for services to be rendered over three, four and
four year terms, respectively.
During 2001, the Company issued a warrant related to the
Joe's License to purchase 250,000 shares of common stock at
a price of $1.00 per share, in the event that certain future
sales and gross margin performance criteria are met. This
warrant has not been included in the table above as the
performance criteria has not been met.
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
th e total market value of common stock that 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
ieu of cash director fees. The 2000 Director Plan will
expire in September 2010.
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 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 a finance company as additional collateral
for a $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 income (loss) would have been (in thousands
except per share information):
2002 2001 2000
------ ------ ------
Net income (loss) -as reported $ 572 $ (618) $(6,151)
Net income (loss) - pro forma 432 (1,072) (6,241)
Net income (loss) per common share -
as reported: Basic 0.04 (0.04) (0.75)
Diluted 0.04 (0.04) (0.75)
Net income (loss) per common share -
pro forma: Basic 0.03 (0.08) (0.76)
Diluted 0.03 (0.08) (0.76)
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 2002,
2001, and 2000; expected volatility of 38%, 68% and 35%;
risk-free interest rate of 6.0%, 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:
2002 2001 2000
-------------------- --------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------- -------------------- ------------------
Outstanding at
beginning of year 1,517,981 $ 2.33 685,417 $ 3.89 685,417 $ 3.89
Granted 40,000 1.00 832,564 1.06 - -
Exercised - - - - - -
Forfeited (300,000) (3.28) - - - -
--------- ------ -------- ----- -------- ------
Outstanding at end of
year 1,257,981 $ 2.07 1,517,981 $ 2.33 685,417 $ 3.89
--------- ------ --------- ------ -------- ------
--------- ------ --------- ------ -------- ------
Exercisable at end of
year 1,220,452 1,305,443 541,667
--------- --------- --------
--------- --------- --------
Weighted average per
option fair value of
options granted
during the year $ 1.26 $ 0.59 $ -
Weighted average
contractual life
remaining 3.7 years 3.4 years
Exercise prices for options outstanding as of November 30,
2002 are as follows:
Number of
Options Exercise Price
--------- --------------
25,000 $ 0.10
102,564 0.39
770,000 1.00-1.25
360,417 3.31-4.75
------- ---------
1,257,981
---------
---------
Earnings (Loss) Per Share
Earnings (loss) per share are computed using weighted
average common shares and dilutive common equivalent shares
outstanding. Potentially dilutive securities consist of
outstanding options and warrants. A reconciliation of the
numerator and denominator of basic earnings per share and
diluted earnings per share is as follows:
Year Ended
November 30 December 1 November 30
2002 2001 2000
------ ------ ------
Basic EPS Computation:
Numerator $ 572,000 $ (618,000) $(6,151,000)
Denominator:
Weighted average common shares
outstanding 14,856,000 14,315,000 8,163,000
Total shares 14,856,000 14,315,000 8,163,000
Basic EPS $ 0.04 $ (0.04) $ (0.75)
Diluted EPS Computation:
Numerator $ 572,000 $ (618,000) $(6,151,000)
Denominator:
Weighted average common shares
outstanding 14,856,000 14,315,000 8,163,000
Incremental shares from assumed exercise
of options and warrants 1,253,000 - -
Total shares 16,109,000 14,315,000 8,163,000
Diluted EPS $ 0.04 $ (0.04) $ (0.75)
Potentially dilutive options and warrants in the aggregate
of 8,397,000 and 7,372,000 in 2001 and 2000, respectively
have been excluded from the calculation of the diluted loss
per share for each of the two years ended December 1, 2001
as their effect would have been anti-dilutive.
12. Commitments and Contingencies
Leases
The Company leases certain property, buildings, a showroom
and equipment. Rental expense for the years ended 2002, 2001
and 2000 was approximately $136,000, $107,000 and $160,000,
respectively. During September 2000, the Company entered into
a lease agreement with a related party, which is owned by the
Company's Chairman, Sam Furrow, to lease office space in
Knoxville, TN. 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.
12. Commitments and Contingencies (continued)
The future minimum rental commitments under operating leases
as of November 30, 2002 are as follows (in thousands):
2003 $ 138
2004 123
2005 116
2006 118
2007 and thereafter 167
-----
Total future minimum lease payments $ 662
-----
-----
License Agreements
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 that 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.
