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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____ Commission file number: 0-18926
INNOVO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2928178
(State or other jurisdiction of (IRS Employer incorporation
or organization) Identification No.)
27 North Main Street 37172
Springfield, Tennessee (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (615) 384-0100
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or (for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of February 28, 1998, 44,726,442 shares of common stock were outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
registrant approximated $21,119,000 at the close of business on February 6,
1998.
Documents incorporated by reference: NONE
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 14
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 59
PART III
Item 10. Directors and Executive Officers of the
Registrant 60
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial
Owners and Management 66
Item 13. Certain Relationships and Related Transactions 68
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 69
SIGNATURES 76
PART I
Item 1. Business
Introduction
Innovo Group Inc. ("Innovo Group"), operating through its wholly-owned
subsidiaries (collectively with Innovo Group are referred to as "the
Company"), designs, manufactures and domestically markets various cut and
sewn canvas and nylon consumer products, such as tote bags and aprons, for
sale to various retailers and in the premium and advertising specialty
market. It also manufactures and domestically markets ladies ready-to-wear
at-home, sleep and lounge wear for sale to retailers and through mail order
distribution. The Company also internationally markets and distributes the
Company's canvas and nylon products, as well as sport bags and backpacks.
The Company's operations are classified into two industry segments. See Note
11 of Notes to Consolidated Financial Statements for financial information on
industry segments.
Innovo, Inc. ("Innovo"), a wholly owned subsidiary, manufactures and
domestically distributes cut and sewn canvas and nylon consumer products for
the utility, craft, sports licensed and advertising specialty markets.
Innovo's products are primarily domestically manufactured at facilities owned
or leased by the Company. Limited products are obtained from foreign
suppliers. See "-Products" and "-Manufacturing."
NASCO Products International, Inc. ("NP International") markets and
distributes overseas, principally in Europe and the Middle East, certain
products similar to those marketed domestically by Innovo, as well as
licensed sports bags and backpacks, which the Company generally obtains from
foreign suppliers. See "-Products" and "-Manufacturing."
The products comprising Innovo's sports licensed line, and those
distributed by NP International, display logos, insignia, names, slogans or
characters licensed from various licensors. Innovo and NP International hold
licenses for the use of the logos and names of the teams of the National
Football League, the National Basketball Association, Major League Baseball,
the National Hockey League, and over 130 colleges. In 1996 NP International
obtained licenses for the use of the Walt Disney Co. ("Walt Disney") cartoon
characters, and the Warner Bros. Studios ("Warner Bros.") Looney Tunes
cartoon characters, on sports bags, backpacks, fanny packs and other products
it markets in Europe and the Middle East. NP International began selling the
Walt Disney and Warner Bros. products in fiscal 1997. For the year ended
November 30, 1997, 33.1% of the Company's net sales represented the sale of
products produced pursuant to such licenses. See "-Licenses."
Thimble Square, Inc. ("Thimble Square"), which Innovo Group acquired in
April, 1996, manufactures and markets ladies' ready-to-wear at-home, sleep
and lounge wear. Thimble Square also provides "sew-only" manufacturing for
other distributors of private-label sleep and lounge wear. See "-Products"
and "-Manufacturing."
The Company has also engaged in the development of a retail mall
facility in Florida (see Item 2. - "Properties" and "Recent Developments").
During fiscal 1994 the Company moved manufacturing operations from
leased facilities in Sugarland, Texas to owned facilities in Springfield,
Tennessee. On July 31, 1995, NASCO Products, Inc. ("NASCO Products"), a
wholly-owned subsidiary, sold to Accessory Network Group, Inc. ("ANG") its
operations of importing to and distributing in the United States sports bags,
backpacks and equipment bags bearing the logos of the teams of the four major
professional sports leagues. The sale did not include the products
distributed by Innovo or NP International. For the licenses ANG is paying
NASCO Products $750,000 through December, 1997. In addition, ANG will make
an ongoing annual payment, for up to forty years, of certain percentages of
sales under each of the National Football League, Major League Baseball,
National Hockey League licenses, and National Basketball Association
licenses. See Note 3 of Notes to Consolidated Financial Statements.
Prior to fiscal 1995 the Company's marketing emphasis was placed on the
U.S. retail market for its sports licensed products. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets and to preparing marketing plans
for its U.S. Olympic Team products for the 1996 Summer Games. As a result of
the Company's fiscal 1995 efforts, Innovo increased its sales of craft
products in fiscal 1996. However, the Company's increase in net sales was
limited by shortages of raw materials, which were caused by a lack of working
capital, and by labor shortages, each of which prevented the Company from
accepting certain orders. The Company raised additional working capital in
the second and third quarters of fiscal 1996 which was used, in part, to
increase raw materials levels to more desirable levels, and in October, 1996
the Company obtained a three year lease of an additional sewing facility.
The additional facility was used to allow the Company to avoid the effects of
labor shortages through the second quarter of fiscal 1997. In August, 1997,
as the result of increases in the production efficiencies of the Company's
main plant in Springfield, Tennessee, the Company idled this additional
plant. However, the additional plant remains available to offset labor
shortages should they occur again.
In fiscal 1997 the Company has improved its operating results by
continuing the growth in sales while controlling any increase in fixed
selling, general and administrative expenses. The sales increases were
achieved from the continued recapture of domestic craft market share by
Innovo, increased sports licensed market sales, by both Innovo and NP
International as the result of recovering demand, and an increase in the
sell-through and reorders for Innovo's back-to-school targeted products.
In fiscal 1998 the Company will attempt to further increase sales and
improve gross margin percentages while reducing overhead expenses.
- Sales increases are anticipated to come from the products being
marketed in Europe under the Walt Disney and Warner Bros. licenses.
Additional sales increases may also be produced by the sources that
produced the 1997 sales increases.
- The Company currently believes that it will be able to increase
certain product prices in fiscal 1998, and that the changes in the
manufacturing and administrative structure of the Company being
made under the direction of its new chief executive and operating
officers will further reduce product costs and operating expenses.
The Company believes that sales increases and cost reductions in fiscal
1998 may be sufficient to return the Company to profitability for the year;
however, there can be no assurance that any of the steps can be successfully
implemented or that the Company will in fact be profitable in fiscal 1998.
See "- Growth Strategy and Product Development," "-Manufacturing," and Item
7 - "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company estimates that its products are carried in over 5,000 retail
outlets in the United States, as well as in numerous retail outlets in
Europe. The Company's marketing efforts are conducted by its own sales and
marketing staff together with its network of domestic marketing organizations
and sales representatives and foreign distributors. The Company sells to
retail accounts such as mass merchandisers, department, sporting goods,
grocery, craft and drug store chains, and mail order retailers, including K
Mart Apparel Corp., Wal-Mart Stores, Inc. (which accounted for 28.8% of the
Company's net sales in fiscal 1997), J.C. Penney Company, Inc., Sports
Authority, Inc., Michael's Stores, Inc., and advertising specialty accounts.
See "Business Marketing and Customers".
Innovo began operations in April, 1987. In August, 1990, Innovo merged
into Elorac Corporation, a so called "blank check" company, which was renamed
Innovo Group. In fiscal 1991 the Company acquired the business of NASCO,
Inc. ("NASCO"), a manufacturer, importer and distributor of sports-licensed
sports bags, backpacks, and other sporting goods, located in Springfield,
Tennessee. NASCO, subsequently renamed 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. Effective April 30, 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 Spirco prior to its acquisition which were not disclosed at that time. On
August 27, 1993, Spirco filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Innovo Group, Innovo and NASCO Products were not parties to
the filing. Spirco's plan of reorganization was confirmed by the court on
August 5, 1994, and became effective on November 7, 1994. Under the plan,
administrative claims were paid in cash from funds borrowed under the
Company's bank credit facility. Leasall Management, Inc. ("Leasall"), a
newly formed subsidiary of Innovo Group, acquired Spirco's equipment and
plant and assumed the related equipment and mortgage debt, which Innovo Group
had previously guaranteed, and Spirco was merged into Innovo Group which as
a result acquired direct ownership of its other assets. Spirco claims which
had been guaranteed by Innovo Group received full payment through the
issuance of shares of Innovo Group common stock. Additionally, shares of
Innovo Group common stock were issued to a trust ("the Class 3 Trust") which,
in fiscal 1996, completed the process of selling those shares and
distributing the proceeds to the Class 3 claimants, which were federal, state
and local taxing authorities that had claims for income, sales, property and
unemployment taxes. Unsecured claims did not receive any distribution and
were extinguished under the plan of reorganization.
The principal executive offices of the Company are located at 27 North
Main Street, Springfield, Tennessee 37172. Its telephone number is (615)
384-0100. Unless the context requires otherwise, "the Company" refers to
Innovo Group Inc. and its subsidiaries, and "Innovo Group" refers to Innovo
Group Inc.
Recent Developments
Issuance of Common Stock and Changes in Management
On August 13, 1997 the Company issued 6,750,000 shares of its common
stock to the Smith Group, which is comprised of L.E. Smith, Daniel A. Page,
J. Eric Hendrickson and Herb J. Newton. The Smith Group paid $1,350,000 for
such shares of common stock. The purchase by the Smith Group was made
pursuant to a Stock Purchase Agreement dated August 13, 1997 ("the Stock
Purchase Agreement") by and between the members of the Smith Group, the
Company, and Patricia Anderson-Lasko. In connection therewith, three members
of the Smith Group became executive officers of the Company and all four
members of the Smith Group became members of the Company's board of
directors.
The net proceeds to the Company, after the payment of the costs of the
transaction, were approximately $1,300,000. The Company utilized $150,000
of the net proceeds to repurchase and cancel its outstanding Class I common
stock purchase warrants.
Products
Innovo is a domestic manufacturer that designs and markets a wide
variety of cut and sewn canvas and nylon consumer products. The following
sets forth the principal products that Innovo manufactures and distributes to
the utility, craft and sports licensed markets:
Utility Craft Sports Licensed
_______ _____ _______________
tote bags tote bags tote bags
gift bags aprons and smocks laundry bags
laundry bags banners shoe bags
shoe bags vests insulated lunch bags
duffle bags Christmas stockings duffle bags
aprons and smocks stonewashed denim stadium totes
vests, aprons and fanny packs
totes backpacks
The products Innovo manufactures for the utility market utilize designs
and artwork developed in-house. For the craft market, Innovo's products are
produced without artwork, and are sold (sometimes packaged with paints or
other supplies) as a product for craft projects (the creation and
applications of a design by the customer).
Innovo's sports licensed products are produced with the logos or other
designs licensed from the four major professional sports leagues and
colleges. See "-Licenses."
Innovo also markets each of these products to the advertising specialty
market, for which it produces the product with the customer's logo, design or
slogan for use as a customer or employee promotion or premium sale item.
NP International designs, manufactures, imports and distributes licensed
sports products internationally, principally throughout Europe and the Middle
East, to distributors that in turn sell to sporting goods, department and
mass merchandise chains, hypermarkets, mail order and grocery and drug
chains. Its line of products consists of a variety of sport, gym, equipment,
duffle bags and backpacks. NP International's products are generally
imprinted or embroidered with logos licensed from the four major professional
sports leagues, colleges, or the characters licensed from Walt Disney and
Warner Bros.
Thimble Square designs, manufactures and distributes moderately priced
ladies' nylon, polyester and cotton at-home, lounge, and sleep wear. It's
products include sleep shirts, night gowns, teddies, house coats and pajamas.
Thimble Square also provides "sew-only" services for other distributors of
similar products. For these customers, Thimble Square cuts, sews and
packages the products using fabric supplied by the customer.
Growth Strategy and Product Development
The Company believes that growth in its business can be accomplished
both by the expansion of the sales of its existing products with new and
existing customers, and through the development or acquisition of new product
designs and the acquisition of new licenses. The Company spent approximately
$182,000 on the design of new products in fiscal 1997, and management
anticipates that in fiscal 1998 such expenditures approximate $300,000.
The Company continually seeks to develop new designs in-house, and
design or acquire new products. In fiscal 1997 the Company began marketing
stone-washed denim tote bags, aprons and vests, and test marketed dyed
versions of the same products.
The Company also continually evaluates the market potential for the sale
of products bearing licensed logos, characters or artwork. Those evaluations
involve both situations where a license has been offered to the Company, and
where the Company itself identifies a logo or character that may have market
potential. Where such an evaluation indicates a sufficient likelihood of
market acceptance, the Company attempts to negotiate and obtain a license
from the owner of the logo or character. In general, a period of from four
to six months is required, once a license is obtained, to develop and obtain
the approval for the art and the products for the new license and produce
samples, and begin marketing. The Company commenced the product development
for the Walt Disney and Warner Bros. licenses in the third and fourth
quarters of fiscal 1996. Shipments under these new licenses began in fiscal
1997. However, there can be no assurance that the Company will be able to
obtain other new licenses, or to renew existing licenses, on favorable terms.
Marketing and Customers
During fiscal 1997, the Company's Innovo and Thimble Square operations
involved sales to approximately 1,100 domestic retail accounts, which
included a mix of mass merchandisers, such as K Mart and Wal-Mart,
department, sporting goods, grocery, craft and drug store chains, mail order
retailers and other retail accounts. NP International's operations involved
sales to 12 foreign distributors which in turn resell to retail accounts.
The Company estimates that its products are carried in over 5,000 retail
outlets in the United States and numerous retail outlets in Europe.
Generally the Company's domestic accounts are serviced by the Company's
sales personnel working together with marketing organizations which have
sales representatives. NP International's marketing is conducted by the
Company's sales department working together with the foreign distributors and
sales representatives having representation throughout Europe and the Middle
East. Marketing organizations are compensated on a commission basis.
In marketing its products the Company attempts to emphasize the
competitive pricing and quality of its products, its ability to assist
customers in designing marketing programs, its short lead times, and the high
sell-through its products have historically achieved. To assist customers in
achieving a higher sell-through of its sports team (professional and college)
logoed products, the Company tracks the retail sales by team logo for various
geographic areas. The Company then uses this information to assist customers
in selecting the optimum mix of team logos for their market. The Company has
an electronic data interchange system that allows certain larger customers to
place orders directly.
The Company also continues to solicit customers whose buying seasons are
contrary to the Company's existing seasonality. See "Seasonality."
For fiscal 1997 and 1996, two customers accounted for sales in excess of
10% of net sales; Wal-Mart, a customer of Innovo which accounted for 28.8%
and 12.5% of net sales, respectively, and Crown-Tex, a customer of Thimble
Square, which accounted for 11.1%, and 11.2% of net sales, respectively.
Although the loss of Wal-Mart could have a material adverse effect on the
Company, the Company believes its efforts to diversify its customer base
would offset any loss of Wal-Mart.
Backlog
Although the Company may at any given time have significant business
booked in advance of purchase orders, customers' purchase orders are
typically filled and shipped within two to six weeks, and at November 30,
1997 and 1996, there was no significant backlog.
Seasonality
The Company's business is seasonal. The majority of the marketing and
sales activities take place from late Fall to early Spring, while 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. See Item 7. - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Seasonality."
Manufacturing
Innovo's and Thimble Square's products are either manufactured
domestically in facilities operated by the Company or obtained from foreign
suppliers through manufacturing agreements. The Company manufactures its
domestic products from an inventory of unfinished fabric rolls using cutting,
sewing and finishing equipment owned or leased by the Company. Innovo
utilizes silk-screening machines to permanently imprint designs onto its
various products. Using its in-house design staff and its computer graphic
equipment, the Company has the capacity to rapidly produce new products.
The principal materials used in Innovo's and Thimble Square's products
include denim, canvas, plain and printed rolls of nylon, polyester and
cotton, mesh and webbing. The Company buys raw materials in bulk for the
products it manufactures domestically. The Company has generally
concentrated its purchases of each type of raw materials for domestic
manufacturing among a small number of suppliers, and during fiscal 1997
purchased the majority of each type of raw material it used from one or two
suppliers. Although the Company does not have any long-term agreements with
these or other suppliers, it has to date, been able to obtain suppliers to
satisfy its raw material requirements. Management believes that if its
current suppliers were unable to supply the necessary raw materials in
sufficient quantities or on acceptable price terms, alternative suppliers
would be available on comparable price terms and delivery schedules. In the
event the Company was unable to find such alternative suppliers at
competitive prices and on a timely basis, its operations could be materially
adversely affected.
During fiscal 1998 the Company intends to shift production of certain
large run and labor intensive products to production facilities owned by
independent contractors in Mexico. Management believes that the resulting
savings in labor would more than offset any increased transportation costs.
The sport and gym bags and backpacks marketed overseas by NP
International and lunch bags for Innovo for domestic distribution are
generally obtained from overseas manufacturers in order to reduce the cost of
obtaining these more labor intensive products. The independent overseas
contractors that manufacture these products are responsible for obtaining the
necessary supply of raw materials and for manufacturing the products to the
Company's specifications. The Company generally uses one independent
contractor to fulfill all of its requirements in order to maximize its
control over production quality and scheduling. Although the Company uses
this, and other methods, to reduce the risk that the independent contractor
will fail to meet the Company's requirements, the use of independent overseas
contractors does reduce the Company's control over production and delivery
and exposes the Company to the other usual risks of sourcing products abroad.
