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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 1, 2003
Commission file number: 0-18926
INNOVO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2928178
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5900 S. Eastern Ave., Suite 104 Commerce,CA 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 registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether registrant is an
accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [X]
As of April 14, 2003, there were 15,129,764 shares
of the issuer's only class of common stock outstanding.
INNOVO GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Financial Statements
Item 1.
Consolidated Condensed Balance Sheets as 3
of March 1, 2003 (unaudited) and November
30, 2002
Consolidated Condensed Statements of 4
Operations for the three months ended
March 1, 2003 and March 2, 2002,
respectively (unaudited)
Consolidated Condensed Statements of 5
Cash Flows for the three months ended
March 1, 2003 and March 2, 2002,
respectively (unaudited)
Notes to Condensed Consolidated 6
Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 20
about Market Risk
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVO GROUP INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(000's except for share data)
03/01/03 11/30/02
-------- --------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 137 $ 222
Accounts receivable, and due from
factor net of allowance for
uncollectible accounts of $428(2003)
and $383(2002) 3,948 2,737
Inventories 5,139 5,710
Prepaid expenses & other current assets 610 279
------- -------
TOTAL CURRENT ASSETS 9,834 8,948
------- -------
PROPERTY, PLANT and EQUIPMENT, net 1,421 1,419
GOODWILL 4,271 4,271
INTANGIBLE ASSETS, net 445 487
OTHER ASSETS 19 18
------- -------
TOTAL ASSETS $ 15,990 $ 15,143
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,888 $ 2,438
Due to related parties 4,522 4,250
Current maturities of long-term debt 788 756
------- -------
TOTAL CURRENT LIABILITIES 8,188 7,444
LONG-TERM DEBT, less current maturities 2,427 2,631
8% Redeemable preferred stock, $0.10 par
value: Authorized shares-5,000
194 shares(2003) and 194(2002) -- --
STOCKHOLDERS EQUITY
Common stock, $0.10 par value - shares
Authorized 40,000,000
Issued and outstanding 14,901(2003)
and 14,901(2002) 1,491 1,491
Additional paid-in capital 40,362 40,343
Accumulated deficit (33,227) (33,507)
Promissory note-officer (703) (703)
Treasury stock (2,547) (2,537)
Accumulated other comprehensive loss -- (19)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,376 5,068
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,990 $ 15,143
------- -------
------- -------
See accompanying notes which are an integral part of these
unaudited consolidated condensed financial statements
INNOVO GROUP INC. AND SUBUSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(000's except per share data)
(unaudited)
Three Months Ended
03/01/03 03/02/02
-------- --------
NET SALES $ 11,915 $ 3,201
COST OF GOODS SOLD 8,605 2,289
------- --------
Gross Profit 3,310 912
OPERATING EXPENSES
Selling, general and administrative 2,838 1,250
Depreciation and amortization 79 46
------- -------
2,917 1,296
INCOME (LOSS) FROM OPERATIONS 393 (384)
INTEREST EXPENSE (150) (97)
OTHER INCOME (EXPENSE), net 102 6
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 345 (475)
INCOME TAXES 63 21
------- -------
NET INCOME (LOSS) $ 282 $ (496)
------- -------
------- -------
NET INCOME (LOSS) PER SHARE:
Basic 0.02 (0.03)
Diluted 0.02 (0.03)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 14,841 14,921
Diluted 17,241 14,921
See accompanying notes which are an integral part of these unaudited
consolidated condensed financial statements
INNOVO GROUP INC. AND SUBUSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(000's except per share data)
(unaudited)
Three Months Ended
03/01/03 03/02/02
-------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ (777) $ (32)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (39) (221)
Proceeds from Real Estate Investment 773 --
Redemption of Preferred Shares (368) --
------- -------
Cash Used in Investing Activites 366 (221)
CASH FLOWS FROM FINANCING ACTIVITIES
Treasury Stock Acquistions (10) (21)
Related Party Borrowings 500 --
Repayments of Long-Term Debt (183) (18)
------- -------
Cash Used in Financing Activities (307) (39)
Effect of Exchange Rate on Cash 19 --
NET CHANGE IN CASH AND CASH EQUIVALENTS (85) (292)
CASH AND CASH EQUIVALENTS, at beginning of period 222 292
------- -------
CASH AND CASH EQUIVALENTS, at end of period 137 --
------- -------
------- -------
See accompanying notes which are an integral part of these unaudited
consolidated condensed financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BASIS OF PRESENTATION
In the opinion of management, the accompanying
unaudited condensed consolidated financial statements
contain all adjustments (consisting of only normal
recurring and consolidating adjustments) considered
necessary to present fairly the balance sheets, the
results of operations and cash flows for the period
reported. The accompanying unaudited condensed
consolidated financial statements include the financial
results of the Innovo Group Inc. ("Innovo Group") and
all its wholly-owned subsidiaries (collectively the
"Company"). All intercompany balances have been
eliminated.
