Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 77± 368K
2: EX-1 Underwriting Agreement 24± 93K
3: EX-2 Plan of Acquisition, Reorganization, Arrangement, 24± 95K
Liquidation or Succession
4: EX-3 Articles of Incorporation/Organization or By-Laws 29± 112K
5: EX-4 Instrument Defining the Rights of Security Holders 17± 76K
6: EX-5 Opinion re: Legality 6± 25K
7: EX-23 Consent of Experts or Counsel 1 7K
8: EX-27 ƒ Financial Data Schedule (Pre-XBRL) 1 5K
9: EX-27 ƒ Innovo Group Inc. - Financial Data Schedule 2± 10K
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, 1996
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 15, 1997, 28,763,990 shares of common stock were outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
registrant approximated $9,783,000 at the close of business on February 15,
1997.
Documents incorporated by reference: NONE
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 15
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 61
PART III
Item 10. Directors and Executive Officers of the
Registrant 62
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial
Owners and Management 68
Item 13. Certain Relationships and Related
Transactions 70
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 71
SIGNATURES 78
PART I
Item 1. Business
Introduction
Innovo Group Inc. ("Innovo Group"), operating through its wholly-owned
subsidiaries (which, 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, and 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
10 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 domestically manufactured at facilities owned or leased
by the Company. 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, as well as the slogans and
taglines of Anheuser-Busch Cos. and the drawings of sports artist Gary
Patterson. In the second half of fiscal 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 will begin
selling the Walt Disney and Warner Bros. products in fiscal 1997. For the
year ended November 30, 1996, 39.9% 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 is also developing a retail facility in Florida (see Item 2.
- "Properties").
During fiscal 1994 the Company began restructuring its operations to
concentrate on domestic manufacturing and the international distribution of
licensed products, which the Company views as its strategic strengths. In
October, 1994 the Company relocated to its owned facility in Springfield,
Tennessee the manufacturing operations it had previously conducted in leased
facilities in Sugarland, Texas to eliminate the expense of the leased space
in Texas and also eliminate certain shipping and duplicative supervision
costs. 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 July 31, 1998. 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.
During fiscal 1994 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.
Production at the facility, which began in November, 1996, will substantially
offset the effects of the labor shortages experienced in fiscal 1996.
In fiscal 1997 the Company will attempt to improve its operating results
by continuing the growth in sales while also improving its gross profit
margins and controlling any increase in fixed selling, general and
administrative expenses.
- Growth in sales. Sales increases are anticipated 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 NP
International's sale of the new products being produced under the
Walt Disney and Warner Bros. licenses.
Sales increases may also be generated from the Anheuser-Busch and
Gary Patterson licenses, and from expanding Thimble Square's
marketing to include mass merchants with which Innovo already has
established relationships but to which Thimble Square has not
previously marketed.
- Improvement in gross margins. To improve gross profit margins the
Company will attempt to both increase prices and reduce
manufacturing costs. Price increases on selected products were
implemented in the first quarter of fiscal 1997, and the review of
product pricing will continue. Prices for certain sports licensed
products will be increased as the result of artwork or other
enhancements that will allow retailers to increase retail pricing.
To reduce production costs, both product designs and production
operations will be revised. These steps began in the first quarter
of fiscal 1997, and will continue into the third quarter of fiscal
1997.
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. However, there can be no assurance that any of these
steps will be successful. 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., J.C. Penney Company, Inc., Sports
Authority, Inc., and Michael's Stores, Inc., and advertising specialty
accounts.
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.
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:
[Download Table]
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 stadium totes
fanny packs
*new product for fiscal 1997.
The products Innovo manufactures for the utility market utilize designs
and artwork developed either in-house or by independent contractors. 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, colleges,
Anheuser-Busch and Gary Patterson. 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. In
fiscal 1995 Innovo also developed a fashion line featuring higher style
backpacks and "day packs." As a result of test marketing in fiscal 1996, the
Company is currently reconsidering the design, pricing and sourcing of the
fashion line products.
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, and mail order, grocery and drug chains. Its line
of products consists of the products produced (and distributed in the United
States) by Innovo, and a variety of sport, gym, equipment and duffle bags and
backpacks. NP International's products are generally imprinted or
embroidered with logos licensed from the four major professional sports
leagues, colleges, Anheuser-Busch, 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 and through the
development or acquisition of new product designs and the acquisition of new
licenses. The Company spent approximately $363,000 on the design and
acquisition of new products and the acquisition of new licenses in fiscal
1996, and management anticipates that in fiscal 1997 such expenditures
approximate $200,000.
The Company continually seeks to develop new designs in-house, and
design or acquire new products. In fiscal 1996 the Company developed canvas
banners and vests, which have been added to its craft market line in fiscal
1997, and in the first quarter of fiscal 1997 developed and began the test
marketing of denim and stone-washed denim tote bags, aprons and vests.
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 fiscal 1996 the Company acquired
the Walt Disney, Warner Bros., Anheuser-Busch and Gary Patterson licenses.
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.
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 newly obtained Walt Disney,
Warner Bros., Anheuser-Busch and Gary Patterson licenses in the third and
fourth quarters of fiscal 1996. The Company currently expects to complete
the product development for the Walt Disney products in the first quarter of
fiscal 1997, which would allow the Company to begin shipments in the second
quarter of fiscal 1997 and, more significantly, be able to solicit and fill
orders for retailers' back-to-school and holiday seasons, which would be
shipped principally in the third and fourth quarters. The Company has
received, and expects to ship in the first quarter, initial or test orders
for its Warner Bros. products. Product development is continuing for this
line, with a plan to complete that process in time for back-to-school and
holiday season orders. Minor sales, resulting from test orders, for the
Anheuser-Busch and Gary Patterson products, were shipped in the first quarter
of fiscal 1997.
Marketing and Customers
During fiscal 1996, 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 13 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 13 foreign distributors and
sales representatives having representation throughout Europe and the Middle
East. Marketing organizations are compensated on a commission basis.
The Company is currently developing, and expects to complete in March,
1997, a store site on the internet (http://innovo-group.com and
http://www.virtualhouse.com/innovo) which will offer selected Innovo products
directly to consumers. The site is being developed under an agreement
whereby the web site developer will absorb all development and maintenance
costs in exchange for a percentage of sales.
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.
For fiscal 1996, two customers accounted for sales in excess of 10% of
net sales; Wal-Mart, a customer of Innovo, and Crown-Tex, a customer of
Thimble Square, which accounted for 12.5%, and 11.2% of net sales,
respectively. However, no customer accounted for 10% or more of sales in
fiscal 1995, and generally the Company is not dependent upon a single
customer or a few customers the loss of any one or more of which would have
a material adverse effect on the Company.
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,
1996 and October 31, 1995, there was no significant backlog.
Seasonality
The Company's business is seasonal. The majority of the marketing and
sales activities take place during the first half of the calendar year, while
the greatest volume of shipments and sales are generally made in the summer
and fall, which coincides with the Company's third and fourth 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 manufactured domestically in
facilities operated by the Company. 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 product
samples.
The Company believes that its equipment provides it with manufacturing
capacity sufficient for projected production over the next twelve months.
During fiscal 1996 Innovo experienced an inability to obtain sufficient
production labor to, at times, meet the demand and customer delivery
requirements for its domestically produced products and, as a result, the
Company was unable to accept certain orders and experienced production
inefficiencies and excess overtime costs. In October, 1996, the Company
obtained a three-year lease on a sewing facility in Red Boiling Springs,
Tennessee which, in November, 1996, began to produce Innovo products. The
geographical location of Red Boiling Springs, relative to Innovo's other
production facility in Springfield, Tennessee, is such that the Red Boiling
Springs facility draws its production labor from a different labor pool while
production at the two facilities can be overseen by a single group of senior
management. Accordingly, the Company believes that the addition of the Red
Boiling Springs facility will reduce the Company's exposure to labor
shortages, which will favorably impact sales and production costs. However,
there can be no assurance that the Company will not again be adversely
affected by labor shortages in the future.
The principal materials used in Innovo's and Thimble Square's products
include 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 raw materials for domestic manufacturing among a small number of
suppliers, and during fiscal 1996 purchased the majority of each type of raw
material it uses from one or two suppliers. Although the Company does not
have any long-term agreements with these or other suppliers, it has to date,
despite its lack of working capital, 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.
The sport and gym bags and backpacks marketed overseas by NP
International 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 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.
[Download Table]
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
United States Olympic tote, lunch, shoe, and United States
Committee/logos of U.S. laundry bags,
Olympic Teams stadium seat cushions,
sports bags and backpacks
Licensor/Licensed Names
logos, characters, etc. Types of Products Geographical Areas
Major League Baseball caps, t-shirts, United States
Players' Association/ various bags
names, records, likenesses
of MLB players
Anheuser-Busch/ totes, cooler bags, United States; Europe
advertising slogans aprons Central America; Far
characters, etc. of East
Anheuser/Busch*
Gary Patterson/sports tote and other bags, United States; Europe
drawings of Gary Patterson* t-shirts
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
Hillerich & Bradsby Co./ various bags United States; Europe
Louisville Slugger
logos
*licenses obtained in fiscal 1996; initial sales in fiscal 1997.
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 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 8% to 15% 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 1997
to 1999. 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
manufactures 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, or 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
four years. Nonetheless, the Company considers such trademark to be a
valuable asset, and has registered it with the United States Patent and
Trademark Office.