The Company does not have any long-term supply agreements with independent
overseas contractors, but believes that there are a number of contractors
that could fulfill the Company's requirements.
The Company has generally utilized overseas contractors that utilize
production facilities located in China. As a result, the products
manufactured for the Company 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 the Company, even if only temporarily while the
Company shifted production to other countries or regions such as Mexico,
Korea, Taiwan, or Latin America. Substantially all of the products
manufactured overseas for the Company are shipped directly to customers
outside the United States; accordingly, the Company is generally not subject
to United States import quotas, inspection or duties.
Licensing Agreements
The following sets forth certain information concerning the license
agreements currently held by the Company.
Licensor/Licensed Names
logos, characters, etc. Types of Products Geographical Areas
National Basketball tote, lunch, shoe, and United States; United
Association/logos of NBA laundry bags, Kingdom; Europe
Teams, NBA Finals stadium seat cushions,
and NBA All-Star Game sports bags and backpacks
Major League Baseball/ tote, lunch, shoe, and United States; United
logos of MLB Teams, World laundry bags, Kingdom; Europe
Series, All-Star Game stadium seat cushions,
sports bags and backpacks
National Football League/ tote, lunch, shoe, and United States; United
logos of NFL Teams, Super laundry bags, Kingdom; Europe
Bowl Game stadium seat cushions,
sports bags and backpacks
National Hockey League/ tote, lunch, shoe, and United States; United
logos of NHL Teams laundry bags, Kingdom; Europe
stadium seat cushions,
sports bags and backpacks
Colleges/logos of tote, lunch, shoe, and United States; United
approximately 130 colleges laundry bags, Kingdom; Europe
stadium seat cushions,
sports bags and backpacks
Walt Disney/Walt tote, sport, gym and Europe; Middle East
Disney characters in other backpacks,
sports settings waistpacks, wallets
Warner Bros./Warner tote, sport, gym and Europe; Middle East
Bros. cartoon characters other bags, backpacks,
in sports settings waistpacks, wallets
Warner Bros./Space Jam tote, sport, gym and Europe; Middle East
movie cartoon characters other bags, backpacks,
waistpacks, wallets
Each license agreement grants the Company either an exclusive or non-
exclusive license for use in connection with specific products and/or
specific territories. The license agreements with the major professional
sports licensing organizations are generally non-exclusive. However, the
Company's experience has been that while the licenses are non-exclusive, the
licensing entities generally limit the number of licenses they grant for any
particular line of products. Thus, direct competition is limited by the
availability of licenses.
Typically, a license agreement is effective for a one or two-year term
for the use of particular characters or designs of the licensor on some or
all of the Company's products. A royalty is paid to the licensor that is
usually a percentage of net sales, with a minimum annual guarantee for the
license period. The royalty rates range from 7% to 17% and the minimum
annual guarantees range from $5,000 to $200,000. Some license agreements
grant the licensor broad termination rights, and most of the license
agreements grant the licensor the right to terminate the license in the event
minimum sales targets are not reached, if the Company does not diligently
market the licensed products, or for the breach of any material term of the
license agreement by the Company. The Company believes that it is in
substantial compliance with the terms of all material licenses.
The expiration dates of the current license agreements range from 1998
to 2000. Generally, the renewal provisions of the license agreements provide
that the licensee may, at its option, renew the license for an additional
one- or two-year term, provided certain conditions are satisfied.
Historically, licenses have been terminated by the Company due to decreased
sales or popularity, rather than by the licensors, and to date the Company
has generally been able to obtain the renewal of licenses it wished to
continue. 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.
Competition
The industries in which the Company operates are fragmented and highly
competitive. The Company competes against a large number of baggage
manufacturers and importers, and other generally small companies, that
distribute products similar to Innovo's and NP International's, and a large
number of companies that produce ladies at-home, sleep and lounge wear. NP
International's sports-licensed products also compete with those of sporting
goods manufacturers, such as Reebok, Nike and Adidas, that produce or license
the manufacture of sports bags bearing their names and logos. In all areas
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 logos or characters its products bear, the price and quality of
its products and its ability to meet its customers' delivery schedules.
The Company believes that it is competitive in each of the above-
described areas with companies producing goods of like quality and pricing,
and that new product development, product identity through marketing,
promotions and low price points will allow it to maintain its competitive
position. In addition, the Company's ability to manufacture its products
domestically and fill orders more promptly than companies whose sole or
predominant source of products are outside the United States is an important
aspect of keeping it competitive in the markets in which Innovo and Thimble
Square compete. However, some of the Company's competitors possess
substantially greater financial, technical and other resources than the
Company, including the ability to implement more extensive marketing
campaigns.
Intellectual Property
Innovo's utility 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.
Employees
As of February 6, 1998, the Company employed 94 full-time personnel at
the Springfield, Tennessee facility, comprised of 6 persons in management, 10
persons in general administration and 78 persons in manufacturing and
production, and Thimble Square employed 66 full-time personnel in Baxley,
Georgia, comprised of 7 persons in management and administration and 59 in
production. Due to varying seasonal demands and redesign of the Company's
manufacturing facilities, the Company's total work force has fluctuated
within a range of approximately 160 to 350 employees through the year.
Management considers its relationship with its employees to be excellent.
None of the Company's employees is party to a collective bargaining
agreement. There has never been any material interruption of operations due
to labor disagreements.
Item 2. Properties
The Company's headquarters, manufacturing and distribution facilities
are located in Springfield, Tennessee, where Leasall owns four buildings.
The main 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 warehouse
annex contains 30,000 square feet. First Independent Bank of Gallatin,
Tennessee holds a First Deed of Trust on the real property located in
Springfield.
Innovo also leases a 5,000 square foot sewing facility in Red Boiling
Springs, Tennessee under a three year lease having an annual rental of
$24,000. The facility was used to allow the Company to avoid the effects of
labor shortages through the second quarter of fiscal 1997. In August, 1997,
as the result of increases in the production efficiencies of the Company's
main plant in Springfield, Tennessee, the Company idled this additional
plant.
Thimble Square owns a 40,000 square foot manufacturing and distribution
facility in Pembroke, Georgia, which is subject to liens held by the First
Bank of Coastal Georgia, the Bryan County Development Authority, Inc. and
the Business Development Corporation of Georgia, Inc. This plant was idled
and sewing capacity was absorbed by Baxley in August, 1997 and in December
1997 the Pembroke, GA cutting operation was moved to Baxley. The building is
held for sale.
Thimble Square also leases two facilities in Baxley, Georgia. The first
is a 21,000 square foot manufacturing facility with any annual rental of
$36,000. The lease runs through August, 2000 and provides Thimble Square
with a bargain purchase option. The second is a 7,000 square foot cutting
facility whose lease runs through October, 1998 with annual lease payments of
$10,000.
The Company believes that its existing facilities are adequate for its
current and future needs.
Florida Retail Property
The company's Florida retail property, operated as Good Deal Mall, was
acquired in fiscal 1995, and through August, 1997 the Company was engaged in
readying it to operate as an indoor multivendor open space mall in which
retailers operate from permanent booths. The Good Deal Mall has
approximately 22,000 square feet of rentable space, which can accommodate up
to 135 vendor merchants. The property was initially opened in August 31,
1997 with approximately 32 spaces, representing approximately 24% of the
space available and monthly rentals of approximately $16,000, rented to
merchants, generally on a monthly basis. The property had continued to
operate at approximately that level of occupancy through November, 1997.
However, in November, 1997, the Company decided to engage new management for
the Good Deal Mall, and in connection therewith refine the long-term goals
for the property. The Company has determined that the then existing merchant
lessees were not consistent with its revised plans, and has commenced steps
to have that space vacated so that merchants consistent with the revised
plans can be attracted. The Company currently anticipates that these steps
will be completed in the second quarter of fiscal 1998.
Item 3. Legal Proceedings
The Company is a party to lawsuits in the ordinary course of its
business. While the damages sought in some of these actions are material,
the Company does not believe that it is probable that the outcome of any
individual action will have a material adverse effect, or that it is likely
that adverse outcomes of individually insignificant actions will be
sufficient enough, in number or magnitude, to have a material adverse effect
in the aggregate.
In Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc., Rick Binet,
and Patricia Anderson-Lasko, f/k/a/ Patricia M. DeAlejandro, the Company
appealed a $700,000 judgement awarded by a jury for employment benefits,
including stock compensation, it found to be due to an ex-employee who it
nonetheless found had been properly terminated for cause. In August, 1994,
the trial court granted the Company's motion for partial summary judgement
and directed verdicts with respect to certain of Tedesco's claims, including
those concerning his ownership of an interest in the "E.A.R.T.H." trademark,
or the existence of a partnership with the Company to jointly own the
trademark, and the state court jury returned findings in favor of the Company
on the remainder of the plaintiff's claims concerning the trademark as well
as his claims for wrongful termination, fraud and conspiracy. However, the
jury awarded Tedesco approximately $700,000, of which $50,000 was assessed
against Innovo Group and $650,000 was assessed against Innovo, including pre-
judgement interest and attorney's fees, on the theory that he was entitled to
have received certain employment benefits, including employee stock awards,
during, and after, the term of his employment. The Company appealed the
jury's award, and in August, 1996 (as revised in an amended October, 1996
opinion), the appeals court reversed approximately $350,000 of the initial
judgement as not supported by the evidence or improper as a matter of law.
As a result, the judgement, including post-judgement interest through August,
1996, has been reduced to $420,000. In addition, the appeals court ruled
that the trial court erred in not submitting to the jury the questions of the
Company's counterclaim of breach of fiduciary duty by Tedesco, ruling that
the trial record indicated that there was evidence of such breach and damages
therefrom. The appeals court remanded the case to the trial court (District
Court of Harris County Texas) for trial of the Company's claims of breach of
fiduciary duty by Tedesco, which trial is scheduled for March 1998. In
connection with its appeal the Company has pledged as an appeal bond of
200,000 shares of its unissued common stock.
The Company believes that its fiduciary duty claims against Tedesco are
meritorious. However, there can be no assurance that the Company's claims
against Tedesco will be successful, or that alternatively the litigation can
be settled on terms manageable to the Company. The need to immediately
satisfy the plaintiff's award in the event the Company's claims are
unsuccessful would have a material adverse impact on the Company.
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products (Pannoy Enterprises Corporation v. NASCO
Products, Inc., Case No. 12948, in the Chancery Court for Robertson County,
Tennessee). NASCO Products and the supplier had previously reached an
agreement on the balance owed (which is the balance recorded), as well as an
arrangement under which the schedule for NASCO Products' payments reducing
the balance would be based on future purchases from that supplier of products
distributed internationally by NP International. The Company has denied the
supplier's claims, and has asserted affirmative defenses, including the
supplier's late shipment of the original products, and the supplier's refusal
to accept and fill NP International orders on terms contained in the
agreement. NASCO Products sold its operations in July, 1995, and that
company currently has no operations or unencumbered assets. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General and -Liquidity and Capital Resources."
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
The Company's common stock is currently traded on the NASDAQ SmallCap
Market under the symbol "INNO". The following sets forth the high and low bid
quotations for the Company's 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 above
quotations necessarily reflect an established public trading market in the
Company's common stock.
High Low
____ ___
Fiscal 1996
___________
First Quarter 7/8 7/32
Second Quarter 2 3/16 17/64
Third Quarter 1 3/4 9/16
Fourth Quarter 5/8 3/16
Fiscal 1997
___________
First Quarter 1/2 5/32
Second Quarter 5/16 5/32
Third Quarter 31/32 9/64
Fourth Quarter 27/32 15/32
As of February 6, 1998, there were approximately 905 record holders of
the Company's common stock.
The Company has never declared or paid a dividend and does not
anticipate paying dividends on its common stock in the foreseeable future.
In deciding whether to pay dividends on the common stock in the future, the
Company's Board of Directors will consider factors it deems relevant,
including the Company's earnings and financial condition and its capital
expenditure requirements.
In July, 1997 the SEC and NASDAQ revised standards for listing on the
NASDAQ SmallCap Market removing certain exemptions for companies whose
securities trade for less than $1.00, this change became effective February,
1998. On February 27, 1998 the Company received notice from NASDAQ that it
was not in compliance with the revised standards and was given to May 28,
1998 to come into compliance. Prior to the change companies with
stockholder's equity greater than $2 million were, for the most part, exempt
from the $1.00 bid requirement. Effective February, 1998 the exemption is
removed and companies must maintain a $1.00 bid price and tangible new worth
of over $2 million.
The Company's stock has generally traded at prices below $1.00 since
November, 1995. The Company has been able to maintain its NASDAQ SmallCap
listing by complying with the alternative $2 million stockholder's equity
requirement. Under the new NASDAQ requirements the Company could face
delisting unless the bid price rises to a minimum of $1.00 through normal
markets or such other steps as deemed necessary by the Company. Although the
Company will continually use its best efforts to maintain its NASDAQ Small
Cap 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, in 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 Company's Common Stock.
During the fourth quarter of fiscal 1997 the Company issued an aggregate
of 1,840,000 shares of common stock. 1,500,000 shares were issued in a
private placement to three accredited investors for $675,000 in gross cash
proceeds. 250,000 shares were issued upon the conversion of all the
outstanding Class E Warrants and in exchange for $9,000 cash and the
extinguishment of debt totaling $66,000. 15,000 shares were issued upon the
exercise of a portion of the Class G Warrants for $4,000. 75,000 shares were
issued in exchange for debt totalling $52,000. No commissions or other
discounts were paid. The shares were issued in reliance upon the exemption
under Section 3(A)(9) of, and Rules 901 through 903 promulgated under, the
Securities Act of 1933.
Also in the fiscal fourth quarter of 1997, 1,500,000 of 4,000,000 shares
issued to an officer of the Company in exchange for a note were returned to
the Company for a prorata reduction in the note of $422,000.
Item 6. Selected Consolidated Financial Data
The table below (including 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.
Year Ended Year Ended
November 30,(1) October 31,
_______________________ ______________________________
Income Statement Data: 1997 1996(2) 1995 1994 1993
_______________________ ______________________________
(000's except per share amounts)
Net Sales $ 9,458 $ 7,391 $ 5,276 $ 8,028 $12,468
Cost of Goods Sold 6,388 4,853 3,808 5,044 6,998
Gross Profit 3,070 2,538 1,468 2,984 5,470
Operating Expenses 4,590 4,478 3,134 5,389(3) 5,023
Income (loss) from operations (1,520) (1,940) (1,666) (2,405) 447
Interest expense (766) (963) (511) (821) (960)
Income (loss) before income taxes
(benefit) (1,839) (3,088) (67)(4) (4,124) (223)
Income (loss) from
continuing operations (1,839) (3,088) (67)(4) (7,905)(5) (661)(5)
Income (loss) per share
from continuing operations (.05) (.23) (.03) (3.99) (.63)
Supplemental loss per share from
continuing operations (6) - - - (3.77) (.14)
Income(loss) from discontinued
operations (7) - - (626) (685) (7,268)
Income(loss) per share from
discontinued operations (7) - - (.24) (.34) (6.92)
Extraordinary gain (loss) 524 (9) - (258) (8) 699 (8) -
Extraordinary gain (loss) per share .01 - (.09) .35 -
Net income (loss) (1,315) (3,088) (951) (7,891) (7,929)
Net income (loss) per share (.04) (.23) (.36) (3.98) (7.55)
Cash dividends declared
per common share - - - - -
Weighted Average Shares of
Common Stock and Common Stock
Equivalents Outstanding 34,382 13,613 2,616 1,982 1,050
Balance Sheet Data:
Total Assets $ 9,168 $ 9,433 $ 5,667 $11,143 $19,351
Long-Term Debt 1,854 3,303 1,565 1,514 1,759
Common Stock Issuable (10) - - - - 2,911
Redeemable Common Stock (11) - - - 1,423 1,423
Stockholders' Equity 3,791 2,275 (230) (2,372) 951
_______________
(1) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year ended on October 31. The
results of operations and cash flows for the transition period of November 1,
1995 to November 30, 1995 are separately presented in the Company's consolidated
financial statements presented elsewhere herein.
(2) Includes the effects of the acquisition of Thimble Square, accounted for
under the purchase method of accounting, beginning April, 1996. See Note 2 of
Notes to Consolidated Financial Statements.
(3) Operating expenses for fiscal 1994 include plant consolidation charges of
$470,000 ($.20 per share) relating to the consolidation of the Company's
manufacturing facilities.
(4) Includes other income of $1.9 million from the settlement of litigation.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations".
(5) Includes the effect of additions to the deferred tax valuation allowance of
$3,679,000 ($1.86 per share) and $624,000 ($.59 per share) in fiscal 1994 and
1993, respectively.
(6) Represents net loss per share adjusted to treat as outstanding from the date
of the loans the 229,720 shares of common stock issued in fiscal 1994 to
extinguish certain borrowings.
(7) Reflects the operations and July 1995 sale of the import operations of NASCO
Products, the operations and May 1993 sale of the fundraising program direct
marketing operations of Spirco and the operations and loss from the disposal of
Sportswear. See Note 3 of Notes to Consolidated Financial Statements.
(8) Represents gains and losses resulting from the Chapter 11 reorganization of
Spirco. See Note 4 of Notes to Consolidated Financial Statements.
(9) Represents gains from favorable debt settlements completed in the fourth
fiscal quarter of 1997. See Note 5 of Notes to Consolidated Financial
Statements.