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 was amended on July 26, 2002
that extended the term of the licensing agreement commencing
as of April 1, 2003 and continuing through March 31, 2007,
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 on net sales 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 based upon the annual term of the royalty
agreement in accordance with the following schedule:
2004 $ 50,000
2005 75,000
2006 87,500
2007 100,000
--------
Total future minimum royalty payments $ 312,500
--------
--------
Innovo's collegiate sports-licensed accessory products display
logos, insignias, names, or slogans licensed from the various
collegiate licensors. Innovo holds licenses for the use of the
logos and names of over 130 colleges for various products.
Each of the collegiate licensing agreements grants Innovo
either an exclusive or non-exclusive license for use in
connection with specific products and/or specific territories.
The agreements are generally for a twelve to twenty four month
period and generally call for Innovo to pay an eight percent
royalty on goods sold bearing the marks.
Innovo had entered into a licensing agreement with Major League
Baseball, which expired on December 31, 2002. Subsequently,
Innovo has reached a verbal agreement with Major League
Baseball for an additional twelve month extension period for
bag related products. While Innovo is in the process of 12.
formally memorializing the agreement, there are no guarantees
that Innovo will be able to enter into a written agreement with
Major League Baseball. According to the terms of the
understanding between Innovo and Major League Baseball, Innovo
is to pay an eleven percent royalty on products sold bearing
Major League Baseball logos with Innovo having the right to
sell the products to concession, club retail outlets and
premium customers in the United States.
License Agreements (continued)
While Innovo is continuing to develop products bearing the sport
licenses, Innovo is placing more time and resources towards
developing more fashion oriented product lines that the Company
believes will have greater potential in the marketplace.
Innovo's craft 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" and
"Toteworks".
IAA has entered into a five-year licensing agreement with Mattel,
Inc. to produce Hot Wheels branded adult apparel and accessories
in the United States, Canada and Puerto Rico. Under the terms of
the license agreement, IAA will produce apparel and accessory
products targeted to men and women in the junior and contemporary
markets. The products lines will include active wear, sweatshirts
and pants, outerwear, t-shirts, "baby tee's" for women, headwear,
bags, backpacks and totes, which will be emblazoned with the
familiar Hot Wheels flame logo.
The product line, which is scheduled to be released in 2003, will
also include items sporting the Hot Wheels 35th Anniversary logo,
as a part of the brand's celebratory campaign for the year. IAA
may terminate the agreement in any year by paying the remaining
balance of that years minimum royalty guarantees plus the
subsequent years minimum royalty guarantees. Royalties paid by
IAA earned in excess of the minimum royalty requirements for any
one given year, may be credited towards the shortfall amount of
the minimum required royalties in any subsequent period during
the term of the licensing agreement.
According to the terms of the agreement, IAA has the right to
sublicense the accessory product's category to Innovo. The
agreement calls for a royalty rate of seven percent royalty and a
two percent advertising fee on the net sales of goods bearing the
Hot Wheels trademark. In the event IAA defaults upon any material
terms of the agreement, the Licensor shall have the right to
terminate the agreement.
On August 1, 2002, IAA entered into an exclusive 42-month
worldwide agreement for the Lil Bow Wow license, granting IAA the
right to produce and market products bearing the mark and
likeness of the popular stage and screen performer. The IAA
division plans to create and market a wide range of apparel and
coordinating accessories for boys and girls. The license
agreement between IAA, Bravado International Group, the agency
with the master licensing rights to Lil Bow Wow, and LBW
Entertainment, Inc. calls for the performer to make at least one
public appearance every six months during the term of the
agreement to promote the Lil Bow Wow products, as well as use his
best efforts to promote and market these products on a daily
basis.
Additional terms of the license agreement allows IAA to market
boys and girls products bearing the Lil Bow Wow brand to all
distribution channels, the right of first refusal on all other
Lil Bow Wow related product categories during the term of the
license agreement, and the right of first of refusal on proposed
transactions by the licensor with third parties upon the
expiration of the agreement. The agreement calls for IAA to pay
an eight percent royalty on the nets sales of goods bearing Lil
Bow Wow related marks. In the event IAA defaults upon any
material terms of the agreement, the Licensor shall have the
right to terminate the agreement. Furthermore, IAA has the right
to sublicense the accessory product's category to Innovo.