These accompanying unaudited condensed
consolidated financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. The balance sheet at November 30, 2002 has
been derived from the audited financial statements at
that date but does not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements.
While management believes that the disclosures
presented are adequate to make the information not
misleading, it is recommended that the consolidated
financial statements and footnotes be read in
conjunction with the consolidated financial statements
included in the Company's Annual Report on Form 10-K
for the year ended November 30, 2002. Operating results
the three-month period ended March 1, 2003 are not
necessarily indicative of the results that may be
expected for the year ended November 29, 2003.
NOTE 2 - INVENTORY
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):
3/01/03 11/30/02
------- --------
Finished goods $ 5,273 $ 5,741
Raw materials 9 74
------ ------
5,282 5,815
Less allowance for obsolescence
and slow moving items (143) (105)
------ ------
$ 5,139 $ 5,710
------ ------
------ ------
NOTE 3 - LONG-TERM DEBT
A summary of our long-term debt follows.
3/01/03 11/30/02
------- --------
First mortgage loan on Springfield
property $ 538 $ 558
Promissory note to Azteca 741 786
Promissory note to Azteca 1,926 2,043
------ ------
Total long-term debt 3,204 3,387
Less current maturities 778 756
------ ------
$ 2,427 $ 2,631
------ ------
------ ------
NOTE 4 - DUE TO RELATED PARTY
On February 7, 2003 the Company entered into a
loan agreement with Marc Crossman, the Company's Chief
Financial Officer and 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.
NOTE 5 --EARNINGS PER SHARE
A reconciliation of the numerator and denominator
of basic earnings per share and diluted earnings per
share is as follows:
THREE MONTHS ENDED
3/01/03 3/02/02
------- -------
Basic EPS Computation:
Numerator 282,000 (496,000)
Denominator:
Weighted Average Common Shares
Outstanding 14,841,000 14,921,000
---------- ----------
Total Shares 14,841,000 14,921,000
---------- ----------
Basic EPS $ 0.02 $ (0.03)
---------- ----------
---------- ----------
Diluted EPS Calculation:
Numerator 288,000 (496,000)
Denominator:
Weighted Average Common Shares
Outstanding 14,841,000 14,921,000
Incremental Shares Outstanding from
Assumed Exercise of Options and Warrants 2,400,000 --
---------- ---------
Total Shares 17,241,000 14,921,000
---------- ----------
Diluted EPS $ 0.02 $ (0.03)
---------- ----------
---------- ----------
1,435,417 options and warrants were excluded from
calculation of diluted EPS at March 1, 2003 as
they had an exercise price in excess of the
average market price of the Company's common
stock during the quarter.
8,382,521 options and warrants at March 2, 2002
were excluded from the calculation of diluted
EPS as their effect would have been anti-dilutive
NOTE 6-EQUITY ISSUANCE
Subsequent to the end of the first quarter of fiscal
2003, the Company completed two prive placements of
equity totaling net proceeds of $571,000. The first
placement, executed on March 19, 2003 raised gross
proceeds of $437,000 at $2.65 per share and the second
placement executed on March 26, 2003 raised gross
proceeds of $168,000 also at $2.65 per share. In
aggregate the Company issued 228,500 shares as a result
of the two private placements.
NOTE 7-INCOME TAXES
The Company's income tax expense for the quarter ended
March 2, 2002 represents estimated state and foreign
income and franchise tax expense.