(10) Represents obligations extinguished subsequent to October 31, 1993 by the
issuance of common stock.
(11) Represents 189,761 shares of common stock, which were issued in September
1993 to extinguish $1,423,000 of debt and accrued interest, which the Company
could have been required to repurchase at $7.50 per share between January 1994
and April 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of 1995 to 1997
The Company has incurred losses from continuing operations in each of
the last three fiscal years, principally as the result of a lack of adequate
working capital and, to some extent, lower than expected sales. Prior to
August of 1997 the Company's capital resources have been below necessary
levels. The losses incurred by the Company's discontinued Spirco and NASCO
Products operations also absorbed significant working capital.
Fiscal 1995 sales were adversely affected by a continuing weakness in
the retail sector, and by a shortage of working capital. The Company had
projected that its sale of the NASCO Products imported product line would
provide it with both immediate working capital and the ability to obtain more
traditional accounts receivable and inventory financing, as the terms
originally negotiated with the buyer provided for an all cash payment with
which the Company could have retired certain existing borrowings. However,
shortly before the completion of the sale, the buyer, ANG, advised the
Company that it would not proceed on an all cash basis. The Company decided
to proceed with the sale to ANG, under revised terms that allowed ANG to pay
the purchase up to a three year period, because the preceding process of
obtaining league approvals, which had been proceeding since March, 1995, had
made it impractical for the Company to alter its restructuring strategy and
remain in this business.
Fiscal 1995 results also reflect effects of the Company's 1994 strategy
of emphasizing sports licensed products in its marketing. The Company
devoted fiscal 1995 to shifting its emphasis to developing new products and
marketing programs for its products in the fashion, utility and craft lines
and for the premium and advertising specialty markets and to preparing
marketing plans for its U.S. Olympic Team products for the 1996 Summer Games.
As a result of the Company's fiscal 1995 efforts, Innovo increased its
sales of craft products in fiscal 1996, which contributed to a 14.2% increase
in net sales before considering the effect of the April, 1996 acquisition of
Thimble Square, and a 40.1% increase in net sales including those of Thimble
Square. However, the Company's increase in net sales was limited by
shortages of raw materials during the first half of fiscal 1996, which were
caused by a lack of working capital, and by labor shortages experienced
during the second, third and fourth quarters of fiscal 1996. These
conditions prevented the Company from accepting orders for an estimated $1
million of products, and also adversely affected the Company's gross profit
percentage. The Company raised additional working capital in the second and
third quarters of fiscal 1996 which was used, in part, to increase raw
material levels to more desirable levels. In October, 1996 the Company
obtained a three year lease of a sewing facility in Red Boiling Springs,
Tennessee. Production at the facility, which began in November, 1996, was
used to allow the Company to avoid the effects of the labor shortages through
the second quarter of fiscal 1996. In August 1997, as a result of increased
production efficiencies at the Company's main plant in Springfield,
Tennessee, the Company idled this additional plant.
The results of operations for fiscal 1996 were also affected by
increases in selling, general and administrative expenses that resulted from
the Company's pursuit of, and subsequent product development for, new
licenses which were obtained in the second half of fiscal 1996. In the third
quarter of fiscal 1996 the Company obtained a license to use the Warner Bros.
Studios Looney Tunes cartoon characters on various bags and backpacks to be
sold in Europe and a license to use the sports drawings of sports artist Gary
Patterson on various bags and t-shirts. In the fourth quarter of fiscal 1996
the Company obtained a license to use the Walt Disney Co. cartoon characters
on various bags and totes in Europe.
In general, a period of from four to six months is required, once a
license is obtained, to develop and obtain the approval for the art and
products for the new license, and produce samples and begin marketing. The
Company commenced the product development for these new licenses in the third
and fourth quarters of fiscal 1996, and expended approximately $363,000 in
fiscal 1996 on those projects. Product development for the Walt Disney and
Warner Bros. products continued into the second quarter of fiscal 1997.
Because product development on these licenses lasted well into fiscal 1997,
the Company missed much of the back-to-school business. Initial orders on
the Disney license was shipped in the second half of fiscal 1997 and totaled
4.0% of fiscal 1997 sales. Substantial increases of sales under this license
and the Warner Bros. license is anticipated in fiscal 1998.
The Company acquired Thimble Square on April 12, 1996. Thimble Square's
operating results are included in the consolidated results of operations from
April 12, 1996. Thimble Square's sales for its fiscal year ended December
31, 1995 were approximately $3 million. Thimble Square operated profitably
for many years, but during fiscal 1994 and 1995 (years ended December 31)
incurred losses, due principally to lower levels of sales. That lower level
of sales, and resulting operating losses, continued through the Company's
1997 fiscal year, in part due to labor shortages, and the Company's use of
Thimble Square's production capacity to produce Innovo products.
On July 31, 1995 NASCO Products sold to ANG its operations of importing
to and distributing in the United States sports bags, backpacks and equipment
bags bearing the logos of the teams of the four major professional sports
leagues. The disposed of product line was imported, and therefore required
the Company to make substantial investments to order and purchase inventory
several months ahead of expected sales. Competition and soft demand for
these products caused the Company to incur operating losses in order to sell
the imported inventories, and the Company's decision to sell the product line
reflected its conclusion that these market conditions were likely to continue
for some time, as a result of which near-term profitability was unlikely. As
the result of the disposal, the Company's continuing operations became
concentrated around its domestic manufacturing capabilities and its
international license rights, which the Company views as its strategic
strengths.
In October 1996, the Company began the process of restructuring senior
management, increasing capitalization and reduction in overhead expenses.
The Company remained focused on these objectives into fiscal 1997. They were
addressed collectively in August 1997 by initiating a private placement which
brought in an investment group that would also participate in management full
time. There were net proceeds to the Company of $1,300,000 raised through
this private placement. The investment group consisted of L. E. "Butch"
Smith, Dan Page, Eric Hendrickson and Herb Newton each simultaneously
accepting positions on the Board of Directors with Smith serving as Chairman
and CEO, Page serving as Chief Operating Officer and Hendrickson serving as
V.P. and Treasurer. Patricia Anderson-Lasko relinquished her positions as
Chairman and CEO while retaining the position of President and was appointed
as the manager of sales.
Prior to the Smith Group's involvement with the Company, it continued to
struggle because of a lack of adequate working capital that adversely
effected raw material availability.
The new management group remained focused on reductions in costs
through the fourth quarter of fiscal 1997 and implemented cost reductions
that will reduce expenses by an estimated $500,000, annually. The cost
reductions included reductions in personnel, closing of the Red Boiling
Springs, Tennessee facility and closing of the Pembroke, Georgia plant,
except for cutting operations. The Pembroke, Georgia cutting operation was
moved to leased space in Baxley, Georgia in December 1997.
The manufacturing lines in Baxley, Georgia and Springfield, Tennessee
were realigned immediately following the plant closings and a significant
portion of the equity raised was directed toward making raw materials more
readily available while at the same time broadening the number of suppliers.
The fourth quarter of fiscal 1997 had sales of $2,228,000 as compared to
$1,687,000 for fiscal 1996 and in spite of the plant closings the Company was
able to raise fulfillment rates and reduce overtime from prior periods.
1998 Strategy and Outlook
In fiscal 1998 the Company will attempt to further increase sales and
improve gross margin percentages while reducing overhead expenses.
- Sales increases are anticipated to come from the products being
marketed in Europe under the Walt Disney and Warner Bros. and
American pro sports licenses. Additional sales increases may also
be produced by the sources that produced the 1997 sales increases.
- Sales from a new line of apparel to existing customers of t-shirts
and night shirts, is also anticipated to impact 1998 sales at
Thimble Square.
- NP International has hired a director of sales for European
operations. Management expects this direct hands on involvement to
favorably impact sales in Europe.
- The Company currently believes that it will be able to increase
certain product prices in fiscal 1998, and that the changes in the
manufacturing and administrative structure of the Company being
made under the direction of its new chief executive and operating
officers will further reduce product costs and operating expenses.
Although such increases could meet customer resistance, causing the
Company to either lose or decline and order, the lost sale would
generally be one that would not have contributed material gross
profits.
- The Company believes it can further reduce manufacturing costs by
using manufacturing alliances it is developing in Mexico to produce
certain large run and labor intensive products with domestic goods.
Management believes that any increase in transportation costs will
be more than offset by labor savings.
As previously discussed, the August 1997 restructuring of senior
management has allowed the Company to put cost controls under more direct
supervision, and the Company believes that both the increases in sales, and
improvements in gross profit margins, can be accomplished without significant
increases to fixed overhead costs.
The Company is also currently evaluating the efficiency of its
production facilities. While the Company believes that these facilities are
adequate for its current and projected future needs, and its investments
therein are recoverable from future operations, it is studying whether
further consolidation or relocation of certain facilities might improve
efficiency and reduce production costs. If the Company were to decide to
relocate or consolidate from any of its owned or leased facilities, such a
step could require the Company to record a non-cash charge relating to the
closed facility, which charge would adversely effect operating results for
the period in which it was recorded.
The Company believes that these steps, once fully effective, will allow
it to return to profitability. However, the timing and ultimate success of
these plans can be affected by numerous factors and risks. See "-Forward
Looking Statements."
Forward Looking Statements
Certain statements in the discussion and analysis of financial condition
and results of operations, and elsewhere in this Annual Report on Form 10-K,
represent "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve
management's estimates, projections or predictions of future developments or
events concerning the development, manufacturing and marketing of products,
operating plans and results, liquidity, significant customers, litigation,
and other plans for the Company and its business, and generally can be
identified by the use of forward looking terminology such as "may", "will",
"would", "could", "should", "expect", "estimate", "anticipate", "project", or
the negative thereof, or other variations thereon or comparable terminology.
Such statements involve matters that are subject to various risks and
uncertainties, as a result of which actual future developments, results or
events may differ materially from management's estimates, projections or
predictions. The following discusses certain of the more significant risks
and uncertainties.
The Company operates in competitive and fragmented industries, and its
ability to maintain or increase its level of sales, and its gross profit
margins, will depend on the popularity of its designs or of the logos or
characters its product bear, and upon overall consumer spending patterns.
Both are difficult to predict with certainty, as a result of which actual
future results can differ materially from projections or estimates.
Additionally, a material portion of the Company's sales are of products
produced pursuant to license agreements obtained from sports or entertainment
licensors. The loss or non-renewal of a material license, either due to the
Company's performance, or due to competition for the license, would
materially affect future results.
The Company's ability to maintain or increase its level of sales, and
its gross profit margins, is also dependent on its ability to meet customers'
delivery schedules. The Company's domestic manufacturing has, in the past
and could in the future, be affected by raw material shortages caused by a
lack of working capital, and by labor shortages. Shortages of working
capital or labor can be caused, or magnified, by the seasonality of the
Company's business. The Company could also be affected by the ability of
foreign manufacturers to meet needed delivery schedules. Such events could
limit the Company's ability to accept and fill customer orders, and would
adversely affect the profitability of the sales the Company does make.
As discussed in Note 10 of Notes to Consolidated Financial Statements,
the Company is engaged in certain litigation. As a result, the Company faces
risks concerning the ultimate outcome of these matters, which, if adverse,
could have a material adverse effect on the Company.
In accordance with the provisions of the Private Securities Litigation
Reform Act of 1995, the Company assumes no obligation to update forward
looking statements.
Results of Continuing Operations
Change in Fiscal Year
Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously, the Company's fiscal year needed on October 31.
The results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 are separately presented in the
Company's consolidated financial statements.
Fiscal 1997 Compared to Fiscal 1996
Sales for fiscal 1997 were $9,458,000 which is an increase of $2,067,000
or 28.0% over 1996 fiscal sales of $7,391,000. Higher sales by Innovo and NP
International accounted for $1,878,000 of the increase, representing an
increase of 31.2% in their sales, and the inclusion of a full 12 months of
Thimble Square's sales, which was acquired in April 1996, accounted for the
remaining $189,000 increase.
The increase in Innovo's and NP International's sales resulted
principally from increased domestic craft product shipments and domestic
sports licensed products. A small portion of the increase was from certain
initial shipments of Warner Bros. licensed products in the second quarter.
The development of the Walt Disney and Warner products was completed in the
second quarter of fiscal 1997. The Company's recent discussions with
international customers have indicated that the volume of back-to-school and
holiday business in fiscal 1997 was adversely affected by the timing of the
product introductions, competitive pricing and poor economic conditions in
certain European markets. As a result, the effects of the Warner Bros. and
Walt Disney licenses are expected to be more significant in fiscal 1998 with
new sourcing which has resulted in lower costs, and recovering economic
conditions in certain markets.
Gross profit as a percentage of sales in fiscal 1997 was 32.5% as
compared to 34.3% for the year ended November 30, 1996. The gross profit for
Innovo and NP International was 37.9%. The gross profit margins have been
less than anticipated because sales for the first half of fiscal 1997 have
been heavily weighted towards craft products which generally carry a lower
gross margin than licensed products, production inefficiencies caused by the
lack of anticipated working capital up to the third quarter and higher than
anticipated costs on some items resulting principally from packaging
requirements imposed by certain major customers. Gross profit margin was
also affected by the full nine months of Thimble Square's sales which,
traditionally carry a higher cost of goods sold than Innovo's mix. Gross
profit for Thimble Square was 4.6% for the year ended November 30, 1997.
Thimble Square's gross profit was adversely affected by its large
concentration (67.6% of its fiscal 1997 revenues) of sew only production
which carries a lower gross margin than other product lines and use by Innovo
for Innovo production.
Selling, general and administrative ("SG&A") was $4,121,000 for the year
ended November 30, 1997 or 43.6% of sales as compared to $3,890,000 or 52.6%
of sales for fiscal 1996. Although SG&A increased from fiscal 1996 and 1997
there was a decrease as a percentage of sales. Of the increase of $231,000
in SG&A, $45,000 is the result of the inclusion of a full year of operations
for Thimble Square, legal and professional fees relating to the Company's
litigation with certain former employees, debt restructurings, and the
Company's year-end reporting and annual meeting caused a $43,000 increase in
those costs, and commissions were $90,000 higher in 1997 than 1996 due to
increased sales.
The loss from operations was $1,520,000 for fiscal 1997 as compared to
$1,940,000 for the year ended November 30, 1996, an improvement of $420,000.
The improvement is primarily due to increased sales as discussed above.
Interest expense was reduced $197,000 to $766,000 in fiscal 1997 as
compared to $963,000 for fiscal 1996. This reduction resulted from
reductions in debt through cash payments and conversion into equity and a
reduction in the interest rate charged by Riviera.
Other income in fiscal 1997 was $447,000 consisting primarily of a gain
from legal settlement with former bridge lenders of $166,000 and an override
on the sale of NASCO Products, Inc. to ANG of $135,000.
In the fourth quarter of 1997 the Company recognized an extraordinary
gain from debt settlement of $524,000, see Note 5 of the Consolidated
financial statements.
Fiscal 1996 Compared to Fiscal 1995
Sales for the year ended November 30, 1996 increased by $2,115,000, or
40.1%, to $7,391,000, from $5,276,000 for fiscal 1995. The inclusion of
Thimble Square's operations for April 12, 1996 through November 30, 1996,
contributed $1,368,000 of the increase. The remaining $747,000 increase was
due to sales of the Company's new craft products, the recapture of certain
craft accounts from import suppliers, and approximately $1.1 million of sales
of the Company's U.S. Olympic Team products, offset by declines in
international and domestic pro-licensed sales. As previously discussed,
insufficient working capital caused raw material shortages during the first
half of fiscal 1996, and labor shortages experienced in the second, third and
fourth quarters of fiscal 1996, forced the Company to not accept orders for
an approximate $1 million, and therefore limited the growth in the Company's
sales.
Gross profit as a percentage of sales was 34.3% for fiscal 1996 compared
to 27.8% for the year ended October 31, 1995. The gross profit percentage
for the sales of Innovo's and NP International's was 33.9% in fiscal 1996,
and was favorably impacted by the increase in Innovo's sales of domestically
manufactured products, which lowered the per unit absorption of fixed
manufacturing costs, and other manufacturing improvements. However, the
gross profit percentage for fiscal 1996 was adversely affected by the
Company's lack of working capital for the purchase of raw materials, the
shortages of labor at its manufacturing facilities, and the presence of
specialized U.S. Olympic orders in the sales mix. These factors caused
production inefficiencies, overtime labor costs, and higher freight costs.
The overall gross profit percentage for fiscal 1996 includes the effect of
the gross profit percentage of 36.3% for Thimble Square for the period April
12, 1996 to November 30, 1996.
Selling, general and administrative ("SG&A") expenses increased from
$2,728,000 for fiscal 1995 to $3,890,000 for the year ended November 30,
1996. The $1,162,000 increase was principally due to the inclusion of
Thimble Square's operations since April 12, 1996 ($347,000), an increase in
commissions and royalties of $302,000 as the result of higher sales,
additional minimum royalties to the USOC of $88,000, and approximately
$358,000 in increases in costs for functions related to the development of
new products, and products for the Company's newly obtained licenses. As a
percentage of sales SG&A expenses were 52.6% for fiscal 1996 compared to
51.7% for the year ended October 31, 1995. Depreciation and amortization
expense increased in the fiscal 1996 periods principally due to the inclusion
of the depreciation and amortization of Thimble Square, including goodwill
amortization of $56,000.
