ITEM 1. BUSINESS
Introduction
The Company, a Delaware Company organized, is a multidivisional sales and marketing organization which designs, imports and distributes accessories, craft and apparel consumer products to the retail, private label and specialty markets through its wholly owned subsidiaries Innovo, Inc. ("Innovo"), Joe's Jeans, Inc. ("Joe's")and Innovo-Azteca Apparel, Inc. ("IAA"). Additionally, the Company's subsidiary Leaseall Management, Inc., owns and invests in certain real estate properties. The Company's sales and marketing offices are located in Los Angeles, CA and Knoxville, TN with showrooms in New York City and Los Angeles, CA. The Company's administrative and distribution operations are located in Los Angeles, CA. The Company's products are sourced directly with factories in the Orient or are produced in Mexico.
The principal executive offices of the Company are located at 2633 Kingston Pike, Suite 100, Knoxville, Tennessee 37919 and at 5900 S. Eastern Ave, Suite 124, Commerce, CA 90040. Its telephone numbers are (865) 546-1110 (TN) and (323) 725-5516 (CA).
Principal Operating Subsidiaries
Innovo. The Company, through its Innovo subsidiary, develops craft canvas and denim totebags and aprons for mass retail and craft department stores such as Wal-Mart, Michaels and Joannes. Innovo also develops licensed and non- licensed, branded and non-branded accessory products for the fashion and non- fashion markets. These products are sold through mass retail, department stores, private label companies and premium organizations including such organizations as Wal-Mart, Goody's, Sears, Target, American Eagle and other venues in the United States. Innovo's craft products are produced in Mexico by affiliates of its strategic partner the Commerce Investment Group. Innovo's accessory products are sourced out of the Orient directly from Oriental suppliers.
Joe's. The Company's high-end apparel line incorporates the Joe's Jeans brand of men's and women's denim apparel products and knit shirts. The Joe's Jeans product line is sold to high-end retailers, and specialty boutiques such as Barney's, Neiman Marcus, Nordstrom's and Fred Segal. Joe's Jeans production is managed by the Company's internal staff and sourced domestically in Los Angeles, CA from the Commerce Investment Group's affiliates or from other outside contractors.
IAA. The Company's subsidiary, IAA, specializes in knit tops and other general apparel items for the private label and retail markets focusing on customers such as Tommy Hilfiger, Calvin Klein, Express and J. Crew. IAA's sources its products in Mexico or the Orient.
Products
Innovo. The following are the principal products that Innovo distributes in the United States to the craft market or to the fashion and licensed accessory markets:
Craft Fashion Accessory Licensed Accessory Tote bags Tote bags Travel and tote bags Adult and children's aprons Beach bags Waist packs Christmas stockings Duffle bags Duffle bags Coolers Stadium totes/cushions Gourmet/BBQ aprons Insulated lunch bags Backpacks Soft coolers Pencil Cases Waist packs Purses and wallets Handbags
Joe's. Joe's Jeans focuses on the design of high-fashion women's and men's apparel products for distribution on a worldwide basis. The product line currently consists of the following:
Women Men Denim Jeans Denim Jeans Denim Skirts Denim Jackets Knit Shirts Handbags
IAA. IAA currently develops products primarily for the private label market. IAA's products consist of knit tops and bottoms for both the men's and women's markets. The product lines include, but are not limited to the following:
Tops Bottoms Knit Fashion Shirts Fleece Sweatpants Fashion T-shirts Knit Pants Basic T-shirts Fleece Sweatshirts Thermal Pullovers
Product Design.
Innovo. Innovo develops the designs and artwork for all products through its in-house design staff. Innovo markets its craft products, without artwork, to be sold for finishing by retail craft customers. Innovo's fashion and licensed accessory products are produced with the logos or other designs licensed from licensors or produced bearing the Company's own private brands.
Joe's. Joe's products are designed in house by Joe's designers. The design staff is headed by Joe Dahan, the creator of the Joe's brand.
IAA. IAA's products are designed by the IAA's merchandising staff or in conjunction with the design teams of the customer.
Licensing Agreements
Innovo. On March 26, 2001, Innovo entered into a licensing agreement with Candies Inc. ("Candies") pursuant to which Innovo obtained the right to design, manufacture and distribute bags, belts and small leather/pvc goods bearing the Bongo trademark. The agreement is to terminate on March 31, 2003 unless the Bongo brand is sold in its entirety, in which case the licensing agreement would terminate immediately. Innovo pays Candies a 5% royalty and a 2% advertising fee on the net sales of the Company's goods bearing the Bongo trademark. According to the terms of the licensing agreement, Innovo shall guarantee payment to Candies during the term of the agreement in an amount equal to or greater than $50,000 (5% of Minimum Net Sales of $1 million). In the event that prior to March 31, 2003, Innovo has failed to pay to Candies an amount equal or greater than $50,000, Innovo shall be obligated to pay to Candies the difference between the amount of the royalties actually paid to Candies during the period and $50,000. The licensing agreement does not grant the Company any renewal options.