The Company's income tax expense for the quarter ended
March 1, 2003 represents estimated state and foreign
income and franchise tax expense, as well as estimated
Federal tax expense in excess of net operating loss
carry-forwards available for the period, using the
effective rate method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, the
words "may," "will," "except," "anticipate," "intend,"
"estimate," "continue," "believe" and similar
expressions are intended to identify forward-looking
statements. Similarly, statements that describe our
future expectations, objectives and goals or contain
projections of our future results of operations or
financial condition are also forward-looking
statements. Statements looking forward in time are
included in this Quarterly Report on Form 10-Q pursuant
to the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and
uncertainties, which could cause actual results to
differ materially, including, without limitation,
continued acceptance of the Company's product, product
demand, competition, capital adequacy and the potential
inability to raise additional capital if required, and
the risk factors contained in the Company's reports
filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as
amended, including its Annual Report on Form 10-K for
the year ended November 30, 2002. Readers are
cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date
hereof. Our future results, performance or
achievements could differ materially from those
expressed or implied in these forward-looking
statements. 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.
Results of Operations
The following table sets forth certain statement of
operations data for the years indicated (in thousands):
Three Months Ended
(in thousands)
3/01/03 3/02/02 $ Change % Change
------- ------- -------- --------
Net Sales $ 11,915 $ 3,201 $ 8,714 272
Costs of Goods Sold 8,605 2,289 6,316 276
------- ------ ------ ----
Gross Profit 3,310 912 2,398 263
Selling, General & Administrative 2,838 1,250 1,588 127
Depreciation & Amortization 79 46 33 72
------- ------ ------ ----
Income (Loss) from Operations 393 (384) 777 (A)
Interest Expense (150) (97) (53) 55
Other Income (expense) 102 6 96 (A)
------- ------ ------ ----
Income (Loss)Before Income Taxes 345 (475) 820 (A)
Income Taxes 63 21 42 200
------- ------ ------ ----
Net Income (Loss) $ 282 $ (496) $ 778 (A)
(A) Not Meaningful
Comparison of Three Months Ended March 1, 2003, to
Three Months Ended March 2, 2002
Overview
During the first quarter 2003, compared to the
first quarter of 2002, the Company significantly
increased its revenues and generated a net profit of
$282,000 compared to a net loss of $496,000 in the
prior period as a result of improved operating
performance from all three of its main consumer
products operating subsidiaries.
Reportable Segments
During the three months ended March 1, 2003 and
March 2, 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, Inc. ("Innovo"). The apparel
segment is comprised of the operations of Joe's Jeans,
Inc. ("Joe's") and Innovo Azteca Apparel, Inc. ("IAA").
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 periods indicated
(in thousands):
Three Months Ended
March 1, 2003 Accessories Apparel Other(A) Total
----------- ------- ------- -----
(in thousands)
Revenues, net $ 2,743 $ 9,172 $ -- $ 11,915
Gross profit 793 2,517 -- 3,310
Depreciation and
amortization 7 52 21 79
Interest expense 38 103 9 150
Three Months Ended
March 2, 2002 Accessories Apparel Other(A) Total
----------- ------- ------- -----
(in thousands)
Revenues, net $ 1,476 $ 1,725 $ -- $ 3,201
Gross profit 370 542 -- 912
Depreciation and
amortization 6 30 10 46
Interest expense 9 76 12 97
Three Months Ended
3/01/03 TO 3/02/02 Accessories Apparel Other(A)
----------- ------- -------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
Revenues, net $ 1,267 86% $ 7,447 432% $ -- --
Gross profit 423 114 1,975 364 -- --
Depreciation and
amortization 1 17 22 73 11 110
Interest expense 29 322 27 36 (3) (25)
(A) Other includes corporate expenses and assets and expenses related to
real estate operations.
Operating Revenues
Net revenues for the three months ended March 1,
2003 increased to $11,915,000 or 272% from $3,201,000
for the three months ended March 2, 2002. During the
period, the Company experienced a significant increase
in sales from its three main operating subsidiaries,
with 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
$2,743,000 in the first quarter of fiscal 2003 compared
to $1,476,000 in the first quarter of fiscal 2002,
representing an 86% increase. The increase is
primarily a result of increased sales to private label
customers, which increased from gross revenues of
$95,000 in the first quarter of fiscal 2002 to gross
revenues of $838,000 in the first quarter of fiscal
2003. Innovo also experienced an increase in revenues
from its craft business and Bongo product line.
Innovo's craft business increased from gross revenues
of $979,000 in the first quarter of 2002 to $1,340,000
in the first quarter of fiscal 2003. Additionally,
Innovo's Bongo gross revenues increased to $415,000
for the first quarter of fiscal 2002, representing a
$112,000 increase.