Employees
As of February 15, 1997, the Company employed 143 full-time personnel at
the Springfield and Red Boiling Springs, Tennessee facilities, comprised of
11 persons in management, 9 persons in general administration and 123 persons
in manufacturing and production, and Thimble Square employed 123 full-time
personnel in Pembroke and Baxley, Georgia, comprised of 8 persons in
management and administration and 115 in production. Due to varying seasonal
demands, the Company's total work force fluctuates within a range of
approximately 250 to 350 employees through any given 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.
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. In addition, Thimble
Square leases a 21,000 square foot manufacturing facility in Baxley, Georgia
for an annual rental of $36,000. The lease runs through August, 2000 and
provides Thimble Square with a bargain purchase option.
In November, 1995 the Company acquired a 32,000 square foot building,
situated on three acres of land, in Lake Worth, Florida. The Company is
developing the site as a specialty mall, which would include an outlet for
the Company's products and other retail tenants, and currently anticipates
that the facility will be ready to accept tenants and begin operations in the
second quarter of fiscal 1997. The property was acquired for $1.5 million,
including an $800,000 first lien non-recourse mortgage payable to the seller.
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 December 1991, Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc.,
Rick Binet, and Patricia Anderson-Lasko, f/k/a Patricia M. DeAlejandro, Cause
No. 91-064033, was filed in the 164th Judicial District Court of Harris
County, Texas. Tedesco's allegations included fraud, tortious interference,
breach of his employment agreement with Innovo and conversion of his
"property interest in the E.A.R.T.H. trademark, idea, concept, and product
lines. . . ." Tedesco claimed in excess of $13.5 million in monetary damages
and sought a declaratory judgment and an accounting relative to his claim
that he was the owner of the "E.A.R.T.H." trademark.
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. The Company is filing motions with
the trial court for the scheduling of the ordered trial on its claims against
the Tedesco award. The Company has also appealed to the Texas Supreme Court
the issue of the appeal courts' decision to uphold $200,000 of the original
judgement (which accounts for $340,000 of the August, 1996 $420,000 amount).
In connection with its appeal the Company has pledged as an appeal bond
200,000 shares of its unissued common stock.
The Company believes that its appeal arguments, and its fiduciary duty
claims against Tedesco, are meritorious. However, there can be no assurance
that the Company's appeal, or its 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 appeal and 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."
On October 29, 1996, the Company filed suit against Joseph Assad, its
former vice-president of sales and marketing, whose employment the Company
had terminated effective November 1, 1996 (Innovo Group Inc. v. Joseph Assad,
Cause 13073, in the Chancery Court for Robertson County, Tennessee). The
Company's suit alleges breach by Mr. Assad of his employment agreement with,
and his fiduciary duty as an officer to, the Company, as the result of Mr.
Assad's expenditure of time pursuing employment with and developing business
plans for, and his disclosure of confidential information to, companies which
would compete with the Company and which had, as significant stockholders,
individuals with financial interests adverse to the Company. The Company's
complaint seeks unspecified damages. Mr. Assad has denied the Company's
allegations, and has filed a counterclaim seeking unspecified severance
benefits and unreimbursed expenses. The Company believes that Mr. Assad's
counterclaims are without merit.
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, which has been adjusted to reflect the one-for-
ten reverse stock split effected in June, 1995, 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.
[Download Table]
High Low
____ ___
Fiscal 1995
___________
First Quarter 3 1/8 15/16
Second Quarter 4 1/16 1 1/4
Third Quarter 2 7/8 1 1/2
Fourth Quarter 2 1/4 1
November 1995 (1) 1 1/8 1/2
Fiscal 1996
___________
First Quarter (Dec. to Feb.) 7/8 7/32
Second Quarter (March to May) 2 3/16 17/64
Third Quarter (June to August) 1 3/4 9/16
Fourth Quarter (Sept. to Nov.) 5/8 3/16
(1) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year had ended on October 31.
As of February 15, 1997, there were approximately 870 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 working
capital expenditure requirements.
Under the rules of the NASDAQ, a company must, among other things,
maintain total assets of $2 million, stockholders' equity of $1 million, a
minimum bid price of $1 (or alternatively stockholders' equity of $2
million), and must remain current in the filing of reports under the
Securities Exchange Act of 1934 (the "Exchange Act") in order to continue
trading on the NASDAQ SmallCap Market. In November, 1995, the Company's
common stock traded on the NASDAQ SmallCap Market pursuant to temporary
exemptions granted while the Company took steps to comply with the
stockholders' equity requirement, which was met when the Company's
stockholders' equity increased to above $1 million during the first quarter
of fiscal 1996. Additionally, although the Company's common stock generally
traded at prices below $1.00 between November, 1995 and May, 1996, and has
generally traded at prices below $1.00 since July, 1996, the Company has been
able to maintain its NASDAQ SmallCap listing by complying with the
alternative $2 million stockholders' equity requirement. However, in
November, 1996, the NASDAQ proposed changes to its listing standards that
would, among other things, eliminate the $2 million stockholders' equity
alternative.
If the Company's stockholders' equity were to fall below $2 million due
to operating losses or for other reasons, or if the NASDAQ adopts final rules
which eliminate the $2 million stockholders' equity alternative, and the
Company's common stock was not trading at prices above $1.00, the Company
could face delisting unless it took action to increase the minimum bid price
of its common stock to $1.00, or, if the alternative standard is still
available, to increase its stockholders' equity to above $2 million.
Although the Company will continually use its best efforts to maintain its
NASDAQ SmallCap listing, there can be no assurance that it will be able to do
so. If, in the future, the Company is unable to satisfy the NASDAQ criteria
for maintaining listing, its securities would be subject to being delisted,
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 1996 the Company issued an aggregate
of 7,521,912 shares of common stock upon the conversion of outstanding 8%
convertible debentures. The shares were issued to ten institutional
investors that were the holders of the 8% convertible debentures. 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.
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.
[Enlarge/Download Table]
Year Year Ended
Ended October 31,
November 30, ___________________________________________
Income Statement Data: 1996 (1)(2) 1995 1994 1993 1992
___________ ___________________________________________
Net Sales $ 7,391 $ 5,276 $ 8,028 $12,468 $12,768
Cost of Goods Sold 4,853 3,808 5,044 6,998 8,899
Gross Profit 2,538 1,468 2,984 5,470 3,869
Operating Expenses 4,478 3,134 5,389(3) 5,023 4,723
Income (loss) from operations (1,940) (1,666) (2,405) 447 (854)
Interest expense (963) (511) (821) (960) (836)
Income (loss) before income taxes
(benefit) (3,088) (67)(4) (4,124) (223) (1,622)
Income (loss) from
continuing operations (3,088) (67)(4) (7,905)(5) (661)(5) (843)
Income (loss) per share
from continuing operations (.23) (.03) (3.99) (.63) (.79)
Supplemental loss per share from
continuing operations (6) - - (3.77) (.14) -
Income(loss) from discontinued
operations (7) - (626) (685) (7,268) (2,117)
Income(loss) per share from
discontinued operations (7) - (.24) (.34) (6.92) (1.95)
Extraordinary gain (loss) (8) - (258) 699 - -
Extraordinary gain (loss) per share - (.09) .35 - -
Net income (loss) (3,088) (951) (7,891) (7,929) (2,896)
Net income (loss) per share (.23) (.36) (3.98) (7.55) (2.74)
Cash dividends declared
per common share - - - - -
Weighted Average Shares of
Common Stock and Common Stock
Equivalents Outstanding 13,613 2,616 1,982 1,050 1,055
Balance Sheet Data:
Total Assets $ 9,433 $ 5,667 $11,143 $19,351 $29,957
Long-Term Debt 3,303 1,565 1,514 1,759 1,962
Common Stock Issuable (9) - - - 2,911 -
Redeemable Common Stock (10) - - 1,423 1,423 -
Stockholders' Equity 2,275 (230) (2,372) 951 7,520
_______________
(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. See Note 1(l) of Notes to Consolidated Financial
Statements.
(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. See Note 8 of Notes to Consolidated Financial
Statements.
(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 obligations extinguished subsequent to October 31, 1993 by the
issuance of common stock. See Note 8 of Notes to Consolidated Financial
Statements.
(10) 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. See Note 8 of Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of 1994 to 1996
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 lower than expected sales. The Company's capital
resources have been below the necessary level throughout the last three
fiscal years. The losses incurred by the Company's discontinued Spirco and
NASCO Products operations absorbed significant working capital.
Additionally, those losses and the bankruptcy reorganization of Spirco
prevented the Company from pursuing a public offering during fiscal 1994,
causing NBD Bank ("NBD"), then the Company's principal lender, to reduce the
amounts available under the bank credit facility and prevented the Company
from obtaining traditional bank working capital financing.
In fiscal 1994 the Company's sales were significantly affected by
production delays caused by working capital constraints, and by a weak retail
environment and the coinciding decline in sports licensed sales caused by the
baseball and hockey strikes, and the resulting shortfall from prior year and
projected sales levels caused a $2.5 million decline in gross profit from
continuing operations and was the principal reason for the fiscal 1994 loss
from operations. The fiscal 1994 loss from continuing operations also
results from the write-down of deferred tax assets originally recorded
principally in 1991 and 1992.