Innovo's sports-licensed accessory products display logos, insignias, names, or slogans licensed from the various licensors. Innovo holds licenses for the use of the logos and names of the teams of the National Football League, Major League Baseball and over 130 colleges for various products.
Each of the sports-license agreements grant Innovo 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. While the Company is continuing to develop products bearing the sport licenses, the Company is placing more time and resources developing other product lines which the Company believes will have greater potential in the marketplace.
The following sets forth certain information concerning the license agreements currently held by the Company.
Licensor Types of Products Geographical Minimum Expiration Areas Royalties
Major League Tote, lunch, shoe and United States $15,000 12/31/02 Baseball laundry bags, stadium for 2002 seat cushions, sports bags and backpacks
National Tote, lunch, shoe and United States N/A 3/31/02 Football laundry bags, stadium League seat cushions, sports bags and backpacks
Cooleges/logos Tote, lunch, shoe and United States $8,000 12/31/02 of approx. laundry bags, stadium 130 colleges seat cushions, sports bags and backpacks
Bongo Bags, belts, small North & South $50,000 3/31/03 leather/pvc goods America and prior to U.S. expiration Territories
Innovo 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.
Innovo believes that it is in substantial compliance with the terms of all material licenses, excluding the sports licenses previously held for international markets. In the event the Company cannot successfully negotiate a reasonable settlement with certain international licensors, the Company has accrued for what it deems to be the reasonable expense or obligation associated with these licensing agreements.
Joe's. In February, 2001, the Company's Joe's Jeans subsidiary acquired the licensing rights to the JD logo and the Joe's Jeans trademark for all apparel and accessory products. The license agreement with JD Design, LLC, has a ten- year term with two ten-year renewal periods. Additionally, pursuant to the terms of the agreement, Joe Dahan is to receive a 3% royalty on the net revenues of Joe's.
Summary of Significant 2001 Developments
During fiscal 2001, the Company completed the transformation from a manufacturing based organization into a sales and marketing trading organization. The Company was able to accomplish this as a result of the closing of its manufacturing facilities in 2000 and the transactions completed with the Commerce Investment Group and its affiliates. The transition has allowed the Company to focus on increasing revenues without proportionately increasing expenses. It has also enabled management's to more effectively utilize the Company's assets.
In February 2001, the Company successfully launched Joe's Jeans, thus propelling the Company into the high-fashion denim business. Joe's has expanded the Company's customer base and has generated positive synergies between Joe's and the Company's existing divisions and product lines. Joe's is establishing brand recognition in the marketplace and the Company, based on the current success, believes that the brand has the ability to attract a strong worldwide audience. The Company intends to continue to expand the product lines beyond its existing offerings thus maximizing the equity of the Joe's brand.
The Company acquired the licensing rights to Joe's from JD Design, LLC ("JD"). In addition to the licensing rights to the Joe's Jeans label, the Company also acquired the rights to market the current product line and assumed existing sales orders in exchange for 500,000 shares of the Company's Common Stock and, if certain sales objectives are reached, a warrant, with a 4 year term, granting JD the right to purchase 250,000 shares of the Company's Common Stock priced at $1.00 per share. Additionally, Joe Dahan, the designer of the Joe's line, joined the Company as an employee and received an option to purchase an additional 250,000 shares of the Company's Common Stock at $1.00 per share, vesting monthly over 24 months. The options granted to Joe Dahan have a term of 4 years.
In the second quarter fiscal 2001, the Company's subsidiary Innovo, Inc., obtained the licensing rights to the Bongo trademark for bags, belts and small pvc/leather goods. Innovo has since successfully launched the line to major retailers across the country and is receiving a strong response in the marketplace. In an attempt to support the momentum of Innovo's Bongo line, the Company has opened an accessory showroom in New York City. The showroom is utilized to showcase the Company's Bongo products as well as Innovo's other accessory products.