Apparel
Joe's. During the first quarter of fiscal 2003,
Joe's net revenues increased to $2,128,000 compared to
$923,000 in the first quarter of fiscal 2002, resulting
in an increase of 131%.
During the first quarter of fiscal 2003, Joe's
experienced increase demand in both the domestic and
international marketplaces. Joe's domestic sales for
the current period were $1,494,000 with the remaining
$634,000 of sales representing international sales from
Joe's Japanese subsidiary Joe's Jeans Japan, Inc. and
sales to international distributors. The increase is
attributable to growing brand awareness and Joe's
continued marketing efforts in the overseas markets.
IAA. IAA, increased its net revenues to
$7,044,000 for first quarter of fiscal 2003 compared to
$802,000 the same quarter a year ago, representing an
increase of approximately 778%. IAA's significant
increase in revenues is largely attributable to an
increase in sales to Target Corporation's Mossimo
division. IAA's products during the first quarter of
fiscal 2003 primarily consisted of denim jeans. IAA is
currently working towards expanding its private label
customer base in an attempt to reduce its reliance on a
limited number of customers.
Gross Margin
The Company's gross margin decreased from 29% in
the first fiscal quarter of 2002 to 28% in the first
fiscal quarter of 2003. The slight decline was
attributable to a higher percentage of sales coming
from the private label apparel segment which typically
carries lower margins that the Company's other
products.
Accessory
Innovo. The Company's accessory segment's gross
margin increased from approximately 25% in the first
quarter of fiscal 2002 to 29% in the first quarter of
fiscal 2003. Innovo's gross margin is largely a
function of Innovo's product mix for the given period.
Innovo's branded products have traditionally
experienced higher gross margins than its craft and
private label businesses, with Innovo's private label
business usually having slightly higher gross margins
than Innovo's craft business. Innovo's gross margin
in the first quarter of fiscal 2002 was lower than its
historical gross margin average as a result of Innovo's
craft business representing a greater percentage of
Innovo's total revenues. In the first quarter of
fiscal 2003, Innovo's branded and private label
businesses represented a greater percentage of sales
and thus slightly increased Innovo's gross margins in
the first quarter of fiscal 2003 compared to the first
quarter of fiscal 2002.
Apparel
Joe's. Joe's gross margins increased from 43% in
first quarter of fiscal 2002 to 61% in first quarter of
fiscal 2003. During the first quarter of fiscal 2003,
Joe's cost of goods sold for its products decreased.
Consequently, Joe's gross margins in first quarter of
fiscal 2003 reflect the impact of this decrease in price.
IAA. IAA's gross margins decreased in the first
quarter of fiscal 2003 to 17% from 19% in the same
quarter a year ago. The majority of the decrease is
attributable to an increase in returns and higher costs
for certain goods sold during the period.
Selling, General and Administrative Expense
The Company's selling, general and administrative
("SG&A") expenses increased in the quarter by
approximately 127% from $1,250,000 in the first quarter
of fiscal 2002 to $2,838,000 in the first quarter of
fiscal 2003. The increase in SG&A expenses is largely a
result of an increase in expenses to support the
Company's 272% revenue 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 67% to $730,000 for the three months
ended March 1, 2003 compared to $440,000 for the three
months ended March 2, 2002. Innovo's increase in SG&A
expenses is largely attributable to expenses which were
necessary to support or associated with Innovo's 86%
increase in revenues. During the quarter, Innovo's
wages increased by approximately 87% to $290,000 as a
result of staff members the Company added at its
headquarters in Knoxville and to its showroom in New
York City during the second half of fiscal 2002.
Additionally, Innovo's wages increased from the
addition of employees at Innovo's sourcing office
Innovo Hong Kong, Inc. in Hong Kong.
Royalties expense for the quarter increased by
350% to $27,000 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 30% during the
period as a result of the expense associated with
distributing a greater amount of product.
Apparel
Joe's. Joe's SG&A expenses increased by
approximately 211% to $1,230,000 during the quarter
compared to $396,000 in the quarter a year ago. Joe's
wage expense increased significantly 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 also increased
substantially as a result of Joe's increasing revenues.