The Company displays names and logos on its products under
license agreements that require royalties ranging from 7% to 17%
of sales. The agreements expired through December 2002 and
require annual advance payments (included in prepaid expenses)
and certain annual minimum payments. Royalty expense was
$463,000, $132,000 and $373,000 for the years ending November 30,
2002, December 1, 2001, and November 30, 2000, 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.
13. Segment Disclosures
Current Operating Segments
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.
During 2002, the Company operated in two segments, Accessories
and Apparel. The 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 Company's
real estate segment is represented by the operations and
investments of the Company's LMI and IRI subsidiaries. The
operating segments have been classified based upon the nature of
their respective operations, customer base and the nature of the
products sold.
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 November 30, 2002, are as follows (in thousands):
November 30, 2002 Accessories Apparel Other (A) Total
----------- ------- --------- -----
Revenues, net $ 12,072 $ 17,537 $ - $ 29,609
Gross profit 3,502 6,268 - 9,770
Depreciation and amortization 21 183 52 256
Interest expense 140 339 59 538
Segment assets 3,820 9,343 1,980 15,143
Expenditures for segment assets 70 97 455 622
(A) Other includes corporate expenses and assets and expenses
related to real estate investments.
December 1, 2001 Accessories Apparel Other (B) 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
(B) Other includes corporate expenses and assets and expenses
related to real estate investments.
November 30, 2000 Domestic (C) 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
(C) Segment operating results include $600,000 charge for
impairment of long-lived assets held for sale related to the
Lake Worth, Florida, real estate property.
Operations by Geographic Areas
Information about the Company's operations in the United
States and Asia is presented below (in thousands). Inter-
ompany revenues and assets have been eliminated to arrive at
the consolidated amounts.
Adjustments and
November 30, 2002 United States Asia Eliminations Total
Sales $ 27,707 $ 1,902 $ - $ 29,609
Inter-company
sales 2,228 - (2,228) -
---------- ------- --------- --------
Total revenue $ 29,935 $ 1,902 $ (2,228) 29,609
---------- ------- -------- --------
---------- ------- -------- --------
Income from
operations $ 1,558 $ 115 $ (524) $ 1,189
---------- ------- -------- --------
---------- ------- -------- --------
Total assets $ 13,693 $ 1,974 $ (524) $ 15,143
---------- ------- -------- --------
---------- ------- -------- --------
December 1, 2001
Sales $ 9,292 $ - $ - $ 9,292
Inter-company
sales - - - -
---------- ------- -------- -------
---------- ------- -------- -------
Total revenue $ 9,292 $ - $ - $ 9,292
---------- ------- ------- -------
---------- ------- ------- -------
Income (loss) from
operations $ (399) $ - $ - $ (399)
---------- ------- -------- -------
---------- ------- -------- -------
Total assets $ 10,247 $ - $ - $ 10,247
---------- ------- -------- --------
---------- ------- -------- --------
November 30, 2000
Sales $ 5,767 $ - $ - $ 5,767
Inter-company
sales - - - -
---------- ------- ------- --------
---------- ------- ------- --------
Total revenue $ 5,767 $ - $ - $ 5,767
---------- ------- ------- ---------
---------- ------- ------- ---------
Income (loss) from
operations $ (4,541) $ - $ - $ (4,541)
---------- ------- ------- ---------
---------- ------- ------- ---------
Total assets $ 7,416 $ - $ - $ 7,416
---------- ------- -------- ---------
---------- ------- -------- ---------
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 president 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 was due, without interest, on April 30, 2002, and was
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.
On July 18, 2002, the Board of Directors voted in favor of
extending the term of Note until April 30, 2005. The
remaining provisions of the Note remained the same. At
November 30, 2002, $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 were
repaid.
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, TN, 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 a three-year term
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.
With respect to 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's Innovo subsidiary purchased its craft goods and
distribution and operational services from Commerce in fiscal
2002 and fiscal 2001. The services purchased included but
were not limited to accounts receivable collections, certain
general accounting functions, inventory management and
distribution logistics. The following schedule represents
Innovo's purchases from Commerce during fiscal 2002 and
fiscal 2001 (in thousands):
Innovo
2002 2001 2001
Goods $ 3,317 $ 2,320 $ 3,108
Distribution Services 644 362 196
Operational Services 203 112 --
------ ------ ------
Total $ 4,164 $ 2,794 $ 3,304
------ ------ ------
------ ------ ------
During fiscal 2002 and fiscal 2001, Joe's and IAA purchased
goods and services from Commerce. Joe's and IAA did not
purchase goods or services from Commerce in 2000. The
purchases were made based on Joe's and IAA's needs during the
period and were not made pursuant to contractual obligations.