In the third quarter of fiscal 2001, the Company acquired Azteca Productions International, Inc.'s knit division and formed the subsidiary Innovo-Azteca Apparel, Inc. IAA focuses on marketing and distributing knit products to private label customers such as Tommy Hilfiger, Calvin Klein, J. Crew and others. Management expects that IAA will increase the Company's revenues and should continue to enhance the Company's efforts to expand its customer base. The knit purchase agreement called for a two phase transaction with the second phase to result in the Company purchasing the then existing Azteca knit inventory. With the first phase closed, the second phase was scheduled to close prior to November 30, 2001 subject to the Company obtaining the necessary funding to purchase the goods. The second phase of the transaction did not close prior to November 30, 2001 and thus will not be completed.
The Company, in 2001, has made many improvements operationally and financially and management believes these advancements should lay the foundation for success in the future. As the Company's historical customer base and product lines continue to be strengthened, the Company is now positioned to take advantage of the blossoming Joe's Jeans division and the opportunities associated with IAA division.
Growth Strategy and Product Development
The Company believes that growth in its business can be accomplished through the increase in sales of its existing Innovo products and through its continued expansion into the apparel market. During 2001, the Company greatly increased the quality of its products, made significant advancements in the design of its products, greatly improved its customer base as a result of acquisitions and licensing agreements and increased the Company's product offerings.
More specifically, the Company believes that it can continue to increase sales of its craft products due to the high quality and competitive pricing of its p roducts as a r esult of the Company's strategic relationship with the Commerce Investment Group and its related parties. Innovo's growth with its accessory product lines will be based on the Innovo's ability to continue to increase the quality and design of its products, deliver competitive products in a timely fashion, maximize the Bongo product line and continue to grow its business with its private label customers.
The Company intends to establish itself as a significant player in the apparel market. The Company believes that Joe's has tremendous potential to generate substantial growth and profitability and the Company expects Joe's to play an important role in the Company's future development in the apparel arena. Additionally, management believes that IAA will allow the Company to penetrate new markets and expose the Company to the largest private label companies in the apparel industry. With the expertise acquired through the IAA acquisition and through the Company's strategic relationship with the Commerce Investment Group, management believes that the Company is well positioned to further penetrate the apparel industry.
The Company continues to review possible acquisition candidates in order to continue to increase its market share. The Company's growth plans are focused on internal as well as external growth and management intends to use its relationships and expertise to seek accretive acquisitions as part of its growth strategy.
Marketing and Customers
Innovo. During fiscal 2001, the Company's Innovo operations sold products to a mix of mass merchandisers (such as Wal-Mart), department stores, sporting goods stores, grocery stores, craft and drug store chains, mail order retailers and other retail accounts. The Company estimates that its products are carried in over 8,000 retail outlets in the United States. Generally the Company's accounts are serviced by the Company's sales personnel working with marketing organizations that have sales representatives which are Compensated on a commission basis.
In marketing its products, the Company attempts to emphasize the competitive pricing and quality of its products, its ability to assist customers in designing marketing programs, its short lead times, and the high sell-through its products have historically achieved.
For fiscal 2001, three customers accounted for aggregate sales in excess of 36.1% of gross sales: Wal-Mart, Michael's and Joannes accounted for 26.4%, 4.3% and 5.4%, respectively. Wal-Mart has continued to be a major customer for the Company and the loss of Wal-Mart as a customer would have a material adverse effect on the Company.
Joe's. Joe's customer base is high-end department stores and boutiques located throughout the world. Joe's products are currently sold through sales representatives' showrooms located in New York City and Los Angeles where customers review the latest collections offered by Joe's and place orders. The Company currently sells to such retailers as Barney's, Neiman Marcus, Saks Fifth Ave, Intermix and Fred Segal.
Late in fiscal 2001, the Company introduced the Joe's line into certain overseas markets. International customers are serviced as in-house accounts or through sales representatives in the foreign markets.
IAA. IAA develops apparel products, with a focus on knit tops, primarily for the private label market. The Company currently sells to or is developing products for customers such as American Eagle, Tommy Hilfiger, J. Crew, Express and other retailers who have their own private label brands.
IAA is currently relying on a few key customers for a majority of its business. During fiscal 2001, Tommy Hilfiger represented 100% of IAA's sales. The Company is currently focused on broadening IAA's customer base.
Backlog
Although the Company may at any given time have significant business booked in advance of ship dates, customers' purchase orders are typically filled and shipped within two to six weeks. As of December 1, 2001, there were no significant backlogs.