In aggregate, wages and commissions, which grew 143%,
accounted for over 42% of Joe's SG&A
In order to continue to achieve rapid sales
growth, the Company actively invests in marketing the
Joe's brand through participation in sales shows and
advertising the Joe's brand in national print
publications. During the quarter, Joe's sales show and
sales sample expense increased by 165% to $127,000 and
its advertising expenses increased by 145% to $128,000
compared to the prior year's first quarter. In response
to sales growth, Joe's factoring expense increased to
$31,000 in the first quarter in response to the
increase in the number of receivables Joe's factored.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and
Capital Resources" for a further discussion of the
factoring agreement between Joe's and the CIT Group,
Inc.
IAA. IAA's SG&A expenses in the first quarter of
fiscal 2003 increased to $412,000 from $107,000 in the
quarter a year ago, representing a 285% increase. As a
result of a ten-fold increase in revenues, factoring
expenses increased at a similar pace rising from $5,000
in the first fiscal quarter of 2002 to $67,000 in the
first fiscal quarter of 2003. During the quarter, wages
increased 26% to $120,000. During the quarter, the
Company directed additional resources towards the
development of three branded product lines, which are
anticipated to begin generating revenues in the second
half of fiscal 2003. For the period, IAA incurred
expenses of $102,000, or 24% of IAA's SG&A, related to
sales shows, samples, and advertising primarily for the
branded product lines. Additionally, the company paid
royalties of $32,000 as a part of its licensing
agreements associated with the branded product lines.
Other
IGI. IGI, which reflects the corporate expenses
of the Company and operates under the "other" segment
does not have revenues. For the first quarter of
fiscal 2003, IGI's expenses, excluding interest,
depreciation and amortization, increased by
approximately 49% to $456,000 compared to $307,000 in
the quarter a year ago. The most notable increase in
expense for IGI is the increase in its professional
fees and management wages. During the quarter, IGI's
professional fee's expense increased approximately 190%
compared to the same quarter a year ago. The increase
in professional fees is largely attributable to
additional legal and accounting fees. IGI's management
wages increased over 100% during the quarter to
$110,000 as the Company continues to hire additional
personnel to support the Company's growth and
development. IGI's remaining expenses did not differ
materially compared to the first quarter of fiscal
2002.
LMI. During the quarter, Leasall Management, Inc.
("LMI"), a wholly-owned subsidiary of the Company,
incurred $10,000 of expense in order to maintain and
operate the Company's former manufacturing facility and
headquarters located in Springfield, TN, which is now
partially leased to third party tenants.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the
Company increased in the three-month period ended March
1, 2003 to $79,000 from $46,000 in the prior year
period, representing an increase of 72%. The increase
is primarily attributable to an increase in LMI's
depreciation of the Springfield facility and the
amortization of the licensing rights to the Joe's Jeans
trademark acquired upon the creation of Joe's. During
fiscal 2002, the Company made significant leasehold
improvements to its Springfield, TN facility. As a
result, depreciation of the facility increased 113%
from $8,000 in the first quarter of fiscal 2002 to
$17,000 in the first quarter of fiscal 2003. 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
quarter ended March 1, 2003 increased by approximately
55% to $150,000 compared to $97,000 for the quarter
ended March 2, 2002. The Company's interest expense is
primarily associated with its factoring and inventory
lines of credit, the knit acquisition purchase note,
the loan to the Company by an officer of the Company,
and the note associated with the Company's former
manufacturing facility and headquarters in Springfield,
TN. See "Managements Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity
and Capital Resources" for a further discussion of
these financing arrangements.
Accessory
Innovo. For the three months ended March 1, 2003,
Innovo's interest expense was $38,000 compared to
$9,000 for the three months ended March 2, 2002. This
represents interest expense incurred from borrowings
under Innovo's factoring facility and inventory based
line of credit. See "Managements Discussion and
Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" for a
further discussion of these financing arrangements.
Apparel
Joe's. Joe's interest expense for the three
months ended March 1, 2003 was approximately $16,000
compared to $2,000 for the three months ended March 2,
2002. While Joe's typically factors fewer receivables
than Innovo and IAA, with the significant increase in
revenues, Joe's borrowings against its factoring
facility increased significantly in the first quarter
of 2003 compared to 2002. Additionally, Joe's increase
in interest expense reflects the interest expense
associated with borrowing under Joe's inventory based
line of credit. See "Managements Discussion and
Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" for a
further discussion of these financing arrangements.