Fiscal 1995 sales were also adversely affected by the 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 allow ANG
to pay the purchase over 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, and 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, will
substantially offset the effects of the labor shortages experienced in fiscal
1996.
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, four 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, a license to use the tag lines and logos of the Anheuser-
Busch Cos. on various bags and totes to be marketed both domestically and
overseas, 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 will continue into the second quarter of fiscal 1997.
The completion of product development on that schedule would allow the
Company to begin shipments of the products in the second quarter of fiscal
1997 and, more significantly, enable the Company to solicit and fill orders
for retailers back-to-school and holiday seasons, which would be shipped
principally in the third and fourth quarters.
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
1996 fiscal year, in part due to labor shortages, and the Company's use of
Thimble Square's production capacity to produce Innovo products.
In fiscal 1994 the Company began a restructuring, which has continued
throughout fiscal 1995 and 1996. Effective November 1, 1994 the Company
closed its Sugarland, Texas manufacturing facility and consolidated all of
Innovo's domestic operations to Tennessee to eliminate the expense of the
leased space in Texas and also eliminate certain shipping and duplicative
supervision costs. In connection with the plant consolidation the Company
recorded a charge of $470,000 during fiscal 1994. See Note 1(l) of Notes to
Consolidated Financial Statements. 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 implemented a restructuring of its senior
management. The Company terminated its senior vice-president of sales after
concluding that the sales and marketing functions under his direction were
not receiving the proper direction and effort, causing both lost sales and
unnecessary expenses (see Item 3 - "Legal Proceedings"), and these functions
were placed under the direct, full-time supervision of the chief executive
officer. A new chief operating officer was added, who will be directly
responsible for production operations and cost controls. Previously, both
the sales and marketing, and production functions had reported to the chief
executive officer, and the Company believes that having each function
directed on a full-time basis by separate senior executives will improve the
effectiveness of both areas. In connection with the restructuring the
Company implemented salary and personnel reductions that will reduce
expenses, net of salaries for new positions, by $150,000 annually. The
management and administrative structure in place after this restructuring
represents a level of costs that the Company currently plans to continue in
anticipation of, and to generate, increased sales and improved gross margins.
The Company recognizes that absent such increases it will not operate
profitably without additional significant expense reductions. If sales
increases are not achieved, it will attempt to further restructure to
accomplish those cost reductions.
1997 Strategy and Outlook
For fiscal 1997 the Company will focus on improving its operating
results by:
- continuing the growth in sales;
- improving its gross profit margins; and
- controlling any increases in fixed selling, general and
administrative expenses.
Sales increases are anticipated to be generated from:
- the continued recapture of domestic craft market share by Innovo;
- increased sports licensed sales, by both Innovo and NP
International, as the result of recovering demand and improved
products. Orders, and order indications, which the Company has
received in the first quarter of 1997 indicate that the demand
for pro licensed products appears to be recovering from the
decline of 1994 to 1996; and
- NP International's sales of the new Walt Disney and Warner Bros.
products.
Sales increases may also be generated from the Anheuser-Busch and Gary
Patterson licenses, and from expanding Thimble Square's marketing programs.
The October, 1996 restructuring of the Company's senior management
included the implementation of new product pricing and costing procedures and
controls, and the Company will monitor product pricing and costs, attempting
to improve gross profit margins through both price increases and reductions
in manufacturing costs.
- Price increases on selected products were implemented in the
first quarter of fiscal 1997. These price increases would, on an
annualized basis, increase the gross profit percentage from the
34.3% for fiscal 1996 to approximately 35.7%. The price
increases already implemented did not cause a loss of customers
or sales. The Company will continue, throughout 1997, to review
the pricing of products with the goal of increasing those where
current prices yield unacceptable gross margins. Although such
increases could meet customer resistance, causing the Company to
either lose, or decline, an order, the lost sale would generally
be one that would have not contributed material gross profits.
- The design of several products has been revised, and other
products will be redesigned, to lower either or both of the
material component costs or the manufacturing time.
- Prices for certain sports licensed products are anticipated to
increase as the result of artwork or other enhancements that will
allow retailers to increase retail pricing.
- The addition of the Red Boiling Springs facility, and continuing
efforts to reduce the exposure to labor shortages, will aid in
reducing overtime costs and other production inefficiencies that
were experienced in fiscal 1996.
As previously discussed, the October, 1996 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 the
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 9 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 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.
Fiscal 1995 compared to Fiscal 1994
Sales from continuing operations for fiscal 1995 were $5,276,000, a
decline of $2,752,000 from sales from continuing operations of $8,028,000 for
fiscal 1994. Fiscal 1995 sales of utility products continued to be affected
by a weak retail sector, and by the Company's 1994 strategy of emphasizing
sports licensed products in its marketing. Innovo's sales of domestically
manufactured sports licensed items continued during fiscal 1995 to be
negatively affected by the overall slow down in the market for sports
licensed merchandise, which in part was triggered by the 1994 baseball
strike. Additionally, marketing efforts for the Company's college logoed
sports bags and backpacks were interrupted pending the decision as to whether
the college products would be continued domestically by Innovo or included in
the sale to ANG.
Gross profit as a percentage of sales was 27.8% for the year ended
October 31, 1995 compared to 37.2% for fiscal 1994. The change in the gross
profit percentage reflects the affect of lower sales, which increased the per
unit absorption of fixed manufacturing costs and adversely effected the gross
profit percentage. The effect was partially offset by the cost savings
achieved from the Company's fourth quarter fiscal 1994 consolidation of its
manufacturing operations. The fiscal 1995 gross profit percentage was also
affected by incentive pricing used to reduce college logoed inventory levels
and provide liquidity.
Selling, general and administrative expenses declined by $1,377,000 to
$2,728,000 for fiscal 1995. Commissions and royalties decreased by $294,000
in fiscal 1995, to 4.7% of sales, principally as the result of an increase in
"in house" sales and a resulting decline in commissions. Other SG&A declined
by $1,083,000, and equaled 47% of sales in fiscal 1995 compared to 44% of
sales for the year ended October 31, 1994. The principal components of the
decline in other SG&A were reductions in salary costs ($240,000), legal and
professional expenses ($490,000), rent ($255,000) and bad debt allowances
($128,000). Although fixed personnel and overhead costs were reduced in
fiscal 1995, as a percentage of sales SG&A was higher in fiscal 1995 due to
the decline in sales. Depreciation expense declined from $814,000 in fiscal
1994 to $406,000 in fiscal 1995 principally due to the complete depreciation,
during fiscal 1994 and 1995, of machinery and other equipment acquired in the
Company's 1991 acquisition of Spirco and the fiscal 1994 write-off of the
unamortized leasehold improvements upon the closure of the Company's
Sugarland, Texas facility.
The fiscal 1995 loss from operations of $1,666,000 was $739,000 lower
than the operating loss for the year ended October 31, 1994. Operating
expense reductions of $2.3 million offset the decline in gross profits of
$1.5 million, resulting in the decline in the operating loss.
Interest expense declined by $310,000 for fiscal 1995 when compared to
the year ended October 31, 1994, mainly as the result of lower borrowings
under the Company's accounts receivable and inventory borrowing facilities.
However, the effect of lower borrowings was partially offset by higher
interest rates, and by the interest expense on the $600,000 working capital
loan obtained in July, 1994.
During the second quarter of fiscal 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 Spirco (then NASCO). The
Company had sued the accountants alleging, among other things, misstatements
in the financial statements of NASCO for pre-acquisition periods. The
accountants did not admit any wrong doing in settling the lawsuit.
Results of Discontinued Operations
Sales for the discontinued NASCO Products operations decreased by $3.2
million in fiscal 1995, from in fiscal 1994 $5,937,000 to $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, 1996 and
October 31, 1995. 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.
[Enlarge/Download Table]
Quarter Ended
__________________________________________________________________________________
1996 1995
__________________________________________________________________________________
February 28,May 31,August 31,November 30,January 31,April 30,(1)July 31,October 31,
__________________________________________________________________________________
(In thousands, except for per share amounts)
(c>
Net sales $1,319 $2,081 $2,304 $1,687 $1,115 $1,249 $1,638 $1,274
Gross profit 587 810 756 385 597 633 385 (147)
Income (loss)
from continuing
operations (161) (436) (890) (1,601) (311) 1,927 (601) (1,082)
Earnings (loss) per
share from continuing
operations (.02) (.04) (.05) (.08) (.15) .77 (.22) (.37)
(1) The results for the second quarter of fiscal 1995 include a $1.9 million
gain from the settlement of litigation.
Liquidity and Capital Resources
On an overall basis the Company's liquidity was materially restricted
throughout most of fiscal 1994, 1995 and 1996. 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. Additionally, those losses and bankruptcy
reorganization of Spirco caused NBD, the Company's principal lender through
fiscal 1994, to reduce the amounts available to the Company, and prevented
the Company from pursuing a public offering originally planned for fiscal
1994. 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 $2,776,000 in fiscal 1996, and
required net repayments of $1,787,000 and $1,058,000 in fiscal 1995 and 1994,
respectively, while operations provided (absorbed) cash flow of $(2,743,000),
$1,704,000 and $(406,000) during those periods.