The loss from operations was $1,940,000 for the year ended November 30,
1996, compared to $1,666,000 for fiscal 1995, a difference of $449,000. That
difference is caused principally by the increase in SG&A expenses, as
discussed above.
Interest expense increased to $963,000 for the year ended November 30,
1996 as compared to $511,000 for fiscal 1995. The $452,000 increase results
from interest on higher accounts receivable based borrowings reflecting the
increase in sales and interest expense of $82,000 relating to Thimble
Square's assumed notes payable and long-term debt.
In March, 1995 the Company recognized other income of $1.9 million for
the net proceeds it received upon the settlement of its lawsuit against the
former auditors of NASCO. The absence of such a gain from fiscal 1996 is the
principal cause in the decline in other income between the current and prior
year periods, and also for $2.1 million of the change in the results of
continuing operations.
Results of Discontinued Operations
Sales for the discontinued NASCO Products operations decreased by $3.2
million from sales in fiscal 1994 of $5,937,000 to sales in fiscal 1995 of
$2,777,000. The decline in sales in fiscal 1995 reflected the effects of the
weakness in the sporting goods sector of the retail sector, and the effects
of the baseball and hockey strikes. The negative effect of those factors was
partially offset by sales the Company made at discounted prices to reduce its
investment in imported inventory. NASCO Products' fiscal 1995 sales were
also impacted by a decline in marketing efforts which took place during, and
as a result of, the negotiations with ANG. Additionally, sales for fiscal
1995 represent only sales through July 31, 1995, or for nine months.
The gross profits from the discontinued NASCO Products operations were
8.8% and 22.0% of sales for fiscal 1995 and 1994, respectively. The fiscal
1995 and 1994 gross profit percentages were adversely affected by the sales
made at discounted prices to reduce inventory in reaction to the decline in
industry-wide sales of sports licensed products.
The SG&A relating to NASCO Products' discontinued operations equaled
37.6% and 44.1% of sales in fiscal 1995 and 1994, respectively. The
percentage decreased in fiscal 1995, as compared to fiscal 1994, due to lower
commissions, as the majority of fiscal 1995 sales were made to accounts
serviced directly by the Company.
The Company recognized a gain from the sale of NASCO Products' domestic
operations of $301,000 during the third quarter of fiscal 1995. The gain
reflects the recording of the payments to be received from ANG over the next
three years at their present value, discounted at 10% per annum.
Reorganization of Spirco
As described in Note 4 of Notes to Consolidated Financial Statements,
the plan of reorganization for Spirco under Chapter 11 of the U.S. Bankruptcy
Code was confirmed on August 5, 1994 and became effective on November 7,
1994. Generally Spirco's plan of reorganization provided for the full
payment of all claims ranking above general unsecured claims, with claims
ranking below general unsecured claims receiving no distribution. With the
exception of administrative expenses, which were paid in cash with funds
borrowed under the Company's bank credit facility, the claims were paid
through the issuance of Innovo Group common stock. Spirco's equipment and
plant were transferred to Leasall, which assumed the related debt, and Spirco
was merged into Innovo Group, which acquired direct ownership of its other
assets.
The implementation of Spirco's plan of reorganization resulted in a
fiscal 1994 extraordinary gain of $699,000 (net of taxes of $429,000) from
the extinguishment of the unsecured and other claims that did not receive any
distribution under the plan of reorganization. In fiscal 1995 the Company
recorded extraordinary charges of $258,000 for changes in the estimates of
certain allowed claims. Certain claims ("the Class 3 claims") were
contributed to a trust ("the Class 3 Trust"), to which shares of the
Company's common stock were contributed. The Class 3 Trust sold those shares
and distributed the proceeds to satisfy the Class 3 claims. For financial
reporting purposes the Class 3 claims were reported as satisfied as the Class
3 Trust sold the shares of common stock and distributed the proceeds to the
claimants (see Note 4 of Notes to Consolidated Financial Statements).
Accordingly, the full impact of the plan of reorganization was not reflected
in the consolidated balance sheet until that process was completed in fiscal
1996. On an overall basis, Spirco's plan of reorganization had the effect of
eliminating liabilities of approximately $3.4 million and increasing
stockholders' equity by approximately $2.5 million.
The majority of Spirco's creditors were related to its discontinued
fundraising program operations and are not suppliers to the Company's
continuing operations. Spirco had continued during its reorganization to
make the scheduled payments on its mortgage debt, and the implementation of
the plan of reorganization resulted in a significant reduction in the amount
and periodic payments for the equipment debt assumed by Leasall.
Additionally, the Company's creditors had, since March, 1994, been generally
aware that unsecured Spirco creditors would receive little or no
distribution. Accordingly, the implementation of the plan did not have a
material adverse effect on the Company's liquidity. Additionally, the
implementation of Spirco's plan of reorganization did not have a material
impact on the Company's results of continuing operations.
Seasonality
The Company's business is seasonal. The greatest volume of shipments
and sales are, in general, made in the summer and fall, which coincide with
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 and production employees, and developing the
marketing programs and designs for and conducting the majority of its sales
campaigns. Inventory levels also increase during the first half of the year.
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.
The following table presents unaudited quarterly consolidated financial
data for the four quarters in each of the years ended November 30, 1997 and
1996. The Company believes all necessary adjustments have been included in
the amounts stated below to present fairly the following selected quarterly
information when read in conjunction with the consolidated financial
statements appearing elsewhere herein. The information includes all normal
recurring adjustments the Company considers necessary for a fair presentation
thereof, in accordance with generally accepted accounting principles.
Quarter Ended
__________________________________________________________________________
1997 1996
__________________________________________________________________________
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
__________________________________________________________________________
(In thousands, except for per share amounts)
Net sales $2,220 $2,112 $2,898 $2,228 $1,319 $2,081 $2,304 $1,687
Gross profit 762 728 1,210 370 587 810 756 385
Income (loss)
from continuing
operations (457) (639) (253) (490) (161) (436) (890) (1,601)
Earnings (loss) per
share from continuing
operations (.02) (.03) (.01) (.01) (.02) (.04) (.05) (.08)
Liquidity and Capital Resources
On an overall basis the Company's liquidity was materially restricted
throughout most of fiscal 1995, 1996 and the first three quarters of fiscal
1997. The repayment of the bank borrowings that had financed a significant
portion of the losses incurred by the Company's discontinued Spirco and NASCO
Products operations absorbed significant working capital. Although the
Company has been able to obtain working capital through the private placement
of debt and equity securities, the Company's losses, and the other factors
discussed above, have had adverse effects on the per share price of the
Company's common stock which in turn has impaired the amount and terms of
capital available from such sources. The Company has financed its operations
and its debt reductions through the issuance of common stock, borrowings and
internally generated cash flow. External financing sources provided net
capital of $1,895,000 and $2,776,000 in fiscal 1997 and 1996, respectively
and required net repayments of $1,787,000 in fiscal 1995, while operations
provided (absorbed) cash flow of $(1,247,000), $(2,743,000) and $1,704,000
during those periods.
Operating cash flows were a negative $1,274,000 for the year ended
November 30, 1997. The primary reason was a net loss of $1,315,000. There
were also net non-cash gains of $104,000, and decrease in receivables and
inventories of $357,000 which was offset by a corresponding decrease in
payables and accruals of $307,000.
Primarily, sales of the Company's common stock for the exercise of
common stock purchase warrants of approximately $2.2 million financed the
fiscal 1997 loss. A majority of the capital raised came in conjunction with
the private placement of $.6 million in the fourth quarter. (See Note 9 to
the consolidated financial statements.) The two private placements were $.20
and $.45, respectively.
The remaining 8% convertible debentures, recorded at $470,000 at
November 30, 1996 were converted into 4,127,931 shares of common stock in the
first and second quarters of 1997. Additionally, in fiscal 1997, 150,000
shares of common stock were used to extinguish $82,000 in liabilities.
Operating cash flows were a negative $2.7 million for fiscal 1996
principally as the result of the $3,088,000 million net loss, non-cash
charges of $672,000, a $836,000 increase in accounts receivable and
inventories and a $40,000 decrease in accounts payable and accrued expenses.
The increase in accounts receivable results from the increase in sales; at
November 30, 1996, accounts receivable equals approximately 58 days of sales,
as compared to 108 days at October 31, 1995.
The net loss, accounts receivable and inventory increases and accounts
payable and accrued expense decreases were financed with an aggregate of $2.8
million obtained from the sale of shares of the Company's common stock, or
the exercise of outstanding common stock purchase warrants, and new notes
payable or long-term debt borrowings (net of repayments on those notes and
the final repayment of NBD, as discussed below). $1.6 million of that
capital was raised during the second quarter and used to reduce trade debt,
which improved the Company's trade credit with its suppliers and allowed it
to finance through new trade credit the increases in accounts receivables and
inventories required to support the increases in sales. The private
placements of shares of common stock, which the Company undertook to obtain
the working capital needed to support the increase in sales, were undertaken
in February, April and May, 1996, at times when the Company's common stock
was trading at prices of between $.25 and $.63 per share.
During the third quarter of fiscal 1996 the Company raised an aggregate
of $2.0 million, principally from the issuance of 8% Convertible Debentures.
The Company undertook these financings to fund the development of products,
advance royalty deposits for the new Warner Bros. license, the repayment of
the notes issued in the acquisition of Thimble Square (repaid in September,
1996), the completion of the development of the Florida retail property, and
to further reduce accounts payable to increase the availability of trade
credit.
$1,205,000 of the 8% Convertible Debentures were converted into shares
of common stock during the fourth quarter of fiscal 1996 (see Note 6 of Notes
to Consolidated Financial Statements). Additionally, other notes payable or
other liabilities aggregating $423,000 were extinguished during fiscal 1996
through the issuance of a total of 1,269,470 shares of common stock (see Note
9 of Notes to Consolidated Financial Statements).
Cash flows from operations of $1,704,000 in fiscal 1995 were generated
principally from a $4.4 million reduction in inventories. The inventory and
accounts receivable reductions both principally resulted from the Company's
exit from its import operations. The cash flows generated from those sources
allowed the Company to reduce current liabilities, including notes payable,
by $5.5 million.
The Company's issuances of common stock in fiscal 1995 were principally
to extinguish debt (including the debt extinguished through Spirco's plan of
reorganization). In fiscal 1995 the Company issued 119,813 shares of common
stock to reduce by $128,000 the balance of notes payable outstanding at
October 31, 1994, and issued 187,049 shares upon the resolution of Class 8
claims in Spirco's reorganization proceeding that were in dispute when the
plan was initially implemented (see "- Reorganization of Spirco").
Additionally, the Class 3 Trust sold 359,049 shares of common stock for
proceeds of $590,000, which were distributed to the Class 3 claimants, and
$350,000 of debt and related accrued interest was tendered as payment for
372,149 shares of common stock that were subsequently issued to the former
creditor over the period November, 1995 to May, 1996.
In April, 1995 Innovo entered into an accounts receivable factoring
agreement with Riviera Finance under which the Company obtains advances of
80% of assigned Innovo accounts receivable. Riviera Finance charges 1% of
each invoice assigned plus 2% per month of average outstanding advances.
Thimble Square was added to the factoring agreement in April, 1996 after
Innovo Group's acquisition of that company. During the course of 1997,
Riviera revised the terms of their factoring agreement to first advance 90%
of eligible receivables of Innovo, and then, in October 1997, Riviera reduced
the rates the charged Innovo to .75% of each invoice plus 1.5% per month of
average outstanding advances. NP International's sales to foreign customers
are generally secured by letters of credit provided by the customer prior to
shipment, which are paid upon or shortly after delivery to the customer. The
Company utilizes those letters of credit to secure the purchase of the
foreign manufactured products included in such orders. Additionally, the
Company is generally able to obtain these orders sufficiently in advance of
requested delivery to contract for foreign manufacturing of quantities that
closely match its sales, and as a result can generally avoid significant
investments in foreign manufactured inventories. As a result, this aspect of
NP International's business neither requires or provides material borrowings.
In October 1997 the Company obtained a line of credit for $762,000 with
First American Bank collateralized by a certificate of deposit owned by the
Company for $462,000 and a certificate of deposit owned by a director of the
Company for $300,000. $489,000 was available on the line at November 30,
1997. In December 1997, First American Bank replaced Riviera as the
Company's factor. First American advances 90% of approved invoices and
charges Innovo 1% for the first 15 days an invoice is outstanding and .05%
per day thereafter to a maximum of 6%. Thimble Square is charged 1.5% for
the first 30 days an invoice is outstanding at .033% per day thereafter to a
maximum of 6%. There are no established limits on the First America Bank
factoring facility.
In December 1997, the Company negotiated a line of credit at First
First Independent Bank for $350,000 collateralized by the equipment of Innovo
and Leasall.
In 1995 the Company paid $936,000 to NBD to eliminate the then
outstanding borrowings on Innovo's existing accounts receivable and
inventory. The payment to NBD was funded from net proceeds of $1.9 million
which the Company received in March 1995 upon the settlement of its lawsuit
against the former auditors of Spirco (then NASCO). NBD agreed to continue
to advance funds against the accounts receivable and inventories of NASCO
Products through July 31, 1995. Effective August 1, 1995, NBD began to apply
to the balance due it all of the proceeds from the collection of NASCO
Products' accounts receivable, and payments being received by NASCO Products
from ANG.
In July, 1994, the Company obtained a $600,000 working capital loan
which was used principally to reduce past due royalties and commissions. The
original term of the loan expired in January, 1995. In April, 1995 the
Company paid accrued interest through that date, and reduced the outstanding
principal to $407,000, using $258,000 from the settlement with Spirco's
former auditors. An extension of the maturity to the earlier of October 15,
1995 or the repayment of the NBD facility was obtained in exchange for the
issuance of 69,500 shares of common stock and the increase of the loan's
interest rate to 20%. In January, 1996, the Company and the lenders extended
the maturity of the working capital loan to October 31, 1996 and reduced the
interest rate to 16% retroactively to October, 1995. The lenders were
granted a security interest, subordinate to NBD's, in the payments to be
received from ANG, to be used to retire the working capital loan once NBD had
been fully repaid. To obtain the extension, the Company issued 50,000 shares
of common stock and issued an additional 6,250 shares each month the
extension remained in force. The Company completed the repayment of the
borrowings under the NBD credit facility in the third quarter of fiscal 1996
with funds from payments received from ANG. The remaining payments received
from ANG were used to reduce the outstanding borrowings on the working
capital loan to $213,000 by November 30, 1996. In February, 1997, the
holders of $124,000 of such remaining balance agreed to accept $70,000,
payable by June 30, 1997 without additional interest, in full satisfaction of
such $124,000 balance, in exchange for the release of certain claims by the
Company against them. The maturity of the remaining $89,000 due under the
loan was extended, under the existing terms, and was paid in fiscal 1997.
The Company believes that working capital provided by operations and
amounts available under the December 1997 line of credit with First
Independent Bank will be sufficient to fund operations and required debt
reductions in fiscal 1998. However, due to the seasonality of the Company's
business, operating cash flows may be negative during the first half of the
year, and the Company may therefore be required to obtain capital through
debt or equity financing. The Company believes that additional capital, to
the extent needed, could be obtained from a private placement of equity
securities, the refinancing of Thimble Square's plants and equipment or the
sale of all or a portion of the Florida property. 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 have to constrict its operations.
Innovo Group is a holding company the principal assets of which are the
common stock of the operating subsidiaries. As a result, to satisfy its
obligations Innovo Group is dependent on cash obtained from the operating
subsidiaries, either as loans, repayments of loans made by Innovo Group to
the subsidiary, or distributions, or on the proceeds from the issuance of
debt or equity securities by Innovo Group. Leasall's first mortgage loan
contains restrictions on its ability to make advances or distributions to
Innovo Group; however, Leasall's activities are limited to the ownership of
the Company's real property and the servicing of the mortgage debt thereon.
The debt agreements of the other subsidiaries do not restrict advances or
distributions to Innovo Group.
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during
the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit date codes to perform computations
or decision-making functions. The Company has not yet performed a
comprehensive review of its computer programs to identify the systems that
would be affected by the Year 2000 issue nor has it yet reviewed the
Company's Year 2000 exposure to customers, distributors, suppliers and
banking institutions. Management is presently unable to estimate the costs
associated with modification or replacement of systems affected by the Year
2000 issue, however, these costs could be significant.
Other
Inflation has not had a significant impact on the operations or
financial position of the Company.
The Company has no material commitments or plans for capital
expenditures. The Company has certain commitments for minimum royalty
payments and may, under certain circumstances, be required to repurchase
certain shares of its common stock. See Notes 9 and 10 of Notes to
Consolidated Financial Statements.
Certain of the Company's sales are to foreign customers, and a material
portion of those sales involved products sourced from foreign suppliers.
Sales to foreign customers and purchases from foreign suppliers are generally
negotiated in U.S. dollars, and are settled at shipment, so that the exchange
rate risk for these transactions is not significant. The Company does not
utilize foreign currency contracts or other derivative instruments.