IAA. IAA's interest expense increased for the
three months ended March 1, 2003 as a result of IAA
factoring a vast majority of its receivables and then
borrowing funds against these receivables. However,
offsetting a portion of the increased interest expense
is a decrease in the interest payments on a note issued
pursuant to the acquisition and creation of the IAA
subsidiary. For the three months ended March 1, 2003,
IAA's interest expense increased by approximately 18%
to $87,000 compared to the three months ended March 2,
2002.
Other Income
The Company had other income of $102,000 in the
first quarter of 2003 compared to other income of a
$6,000 in first quarter of 2002.
IRI. The increase in other income for the three
months ended March 1, 2003, is largely attributable to
$85,000 of income from a management fee that Innovo
Realty, Inc. ("IRI") receives pursuant to an investment
the Company made through its newly formed IRI
subsidiary in the second quarter of fiscal 2002, thus
there was not other income affiliated with IRI for the
first quarter of fiscal 2002 since the investment was
not made until the second quarter of 2002.
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 generated net income of $282,000 for
the three months ended March 1, 2003 compared to a net
loss of $496,000 for the three months ended March 2,
2002. The Company's profitability is primarily
attributable to the Company's significant increase in
revenues due to the growth of the business of its three
main consumer products operating subsidiaries as
discussed above. Subsequently, the gross profit
associated with the increase in revenues exceeded the
Company's expenses during the period resulting in a net
income of $282,000 for the first quarter of fiscal
2003.
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 used for operating activities during the
first quarter of 2003 was $777,000 compared to cash
used for operating activities of $32,000 during the
first quarter of 2002. During the quarter, cash
generated from the reduction of inventory was offset by
an increase in accounts receivable and a decrease in
prepaid expenses and other current liabilities
resulting in a net use of cash for operating
activities of $777,000. Cash used in operating
activities combined with cash generated through a
related party borrowing of $500,000 resulted in a
slight use of cash of $85,000 during the quarter.
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.
The Company relied on the following primary
sources to fund operations during the first quarter of
fiscal 2003:
- 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 March 1, 2003, 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. Joe's and Innovo's
agreements with CIT expire on June 1, 2003 and IAA's
agreement expires on September 10, 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.
Equity Financing
Subsequent to the end of the first quarter of
fiscal 2003, the Company completed two private
placement of equity totaling net proceeds of $571,000.
The first placement, executed on March 19, 2003 raised
gross proceeds of $437,000 at $2.65 per share and the
second placement executed on March 26, 2003 raised
gross proceeds of $168,000 also at $2.65 per share.
In aggregate the Company issued 228,500 shares as a
result of the two private placements.
Short-Term Debt
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 and the Company's current
Chief Financial Officer. 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 unsecured 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):
3/01/03 11/30/02
------- --------
First mortgage loan on Springfield property $ 538 $ 558
Promissory note to Azteca 741 786
Promissory note to Azteca 1,926 2,043
------- --------
Total long-term debt 3,205 3,387
Less current maturities 778 756
------- --------
$ 2,427 $ 2,631
------- --------
------- --------
The first mortgage loan held by First Independent
Bank of Gallatin, is collateralized by a first deed of
trust on real property in Springfield, TN (with a
carrying value of $1,220,000 at March 1, 2003), 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 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, Nasco Products
International, Inc., a wholly-owned subsidiary of the
Comapny, and the President of the Company,
Pat Anderson, 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 Production International, Inc.,
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 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 March 1, 2003, 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 the
Commerce Investment Group).
The following table sets forth the Company's
contractual obligations and commercial commitments as
of March 1, 2003:
CONTRACTUAL
OBLIGATIONS PAYMENTS DUE BY PERIOD
Total Less 1-3 4-5 After
than years years 5
1 year years
Long Term Debt $3,205 $573 $1,700 $844 $88
Operating Leases 627 103 239 285 --
Other Long Term
Obligations-Minimum Royalties 3,748 381 2,302 1,065 --
Licenses
In the first quarter of fiscal 2003, the
Company's IAA subsidiary entered into a 44 month
exclusive licensing agreement for the United States,
its territories and possessions with the recording
artist and entertainer Eve for the license of the
Fetish trademark for use with the production and
distribution of apparel and accessory products. The
Company has guaranteed minimum net sales obligations of
$8,000,000 in the first 18 months of the agreement,
$10,000,000 in the following 12 month period and
$12,000,000 in 12 month period following thereafter.