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 the
products, and the advance royalty deposits, for the new Warner Bros. and Walt
Disney licenses, 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
8 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 fiscal 1994 net loss of $7.9 million included significant non-cash
charges for depreciation and amortization, the write-down of deferred tax
assets and the write-off of costs incurred in prior years. As a result, the
cash flow absorbed by operations, $406,000, was $7.5 million less than the
net loss. Inventories were essentially unchanged; although the Company
reduced its investment in imported sports-logoed inventories by offering
discounts, the resulting decrease in inventory was offset by the purchases of
mostly blank sports bags the Company imported in the second and third
quarters of fiscal 1994 in order to obtain adequate supplies of these
products before the exhaustion of the Chinese export quotas.
The Company's issuances of common stock in fiscal 1994 and fiscal 1995
were principally to extinguish debt (including the debt extinguished through
Spirco's plan of reorganization). On April 5, 1994 the Company completed an
equity for debt exchange in which an aggregate of 301,789 shares of common
stock were issued to extinguish an aggregate of $2,132,000 of indebtedness
(see Note 8 of Notes to Consolidated Financial Statements). In addition, in
other transactions during fiscal 1994 the Company issued an aggregate of
153,424 shares of common stock to extinguish liabilities totaling $672,000
(including 115,700 shares issued to reimburse a principal stockholder for
personally pledged shares sold by creditors - see Note 8 of Notes to
Consolidated Financial Statements), and issued 247,097 shares of common stock
in connection with the implementation of 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.
Through fiscal 1994 the Company's principal credit facility was with
NBD. The credit facility was initially obtained in fiscal 1992, and provided
for borrowings up to specified percentages (which were reduced in fiscal
1994) of the accounts receivable and inventories of Innovo and NASCO
Products. Interest was paid monthly at 4% above NBD's prime rate. The
substantial majority of the borrowings the Company historically obtained
under the NBD credit facility were supported by, and needed to finance, the
accounts receivable of NASCO Products and Innovo and the imported inventories
of NASCO Products. The domestic raw materials and finished goods inventories
of Innovo have not supported or required significant borrowings because the
time that elapses from Innovo's purchase of raw materials to its completion
and shipment of finished goods is relatively short, resulting in generally
low inventory levels.
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. 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.
At the same time 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 has
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, to December 31, 1997.
As previously discussed, the Company had anticipated throughout its
negotiations with ANG that it would receive an all cash settlement upon the
completion of the sale. The receipt of those funds at that time would have
allowed the Company to eliminate the balances due NBD, and the balance due on
the July, 1994 working capital loan. Based on discussions the Company had
with potential lenders, such repayments would have allowed the Company to
replace the Riviera factoring facility with an accounts receivable and
inventory financing facility that would have provided the Company with the
working capital necessary to accept certain orders and operate more
efficiently. However, as the result of having to finance ANG's purchase, the
Company was unable to take these actions, and was forced to both take other
steps to obtain some of the needed working capital, and to operate at a lower
working capital level.
The Company believes that working capital provided by operations will be
sufficient to fund operations and required debt reductions in fiscal 1997.
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's ability to obtain capital through equity financing is currently
limited by the fact that it has utilized essentially all of its authorized 30
million common shares. On February 10, 1997 the Company filed with the
Securities and Exchange Commission preliminary proxy materials for its 1997
annual meeting, tentatively scheduled for April, 1997, which propose for
stockholder approval an increase in the number of authorized common shares to
90 million. Until, and unless, the Company receives such approval, it will
be required to fulfill any interim capital needs with debt financing. In
January and February, 1997 the Company obtained an aggregate of $232,000 of
capital from short-term debt financing, and $175,000 for additional
development of the Florida retail property. The Company believes that
additional capital, to the extent needed, could be obtained from the
refinancing of Thimble Square's plants and equipment, the sale of all or a
portion of the Florida property, or the remaining payments due from ANG.
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.
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 8 and 9 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.
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 121. "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company will adopt SFAS No. 121 as of December 1, 1996 and its
implementation is not expected to have a material effect on the Company's
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation," SFAS No. 123 is effective December 15, 1995, and
requires either the application of an option pricing model measurement for
stock compensation, or, if a company elects to continue to measure stock
compensation based on the difference between the market price of the
Company's common stock and the exercise price of the employer stock option,
disclosure of what the effect of the application of option pricing model
measurement would have been. The Company will initially apply SFAS No. 123
in fiscal 1997, and will elect to disclose the effect that the application of
option pricing model measurement would have been for options granted from
December 1, 1995. The adoption of SFAS No. 123 will not impact the Company's
consolidated results of operations, financial position or cash flows.
Item 8. Financial Statements
Innovo Group Inc.
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants 35
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statements of Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
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, 1996 and October 31,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years ended November 30, 1996 and
October 31, 1995 and 1994 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, 1996 and
October 31, 1995, and the consolidated results of their operations and their
cash flows for each of the years ended November 30, 1996, October 31, 1995
and 1994 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 18, 1997
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's, except for share data)
[Download Table]
November 30, October 31,
1996 1995
____________ ___________
ASSETS
CURRENT:
Cash and cash equivalents $ 31 $ 6
Accounts receivable (Note 5) 1,238 1,524
Inventories (Note 5) 1,749 1,229
Prepaid expenses 332 406
_______ _______
TOTAL CURRENT ASSETS 3,350 3,165
PROPERTY AND EQUIPMENT, net (Note 6) 5,188 2,126
OTHER ASSETS 895 376
_______ _______
$ 9,433 $ 5,667
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 921 $ 993
Subordinated notes payable (Note 8) - 235
Current maturities of long-term
debt (Note 6) 224 143
Accounts payable 1,861 1,942
Accrued expenses 954 735
_______ ______
TOTAL CURRENT LIABILITIES 3,960 4,048
LONG-TERM DEBT, less current
maturities (Note 6) 3,079 1,422
OTHER 119 153
_______ _______
TOTAL LIABILITIES 7,158 5,623
_______ _______
COMMITMENTS AND CONTINGENCIES (Note 9)
CLASS 3 TRUST (Note 4) - 274
_______ _______
STOCKHOLDERS' EQUITY (Notes 4 and 8):
Common stock, $.01 par - shares
authorized 30,000,000; issued 26,530,577 in
1996 and 3,050,062 in 1995 265 30
Stock subscription (Note 8) - 50
Additional paid-in capital 25,076 19,137
Deficit (20,640) 17,358)
Treasury stock, 119,691 and 53,072 shares (2,426) (2,389)
_______ ______
TOTAL STOCKHOLDERS' EQUITY 2,275 (230)
_______ _______
$ 9,433 $ 5,667
_______ _______
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except earnings per share information)
[Enlarge/Download Table]
Transition
Year Ended Period Year ended October 31,
November 30, November 1-30,_____________________
1996 1995 1995 1994
_________ __________ _____ _____
NET SALES $ 7,391 $ 281 $ 5,276 $ 8,028
COST OF GOODS SOLD 4,853 166 3,808 5,044
_______ _______ _______ ______
Gross profit 2,538 115 1,468 2,984
OPERATING EXPENSES
Selling, general and administrative 3,890 233 2,728 4,105
Depreciation and amortization 588 31 406 814
Plant consolidation (Note 1(l)) - - - 470
_______ _______ _______ ______
Income (loss) from operations (1,940) (149) (1,666) (2,405)
INTEREST EXPENSE (963) (33) (511) (821)
OTHER INCOME (EXPENSE), net (Note 1(m)) (185) (12) 2,110 (898)
_______ _______ _______ _______
Income (loss) before income taxes
(benefit) (3,088) (194) (67) (4,124)
INCOME TAXES (BENEFIT) (Note 7) - - - 3,781
_______ _______ _______ _______
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,088) (194) (67) (7,905)
_______ _______ _______ _______
DISCONTINUED OPERATIONS, NET OF TAXES (Note 3)
Results of discontinued NASCO Products
operations - - (927) (1,537)
Gain on sale of NASCO Products operations - - 301 -
Gain (loss) on sale of Spirco
operations - - - 852
- - (626) (685)
_______ _______ _______ _______
EXTRAORDINARY ITEM (Note 4) - - (258) 699
_______ _______ _______ _______
NET INCOME (LOSS) $ (3,088) $ (194) $ (951) $(7,891)
_______ _______ _______ _______
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.23) $ (.05) $ (.03) $ (3.99)
Discontinued operations (Note 3) - - (.24) (.34)
Extraordinary item (Note 4) - - (.09) .35
_______ _______ _______ _______
Net income (loss) $ (.23) $ (.05) $ (.36) $ (3.98)
_______ _______ _______ _______
WEIGHTED AVERAGE SHARES OUTSTANDING 13,613 3,846 2,616 1,982
_______ _______ _______ _______
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's except for shares)
[Enlarge/Download Table]
Additional Retained
Common Stock Stock paid-in earnings Treasury
Shares Amount Subscription capital (deficit) stock Total
______ ______ ____________ _______ _________ ________ _____
BALANCE, November 1, 1993 1,181,437 $ 12 $ - $12,926 $ (8,516) $(3,471) $ 951
Issuance of common stock
Cash 110,000 1 - 474 - - 475
Services 62,750 1 - 306 - - 307
Stock award (Note 8(b)) 9,875 - - 81 - - 81
Extinguishment of debt (Notes 5 and 8) 455,213 4 - 2,800 - - 2,804
Loan fees (Note 5) 80,000 1 - 299 - - 300