New Accounting Pronouncements
SFAS No. 128, "Earnings Per Share" is effective for periods ending
after December 15, 1997. This statement revised the manner in which earnings
per share is calculated and requires the restatement, when first applied, of
prior period earnings per share data. The Company does not expect the adoption
of this pronouncement to have a material effect on the previously reported
earnings per share data.
SFAS No. 130, "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. This pronouncement is not expected to have a material impact on
the Company's financial statements when adopted.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for years beginning after December 15, 1997. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This pronouncement is not
expected to have a material impact on the Company's financial statements when
adopted.
Item 8. Financial Statements
Innovo Group Inc.
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38
Financial Statement Schedules are included at Item 14.
Report of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We have audited the accompanying consolidated balance sheets of
Innovo Group Inc. and subsidiaries as of November 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years ended November 30, 1997, 1996 and October 31,
1995 and for the period November 1, 1995 to November 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 consolidated 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, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the years ended November 30, 1997, 1996 and October 31, 1995 and
for the period November 1, 1995 to November 30, 1995, in conformity with
generally accepted accounting principles.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
February 6, 1998
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's, except for share data)
November 30, November 30,
1997 1996
____________ ___________
ASSETS
CURRENT:
Cash and cash equivalents (including
$462 pledged in 1997, Note 6) $ 469 $ 31
Accounts receivable (Note 6) 895 1,238
Inventories (Note 6) 1,582 1,749
Prepaid expenses 398 332
_______ _______
TOTAL CURRENT ASSETS 3,344 3,350
PROPERTY AND EQUIPMENT, net (Notes 6 and 7) 5,071 5,188
OTHER ASSETS 753 895
_______ _______
$ 9,168 $ 9,433
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 6) $ 1,131 $ 921
Current maturities of long-term
debt (Note 7) 211 224
Accounts payable 1,412 1,861
Accrued expenses 769 954
_______ _______
TOTAL CURRENT LIABILITIES 3,523 3,960
LONG-TERM DEBT, less current
maturities (Note 7) 1,854 3,079
OTHER - 119
_______ _______
TOTAL LIABILITIES 5,377 7,158
_______ _______
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 4 and 9):
Common stock, $.01 par - shares
authorized 70,000,000 in 1997 and
30,000,000 in 1996; issued 44,596,133
in 1997 and 26,530,577 in 1996 446 265
Additional paid-in capital 28,429 25,076
Promissory Note - Officer (703) -
Deficit (21,955) (20,640)
Treasury stock, 119,691 shares (2,426) (2,426)
_______ _______
TOTAL STOCKHOLDERS' EQUITY 3,791 2,275
_______ _______
$ 9,168 $ 9,433
_______ _______
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except earnings per share information)
Transition Year Ended
Year Ended Period October 31,
November 30, November 1-30, __________
1997 1996 1995 1995
________ _________ __________ ____
NET SALES $ 9,458 $ 7,391 $ 281 $ 5,276
COST OF GOODS SOLD 6,388 4,853 166 3,808
_______ _______ _______ ______
Gross profit 3,070 2,538 115 1,468
OPERATING EXPENSES
Selling, general and administrative 4,121 3,890 233 2,728
Depreciation and amortization 469 588 31 406
______ _______ _______ _______
Income (loss) from operations (1,520) (1,940) (149) (1,666)
INTEREST EXPENSE (766) (963) (33) (511)
OTHER INCOME (EXPENSE), net (Note 1(m)) 447 (185) (12) 2,110
______ _______ _______ _______
Income (loss) before income taxes
(benefit) (1,839) (3,088) (194) (67)
INCOME TAXES (BENEFIT) (Note 8) - - - -
_______ _______ _______ _______
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,839) (3,088) (194) (67)
_______ _______ _______ _______
DISCONTINUED OPERATIONS, NET OF TAXES (Note 3)
Results of discontinued NASCO Products
operations - - - (927)
Gain on sale of NASCO Products operations - - - 301
_______ _______ ______ ______
- - - (626)
_______ _______ _______ _______
EXTRAORDINARY ITEM (Notes 4 and 5) 524 - - (258)
_______ _______ _______ _______
NET INCOME (LOSS) $ (1,315) $ (3,088) $ (194) $ (951)
_______ _______ _______ _______
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.05) $ (.23) $ (.05) $ (.03)
Discontinued operations (Note 3) - - - (.24)
Extraordinary item (Notes 4 and 5) .01 - - (.09)
_______ _______ _______ _______
Net income (loss) $ (.04) $ (.23) $ (.05) $ (.36)
_______ _______ _______ _______
WEIGHTED AVERAGE SHARES OUTSTANDING 34,382 13,613 3,846 2,616
_______ _______ _______ _______
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's except for shares)
Additional Retained Promissory
Common Stock Stock paid-in earnings Note Treasury
Shares Amount Subscription capital (deficit) Officer stock Total
______ ______ ____________ _______ ________ ________ ________ _____
BALANCE, November 1, 1994 2,146,372 $ 21 $ - $17,485 $(16,407) - $(3,471) $(2,372)
Issuance of common stock
Spirco reorganization (Note 4) 546,103 5 - 1,116 - - - 1,121
Extinguishment of debt 119,873 1 350 127 - - - 478
Loan extension 69,500 1 - 121 - - - 122
Other 2,500 - - 9 - - - 9
Costs of issuances - - - (60) - - - (60)
Expiration of put options 189,761 2 - 1,421 - - - 1,423
Cancellation of treasury shares (24,047) - - (1,082) - - 1,082 -
Net loss - - - - (951) - - (951)
_________ _____ _____ ______ ________ ______ _______ ______
BALANCE, October 31, 1995 3,050,062 30 350 19,137 (17,358) - (2,389) (230)
Issuances of common stock
Exercise of warrants 750,000 8 - 232 - - - 240
Subscription agreement 60,793 1 (58) 57 - - - -
Spirco reorganization (Note 4) 18,000 - - 12 - - - 12
Issuance of stock option (Note 7) - - - 700 - - - 700
Net loss - - - - (194) - - (194)
_________ _____ _____ ______ ________ ______ _______ ______
BALANCE, November 30, 1995 3,878,855 39 292 20,138 (17,552) - (2,389) 528
Issuances of common stock
Cash 7,316,282 73 - 1,737 - - - 1,810
Subscription agreements 311,356 3 (292) 289 - - - -
Spirco reorganization (Note 4) 312,994 3 - 295 - - - 298
Manufacturing agreement 1,200,000 12 - 388 - - - 400
Thimble Square acquisition (Note 4)1,241,176 12 - 621 - - - 633
Extinguishment of debt 1,269,470 13 - 410 - - - 423
Conversion of debentures (Note 7) 7,521,912 75 - 915 - - - 990
Exercise of warrants and options 3,372,730 34 - 412 - - - 446
Loan fees (Note 7) 105,802 1 - 31 - - - 32
Debt settlement - - - - - - (37) (37)
Issuance of warrants (Note 8) - - - 40 - - - 40
Issuance costs - - - (200) - - - (200)
Net loss - - - - (3,088) - - (3,088)
_________ _____ _____ ______ _______ ______ ______ _____
BALANCE, November 30, 1996 26,530,577 265 - 25,076 (20,640) - (2,426) 2,275
Issuances of common stock
Smith group purchase 6,750,000 68 - 1,282 - - - 1,350
Cash 1,500,000 15 _ 660 - - - 675
Conversion of debenture 4,127,931 41 - 359 - - - 400
Exercise of stock purchase right 4,000,000 40 - 1,085 - (1,125) - -
Conversion of convertible notes 2,100,000 21 - 383 - - - 383
Exercise of warrants 765,000 8 - 135 - - - 143
Debt settlement 75,000 1 - 50 - - - 51
Other 247,625 2 - 41 - - - 43
Cost of issuances - - _ (85) - - - (85)
Retire shares subject to stock
purchase right (1,500,000) (15) - (407) - 422 - -
Warrant repurchase - - - (150) - - - (150)
Net Loss - - - - (1,315) - - (1,315)
__________ ____ _____ _______ _______ ______ ________ ______
BALANCE, November 30, 1997 44,596,133 $446 $ 0 $28,429 $(21,955) $ (703) $(2,426) $3,791
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
Year Ended Transition Year Ended
November 30, Period October 31,
_______________________ November 1-30, __________
1997 1996 1995 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,315) $(3,088) $ (194) $ (951)
Adjustments to reconcile net
(loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 469 588 26 412
Provision for uncollectible accounts 153 78 - 102
(Gain) on disposal of discontinued
operations - - - (395)
Extraordinary (gain) or loss (524) - - 258
Other - 6 (2) -
Changes in assets and liabilities:
Accounts receivable 190 (430) 821 279
Inventories 167 (406) (14) 4,430
Prepaid expenses (66) 560 (672) (25)
Accounts payable (173) 558 (688) (867)
Accrued expenses (134) (598) 556 (1,032)
Other (14) (11) (2) (507)
______ ______ _______ ______
Cash provided by (used in) operating activities (1,247) (2,743) (169) 1,704
______ ______ _______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (469) (379) - (19)
Increase in other assets 43 - - 4
Proceeds from sale of discontinued operations - 257 - 100
Disposal of fixed assets 216 - - -
______ ______ _______ ______
Cash provided by (used in) investing activities (210) (122) - 85
______ ______ _______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition of notes payable 869 - 300 356
Repayments of notes payable (221) (444) (245) (1,970)
Additions to long-term debt - 1,675 - -
Debt issue costs - (285) - -
Repayments of long-term debt (729) (226) (12) (113)
Proceeds from issuance of common stock 2,168 2,256 240 -
Stock issuance costs (85) (200) - (60)
Warrant repurchase (150) - - -
Other 43 - - -
______ ______ _______ ______
Cash provided by (used in) financing activities 1,895 2,776 283 (1,787)
______ ______ _______ ______
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 438 (89) 114 2
CASH AND CASH EQUIVALENTS, at beginning of period 31 120 6 4
______ ______ _______ ______
CASH AND CASH EQUIVALENTS, at end of year $ 469 $ 31 $ 120 $ 6
______ ______ _______ ______
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of business
Innovo Group Inc. ("Innovo Group") is a holding company, the principal
assets of which is the common stock of three operating subsidiaries, Innovo,
Inc. ("Innovo"), NASCO Products International, Inc. ("NP International") and
Thimble Square, Inc. ("Thimble Square"), which Innovo Group acquired in
April, 1996 (see Note 2). Innovo Group and its wholly-owned subsidiaries are
referred to as "the Company".
Innovo is a domestic manufacturer and distributor of cut and sewn canvas
and nylon consumer products, such as tote and other bags and aprons, which
are sold to the utility, craft, sports licensed and advertising specialty
markets. Innovo's sports licensed products are produced with logos or other
designs licensed from various sports and entertainment related licensors.
Innovo grants credit to customers, substantially all of which are retail
merchandisers or are in the premium incentive industry.
NP International distributes in foreign, principally European markets,
nylon sports bags and backpacks, imprinted or embroidered with logos or other
designs licensed from various sports and entertainment related licensors. NP
International generally receives payment at the time of shipment.
Thimble Square manufactures and markets ladies' ready-to-wear at home,
sleep and lounge wear. Its products are sold to mail order companies,
retailers and through mail order distribution. Thimble Square also provides
"sew-only" manufacturing for other distributors of private-label sleep and
lounge wear; in those instances, the customer provides the raw materials and
Thimble Square manufactures the products to the customer's specifications.
Thimble Square grants credit to apparel retailers, mail order distributors,
and to other apparel distributors.
NASCO Products, Inc., also a wholly owned subsidiary, imported a line of
canvas and nylon sport bags, backpacks, equipment bags, and other sporting
goods products imprinted or embroidered with emblems and logos licensed from
various sports related licensors, principally the major professional sports
teams. NASCO Products, Inc. granted credit to customers, substantially all
of which were major retailers and mail order catalog businesses. Effective
July 31, 1995 the Company disposed of and discontinued the import operations
of NASCO Products, Inc. (see Note 3).
The Company operated in a single business segment, the manufacture and
sale of Innovo's and NP International's canvas and nylon consumer products,
throughout fiscal 1995. Thimble Square's operations are classified as a
separate business segment ("apparel products"). See Note 11. Sales to two
customers (one a customer of Innovo, and one a customer of Thimble Square)
accounted for 28.8%, and 11.1% of net sales for the year ended November 30,
1997. Sales to foreign customers, principally in Europe, accounted for
16.4%, 12,1% and 27.5% of net sales in fiscal 1997, 1996 and 1995,
respectively.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Changes in fiscal year end
Effective November 1, 1995, the Company changed its fiscal year to end
on November 30. Previously, the Company's fiscal year ended on October 31.
The results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 are separately presented in the
accompanying consolidated financial statements.
(c) 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.
(d) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Estimates most significantly affect the amortization of
goodwill (see Note 1(g)), the evaluation of contingencies (see Note 10), and
the determination of allowances for accounts receivable (see Note 1(i)) and
inventories (see Note 1(e)).
(e) 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:
November 30,
1997 1996
(000's) (000's)
Finished goods $ 680 $ 440
Work-in-process 246 719
Raw materials 692 663
______ ______
1,618 1,822
Less inventory reserve (36) (73)
______ ______
$ 1,582 $ 1,749
______ ______
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Property, plant, equipment, depreciation and amortization
Property, plant and equipment, including assets utilized under capital
leases, are stated at cost. Depreciation and amortization are provided in
amounts sufficient to allocate the cost of depreciable assets to operations
over their estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the lives of the respective leases or the
estimated service lives of the improvements, whichever is shorter. On sale
or retirement, the asset cost and related accumulated depreciation or
amortization are removed from the accounts, and any related gain or loss is
included in the determination of income.
Fixed assets and fixed assets to be disposed of are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 121. Under the
standard, where there is a significant change in use or value of a long-lived
asset, the asset is written down to recoverable value if it is determined
that recoverable value is less than the Company's cost basis. SFAS No. 121
was adopted in fiscal 1997 and has not had a material effect on the Company's
consolidated financial statements.
Property and equipment consisted of the following:
Useful
Lives November 30,
(Years) 1997 1996
_______ _________ _________
(000's) (000's)
Buildings, land and
improvements 88-20 $ 4,575 $ 4,351
Machinery and equipment 5-8 1,526 1,766
Furniture and fixtures 3-8 674 412
Transportation equipment 5 65 65
Leasehold improvements 5-8 3 11
______ ______
6,843 6,605
Less accumulated depreciation
and amortization (1,772) (1,417)
______ ______
Net property and equipment $ 5,071 $ 5,188
______ ______
The cost and accumulated depreciation for assets utilized under capital
leases were $475,000 and $36,000, respectively, at November 30, 1997.
Due to the incorporation of the Pembroke, Georgia operation into Baxley,
Georgia, the above also includes the Pembroke real estate, that is held for
sale, recorded at a net book value of $500,000 at November 30, 1997. The
Pembroke real estate is recorded in the apparel products business segment and
no gain or loss was recognized in relation to the classification of the asset
as held for sale.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Other assets
Other assets consisted of the following:
November 30,
1997 1996
(000's) (000's)
Goodwill, net of accumulated
amortization $ 702 $ 786
Debt issue costs, net 8 80
Other 43 29
_____ ______
$ 753 $ 895
_____ ______
Goodwill, which arose in the Company's acquisition of Thimble Square, is
being amortized over a period of ten years. The Company assesses the
recoverability of goodwill by comparison to the projected undiscounted cash
flows from the acquired operations. If such a comparison indicates
impairment, unamortized goodwill will be reduced to equal the present value
of such projected cash flows. The amortization of goodwill for the years
ended November 30, 1997 and 1996 were $84,000 and $56,000, respectively.
Accumulated amortization at November 30, 1997 and 1996, were $140,000 and
$56,000, respectively.
Cost incurred in the issuance of debt securities or to obtain bank
financing are capitalized and are amortized as a component of interest
expense using the level yield method.
The Company charges to expense in the year incurred costs to develop new
products and programs. Amounts charged to expense approximated $182,000,
$363,000 and $39,000 in fiscal 1997, 1996 and 1995, respectively.
(h) Income taxes
The Company files a consolidated income tax return and provides for
income taxes under Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under that standard, deferred income
taxes are provided for temporary differences arising from differences between
financial statement and federal income tax bases of assets and liabilities.
(i) Revenue recognition
Revenues are recorded on the accrual basis of accounting when the Company
ships products to its customers. The Company provides an allowance ($106,000
and $66,000 at year ended November 30, 1997 and 1996, respectively) for
estimated losses to be incurred in the collection of accounts receivable.
(j) Earnings per share
Earnings (loss) per share are computed using weighted average common
shares and dilutive common equivalent shares outstanding. Common stock
equivalents consist of outstanding options and warrants. Common stock
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
equivalents were not considered in the computation of weighted average common
shares as their effect would have been antidilutive.
On June 8, 1995 the Company declared a one-for-ten reverse stock split,
effective June 19, 1995. All share and per share amounts have been restated
to reflect the effects of the reverse stock split.
(k) Stock Options
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recorded in conjunction with
options issued to employees. Had compensation cost been determined based on
the fair value of the options at the grant date, consistent with the method
prescribed by SFAS No. 123, the Company's net earnings would have been
reduced to the pro forma amounts indicated below:
(000's except per share information)
1997 1996
____ ____
Net income (loss) - as reported $(1,315) $(3,088)
Net income (loss) - pro forma (1,496) (3,088)
Net income (loss) per common share - pro forma (.04) (.23)
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 1997; expected volatility of 40%; risk-free interest rate
of 5.8%; and expected lives from one to five years.