According to the terms of the agreement the Company is
required to pay an 8% royalty and a 2% advertising fee
on the nets sales of products bearing the Fetish logo.
In the event the Company does not meet the minimum
guaranteed sales, the Company will be obligated to make
royalty and advertising payments equal to the minimum
guaranteed sales multiplied by the royalty rate of 8%
and advertising fee of 2%. The Company also has the
right of first refusal in regards to the licensing
rights for the Fetish trademark in the apparel and
accessories category upon the expiration of the
agreement, subject to the Company meeting certain sales
performance targets during the term of the agreement.
Additionally, the Company has the right of first
refusal for the apparel and accessory categories in
territories in which the Company does not currently
have the licensing rights for the Fetish trademark.
Seasonality
The Company's business is seasonal. The majority
of the marketing and sales activities take place from
late fall to early spring. The greatest volume of
shipments and sales are generally made from late spring
through the summer, which coincides with the Company's
second and third fiscal quarters and the Company's cash
flow is strongest in its third and fourth fiscal
quarters. Due to the seasonality of the business, the
third quarter results are not necessarily indicative of
the results for the fourth quarter.
Management's Discussion of Critical Accounting Policies
Management believes that the accounting policies
discussed below are important to an understanding of
our financial statements because they require
management to exercise judgment and estimate the
effects of uncertain matters in the preparation and
reporting of financial results. Accordingly, management
cautions that these policies and the judgments and
estimates they involve are subject to revision and
adjustment in the future. While they involve less
judgment, management believes that the other accounting
policies discussed in Note 2 "Summary of Significant
Accounting Polices" of the Consolidated Financial
Statements included in our Annual Report on Form 10-K
for the year ended November 30, 2002 are also important
to an understanding of our financial statements. The
Company believes the following critical accounting
policies affect our more significant judgments and
estimates used in the preparation of our consolidated
financial statements.
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 three months ended March 1, 2003 and
March 2, 2002, 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 first quarter ended March 1, 2003, the
Company outsourced its distribution function to the
Commerce Investment Group, an affiliated company.
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 $205,000 and
$1150,000 for the three months ended March 1, 2003 and
March 2, 2002, respectively, and are included in
selling, general and administrative expenses.
Accounts Receivable-Allowance for Returns,
Discounts and Bad Debts
The Company evaluates its ability to collect on
accounts receivable and charge-backs (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 charge-backs
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 March 1, 2003, the balance in the allowance
for returns, discounts and bad debts reserves was
$428,000 compared to $383,000 at November 30, 2002.
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.
3/01/03 11/30/02
------- --------
Finished goods $ 5,273 $ 5,741
Raw materials 9 74
------- -------
5,282 5,815
Less allowance for obsolescence and
slow moving items (143) (105)
------- -------
$ 5,139 $ 5,710
------- -------
------- -------
1356:
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 March 1, 2003.
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.
The Company determines its allowance for doubtful
accounts using a number of factors including historical
collection experience, the financial prospects of
specific customers and market sectors, and general
economic conditions. Generally, the Company establishes
an allowance for doubtful accounts based on our
collection experience when measured by the amount of
time an account receivable is past its payment due
date. In certain circumstances where the Company
believes an account is unable to meet its financial
obligations, the Company records a specific allowance
for doubtful accounts to reduce the account receivable
to the amount the Company believes will be collected.
The Company evaluates its long-lived assets for
impairment based on accounting pronouncements that
require management to assess fair value of these assets
by estimating the future cash flows that will be
generated by the assets and then selecting an
appropriate discount rate to determine the present
value of these future cash flows. An evaluation for
impairment must be conducted when circumstances
indicate that an impairment may exist; but not less
frequently than on an annual basis. The determination
of impairment is subjective and based on facts and
circumstances specific to the company and the relevant
long-lived asset. Factors indicating an impairment
condition exists may include permanent declines in cash
flows, continued decreases in utilization of a long-
lived asset or a change in business strategy. We
adopted Financial Accounting Standards (SFAS) No. 142
"Goodwill and Other Intangible Assets," beginning with
the first quarter of 2002. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite
useful lives not be amortized but, instead, tested at
least annually for impairment while intangible assets
that have finite useful lives continue to be amortized
over their respective useful lives. SFAS No. 142
requires that goodwill be tested for impairment using a
two-step process. The first step is to determine the
fair value of the reporting unit, which may be
calculated using a discounted cash flow methodology,
and compare this value to its carrying value. If the
fair value exceeds the carrying value, no further work
is required and no impairment loss would be recognized.