Spirco reorganization (Note 4) 247,097 2 - 700 - - 702
Costs of issuances - - - (584) - - (584)
Capital contribution (Note 8) - - - 483 - - 483
Net loss - - - - (7,891) - (7,891)
_________ ____ ____ ______ _______ ______ ______
BALANCE, October 31, 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 (Note 8(a)) 119,873 1 350 127 - - 478
Loan extension (Note 5) 69,500 1 - 121 - - 122
Other 2,500 - - 9 - - 9
Costs of issuances - - - (60) - - (60)
Expiration of put options (Note 8(a)) 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 6) - - - 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 6) 7,521,912 75 - 915 - - 990
Exercise of warrants and options 3,372,730 34 - 412 - - 446
Loan fees (Note 5) 105,802 1 - 31 - - 32
Debt settlement - - - - - (37) (37)
Issuance of warrants (Note 6) - - - 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
_________ ____ $_____ ______ _______ ______ _____
See accompanying notes to consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
[Enlarge/Download Table]
Transition
Year Ended Period Year ended October 31,
November 30, November 1-30,_____________________
1996 1995 1995 1994
_________ __________ _____ _____
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,088) $ (194) $ (951) $(7,891)
Adjustments to reconcile net income
(loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 588 26 412 822
Deferred income taxes - - - 4,630
Provision for uncollectible accounts 78 - 102 383
Loss (gain) on disposal of discontinued
operations - - (395) (1,374)
Extraordinary gain or loss - - 258 (1,128)
Other 6 (2) - -
Changes in assets and liabilities (exclusive
of Thimble Square acquisition):
Accounts receivable (430) 821 279 1,365
Inventories (406) (14) 430 (26)
Prepaid expenses 560 (672) (25) 33
Accounts payable 558 (688) (867) 37
Accrued expenses (598) 556 (1,032) 1,306
Other (11) (2) (507) 1,437
______ _______ ______ ______
Cash provided by (used in) operating activities (2,743) (169) 1,704 (406)
______ _______ ______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (379) - (19) (18)
Increase (decrease) in other assets - - 4 -
Proceeds from sale of discontinued operations 257 - 100 1,445
______ _______ ______ ______
Cash provided by (used in) investing activities (122) - 85 1,427
______ _______ ______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition of notes payable - 300 356 612
Repayments of notes payable (444) (245) (1,970) (1,493)
Additions to long-term debt 1,675 - - -
Debt issue costs (285) - - -
Repayments of long-term debt (226) (12) (113) (68)
Proceeds from issuance of common stock 2,256 240 - 475
Stock issuance costs (200) - (60) (584)
Purchase of treasury stock - - - -
______ _______ ______ ______
Cash provided by (used in) financing activities 2,776 283 (1,787) (1,058)
______ _______ ______ ______
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (89) 114 2 (37)
CASH AND CASH EQUIVALENTS, at beginning of period 120 6 4 41
______ _______ ______ ______
CASH AND CASH EQUIVALENTS, at end of year $ 31 $ 120 $ 6 $ 4
______ _______ ______ ______
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, Inc. ("NASCO Products"), 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,
the products similar to those manufactured by Innovo, as well as canvas and
nylon sports bags and backpacks, imprinted or embroidered with logos or other
designs licensed from various sports and entertainment related licensors.
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 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 granted
credit to customers, substantially all of which are major retailers and mail
order catalog businesses. Effective July 31, 1995 the Company disposed of
and discontinued the import operations of NASCO Products (see Note 3).
Spirco, Inc. ("Spirco"), formerly known as NASCO, Inc. ("NASCO"), was a
wholly-owned subsidiary of Innovo Group until November, 1994, at which time
it was merged into Innovo Group. Spirco's principal products and markets
included magazines and food products which were sold directly to primary and
secondary schools for fundraising and school spirit programs. Spirco
discontinued marketing fundraising programs to school and youth organizations
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
in May 1993 (see Note 3). On August 27, 1993 Spirco filed for protection
under Chapter 11 of the Bankruptcy Code. Its plan of reorganization was
confirmed by the U.S. Bankruptcy Court on August 5, 1994 and became effective
on November 7, 1994 (see Note 4).
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 1994 and fiscal 1995. Thimble Square's operations are
classified as a separate business segment ("apparel products"). See Note 10.
Sales to one customer accounted for 13.9% of net sales in fiscal 1994, and
sales to two customers (one a customer of Innovo, and one a customer of
Thimble Square) accounted for 12.5%, and 11.2% of net sales for the year
ended November 30, 1996. Sales to foreign customers, principally in Europe,
accounted for 27.5% and 12.1% of net sales in fiscal 1995 and fiscal 1996,
respectively.
(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 9), and
the determination of allowances for accounts receivable (see Note 1(i)) and
inventories (see Note 5).
(e) Inventories
Inventories are stated at the lower of cost, as determined by the first-
in, first-out method, or market.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories consisted of the following:
[Download Table]
November 30, October 31,
1996 1995
(000's) (000's)
Finished goods $ 440 $ 601
Work-in-process 719 177
Raw materials 663 469
______ ______
1,822 1,247
Less inventory reserve (73) (18)
______ ______
$ 1,749 $ 1,229
______ ______
(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.
Property and equipment consisted of the following:
[Download Table]
Useful
Lives November 30, October 31,
(Years) 1996 1995
_______ _________ _________
(000's) (000's)
Buildings, land and
improvements 8-20 $ 4,351 $ 1,500
Machinery and equipment 5-8 1,766 1,506
Furniture and fixtures 3-8 412 597
Transportation equipment 5 65 54
Leasehold improvements 5-8 11 3
______ ______
6,605 3,660
Less accumulated depreciation
and amortization (1,417) (1,534)
______ ______
Net property and equipment $ 5,188 $ 2,126
______ ______
The cost and accumulated depreciation for assets utilized under capital
leases were $704,000 and $203,000, respectively, at November 30, 1996.
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:
[Download Table]
November 30, October 31,
1996 1995
(000's) (000's)
Goodwill, net of accumulated
amortization $ 786 $ -
Debt issue costs, net 80 41
Non-current receivable (Note 3) - 306
Other 29 29
______ ______
$ 895 $ 376
______ ______
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 year
ended November 30, 1996, and accumulated amortization at November 30, 1996,
were $56,000.
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 $363,000,
$39,000 and $152,000 in fiscal 1996, 1995 and 1994, 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 ($66,000
and $120,000 at November 30, 1996 and October 31, 1995, 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
equivalents were not considered in the computation of weighted average common
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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) Statement of cash flows
Cash and cash equivalents are generally comprised of highly liquid
instruments with original maturities of three months or less, such as
treasury bills, certificates of deposit, commercial paper and call and time
deposits.
[Download Table]
Year Ended
November 30, Year ended October 31,
1996 1995 1994
(000's)
Cash paid for interest $ 618 $ 576 $ 454
Cash paid for income taxes - - -
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, 5 and 8) and upon the conversion of $1,205,000 of 8%
Convertible Debentures (see Note 6). The Company also issued stock warrants
and a mortgage note to acquire property for $1.5 million (see Note 6).
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, 5 and 8.
During fiscal 1994 the Company issued common stock to extinguish an
aggregate of $3,506,000 in liabilities, for services of $307,000, and in
consideration for a $600,000 working capital loan. See Notes 4,5 and 8.
(l) Plant Consolidation
In October, 1994 the Company began certain steps to restructure its
operations. Principal among these steps were the closing of its leased
manufacturing facility in Texas and the consolidation of its operations to
Tennessee. In connection with these steps the Company incurred expenses of
$470,000, which included the accrual of provisions of $152,000 for the
remaining obligations under its Texas lease, and $40,000 for the termination
of employees who were not relocated to Tennessee.
(m) Other Income (Expense)
Other income in fiscal 1995 includes a $1.9 million gain from the
settlement from litigation. Other expense in fiscal 1994 includes $300,000
of costs associated with the preparation of a public offering of the
Company's securities which was charged to expense when the Company decided
not to proceed with an offering.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
(n) Financial Instruments
The fair values of the Company's financial instruments (consisting of
cash, accounts receivable, accounts payable, notes payable and long-term
debt) 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
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". The Company will adopt SFAS No. 121 as of December 1, 1996 and its
implementation is not expected to have a material effect on the Company's
consolidated financial statements.
The Company accounts for the grant of employee stock options under
Accounting Principles Board Opinion ("APB") No. 25. In October 1995, the
FASB issued SFAS No. 123, "Accounting for Stock Based Compensation". SFAS
No. 123 is effective December 15, 1995, and requires either the application
of an option pricing model measurement for stock compensation, or, if a
company elects to continue to measure stock compensation under APB No. 25,
based on the difference between the market price of the company's common
stock and the exercise price of the employer stock option, disclosure of what
the effect of the application of option pricing model measurement would have
been. The Company will initially apply SFAS No. 123 in fiscal 1997, and will
elect to disclose the effect that the application of option pricing model
measurement would have been for options granted from December 1, 1995. The
adoption of SFAS No. 123 will not impact the Company's consolidated results
of operations, financial position, or cash flows.
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
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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (concluded)
the companies (see Note 6). 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:
[Download Table]
(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.