(l) Statement of cash flows
Cash and cash equivalents are generally comprised of highly liquid
instruments with original maturities of six months or less, such as treasury
bills, certificates of deposit, commercial paper and call and time deposits.
Year Ended Year Ended
November 30, October 31,
1997 1996 1995
(000's) (000's) (000's)
Cash paid for interest $ 767 $ 618 $ 576
Cash paid for income taxes $ - $ - $ -
During fiscal 1997 the Company issued stock to extinguish an aggregate
of $855,000 of liabilities.
During fiscal 1996 the Company issued common stock in connection with the
acquisition of Thimble Square (see Note 2), to extinguish an aggregate of
$423,000 in liabilities, as a loan fee extension, to acquire manufacturing
services (see Notes 4, 6 and 9) and upon the conversion of $1,205,000 of 8%
Convertible Debentures (see Note 7). The Company also issued stock warrants
and a mortgage note to acquire property for $1.5 million (see Note 7).
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
During fiscal 1995 the Company issued common stock and common stock
subscriptions to extinguish an aggregate of $1,599,000 in liabilities, as a
loan extension fee, and for stock awards. See Notes 4, 6 and 9.
(m) Other Income (Expense)
Other income in fiscal 1995 includes a $1.9 million gain from the
settlement from litigation.
(n) Financial Instruments
The fair values of the Company's financial instruments (consisting of
cash, accounts receivable, accounts payable, notes payable, long-term debt
and notes payable officer) do not differ materially from their recorded
amounts.
The Company neither holds, or is obligated under, financial instruments
that possess off-balance sheet credit or market risk.
(o) New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. This pronouncement is not expected to have a material impact on
the Company's financial statements when adopted.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for years beginning after December 15, 1997. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This pronouncement is not
expected to have a material impact on the Company's financial statements when
adopted.
SFAS No. 128, "Earnings Per Share" is effective for periods ending after
December 15, 1997. This statement revised the manner in which earnings per
share is calculated and requires the restatement, when first applied, of
prior period earnings per share data. The Company does not expect the
adoption of this pronouncement to have a material effect on the previously
reported earnings per share data.
NOTE 2 - ACQUISITIONS
On April 12, 1996, the Company acquired 100% of the outstanding common
stock of Thimble Square, Inc. ("Thimble Square") for an aggregate of $1.1
million, paid by the issuance of shares of the restricted common stock of the
Company. In a concurrent transaction, Thimble Square acquired from its
stockholders a plant it had previously leased from them in exchange for (a)
$300,000 paid by the issuance of shares of the restricted common stock of
Innovo Group, and (b) the issuance by Thimble Square of $200,000 of unsecured
notes payable, which were paid in September, 1996. The Company also issued
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (continued)
95,686 shares in payment of a finder's fee related to the acquisition.
A total of 2,840,784 shares of the Company's common stock were initially
issued to effect the acquisition. However, in August, 1996, upon completion
of the audit of Thimble Square's financial statements and the appraisal of
its plants and equipment, the number of shares was, pursuant to the terms of
the merger agreement, reduced by 519,608 shares. Additionally, at the time
of the acquisition Thimble Square owned 1,080,000 shares of the Company's
common stock as a result of the January, 1996 manufacturing agreement between
the companies (see Note 7). As a result of the acquisition, Innovo Group
reacquired, and retired, those shares, and the net increase in the number of
shares of Innovo Group common stock outstanding was 1,241,176 shares.
The aggregate purchase price, as adjusted, of $1,584,000 (which includes
the finder's fee of $49,000 and acquisition costs of $200,000) was allocated
to Thimble Square's assets and liabilities, based on their fair values, as
follows:
(000's)
Current assets $ 220
Property and equipment 1,525
Investment in Innovo Group
common stock 551
Goodwill 842
Current liabilities (924)
Long-term debt (546)
Other liabilities (84)
_______
$ 1,584
_______
The acquisition was accounted for as a purchase, and Thimble Square's
operating results are included in the consolidated results of operations from
April 12, 1996. The following unaudited pro forma information indicates what
net sales, income from continuing operations, and income from continuing
operations per share, would have been had the acquisition of Thimble Square
been completed on December 1, 1995 and November 1, 1994, respectively. This
unaudited pro forma information has been prepared for illustrative purposes
only and is not necessarily indicative of the Company's future financial
position or results of operations.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (concluded)
Year Ended
________________________
November 30, October 31,
1996 1995
___________ __________
(000's except per share amounts)
Sales $ 7,824 $8,905
Income (loss) from
continuing operations (3,300) (165)
Income (loss) from continuing
operations per share $ (.24) $ (.04)
NOTE 3 - DISCONTINUED OPERATIONS
The components of income (loss) from discontinued operations are as
follows:
Year ended
October 31,
________
1995
(000's)
Results of discontinued NASCO
Products operations $ (927)
Gain on sale of NASCO Products
operations 301
_______
$ (626)
_______
On July 31, 1995 the Company executed an agreement with Accessory Network
Group ("ANG") under which ANG succeeded to all of the rights held by NASCO
Products to market and distribute in the United States the National Football
League, NBA, Major League Baseball and National Hockey League logoed sports
bags, back packs and equipment bags NASCO Products previously imported and
distributed.
For each license ANG paid NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining
$650,000 was payable, without interest, in monthly installments equal to 5%
of ANG's aggregate sales of the licensed products. The final payment was
made in December, 1997. NASCO Products transferred to ANG its existing
inventory of these products, for which ANG paid approximately 67% of NASCO
Products' cost over a six month period. The gain of $301,000 recognized in
fiscal 1995 from the sale of the NASCO Products' domestic operations reflects
the recording of the payments to be received from ANG over the next three
years at their present value, discounted at 10% per annum. Payments from ANG
were pledged and paid to certain secured debts of Leasall, Innovo and Innovo
Group of which NASCO Products was a guarantor.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - DISCONTINUED OPERATIONS (concluded
In addition, through December 1997, ANG was making ongoing annual
payments to NASCO Products of 2% of sales under each of the National Football
League, Major League Baseball and National Hockey League licenses, and 1% of
sales under the NBA license. ANG will pay 1.5% and .5% of sales hereafter.
The payments will continue for forty years unless a license expires or is
terminated and is not renewed or reinstated within twelve months.
The revenues and expenses relating to the disposed NASCO Products
imported product line were as follows:
Year ended
October 31,
___________
1995
____
(000's)
Net sales $ 2,777
Cost of goods sold (2,532)
Selling, general and
administrative expenses (1,043)
Interest expense (79)
Other (50)
Income tax benefit -
________
Income (loss) from operations $ (927)
________
Interest expense was allocated to the discontinued operations in
accordance with EITF 87-24, which provides for allocating interest to a
discontinued operation based on the relationship of the net assets employed
in the discontinued operation to the Company's consolidated net assets.
NOTE 4 - REORGANIZATION OF SPIRCO
On August 5, 1994 the U.S. Bankruptcy Court for the Western District of
Pennsylvania issued an order confirming the plan of reorganization of Spirco,
and the confirmed plan was implemented and made effective on November 7,
1994. Spirco had filed for reorganization under Chapter 11 of the Bankruptcy
Code on August 27, 1993. Innovo Group, Innovo, NP International and NASCO
Products were not parties to the filing.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - REORGANIZATION OF SPIRCO (concluded)
Spirco's creditors were divided into six categories. Administrative
expenses were paid in cash. Spirco's equipment and mortgage debt, which had
been guaranteed by Innovo Group, were assumed by Leasall Management, Inc.
("Leasall"), a newly formed subsidiary. Other Spirco liabilities that were
secured or that had been guaranteed by Innovo Group were paid in full through
the issuance of 222,000 shares of Innovo Group common stock on the basis of
$2.84 per share. The claim of the Internal Revenue Service was satisfied
through the issuance to the IRS of 25,000 shares of common stock.
Additionally, the IRS foreclosed on 30,000 shares of common stock that had
been personally pledged to it by the Company's president.
Priority claims for sales, property and unemployment taxes held by state
and local taxing authorities, estimated to total $826,000 after the
resolution of disputes, were contributed to a trust ("the Class 3 Trust") to
which Innovo Group issued 584,000 shares of common stock. The plan of
reorganization provided that the Class 3 Trust would sell the shares of
common stock and distribute the net proceeds therefrom to the Class 3
claimants. During fiscal 1995 and the period November 1, 1995 to November
30, 1995, the Class 3 Trust received, and distributed to the Class 3
claimants, $590,000 and $12,000, respectively, from the sale of 359,054 and
18,000 shares of common stock. During fiscal 1996 the Class 3 Trust sold an
additional 286,678 shares, and, with the distribution of the proceeds of
$271,000 therefrom, completed the payment of the Class 3 claims.
Additionally, an aggregate of 187,049 shares were issued to settle certain
disputed claims.
For financial reporting purposes the shares of common stock issued
pursuant to Spirco's plan of reorganization to satisfy the secured, Innovo
Group guaranteed and IRS claims were recorded as issued on October 31, 1994
at a value of $2.84 per share, which represents the per share value
determined pursuant to the plan of reorganization. The claims contributed to
the Class 3 Trust were reflected as a separate item on the Company's
consolidated balance sheet. As shares of common stock were sold by the Class
3 Trust, the satisfaction of those claims and the issuance of those shares
was reflected based on the net proceeds received and distributed by the Class
3 Trust. The implementation of Spirco's plan of reorganization resulted in
the discharge of all of its remaining indebtedness, including the claims of
Spirco's general unsecured creditors and of Innovo Group, Innovo and NASCO
Products, for intercompany advances to Spirco. During fiscal 1995 the
Company recorded extraordinary charges of $285,000 for changes in the
estimates of allowed claims.
NOTE 5 - DEBT SETTLEMENTS
In the fourth quarter of 1997 the Company settled debts with 44 creditors
recorded at $930,000. The Company made cash payments totaling $406,000,
thereby recognizing an extraordinary gain in the amount of $524,000.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following:
November 30,
1997 1996
____________ ________
(000's) (000's)
Accounts receivable factoring facility $ 504 $ 468
Bank credit facility 273 -
Working capital loan - 213
NP International loan 251 100
Other 103 140
______ ______
$ 1,131 $ 921
______ ______
Innovo and Thimble Square previously borrowed under an accounts
receivable factoring facility with Riviera Finance ("Riviera") under which
Riviera advanced 90% and 80% of assigned accounts receivable, respectively.
The factoring facility provides for advances up to $1,500,000. Riviera
charged .75% of each invoice assigned plus 1.5% per month of outstanding
advances. Borrowings under the facility are collateralized by assigned
accounts receivable, which aggregated $603,000 and $652,000 at November 30,
1997 and 1996, respectively.
In December 1997 the Company replaced its accounts receivable factoring
facility with Riviera with a facility with First American Bank ("First
American"). Under the facility, First American advances 90% of approved
invoices. There is no established limit on the total facility. First
American charges Innovo 1% for the first 15 days an invoice is outstanding
and .05% per day thereafter until paid, up to a maximum of 6%. Thimble
Square is charged 1.5% for the first 30 days an invoice is outstanding and
.033% per day thereafter, also to a maximum of 6%. The facility is secured
by first position on accounts receivable and inventory and personal
guarantees of management members of the Smith Group (see Note 9(a)).
In December, 1995, the Company obtained a $300,000 short-term loan,
collateralized by the common stock of NP International, which bears interest
at 12%. At November 30, 1997 and 1996, $251,000 and 100,000, respectively,
was outstanding on this loan. The lender is a company owned and controlled
by a relative of the Company's President. The Company is in default on the
payment terms of this note but has not received notice or demand from DWL.
In October 1997 Innovo Group obtained a secured bank line of credit of
$762,000. $273,000 was outstanding on the line at November 30, 1997. The
line is collateralized by a $462,000 certificate of deposit owned by the
Company and a $300,000 certificate of deposit owned by a director of the
Company. The line expires along with the pledge of certificates of deposit
in May 1998. The line of credit is at the bank's prime which was 8.5% at
November 30, 1997.
Also in December 1997 the Company entered into a revolving line of credit
with a bank for $365,000 at a fixed rate of 9.5%. The line is secured by
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - NOTES PAYABLE (concluded)
equipment owned by Innovo and Leasall and the personal guarantees of
management members of the Smith Group. The line of credit expires in
December 1998.
The weighted average interest rate on outstanding short-term borrowings
was 17.7% and 18.7% at November 30, 1997 and 1996, respectively.
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following:
November 30, November 30,
1997 1996
(000's) (000's)
Notes payable to ICON Cash Flow Partners,
L.P., Series D ("ICON") $ - $ 268
Leasall first mortgage loan 783 876
Non-recourse first mortgage on
Florida property 759 787
Thimble Square SBA loan 194 214
Thimble Square first mortgage loan 112 140
Capital plant lease obligation 211 221
Capitalized equipment lease obligation - 151
8% Convertible Debentures - 470
Other 6 176
______ ______
Total long-term debt 2,065 3,303
Less current maturities (211) (224)
______ ______
$ 1,854 $ 3,079
______ ______
The ICON loan bore interest at 11% and was collateralized by all the
equipment and personal property located at the Company's main office in
Springfield, Tennessee. The loan was originally obtained by Spirco, and was
assumed by Leasall in connection with the implementation of Spirco's plan of
reorganization (see Note 4). Innovo and NASCO Products had each guaranteed
the obligations of Leasall under this loan.
Leasall's first mortgage loan is collateralized by a first deed of trust
on the real property in Springfield, Tennessee and by an assignment of key-
man life insurance on the president of the Company in the amount of $950,000.
The loan bears interest at 2.75% over the lender's prime rate (which was
8.50% at November 30, 1997) and requires monthly payments of $9,900. In
order for the loan to be guaranteed by the Small Business Administration
("SBA"), Innovo Group, Innovo, NASCO Products, and the president of the
Company agreed to act as guarantors for Spirco's obligations under the loan
agreement.
In November, 1995 the Company acquired a facility which it developed as
an indoor retail outlet featuring antique and flea market shops. The $1.5
million purchase price was paid by the issuance to the seller of (i) warrants
to purchase 1 million shares of the Company's common stock, exercisable at
$.01 per share through March, 1998, and (ii) an $800,000 first lien non-
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - LONG-TERM DEBT (continued)
recourse mortgage secured by the property. The mortgage is payable $25,500
quarterly; all unpaid principal, and interest (which accrues at the rate of
9.5% per annum) is due January, 2006. Construction period interest of
$79,000 was capitalized during fiscal 1996. The stock option was exercised
in March, 1996. The Company also issued a warrant, exercisable for the
purchase of 100,000 shares at $.01 per share, as a finder's fee on the
property acquisition. The warrant was exercised in April, 1996.
Thimble Square's SBA and first mortgage loans are collateralized by liens
on that company's Pembroke, Georgia plant and certain machinery and
equipment. The loans bear interest at 2.75% and 2%, respectively, over the
prime rate. The capital plant lease obligation represents the lease on
Thimble Square's Baxley, Georgia plant. Interest on the capital plant lease
is imputed at the rate of 10% per annum.
In fiscal 1996 the Company privately placed $1,625,000 of 8% Convertible
Debentures due September 30, 1998. As of November 30, 1996 $1,205,000 of the
8% Convertible Debentures had been converted into 7,521,912 shares of common
stock. During fiscal 1997 the remaining $470,000 of convertible debentures
was converted into 4,127,932 shares of common stock.
Principal maturities of long-term debt as of November 30, 1997 are as
follows:
Year ending November 30, Amount
(000's)
1998 $ 211
1999 117
2000 284
2001 120
2002 134
Thereafter 1,199
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - INCOME TAXES
No Provision for income tax for any of the last three fiscal years
has been provided for, as income tax benefits arising from net operating losses
are offset by corresponding increases in the deferred tax asset valuation.
Net deferred tax assets result from the following temporary
differences between the book and tax bases of assets and liabilities:
November 30,
1997 1996
(000's) (000's)
Deferred tax assets:
Allowance for doubtful accounts $ 36 $ 22
Inventory reserves 18 57
Property and equipment 111 91
Other 31 62
Benefit of net operating loss
carryforwards 3,664 3,183
______ ______
Gross deferred tax assets 3,860 3,415
Deferred tax assets valuation allowance (3,860) (3,415)
______ ______
Net deferred tax assets $ - $ -
______ ______
The valuation allowance for deferred taxes decreased in fiscal 1996
as the result of the reduction in the net operating loss carryforward
resulting from the limitations of Internal Revenue Code Section 382, as
discussed below.
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
Year ended
November 30, October 31,
1997 1996 1995
_______ _____ __________
(000's)
Computed tax (benefit)
at the statutory rate (34%) (34%) (34%)
State income tax - - -
Change in valuation allowance 34% 34% 34%
______ ____ ____
- - -
______ ____ ____
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - INCOME TAXES (concluded)
The Company has consolidated net operating loss carryforwards of
approximately $27.9 million expiring through the year 2012. However, as the
result of "changes in control" as defined in Section 382 of the Internal
Revenue Code, approximately $25 million of such carryforwards may be subject
to an annual limitation, which is currently estimated to be a minimum of
$432,000, subject to adjustment. Such limitation would have the effect of
limiting to approximately $9 million the future taxable income which the
Company may offset through the year 2012 through the application of its net
operating loss carryforwards. A subsidiary of the Company has state tax net
operating loss carryforwards of approximately $12.1 million to offset state
taxable income. These carryforwards expire in varying amounts between the
years 1999 and 2006.