The distribution expenses are reflected in the cost of goods
sold in the Company's financial statements. The following
schedule represents Joe's and IAA's purchases from Commerce
(in thousands):
Joe's IAA
2002 2001 2002 2001
---- ---- ---- ----
Goods $6,102 $1,102 $6,171 $1,794
Distribution Services 107 20 -- --
----- ----- ----- -----
Total $6,209 $1,122 $6,171 $1,794
----- ----- ----- -----
----- ----- ----- -----
Additionally, the Company is charged an allocation expense
from Commerce for expenses associated with the Company
occupying space in Commerce's Commerce, California facility
and the use of general business machines and communication
services. These expenses totaled approximately $25,000 for
fiscal 2002 and fiscal 2001.
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 2002 and 2001, this amount totaled
$277,000 and $46,000, respectively.
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 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. Included in due to related parties is
$2,250,000 at November 30, 2002 relating to amounts due to
Commerce for goods and services described above.
15. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of
operations for the two years (in thousands, except per share
amounts)
2002 Quarter ended
March 2 June 1 August 31 November 30
------- ------ ------- -------
Net sales $ 3,201 $ 6,802 $10,148 $ 9,458
Gross profit 912 2,345 3,357 3,156
Income (loss) before
income taxes (475) 223 932 32
Net income (loss) (496) 207 820 41
Income (loss) per share:
Basic $ (0.03) $ 0.01 $ 0.06 $ 0.00
Diluted $ (0.03) $ 0.01 $ 0.05 $ 0.00
2001 Quarter ended
March 3 June 2 September 1 December 1
------- ------ -------- --------
Net sales $ 1,153 $ 1,968 $ 2,625 $ 3,546
Gross profit 499 746 951 763
Income (Loss) before
income taxes (103) 41 (16) (451)
Net income (loss) (103) 41 (16) (540)
Income (loss) per share
(basic and diluted): $ (0.01) $ 0.00 $ 0.00 $ (0.04)
16. Subsequent Events (unaudited)
Crossman Loan
On February 7, 2003 the Company entered into a loan agreement
with Marc Crossman, a member of the Company's Board of
Directors. The loan was funded in two phases of $250,000 each
on February 7, 2003 and February 13, 2003 for an aggregate
loan value of $500,000. In the event of default, each phase
is collateralized by 125,000 shares of the Company's common
stock as well as a general claim on the assets of the
Company, subordinate to existing lenders. Each phase matures
six months and one day from the date of its respective
funding, at which point the principal amount and any accrued
interest is due in full. The loan carries an 8% annualized
interest rate with interest due on a monthly basis. The loan
may be repaid by the Company at any time during the term of
the loan without penalty. Further, the Company has the option
to extend the term of the loan for an additional period of
six months and one day at anytime before maturity. The
disinterested directors of the Company approved the Loan from
Mr. Crossman.
Employee Benefits
On December 1, 2002, the Company established a tax qualified
defined contribution 401(k) Profit Sharing Plan (the "Plan").
All employees who have worked for the Company for 30
consecutive days may participate in the 401(k) Profit Sharing
Plan. The Company's contributions may be made on a
discretionary basis. All employees who have worked 500 hours
qualify for profit sharing in the event at the end of each
year the Company decides to do so.
Innovo Group Inc. and Subsidiaries
Schedule II
Valuation of Qualifying Accounts
Additions
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Description Period Expense Other Accounts Deductions of Period
----------- ------ ------- --------- -------- ---------
Allowance for doubtful accounts:
Year ended November 30, 2002 $ 164,000 $ 56,000 $ 163,000(A) $ - $ 383,000
Year ended November 30, 2001 36,000 128,000 - - 164,000
Year ended November 30, 2000 153,000 99,000 - 216,000(B) 36,000
Allowance for inventories: 125,000 19,000 (39,000) 105,000
Year ended November 30, 2002 125,000 105,000
Year ended November 30, 2001 78,000 47,000 - - 125,000
Year ended November 30, 2000 104,000 60,000 - 86,000 78,000
Allowance for deferred taxes:
Year ended November 30, 2002 7,316,000 6,602,000 13,918,00
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
(A) Uncollected receivables written off, net of recoveries.
(B) Amounts charged to sales returns and allowances