[Download Table]
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:
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - DISCONTINUED OPERATIONS (continued)
[Download Table]
Year ended October 31,
______________________
1995 1994
____ ____
(000's)
Results of discontinued NASCO
Products operations $ (927) $(1,537)
Gain on sale of NASCO Products
operations 301 -
Gain (loss) on sale of Spirco
operations - 852
_______ _______
$ (626) $ (685)
_______ _______
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. The products marketed and sold under those license rights
represented a separate class of products and previously issued 1994 and 1993
financial statements have been restated to report the results of those
operations as a component of discontinued operations.
For each license ANG is paying NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining
$650,000 is payable, without interest, in monthly installments equal to 5% of
ANG's aggregate sales of the licensed products, with the final payment due
July 31, 1998. ANG assumed all of NASCO Products' obligations under the
licenses, including the payment of royalties and minimum royalties. NASCO
Products also 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.
In addition, ANG will make an ongoing annual payment 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, up to aggregate sales of $15 million, and 1.5% and .5% of sales
thereafter. The payments will continue for forty years unless a license
expires or is terminated and is not renewed or reinstated within twelve
months.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - DISCONTINUED OPERATIONS (concluded)
The revenues and expenses relating to the disposed NASCO Products
imported product line were as follows:
[Download Table]
Year ended October 31,
____________________
1995 1994
____ ____
(000's)
Net sales $ 2,777 $ 5,937
Cost of goods sold (2,532) (4,631)
Selling, general and
administrative expenses (1,043) (2,619)
Interest expense (79) (193)
Other (50) (111)
Income tax benefit - 80
________ _______
Income (loss) from operations $ (927) $(1,537)
________ _______
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.
Effective April 30, 1993 the Company sold the youth and school
fundraising program direct marketing operations formerly conducted by Spirco.
The operations were purchased by QSP, Inc. ("QSP"), which is a wholly-owned
subsidiary of The Reader's Digest Association, Inc. The sales agreement
provided that QSP would pay Spirco 25% of the gross sales, as defined in the
sales agreement, received by QSP between July 1, 1993 and June 30, 1994 from
fundraising programs sold to former Spirco fundraising customers or by former
Spirco salespersons. The minimum sales price was $0.5 million, which Spirco
received on May 10, 1993. In addition, Innovo Group received $1.0 million
under the non-competition agreement. During fiscal 1994 Spirco received
additional payments of $1,445,000 from QSP. The fiscal 1994 gain on the
disposals of Spirco is net of income tax expense of $522,000.
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 and NASCO Products were not
parties to the filing.
Spirco's plan of reorganization established fourteen classes of creditors
which, with respect to the nature and amount of distribution, were divided
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - REORGANIZATION OF SPIRCO (continued)
into six categories. Administrative expenses were paid in cash using funds
borrowed under the Company's bank credit facility (see Note 4). Spirco's
equipment and mortgage debt, which had been guaranteed by Innovo Group, were
assumed by Leasall Management, Inc. ("Leasall"), a newly formed subsidiary,
together with its acquisition of the collateral assets, and 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 ("IRS") resulting from its 1991 examination of the 1986 and
1988 income tax returns of Spirco was satisfied through the issuance to the
IRS of 25,000 shares of common stock, in return for which the IRS released
its lien on 25,000 shares of Innovo Group treasury stock owned by Spirco.
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. As a result, in fiscal 1994,
the Company recognized an extraordinary gain of $1,128,000, before related
deferred income tax expense of $429,000, representing principally the
forgiveness of the general unsecured claims that received no distribution
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - REORGANIZATION OF SPIRCO (concluded)
under the plan. During fiscal 1995 the Company recorded extraordinary
charges of $258,000 for changes in the estimates of allowed claims.
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
[Download Table]
November 30, October 31,
1996 1995
____________ ___________
(000's) (000's)
Accounts receivable factoring facility $ 468 $ 356
Bank credit facility - 202
Working capital loan 213 407
NP International loan 100 -
Other 140 28
______ ______
$ 921 $ 993
______ ______
Innovo and Thimble Square borrow under an accounts receivable factoring
facility with Riviera Finance ("Riviera") under which Riviera advances 80% of
assigned accounts receivable. The factoring facility provides for advances
up to $1,000,000. Riviera charges 1% of each invoice assigned plus 2% per
month of outstanding advances. Borrowings under the facility are
collateralized by assigned accounts receivable, which aggregated $652,000 and
$445,000 at November 30, 1996 and October 31, 1995, respectively.
Previously Innovo, and NASCO Products, borrowed under a bank credit
facility with NBD Bank ("NBD"). Borrowings under the bank credit facility
bore interest at 4% over the NBD's prime rate. Effective August 1, 1995 NBD
began to apply to the balance due it all proceeds from the collection of
NASCO Products accounts receivable, and all payments being received from ANG
(see Note 3). The repayment of the borrowings under the NBD facility was
completed in fiscal 1996 from the proceeds of the payments from ANG.
The July 1994 working capital loan originally bore interest payable
quarterly at 4% above NBD's prime rate, and was collateralized by a security
interest, subordinate to those held by Riviera and NBD, in the Company's
accounts receivable and inventory. As consideration for making the loan the
lenders received 80,000 shares of common stock, valued at $300,000 on the
basis of the then market price. In January 1995 the Company obtained an
extension of the maturity of the working capital loan until the earlier of
October 15, 1995 or the repayment of NBD's advances. At that time the
interest rate on the working capital loan was reset at 20% per annum, and the
Company issued 69,500 shares of its common stock as an extension fee. In
January, 1996 the lenders agreed to extend the maturity of the working
capital loan until October 31, 1996 and reduce the interest rate to 16%
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 - NOTES PAYABLE (concluded)
retroactively to October, 1995 in exchange for (i) the issuance of 50,000
shares of common stock and (ii) the assignment to the repayment of the loan
of the payments being received from ANG (see Note 3) after the repayment of
NBD. During fiscal 1996 an aggregate of 105,802 shares of common stock were
issued pursuant to the second extension, and the outstanding principal was
reduced to $213,000 through the application of payments from ANG. 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, to December 31,
1997.
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, 1996, $100,000 remains outstanding. The lender is
a company owned and controlled by a relative of the Company's chief executive
officer.
The weighted average interest rate on outstanding short-term borrowings
was 18.7% and 19.6% at November 30, 1996 and October 31, 1995, respectively.
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following:
[Download Table]
November 30, October 31,
1996 1995
(000's) (000's)
Notes payable to ICON Cash Flow Partners,
L.P., Series D ("ICON") $ 268 $ 355
Leasall first mortgage loan 876 895
Non-recourse first mortgage on
Florida property 787 -
Thimble Square SBA loan 214 -
Thimble Square first mortgage loan 140 -
Capital plant lease obligation 221 -
Capitalized equipment lease obligation 151 315
8% Convertible Debentures 470 -
Other 176 -
______ _______
Total long-term debt 3,303 1,565
Less current maturities (224) (143)
______ _______
$ 3,079 $ 1,422
______ _______
The ICON loan bears interest at 11% and is 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 have each guaranteed
the obligations of Leasall under this loan.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - LONG-TERM DEBT (continued)
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
8.25% at November 30, 1996) 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 is developing
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) options
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-
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, and subsequent to November 30, 1995 an additional $265,000 of 8%
Convertible Debentures were converted into 2,353,104 shares of common stock.
The remaining $205,000 of 8% Convertible Debentures are convertible into
1,802,198 shares of common stock, provided, however, that the Company is not
required to allow conversion, or reserve or otherwise keep available shares
of common stock for issuance upon conversion, unless and until the Company's
authorized common stock is increased to 40 million shares. The Company may,
at its option, pay any outstanding debentures and accrued interest at their
September 30,1998 maturity by the issuance of shares of common stock on the
basis of 70% of the then closing bid price, and may call the 8% Convertible
Debentures prior to their maturity by the payment of the value of the shares
of common stock obtainable upon conversion.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - LONG-TERM DEBT (concluded)
Principal maturities of long-term debt as of November 30, 1996 are as
follows:
[Download Table]
Year ending November 30, Amount
(000's)
1997 $ 224
1998 810
1999 220
2000 395
2001 175
Thereafter 1,479
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes included in net income (loss)
was as follows:
[Enlarge/Download Table]
Year ended
November 30, Year ended October 31,
___________ ____________________
1996 1995 1994
_______ _______ ____
(000's)
Continuing operations:
Current (Federal) $ - $ - $ -
Deferred:
Federal - - 3,781
State - -
Total - - 3,781
_____ _______ ________
Total continuing operations - - 3,781
Discontinued operations - - 442
Extraordinary item - - 429
_____ _______ ________
Total income taxes (benefit) $ - $ - $ 4,652
_____ _______ ________
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - INCOME TAXES (continued)
Net deferred tax assets result from the following temporary
differences between the book and tax bases of assets and liabilities:
[Download Table]
November 30, October 31,
1996 1995
(000's) (000's)
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 22 $ 41
Inventory reserves 57 6
Property and equipment 91 239
Other 62 65
Benefit of net operating loss
carryforwards 3,183 8,464
______ ______
Gross deferred tax assets 3,415 8,815
Deferred tax assets valuation allowance (3,415) (8,815)
_______ ______
Net deferred tax assets $ - $ -
_______ ______
A net increase in the valuation allowance for deferred taxes of
$5,767,000 was recorded in fiscal 1994. The valuation allowance 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 provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
[Download Table]
Year ended
November 30, Year ended October 31,
1996 1995 1994
00's)
Computed tax (benefit)
at the statutory rate $(1,049) $ (23) $(1,402)
State income tax - - -
Change in valuation allowance 1,049 23 5,767
Other - - (584)
______ ______ _______
$ - $ - $ 3,781
______ ______ _______
The Company has consolidated net operating loss carryforwards of
approximately $26.6 million expiring through the year 2011. 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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - INCOME TAXES (concluded)
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 $8 million the future taxable income which the
Company may offset through the year 2011 through the application of its net
operating loss carryforwards. A subsidiary of the Company has state tax net
operating loss carryforwards of approximately $11.0 million to offset state
taxable income. These carryforwards expire in varying amounts between the
years 1999 and 2005.