NOTE 9 - STOCKHOLDERS' EQUITY
(a) Common Stock
During fiscal 1995 the Company issued an aggregate of 119,873 shares
of common stock to extinguish an aggregate of $128,000 of unsecured notes
payable, which were past due. Additionally, in October 1995 the holder of
unsecured notes aggregating $319,000 tendered the notes, and accrued interest
of $31,000, as a subscription for shares of the Company's common stock.
Under the subscription agreement the Company issued 372,149 shares over the
six month period ending May, 1996, on the basis of 75 percent of the market
prices at the times the shares are issued.
In January, 1996, the Company entered into an agreement to obtain
contract manufacturing services, and issued to the contractor (Thimble
Square) 1,200,000 shares of its common stock as prepayment for $400,000
(approximately 57,000 hours) of manufacturing operations which the Company
may use on an as needed basis through July 31, 1997. Thimble Square owned
1,080,000 of such shares at the time of its acquisition by the Company (see
Note 2), as the result of which the agreement was canceled and the Company
reacquired, and retired, such 1,080,000 shares.
During the first quarter of fiscal 1996 the Company settled an
outstanding obligation held by a creditor who had previously received 66,619
shares of common stock as a partial payment. As a part of the settlement the
creditor returned the shares to the Company. The returned shares were
recorded as treasury stock at their market value.
In connection with the private placement of shares of its common stock
for cash during the first quarter of fiscal 1996, the Company issued warrants
for the issuance of 2,272,730 shares of its common stock, exercisable through
January, 1998 at a per share price equal to 50% of the exercise date market
price of the Company's common stock. The warrants were exercised in April
and May, 1996.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
During the third quarter of fiscal 1996 the Company completed the
private placement of aggregate of 1,751,516 shares of its common stock for
net cash proceeds of $560,000. The placements included the issuance of
warrants for the purchase of 775,758 shares of the Company's common stock
exercisable for five years at an exercise price of $.52 per share. In
connection with the third quarter fiscal 1996 placements of common stock and
the 8% Convertible Debentures, the Company issued to the placement agent
warrants (Class I warrants) for the purchase of an aggregate of 1,220,588
shares of its common stock, subject to adjustment, exercisable for a period
of five years at an exercise price of $.17 per share. In the third quarter
of fiscal 1997 all the outstanding Class I warrants were repurchased by the
Company for $150,000.
An aggregate of 1,269,470 shares of common stock, and 250,000 Class E
and 50,000 Class G common stock purchase warrants, were issued during fiscal
1996 to extinguish an aggregate of $423,000 of indebtedness. The
extinguished indebtedness included the remaining $300,000 of Subordinated
Collateralized Notes.
During the first quarter of fiscal 1997 the Company issued $271,000 in
10% unsecured convertible promissory notes due January 1998. The notes were
convertible into 2,100,000 shares of common stock. Also, in connection
therewith, the Company issued 500,000 Class J warrants. the warrants expired
in January 1998 and held an option price of $.125 per share. In the second
quarter of fiscal 1997 the notes were converted and the warrants were
exercised for net cash proceeds of $63,000.
On April 4, 1997 the Company's stockholders approved the increase in
the number of authorized shares of common stock to 70 million.
On August 4, 1997, the Company's president exercised a stock purchase
right (the "Purchase Right") awarded her by the board of directors on
February 12, 1997. The Purchase Right entitled her to purchase up to 4
million shares of the Company's common stock during the period April 30, 1997
to April 30, 2002 at a price of $.28125 per share. The officer paid for the
shares by the delivery of a non-recourse promissory note, bearing no
interest, due April 30, 2002. The note is collateralized by the shares
purchased therewith, which shares would be forfeited to the extent the note
is not paid on or before maturity, and would be payable (including
prepayable), in whole or in part, by the delivery to the Company of (i) cash,
or (ii) other shares of the Company's common stock that the officer has owned
for a period of at least six months, which shares would be credited against
the note on the basis of the closing bid price for the Company's common stock
on the date of delivery. Any dividends or distributions made with respect to
shares collateralizing any unpaid note will be held in the escrow to be
established for such shares and note until such time, if any, as the related
note is paid. In November 1997, 1,500,000 shares subject to this Purchase
Right were returned to the Company for a pro-rata reduction in the note.
Concurrently, Ms. Anderson-Lasko relinquished any further rights to such
1,500,000 shares of common stock. At November 30, 1997, $703,000 remains
outstanding under this Promissory Note.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
On August 13, 1997, the Company issued 6,750,000 shares of common
stock to a group of investors ("the Smith Group") for $1,350,000 pursuant to
a stock purchase agreement also dated August 13, 1997 between members of the
Smith group, the Company and Patricia Anderson-Lasko. Concurrent with the
execution of the stock agreement and in conjunction with employment
agreements with key executives, the Company granted 2,925,000 in non-
qualified stock options to those executives. Subject to vesting provisions,
the options remain exercisable until August, 2002 at a price of $.3315 per
share. At November 30, 1997 487,500 options were vested.
During the fourth quarter of fiscal 1997 15,000 Class G warrants and
all 250,000 Class E warrants were exercised. In connection therewith, the
Company extinguished $66,000 in indebtedness and received $14,000 in cash.
Additionally, in the fourth quarter of fiscal 1997 the Company received net
proceeds of $645,000 in a private placement for 1,500,000 shares of common
stock.
In fiscal 1997, an aggregate of 4,277,931 shares of common stock were
issued to extinguish a total of $482,000 in indebtedness, including the
remaining amounts outstanding of the 8% convertible debentures.
As of November 30, 1997 the Company has outstanding common stock
purchase warrants as follows:
Class Exercise Price Shares Expiration
_____ ______________ ______ __________
G $.28 35,000 May 1998
H $.52 775,758 August 2001
The Company also has outstanding at November 30, 1997, 2,925,000 in non-
qualified stock options of which 487,500 were exercisable at $.33125.
The Company has reserved 3,685,758 shares for issuance upon the exercise
of the outstanding common stock purchase warrants and options.
In September 1993 the Company issued 189,761 shares of restricted common
stock to extinguish notes payable and accrued interest of $1,423,000. The
holders of such shares hold options ("put options") that allowed them, until
April, 1995, to require that the Company repurchase any or all of the shares
at a price of $7.50 per share. The put options continue to be exercisable at
$30 per share, in the event of certain "changes in control" not approved by
the board of directors. The put options grant the Company a right of first
refusal to purchase any of the related shares upon the payment of the same
price offered to the holders by another party. Also, the Company can cancel
the put options by paying nominal consideration.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
(b) Stock Compensation
The Company adopted a Stock Option Plan (the "1991 Plan") in December
1991 (amended in April 1992) under which 100,000 shares of the Company's
common stock have been reserved for issuance to officers, directors,
consultants and employees of the Company under the terms of the 1991 Plan.
The 1991 Plan will expire on December 10, 2001.
The 1991 Plan provides for the issuance of "incentive stock options" (as
defined in the Internal Revenue Code) and non-qualified options to officers,
directors, consultants and employees of the Company. The exercise price of
incentive stock options must be equal to the fair market value of the
underlying common stock on the date of grant. The exercise price of non-
qualified stock options must be at least 50% of the fair market value of the
common stock on the date of issuance.
The following table summarizes the activity in the 1991 Plan for the
periods indicated:
Exercise
Options Price Options
Outstanding Per Share Exercisable
___________ _________ ___________
Outstanding at
October 31, 1994 4,500 $10 - $3.80 4,500
Canceled (1,500) $10
Granted -
______
Outstanding at
October 31, 1995 3,000 $3.80 3,000
Canceled -
Granted -
______
Outstanding at
November 30, 1996 3,000 $3.80 3,000
Canceled -
Granted -
______
Outstanding at
November 30, 1997 3,000 $3.80 3,000
______
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain property, buildings and equipment. Rental
expense for the years ended November 30, 1997, 1996 and October 31, 1995 was
approximately $63,000, $54,000, and $50,000, respectively. The minimum
rental commitments under noncancellable operating leases as of November 30,
1997 are as follows: 1998, $40,000; 1999, $33,000; 2000, $12,055.
The Company displays characters, names and logos on its products under
license agreements that require royalties ranging from 7% to 17% of sales.
The agreements expire through 1998 and require annual advance payments
(included in prepaid expenses) and certain annual minimums. Royalties were
$363,000, $441,000 and $402,000 for fiscal 1997, 1996 and 1995, respectively.
Four executive officers of the Company have entered into employment
agreements that expire in August 1999. The Company or the employee may
terminate the agreement at any time for cause, or without cause with 60 days
notice and 12 months severance. Annual salaries under the employment
agreements are $157,500, $70,000, $30,000 and $30,000.
In Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc., Rick Binet, and
Patricia Anderson-Lasko, f/k/a/ Patricia M. DeAlejandro, the Company appealed
a $700,000 judgement awarded by a jury for employment benefits, including
stock compensation, it found to be due to an ex-employee who it nonetheless
found had been properly terminated for cause. In August, 1994, the trial
court granted the Company's motion for partial summary judgement and directed
verdicts with respect to certain of Tedesco's claims, including those
concerning his ownership of an interest in the "E.A.R.T.H." trademark, or the
existence of a partnership with the Company to jointly own the trademark, and
the state court jury returned findings in favor of the Company on the
remainder of the plaintiff's claims concerning the trademark as well as his
claims for wrongful termination, fraud and conspiracy. However, the jury
awarded Tedesco approximately $700,000, of which $50,000 was assessed against
Innovo Group and $650,000 was assessed against Innovo, including pre-
judgement interest and attorney's fees, on the theory that he was entitled to
have received certain employment benefits, including employee stock awards,
during, and after, the term of his employment. The Company appealed the
jury's award, and in August, 1996 (as revised in an amended October, 1996
opinion), the appeals court reversed approximately $350,000 of the initial
judgement as not supported by the evidence or improper as a matter of law.
As a result, the judgement, including post-judgement interest through August,
1996, has been reduced to $420,000. In addition, the appeals court ruled
that the trial court erred in not submitting to the jury the questions of the
Company's counterclaim of breach of fiduciary duty by Tedesco, ruling that
the trial record indicated that there was evidence of such breach and damages
therefrom. The appeals court remanded the case to the trial court for trial
of the Company's claims of breach of fiduciary duty by Tedesco, which trial
is scheduled for March 1998. In connection with its appeal the Company has
pledged as an appeal bond of 200,000 shares of its unissued common stock.
The Company continues to believe that the ultimate resolution of the case is
unlikely to result in a material loss. An adverse outcome of the Company's
appeal to the Texas Supreme Court, which is scheduled for March 1998, and of
the Company's claims against Tedesco, could result in a loss of up to
$400,000.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products. NASCO Products and the supplier had
previously reached an agreement on the balance owed (which is the balance
recorded), as well as an arrangement under which the schedule for NASCO
Products' payments reducing the balance would be based on future purchases
from that supplier of products distributed internationally by NP
International. The Company has denied the supplier's claims, and has
asserted affirmative defenses, including the supplier's late shipment of the
original products, and the supplier's refusal to accept and fill NP
International orders on terms contained in the agreement. NASCO Products
sold its operations in July, 1995, and that company currently has no
operations or unencumbered assets. No provisions for the additional amount
sought has been recorded in the consolidated financial statements.
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during
the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit date codes to perform computations
or decision-making functions. The Company has not yet performed a
comprehensive review of its computer programs to identify the systems that
would be affected by the Year 2000 issue nor has it yet reviewed the
Company's Year 2000 exposure to customers, distributors, suppliers and
banking institutions. Management is presently unable to estimate the costs
associated with modification or replacement of systems affected by the Year
2000 issue, however, these costs could be significant.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
NOTE 11 - SEGMENT INFORMATION
Information concerning the two segments in which the Company operated in
fiscal 1997 and 1996 is as follows:
Year ended
November 30,
1997 1996
____ ____
(000's)
Net Sales
Canvas and Nylon
Consumer Products $7,901 $6,023
Apparel Products 1,557 1,368
General Corporate - -
_____ _____
Consolidated 9,458 7,391
_____ _____
Income (loss) from operations
Canvas and Nylon
Consumer Products 125 (965)
Apparel Products (520) (12)
General Corporate (1,125) (963)
_____ _____
Consolidated (1,520) (1,940)
_____ _____
Indentifiable assets
Canvas and Nylon
Consumer Products 2,768 3,657
Apparel Products 2,376 2,830
General Corporate 4,204 2,946
_____ _____
Consolidated 9,168 9,433
_____ _____
Capital expenditures
Canvas and Nylon
Consumer Products 35 48
Apparel Products - 1,525
General Corporate 434 331
_____ _____
Consolidated 469 1,904
_____ _____
Depreciation and amortization
Canvas and Nylon
Consumer Products 185 397
Apparel Products 202 134
General Corporate 82 57
_____ _____
Consolidated 469 588
_____ _____
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
PART III
Item 10. Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company as of February 28, 1998.
Name Age Position
____ ___ ________
L. E. Smith 50 Chairman of the
Board, Chief
Executive Officer,
Director
Dan Page 49 Chief Operating
Officer, Director
Patricia Anderson-Lasko (2) 38 President, Director
J. Eric Hendrickson 45 Vice President,
Treasurer, Director
Herb Newton (1)(2)(3) 47 Director
Marvin M. Williamson (1)(2)(3) 58 Director
____________________
(1) Member of the audit committee of the board of directors.
(2) Member of the executive compensation committee of the board of directors.
(3) Member of the stock option committee of the board of directors.
L. E. Smith became the chairman and chief executive officer of the
Company in August, 1997. For more than five years prior thereto Mr. Smith
has served as the president of Smith & Smith, Inc., a privately held company
engaged in real estate investing in Tennessee. Mr. Smith is also the
managing partner of Forbus Capital, LLC, Capital Management, LLC and Crawford
Properties, LLC, each of which is a privately held real estate investment
company.
Patricia Anderson-Lasko has been President and a director of the Company
since August 1990, and President of Innovo since her founding of that company
in 1987. From August, 1990 until August, 1997 Ms. Anderson-Lasko was also
the Chairman and Chief Executive Officer of the Company.
Daniel A. Page became the chief operating officer and a director of the
Company in August, 1997. From June, 1993 until August, 1997, Mr. Page was
the principal operating and executive officer of Southeast Mat Company, a
privately held manufacturer of automobile mats. Prior thereto Mr. Page was
the president of Tennessee Properties Company, a privately held real estate
development company.
J. Eric Hendrickson became vice president, treasurer and a director of
the Company in August, 1997. From February, 1997 until August, 1997, Mr.
Hendrickson was engaged as a consultant for Smith & Smith, Inc. From
December 1995 until February, 1997 Mr. Hendrickson held an executive officer
and director position with a state chartered bank, and from February, 1994
until May, 1995 held a similar position with a regional banking subsidiary of
a federally chartered bank holding company. From November, 1984 until
February, 1994 Mr. Hendrickson held various executive positions with banking
subsidiaries of NationsBank, N.A.
Herb J. Newton became a director of the Company in August, 1997. Mr.
Newton's principal occupation for in excess of the last five years has been
the ownership of retail automobile dealer franchises.
Marvin Williamson has been a director of the Company since August 1990.
From April 1982 to June 1987, he was a Vice President and Mortgage Sales
Manager for First Boston Corp. in New York City. From June 1987 through
August 1990 he was Vice President of Mortgage Sales for Greenwich Capital,
Greenwich, Connecticut. From August 1990 to April 1991 Mr. Williamson was a
Senior Vice President with Alliance Funding Co. in Montvale, New Jersey. In
April 1991 he left Alliance Funding Co. to establish his own business, Marvin
Williamson Associates, a mortgage investment brokerage and consulting firm in
New Canaan, Connecticut. Mr. Williamson is currently a registered
representative of First Sentinel Securities Ltd., a member firm of the
National Association of Securities Dealers, Inc.
Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting or until his successor
has been elected and qualified. Vacancies in the board of directors are
filled by a majority vote of the remaining members of the board of directors.
Pursuant to the Stock Purchase Agreement, the Company has agreed that the
current six members of the board of directors will be the Company's director
nominees at the next annual meeting of stockholders.
Executive officers of the Company are elected on an annual basis and
serve at the discretion of the board of directors.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who own more than 10% of the
registered class of the Company's equity securities to file reports of
ownership with the Securities and Exchange Commission. Officers, directors
and greater than 10% stockholders are required by the regulations of the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the Forms 3, 4 and 5 and amendments thereto
and certain written representations furnished to the Company, the Company
believes that during the fiscal year ended November 30, 1997, all filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
Form 5 is not required to be filed if there are not previously unreported
transactions or holdings to report. Nevertheless, the Company is required to
disclose the name of directors, executives officers and 10% shareholders who
did not file a Form 5, unless the Company has obtained a written statement
that no filing is due. The Company has been advised by those required to
file Form 5 that no filings were due.