The second step is an allocation of the fair value of
the reporting unit to all of the reporting unit's
assets and liabilities under a hypothetical purchase
price allocation.
The Company believes that its other long-lived
assets are currently being carried on the Company's
books at their fair value. However, as a result of the
recent decrease in rental revenue from the Company's
Springfield facility, the Company will be monitoring
the fair value of the facility in accordance with SFAS
No. 144.
The Company has entered into agreements and
transaction with related parties and the Company has
adopted a policy requiring that any material
transactions between the Company and persons or
entities affiliated with officers, Directors or
principal stockholders of the Company be on terms no
less favorable to the Company than reasonably could
have been obtained in arms' length transactions with
independent third parties.
We continually evaluate the composition of our
inventories, assessing slow-turning, ongoing product as
well as product from prior seasons. Market value of
distressed inventory is valued based on historical
sales trends of our individual product lines, the
impact of market trends and economic conditions, and
the value of current orders relating to the future
sales of this type of inventory.
ITEM 3. 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
acquisitions it has made. 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.
The Company believes that its current cash on hand
and cash received pursuant to factored receivables
under the factoring and asset based line of credit
arrangements with CIT should provide sufficient working
capital to fund operations and required debt reductions
during fiscal 2002. However, due to the seasonality of
the Company's business and negative cash flow during
the first three months of the year, the Company may be
required to obtain additional capital through debt or
equity financing. The Company believes that any
additional capital, to the extent needed, could be
obtained from the sale of equity securities or short-
term working capital loans. There can be no assurance
that this or other financing will be available if
needed. The inability of the Company to be able to
fulfill any interim working capital requirements would
force the Company to constrict its operations.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report,
the Company carried out an evaluation, under the
supervision and with the participation of the Company's
management, including the chief executive officer and
acting chief financial officer, of the effectiveness of
the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Company's
management, including the chief executive officer and
chief financial officer, concluded that the Company's
disclosure controls and procedures are effective.
There were no significant changes in the Company's
internal controls or other factors that could
significantly affect these internal controls subsequent
to the date of the completion of their evaluation.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits. The following exhibit is filed
herewith.
Exhibit No. Description
10.96 Licensing Agreement with Blondie
Rockwell, Inc. for the Fetish
Trademark
10.97 Crossman Loan Note, February 7, 2003
10.98 Crossman Loan Note, February 13, 2003
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 90 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 17, 2003
containing a copy of the Company's press
release dated March 17, 2003 titled "Innovo
Group Reports Fiscal 2002 and Fourth Quarter
Results."
Current Report on Form 8-K dated April 15, 2003
containing a copy of the Company's press
release dated April 15, 2003 titled "Innovo
Group Reports Record First Quarter Results with
Revenues Increasing 272%."
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.
Dated: April 15, 2003 By: /s/ Samuel Joseph Furrow, Jr.
----------------- --------------------------------
Samuel Joseph Furrow, Jr.,
Chief Executive Officer
Dated: April 15, 2003 By: /s/ Marc B. Crossman
--------------- ---------------------
Marc B. Crossman,
Chief Financial Officer
(Principal Accounting Officer)
CERTIFICATION BY SAMUEL JOSEPH FURROW, JR. AS CHIEF
EXECUTIVE OFFICER
I, Samuel Joseph Furrow, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q
of Innovo Group Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements,
and other financial information included in this
quarterly 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 quarterly 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 quarterly
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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: April 15, 2003 /s/ Samuel Joesph Furrow, Jr.
--------------- -----------------------------
Samuel Joseph Furrow, Jr.
Chief Executive Officer
CERTIFICATION BY MARC B. CROSSMAN AS CHIEF FINANCIAL
OFFICER (PRINCIPAL ACCOUNTING OFFICER)
I, Marc B. Crossman, certify that:
1. I have reviewed this quarterly report on Form 10-Q
of Innovo Group Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements,
and other financial information included in this
quarterly 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 quarterly 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 quarterly
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 quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly 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 quarterly 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: April 15, 2003 /s/ Marc B. Crossman
--------------- --------------------
Marc B. Crossman
Chief Financial Officer
Exhibit Index
Exhibit No. Description
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.