NOTE 8 - STOCKHOLDERS' EQUITY
(a) Common Stock
In June 1992, Innovo Group issued $2,000,000 of 12% Subordinated
Collateralized Notes (the "Subordinated Collateralized Notes") due on or
before December 1, 1992. On April 5, 1994 the Company completed an equity
for debt exchange in which (i) 216,128 shares of common stock were issued to
extinguish $1.7 million of the Subordinated Collateralized Notes and related
accrued interest of $191,000, (ii) 6,334 shares of common stock were issued
to extinguish $50,000 of other notes payable and accrued interest of $5,400
and (iii) 26,327 shares of common stock were issued to satisfy $185,000 of
other obligations. Several of the holders of the debt exchanged for common
stock were also holders of the units sold by the Company in a June, 1993
private placement. As a result, in order to obtain agreement to the debt
conversion, the Company also agreed to revise the terms of the June, 1993
private placement by issuing 53,000 shares of common stock to increase to two
shares the number of shares included in the units sold, decrease to $20 the
exercise price of the 53,000 warrants included in the units, and extend the
term of the warrants until July 31, 1997. As a result, the Company issued an
aggregate of 301,789 shares, which have been recorded in stockholders' equity
at the amount of debt extinguished ($2,132,000). Costs and expenses of the
exchange of $270,000 were charged against stockholders' equity. No gain or
loss was recognized.
In December, 1993 the Company reached an agreement with a vendor,
which had been owed approximately $1.3 million, under which the vendor (i)
retained proceeds of $483,000 from its sale of shares previously pledged by
a principal stockholder, (ii) received proceeds of $500,000 from its sale of
100,000 shares previously pledged by the Company's president and (iii)
received a $300,000 interest-free note due June, 1994 collateralized by the
remaining 15,700 shares previously pledged by the Company's president. The
$483,000 was recorded as a contribution to the Company's capital. In July
and August, 1994, the vendor sold the 15,700 pledged shares, applying the
proceeds of $60,000 to reduce the note. The Company's president was issued
115,700 shares to reimburse her in August, 1994. In other transactions in
fiscal 1994 the Company issued 37,724 shares to reduce outstanding notes
payable by $112,000.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
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.
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 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.
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.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
As of November 30, 1996 the Company has outstanding common stock
purchase warrants as follows:
[Download Table]
Class Exercise Price Shares Expiration
_____ ______________ ______ __________
A $30 91,700 July 1997
A-1 $ 2 2,250 March 1997
B $20 53,000 July 1997
E $.30 250,000 April 1999
G $.28 50,000 May 1998
H $.52 725,758 August 2001
I $.17 ,220,588 August 2001
The Company has reserved 446,950 shares for issuance upon the exercise
of the outstanding common stock purchase warrants. Under the terms of the
Class H and Class I warrants, the Company is not required to reserve or
otherwise keep available from its authorized but unissued common stock shares
for issuance upon the exercise, if any, of the Class H and Class I warrants,
unless and until the Company's authorized common stock is increased to 40
million shares, and prior to any such increase, is only required to allow the
exercise of the Class H and Class I warrants if and to the extent there are
available shares of its authorized common stock not already issued and
outstanding, or reserved for the exercise of other then outstanding stock
options, warrants, or conversion rights.
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.
(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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (concluded)
common stock on the date of issuance.
The following table summarizes the activity in the 1991 Plan for the
periods indicated:
[Download Table]
Exercise
Options Price Options
Outstanding Per Share Exercisable
___________ _________ ___________
Outstanding at
November 1, 1993 7,800 $80 - 10 7,800
Canceled (4,800) $80 - 10
Granted 1,500 $ 3.80
______
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
______
During fiscal 1994 the Company granted a restricted stock award of
9,875 shares having an aggregate value of $81,000. The award vested during
fiscal 1994.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leases certain property, buildings and equipment. Rental
expense for the years ended November 30, 1996, October 31, 1995 and 1994 was
approximately $54,000, $50,000 and $276,000, respectively. The minimum
rental commitments under noncancellable operating leases as of November 30,
1996 are as follows: 1997, $38,000; 1998, $28,000; 1999, $28,000.
The Company displays characters, names and logos on its products under
license agreements that require royalties ranging from 8% to 12.5% of sales.
The agreements expire through 1998 and require annual advance payments
(included in prepaid expenses) and certain annual minimums. Royalties were
$441,000, $402,000 and $823,000 for fiscal 1996, 1995 and 1994, respectively.
An executive officer has an employment agreement with the Company that
expires in October, 1997. The Company or the employee may terminate the
employment agreement at any time for cause. The agreement provides that, in
the event of a "change in control" not approved by the board of directors,
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
any breach or termination shall require the payment of severance benefits
equal to the greater of the annual salary payable for the remainder of the
agreement's term, or three times the annual salary under the agreement
(presently $175,000).
In December 1991, a former employee filed suit against the Company and
others alleging breach of his employment agreement and conversion of his
interest in certain property rights of the Company. The complaint, as
amended, sought compensation damages of at least $13.5 million. In August,
1994 the trial court granted the Company's motion for partial summary
judgement and directed verdicts with respect to certain of the former
employee'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 claim
concerning the trademark as well as his claims for wrongful termination of
employment. However, the jury awarded the plaintiff 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
no submitting to the jury the question 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 on, and submission to a
jury of, the Company's claim of breach of fiduciary duty by Tedesco. The
Company is filing motions with the trial court for the scheduling of the
ordered trial on its claims against Tedesco and would be entitled to offset
any damages it is awarded against the Tedesco award. The Company has also
appealed to the Texas Supreme Court the issue of the appeal courts' decision
to uphold $200,000 of the original judgement (which accounts for $340,000 of
the August, 1996 $420,000 amount). In connection with its appeals the
Company has pledged as an appeal bond 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, and of the Company's claims
against Tedesco, could result in a loss of up to $400,000.
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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
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.
NOTE 10 - SEGMENT INFORMATION
Information concerning the two segments in which the Company operated in
fiscal 1996 is as follows:
[Download Table]
Canvas and Apparel General
Nylon Consumer Products Corporate Consolidated
Products
______________ ________ _________ ____________
(000's)
Net Sales $ 6,023 $ 1,368 $ - $ 7,391
Income (loss) from
operations (965) (12) (963) (1,940)
Identifiable
assets 3,657 2,830 2,946 9,433
Capital
expenditures 48 1,525 331 1,904
Depreciation and
amortization 397 134 57 588
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 15, 1997.
[Download Table]
Name Age Position
____ ___ ________
Patricia Anderson-Lasko (1) 37 Chairman of the
Board, President,
Chief Executive
Officer and
Director
Scott Parliament 39 Senior Vice
President; Chief
Operating Officer
Terrance Bond 40 Controller
Felix Lee 48 Vice President
of Manufacturing
of Innovo and
Director
Eleanor V. Schwartz 64 Director; Designer
for Thimble Square
Alexander K. Miller (2) (3) 50 Director
Reino C. Lanto, Jr. (1)(2) 53 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.
Patricia Anderson-Lasko has been Chairman, President, Chief Executive
Officer and a director of the Company since August 1990, and President of
Innovo since her founding of that company in 1987.
Scott Parliament joined the Company as Senior Vice-President and chief
operating officer in October, 1996. From November, 1993 until October, 1996
Mr. Parliament was a principal of Parlon Ventures, Ltd., a privately held
consulting and investment firm. From March, 1990 until he joined Parlon
Ventures, Ltd. Mr. Parliament held various positions with National Steel
Services Center, Inc.
Terrance Bond joined the Company as Controller in April 1993. From
November 1988 until he joined Innovo Group, Mr. Bond was Director of
Corporate Accounting at United Merchants and Manufacturers, Inc.
Felix Lee has been a director of the Company since August 1990 and Vice
President of Manufacturing of Innovo since June 1989. From July 1981 through
May 1989, Mr. Lee was plant manager at Industria Nacional De Artefactes,
S.A., a luggage manufacturer in Panama City, Republic of Panama, where his
responsibilities included production and manufacturing.
Eleanor V. Schwartz became a director of the Company in April, 1996 upon
the completion of the Company's acquisition of Thimble Square. Mrs.
Schwartz, together with her husband Philip Schwartz, founded Thimble Square
in 1985 and since that time has been a director of Thimble Square and its
principal designer. Mrs. Schwartz has over 35 years of experience in the
buying, design and marketing of ladies apparel.