Item 11. Executive Compensation
Executive Compensation
The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of the Company's chief executive
officer, and the one other executive officer who is compensated at an annual
rate of $100,000 or higher.
Summary Compensation Table
Long Term Compensation
______________________
Annual Compensation Awards Payouts
___________________ ______ _______
Other
Annual Restricted LTIP All Other
Compen- Stock Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) (1) (#) ($) ($)
________ ____ _________ ________ _______ _______ ________ _______ ________
L. E. Smith, Chief 1997 $ 8,981(2) - 0 0 1,600,000(2) 0 -
Executive Officer,
and Chairman of the
Board
Patricia Anderson- 1997 $157,500 - 4,070(4) 0 0 0 -
Lasko, President 1996 171,354(3) - 1,346(4) 0 0 0 -
1995 175,000(3) - 2,791(4) 0 0 0 -
(1) No executive officer received or held restricted stock awards during
or at the end of fiscal 1997, 1996, or 1995.
(2) Mr. Smith Became employed in August, 1997 and is compensated at an
annual rate of $30,000. In connection with his employment, Mr. Smith was
granted 1,600,000 in non-qualifying stock options. The options vest over a
24 month period. At November 30,1997, 266,667 of the options were vested.
(3) At the request of the Company Ms. Anderson-Lasko deferred the payment
of $51,000 of her fiscal 1995 salary until fiscal 1996.
(4) During fiscal 1997, 1996 and 1995 Ms. Anderson-Lasko received life
insurance benefits in the aggregate amount of $4,070, $1,346 and $2,019,
respectively.
Option Grants in Last Fiscal Year
Potential
Realized Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
________________________________________________________________________________________________________________
(a) (b) (c) (d) (e) (f) (g)
% of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
Name (/) Year (S/Sh) Date 5% ($) 10% ($)
________________________________________________________________________________________________________________
L. E. Smith,
Chief Executive
Officer and
Chairman of
the Board 1,600,000 55% $.33 8/31/02 $54,080 $110,880
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (/) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (/) Value Realized ($) Unexercisable Unexercisable
________________________________________________________________________________________________________________
L. E. Smith,
Chief Executive
Officer and
Chairman of
the Board - - 233,333/ $153,125/
1,366,667 $896,875
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Ms. Anderson-Lasko and Messrs. Newton and Williamson served on the
executive compensation committee of the board of directors during the past
fiscal year. Although Ms. Anderson-Lasko, the Company's President served on
the Company's executive compensation committee, she did not participate in
any decisions regarding her own compensation as an executive officer.
Messrs. Newton and Williamson are not officers of the Company.
Employment Agreements
In August 1997 the Company entered into employment agreements with L.
E. Smith, Dan Page, Eric Hendrickson and Patricia Anderson-Lasko. The
agreements expire in August 1999, but provide that the terms may be extended
for additional one-year periods, starting in August 1999, at the election of
the parties. The employment agreements provide that L. E. Smith, Dan Page,
Eric Hendrickson and Patricia Anderson-Lasko shall be employed as the chief
executive officer, chief operating officer, treasurer and president,
respectively, of the Company at annual base salaries of $30,000, $30,000,
$70,000 and $157,000 and shall be eligible for such increases in salary,
other bonuses and payments as the Board of Directors shall direct.
The employment agreements contain provisions requiring certain
severance payments in the event the Company terminates employment other than
for cause, death or disability. In such event, after 60 days notice, the
officers are entitled to a severance payment equal to the annual salary
provided for in their agreements. Such severance is to be paid in 12 equal
monthly installments.
Stock Option Plan
The Company has adopted a stock option plan (the "1991 Plan") pursuant
to which an aggregate of 100,000 shares of common stock had been reserved for
issuance to officers, directors, consultants and employees of the Company and
its subsidiaries upon exercise of non-qualified options and exercise of
"incentive stock options" (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended) issuable under the 1991 Plan. The primary
purpose of the 1991 Plan is to attract and retain capable executives,
consultants and employees by offering them stock ownership in the Company.
The 1991 Plan was originally adopted by the board of directors on December
11, 1991, and amended and ratified by the board of directors on April 10,
1992. The 1991 Plan was approved by the Company's shareholders at the annual
meeting of shareholders on May 28, 1992.
The 1991 Plan is administered by the stock option committee appointed
by the Company's board of directors. The current members of the stock option
committee are Messrs. Newton and Williamson. No member of the stock option
committee will be eligible to participate in a grant of options pursuant to
the 1991 Plan.
The stock option committee will determine, among other things, the
persons to be granted options, the number of shares subject to each option
and the option price. The exercise price of any incentive stock option
granted under the 1991 Plan to an eligible employee must be equal to the fair
market value of the shares on the date of grant and, with respect to persons
owning more than 10% of the outstanding common stock, the exercise price may
not be less than 110% of the fair market value of the shares underlying such
option on the date of grant. The exercise price for non-qualified options
must be at least 50% of the fair market value of the shares on the date of
issue. The stock option committee will determine the terms of each option
and the manner in which it may be exercised. No option may be exercisable
more than ten years after the date of grant, except for those held by
optionee who own more than 10% of the Company's common stock, which may not
be exercisable more than five years after the date of grant. Options are not
transferable except upon the death of the optionee.
The board of directors may amend the 1991 Plan from time to time;
however, without stockholder approval, the 1991 Plan may not be amended to:
(i) increase the aggregate number of shares subject to the 1991 Plan; (ii)
materially increase the benefits accruing to participants under the 1991
Plan; (iii) change the class of individuals eligible to receive options under
the 1991 Plan; or (iv) extend the term of the 1991 Plan.
As of February 6, 1998, the Company had outstanding options to acquire
a total of 3,000 shares of the Company's common stock held by officers and
other employees of the Company under the 1991 Plan. No options granted under
the 1991 Plan have been exercised.
Stock Bonus Plan
The board of directors has authorized and may in the future authorize
the issuance of restricted stock to certain employees of the Company.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the
beneficial ownership of the Company's common stock on February 28, 1998 by
(i) each of the Company's executive officers or directors, (ii) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding shares of the common stock, and (iii) all directors and
executive officers of the Company as a group.
Shares Beneficially Owned (1)
_____________________________
Name Number Percent
__________________________________________________________________________________________
L.E. Smith (2) 3,455,336 (3) (4) 7.6%
27 North Main Street
Springfield, Tennessee 37172
Patricia Anderson-Lasko 2,861,439 (5) (6) (7) (8) 6.3%
27 North Main Street
Springfield, TN 37172
Daniel A. Page (2) 2,838,330 (9) 6.2%
27 North Main Street
Springfield, Tennessee 37172
J. Eric Hendrickson (2) 500,000 1.1%
27 North Main Street
Springfield, Tennessee 37172
Marvin M. Williamson 22,000 *
53 Fitch Lane
New Canaan, CT 06840
Herb J. Newton (2) 2,308,335 5.1%
2865 Camp Branch Road
Buford, Georgia 30519
All Executive Officers 11,985,440(2) (3) (4) (5) 26.3%
and Directors as a Group (8) (9)
(6 persons)
_________________
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission,
certain shares of the Company's common stock that a beneficial owner set
forth in this table has a right to acquire within 60 days of the date hereof
pursuant to the exercise of options or warrants for the purchase of shares of
common stock are deemed to be outstanding for the purpose of computing the
percentage ownership of that owner but are not deemed outstanding for the
purpose of computing percentage ownership of any other beneficial owner shown
in the table. Shares outstanding and eligible to vote exclude 200,000 shares
held as an appeal bond for the Company's appeal of the Tedesco litigation
(see Note 10 of Notes to Consolidated Financial Statements). Under the terms
of the bond, such shares are not eligible to vote.
(2) Messrs. Smith, Page, Hendrickson and Newton are deemed to be a
"group" (the Smith Group) for purposes of Section 13(d) of the Exchange Act.
In certain circumstances the Smith Group may be entitled to direct the manner
in which shares owned by Patricia Anderson-Lasko are voted, and the Smith
Group holds rights of first refusal with respect to certain shares of common
stock.
(3) Includes 2,458,335 shares owned by Forbus Investments, L.P., a
limited partnership comprised of members of the family of Mr. Smith. The
management of Forbus Investments, L.P. resides in two general partner limited
liability companies controlled by Mr. Smith. Mr. Smith disclaims beneficial
ownership of the shares owned by Forbus Investments, L.P.
(4) Includes 600,000 shares subject to options exercisable, or which
become exercisable within 60 days of the date hereof, by Mr. Smith.
(5) Includes 79,432 shares owned by DWL International, a corporation in
which Ms. Anderson-Lasko's spouse, Donald W. Lasko, holds a controlling
interest.
(6) Includes 2.5 million shares purchased by Ms. Anderson-Lasko
pursuant to the 1997 Stock Purchase Right Award, awarded to her in February,
1997. Under the terms of the 1997 Stock Purchase Right Award, Ms. Anderson-
Lasko was permitted to, and elected to, pay for the purchase of the 2.5
million shares ("the 1997 Award Shares") by the execution of a non-recourse
note ("the Note") to the Company for the exercise price of $.28125 per share
($703,125) in the aggregate). The Note is due, without interest, on April
30, 2002, and is collateralized by the 1997 Award Shares purchased therewith.
Ms. Anderson-Lasko may pay, or prepay (without penalty) all or any part of
the Note by (i) the payment of cash, or (ii) the delivery to the Company of
other shares of the Company's common stock (other than the 1997 Award Shares)
that Ms. Anderson-Lasko has owned for a period of at least six months, which
shares would be credited against the Note on the basis of the closing bid
price for the Company's common stock on the date of delivery. The 1997 Award
Shares will be forfeited and returned (at the rate of one shares per $.28125)
to the Company to the extent the Note is not paid on or before its maturity;
accordingly, the number of shares owned by Ms. Anderson-Lasko could decrease
in the future.
(7) In certain circumstances the Smith Group may be entitled to direct
the manner in which shares owned by Ms. Anderson-Lasko are voted. See "-
Voting Agreements."
(8) Includes 2.5 million shares (the 1997 Award Shares) as to which the
Smith Group holds rights of first refusal. See "-Rights of First Refusal."
(9) Includes 450,000 shares subject to options exercisable, or which
become exercisable within 60 days of the date hereof, by Mr. Page.
Item 13. Certain Relationships and Related Transactions
In December, 1995, the Company obtained a $300,000 12% short term
loan collateralized by the common stock of NP International from DWL
International. Donald W. Lasko, the husband of Patricia Anderson-Lasko, is
an officer and stockholder of DWL International. $200,000 of the loan was
repaid in fiscal 1996, together with interest of $22,000. In fiscal 1997 the
Company borrowed an additional $155,000 on this note and repaid $4,000.
Interest paid on the note in fiscal 1997 was $9,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements. See Item 8.
(2) Financial Statement Schedules
Schedule Page Reference
Report of Independent Certified Public
Accountants on Financial Statement Schedules 76
Schedule II - Valuation and Qualifying Accounts 77
(3) Exhibits
Exhibit Reference
Number Description No.
3.1 Form of Amended and Restated Certificate
of Incorporation of Registrant. 3.1 (12)
3.2 Amended and Restated Bylaws of Registrant.* 4.2 (5)
4.1 Article Four of the Registrant's Amended
and Restated Certificate of Incorporation
(included in Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.2 NASCO, Inc. Amended Stock Bonus Plan dated
as of December 31, 1991.* 10.6 (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)
10.13 Note executed by NASCO, Inc. and payable to
ICON Cash Flow Partners, L.P., Series D, in
the principal amount of $750,000 dated
August 7, 1992.* 10.36 (2)
10.14 Security Agreement between NASCO, Inc.
and ICON Cash Flow Partners, L.P., Series
D dated August 7, 1992.* 10.37 (2)
10.15 Guaranty of Innovo Group Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.38 (2)
10.16 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of ICON Cash Flow Partners,
L.P., Series D dated July 30, 1992.* 10.39 (2)
10.17 Guaranty of NASCO Products, Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.40 (2)
10.18 Guaranty of NASCO Sportswear, Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.41 (2)
10.19 1993-1996 U.S. Olympic Merchandise Agreement
between United States Olympic Committee and
Innovo Group Inc. dated April 29, 1993.* 10.51 (6)
10.20 Non-Competition and Non-Solicitation Agreement
dated May 10, 1993 among QSP, Inc., NASCO,
Inc. and Innovo Group Inc.* 10.45 (4)
10.21 Employment Agreement dated September 30, 1993
between Innovo Group Inc. and Patricia
Anderson-Lasko.* 10.56 (6)
10.22 Form of Common Stock Put Option.* 10.61 (6)
10.23 Form of Debt Conversion Agreement between
Innovo Group Inc. and certain holders of
notes payable or Subordinated Notes Payable.* 10.63 (6)
10.24 Form of Agreement between Innovo Group Inc.
and Purchasers under the June 11, 1993 Unit
Purchase Agreement.* 10.64 (6)
10.25 Agreement dated April 29, 1994 between C.I.
Sports, Inc. and NASCO Products, Inc.* 10.65 (7)
10.26 Amended Plan of Reorganization of Spirco, Inc.* 10.67 (8)
10.27 $600,000 Secured Promissory Note and Security
Agreement dated July 20, 1994 between Innovo
Group Inc., Innovo, Inc. and NASCO Products,
Inc. and certain individual lenders.* 10.68 (8)
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.
10.30 First Amendment to $600,000 Secured Promissory
Note and Security Agreement dated April 15, 1995.* 10.70 (9)
10.31 Security Agreement dated April 28, 1995 between
Innovo, Inc. and Riviera Finance.* 10.71 (9)
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)
10.34 License Agreement dated November 14, 1995 between
Innovo Group Inc., United States Olympic Committee
and Warner Bros. Studios* 10.47 (12)
10.35 Agreement dated December 11, 1995 between Innovo
Group Inc., United States Olympic Committee and
Original Appalachian Artworks, Inc.* 10.48 (12)
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 License Agreement dated August 1, 1997
between NBA Properties, Inc. and Innovo, Inc.
10.41 License Agreement dated August 1, 1997
between NBA Properties, Inc. and NASCO
Products International, Inc.
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)
10.44 License Agreement between Innovo, Inc. and
Anheuser-Busch Cos., Inc.* 10.57(14)
10.45 License Agreement between Innovo Group Inc.
and Warner Bros. dated June 25, 1996.* 10.45(15)
10.46 License Agreement between Innovo Group Inc.
and Walt Disney dated September 12, 1996.* 10.46(15)
10.47 Indenture of Lease dated October 12, 1993
between Thimble Square, Inc. and Development
Authority of Appling County, Georgia* 10.47(15)
10.48 Lease dated October 1, 1996 between Innovo,
Inc. and John F. Wilson, Terry Hale, and
William Dulworth* 10.48(15)
21 Subsidiaries of the Registrant 21 (13)
23.1 Consent of BDO Seidman, LLP (incorporated by
reference as Exhibit 23.2 to Registration
Statements No. 33-71576 and No. 333-12527).
27 Financial Data Schedule (appears only in
electronically filed version of this report).
_________________________
* 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.
(b) Reports on Form 8-K
On September 13, 1996, the Company filed a Current Report on Form 8-K
that included certain updated historical and pro forma financial information
relating to the acquisition of Thimble Square.
Report of Independent Certified Public Accountants
on Financial Statement Schedules
Board of Directors
Innovo Group Inc.
The audits referred to in our report to Innovo Group Inc. and
subsidiaries, dated February 6, 1998 which is contained in Item 8,
included the audits of the schedule listed under Item 14(a)(2).
This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits.
In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
March 18, 1998
INNOVO GROUP INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
________________________________
(1) (2)
Balance at Charged Charged to Balance
Beginning to Costs Other Accounts- Deductions- at End
Description of Period and Expenses Describe Describe of Period
___________ _________ ____________ ________ ________ _________
Allowance deducted
from asset to
which it applies:
Allowance for
doubtful accounts:
Year ended November 30,
1997 $ 66,000 $153,000 $ - $113,000(A) $106,000
Year ended November 30,
1996 99,000 78,000 - 111,000(A) 66,000
Year ended October 31,
1995 117,000 102,000 - 120,000(A) 99,000
Allowance for inventories:
Year ended November 30,
1997 $ 73,000 $ - $ - $ 37,000(B) $ 36,000
Year ended November 30,
1996 18,000 55,000 - - 73,000
Year ended October 31,
1995 759,000 - - 741,000(B) 18,000
Note A - Uncollected receivables written off, net of recoveries.
Note B - Recovery of valuation reserve.
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/ L. E. Smith
L. E. Smith
Chairman of the Board, and
Chief Executive Officer
March 18, 1998
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/ L. E. Smith
L. E. Smith
Chairman of the Board,
Chief Executive Officer
and Director March 18, 1998
/s/ Dan Page
Dan Page
Chief Operating Officer March 18, 1998
/s/ Patricia Anderson-Lasko
Patricia Anderson-Lasko
President and Director March 18, 1998
/s/ J. Eric Hendrickson
J. Eric Hendrickson
Vice President, Treasurer
and Director March 18, 1998
/s/ Herb Newton
Herb Newton
Director March 18, 1998
/s/ Marvin N. Williamson
Marvin N. Williamson
Director March 18, 1998