Alexander K. Miller has been a director of the Company since December
1991. From June 1993 to December 1994, Mr. Miller also served as the Vice-
President of Administration of the Company. Prior and subsequent to that
period Mr. Miller also served the Company on a consulting basis. Mr. Miller
is self-employed as a management and marketing consultant. From 1986 to 1993
he was a member of the faculty of California State Polytechnic University in
San Luis Obispo, California, where he taught business administration.
Reino C. Lanto, Jr. has been a director of the Company since August 1990.
He is an attorney licensed to practice in Illinois and has been a partner in
the law firm of Wilson & Lanto since November 1982.
Marvin M. 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.
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 October 31, 1995, 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 $100,000 or higher.
Summary Compensation Table
[Enlarge/Download Table]
Long Term Compensation
______________________
Annual Compensation Awards Payouts
___________________ ______ _______
Other
Annual Restricted LTIP All Other
Compen- Stock Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) (1) (#) ($)
_______ ____ _________ ________ _______ _______ ________ _______ ________
Patricia Anderson- 1996 $171,354(2) - 1,346(3) 0 0 0 -
Lasko 1995 175,000(2) - 1,346(3) 0 0 0 -
President, Chief 1994 175,000(2) - 2,791(3) 0 0 0 -
Executive Officer,
and Chairman of the
Board
Scott Parliament 1996 $16,900(4) - - 0 0 0 -
Senior Vice-President
and Chief Operating
Officer
(1) No executive officer received or held restricted stock awards during
or at the end of fiscal 1996, 1995, or 1994, or received, exercised or held
stock options during or at the end of fiscal 1996, 1995 or 1994.
(2) At the request of the Company Ms. Anderson-Lasko deferred the payment
of $51,000 of her fiscal 1995 salary until fiscal 1996.
(3) During fiscal 1996, 1995 and 1994 Ms. Anderson-Lasko received life
insurance benefits in the aggregate amount of $1,346, $1,346 and $2,019,
respectively, and, in fiscal 1994, health insurance benefits in the aggregate
amount of $772.
(4) Represents salary paid to Mr. Parliament from October, 1996, the
commencement of his employment, through November 30, 1996. Mr. Parliament is
compensated at the rate of $120,000 annually.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Ms. Anderson-Lasko and Messrs. Lanto 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, chief
executive officer and Chairman of the Board, served on the Company's
executive compensation committee, she did not participate in any decisions
regarding her own compensation as an executive officer. Messrs. Lanto and
Williamson are not officers of the Company.
Employment Agreements
In September 1993 the Company entered into a revised employment
agreement with Patricia Anderson-Lasko. The agreement expires in October
1997, but provides that its terms may be extended for additional one-year
periods, starting in October 1995, at the election of the parties. The
employment agreement provides that Ms. Anderson-Lasko shall be employed as
the chief executive officer of the Company at an annual base salary of
$175,000 and shall be eligible for such increases in salary, other bonuses
and payments as the Board of Directors shall direct. In January, 1997, Ms.
Anderson-Lasko's employment contract was amended to eliminate provisions
entitling her to a $100,000 mortgage loan from the Company. Ms. Anderson-
Lasko had not taken the loan.
The employment agreement of Ms. Anderson-Lasko contains provisions
requiring certain severance payments in the event (i) the Company terminates
her employment other than for cause, death or disability or (ii) Ms.
Anderson-Lasko terminates the contract after a change in control, or as the
result of a breach of the agreement by the Company, including a change in her
responsibilities or authorities not provided for in the contract. In such
event, Ms. Anderson-Lasko is entitled to a severance payment equal to the
greater of three times the annual salary in effect at the date of termination
or such annual salary multiplied by the number of years remaining in the term
(including extensions thereof) of the contract. For purposes of the
contract, a change in control is defined to occur if any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934 (the "Exchange Act") but excluding the Company, its existing officers
and directors and any other individual, entity or group whose acquisition of
control is approved in advance by the Board) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities issued by the Company representing 30% or more of
the combined voting power of the Company's then-outstanding securities, or if
during any period of two consecutive years during the term of the agreement,
individuals who at the beginning of such period constitute the Board cease
for any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the
directors then in office who were directors at the beginning of the period.
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. Miller 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 15, 1997, 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 15, 1997 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.
[Enlarge/Download Table]
Shares Beneficially Owned (1)
_____________________________
Name Number (1) Percent
__________________________________________________________________________________________
Patricia Anderson-Lasko 363,440 (2) 1.3%
27 North Main Street
Springfield, TN 37172
Scott Parliament - -
27 North Main Street
Springfield, TN 37172
Alexander K. Miller - -
27 North Main Street
Springfield, TN 37172
Terrance Bond 1,000 (3) *
27 North Main Street
Springfield, TN 37172
Felix Lee 1,050 (4) *
27 North Main Street
Springfield, TN 37172
Reino C. Lanto, Jr. 61,286 (5) *
235 North Garrard St.
Rantoul, IL 61866
Marvin M. Williamson 2,000 *
53 Fitch Lane
New Canaan, CT 06840
Eleanor and Philip Schwartz 1,665,745 (6) 5.8%
23362 Water Circle
Boca Raton, FL 33486
All Executive Officers 2,928,521 (2) (3) (4) (5) 10.2%
and Directors as a Group (6) (7)
(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 (i) 213,625
shares held by trusts established under the Plan of Reorganization of Spirco,
Inc. (see Note 4 of Notes to Consolidated Financial Statements) and (ii)
200,000 shares held as an appeal bond for the Company's appeal of the Tedesco
litigation (see Note 9 of Notes to Consolidated Financial Statements). Under
the terms of the trusts and the bond, such shares are not eligible to vote.
(2) Includes 79,432 shares owned by DWL International, a corporation in
which Ms. Anderson-Lasko's spouse, Donald W. Lasko, holds a controlling
interest.
(3) Consists of 1,000 shares subject to options exercisable by Mr. Bond.
(4) Includes 50 shares currently held by Mr. Lee and 1,000 shares subject
to options exercisable by Mr. Lee.
(5) Consists of 32,735 shares owned by Jeanene Lanto, the wife of Mr.
Lanto, and 28,551 shares owned by a trust for the benefit of Jeanene Lanto of
which Mr. Lanto is the trustee, as to all of which Mr. Lanto disclaims any
beneficial ownership.
(6) Pursuant to a voting agreement between Lee Schwartz, Eleanor Schwartz
and Philip Schwartz, Lee Schwartz and Philip Schwartz have granted to Eleanor
Schwartz the power to vote any shares owned by the for so long as Eleanor
Schwartz is a member of the Company's board of directors, including 553,000
shares, owned by Lee Schwartz, that Eleanor Schwartz has the power to vote
pursuant to such voting agreement.
(7) Includes 834,000 shares held by Matthew Mulhern. Pursuant to an
agreement between the Company and Mr. Mulhern, Mr. Mulhern has agreed to vote
in accordance with the recommendations of the Company's board of directors.
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.
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
[Download Table]
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 6, 1994 between
National Football League Properties, Inc. and
Innovo Group Inc.* 10.68 (9)
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 October 13, 1995
between NBA Properties, Inc. and Innovo, Inc.* 10.53 (12)
10.41 License Agreement dated October 13, 1995
between NBA Properties, Inc. and NASCO
Products International, Inc.* 10.54 (12)
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.
10.46 License Agreement between Innovo Group Inc.
and Walt Disney dated September 12, 1996.
10.47 Indenture of Lease dated October 12, 1993
between Thimble Square, Inc. and Development
Authority of Appling County, Georgia
10.48 Lease dated October 1, 1996 between Innovo,
Inc. and John F. Wilson, Terry Hale, and
William Dulworth
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.
(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 18, 1997 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
February 18, 1997
INNOVO GROUP INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
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,
1996 $ 99,000 $ 78,000 $ - $111,000(A) $66,000
Year ended October 31,
1995 117,000 102,000 - 99,000(A) 120,000
Year ended October 31,
1994 170,000 383,000 - 436,000(A) 117,000
Allowance for inventories:
Year ended November 30,
1996 $ 18,000 $ 55,000 $ - $ - $ 73,000
Year ended October 31,
1995 759,000 - - 741,000(B) 18,000
Year ended October 31,
1994 689,000 759,000 - 689,000(B) 759,000
Note A - Uncollected receivables written off, net of recoveries.
Note B - Recovery of valuation reserve.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INNOVO GROUP INC.
By:/s/ Patricia Anderson-Lasko
Patricia Anderson-Lasko
Chairman of the Board, President and
Chief Executive Officer
February 28, 1997
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.
[Download Table]
Signature and Title Date
___________________ ____
/s/ Patricia Anderson-Lasko
Patricia Anderson-Lasko
Chairman of the Board, President
Chief Executive Officer and Director
(Principal Executive and Financial Officer) February 28, 1997
/s/ Terrance Bond
Terrance Bond
Controller
(Chief Accounting Officer) February 28, 1997
/s/ Reino C. Lanto, Jr.
Reino C. Lanto, Jr.
Director February 28, 1997
/s/ Felix Lee
Felix Lee
Director February 28, 1997
/s/ Alexander K. Miller
Alexander K. Miller
Director February 28, 1997
/s/Eleanor V. Schwartz
Eleanor V. Schwartz
Director February 28, 1997
/s/ Marvin N. Williamson
Marvin N. Williamson
Director February 28, 1997
Dates Referenced Herein and Documents Incorporated by Reference
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