Sourcing
Innovo. Innovo's craft products are purchased from the Commerce Investment Group, which manufactures the Company's products primarily in Mexico, with Innovo obtaining its accessory products from overseas suppliers through short term manufacturing agreements. The Company is obligated, as defined in the supply agreement with the Commerce Investment Group, to purchase all of its craft products from the Commerce Group through August of 2002. The independent contractors that manufacture Innovo's products are responsible for obtaining the necessary supply of raw materials and for manufacturing the products to Innovo's specifications. While Innovo attempts to mitigate its exposure to manufacturing, the use of independent contractors does reduce Innovo's control over production and delivery and exposes Innovo to the other usual risks of sourcing products from independent suppliers. Innovo does not have any long-term supply agreements with independent overseas contractors, notwithstanding the production agreement with the Commerce Investment Group, but believes that there are a number of contractors that could fulfill Innovo's requirements. See "Certain Relationships and Related Transactions".
Innovo has generally utilized overseas contractors that employ production facilities located in China. As a result, the products manufactured for Innovo are subject to export quotas and other restrictions i mposed by the Chinese government. To date the Company has not been adversely affected by such restrictions; however, there can be no assurance that future changes in such restrictions by the Chinese government would not adversely affect Innovo, even if only temporarily while Innovo shifted production to other countries or regions such as Mexico, Korea, Taiwan or Latin America. It is anticipated that in fiscal 2002 more than 75% of Innovo's sales will be imported products which are subject to United States import quotas, inspection or duties.
Joe's. Joe's products are sourced through Azteca Production International, Inc., an affiliate of the Commerce Investment Group or domestic contractors generally located in the Los Angeles area. Joe's staff, however, controls the production schedules in order to secure quality and on time deliveries. The Company is currently reviewing the option of sourcing products from international sources.
IAA. IAA's products are sourced from Mexico through independent contractors. IAA currently controls the production process through its Los Angeles staff. The Company constantly reviews alternative foreign sourcing possibilities, but with IAA's knowledge of the Mexican production market, the Company is usually able to provide its customers with competive pricing and is able do so in a timely manner.
The Company is currently heavily reliant on the Commerce Investment Group's ability to source and supply the Company's products. The Company expects its reliance on Commerce Investment Group to decrease in the future as the Company begins to purchase more of its products from third party suppliers. During 2001, the Company purchased $5,216,000 or 82% of its products from Commerce Investment Group.
Competition
The industries in which the Company operates are fragmented and highly competitive. The Company competes against a large number of marketing organizations and importers, and other generally small companies that distribute products similar to the Company's. The Company does not hold a dominant competitive position, and its ability to sell its products is dependent upon the anticipated popularity of its designs, the brands its products bear, the price and quality of its products and its ability to meet its customers' delivery schedules.
The Company believes that it is competitive in each of the above-described 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. However, many of the Company's competitors possess substantially greater financial, technical and other resources than the Company, including the ability to implement more extensive marketing campaigns.
Intellectual Property
Innovo's fashion line includes tote bags imprinted with the E.A.R.T.H. ("EVERY AMERICAN'S RESPONSIBILITY TO HELP") BAG trademark. E.A.R.T.H. Bags are marketed as a reusable bag that represents an environmentally conscious alternative to paper or plastic bags. Sales of E.A.R.T.H. Bags, while significant in Innovo's early years, have not been significant in the last five years. The Company still considers the trademark to be a valuable asset, and has registered it with the United States Patent and Trademark Office.
The Company has also applied for a trademark for its product lines known as "Friendship", "Clear Gear" and "Toteworks". The Company anticipates that these trademarks will be registered during 2002.
Employees
As of February 17, 2002, the Company employed 45 fulltime employees. Innovo Group Inc. accounted for 3 of the employees, Innovo employed 15 individuals including 3 individuals in Innovo's New York showroom, Joe's employed 14 individuals out of its Los Angeles offices, and IAA employed 13 individuals.
ITEM 2.
ITEM 2. PROPERTIES
The Company's Tennessee sales and marketing headquarters is located in approximately 5,000 square feet of office spaces located near downtown Knoxville, Tennessee. The Company pays $3,500 per month, triple net for the office space. The space being leased in Knoxville is owned by an entity that is controlled by the Company's Chairman.
The Company's Los Angeles offices are located in an office complex located in Commerce, CA. The Company occupies the space under an agreement with Azteca Productions International, Inc., an affiliate of the Commerce Investment Group with a reasonable allocation being allotted to the Company depending upon the amount of space used by the Company.
The Company currently leases office space for its Innovo accessory showroom in New York City on an annual basis. The Company pays $2,888 a month for the property. The showroom is located at 10 West 33rd Street, Suite 1118, New York, NY, 10001.
Joe's products are displayed in showrooms in New York City and Los Angeles through a sales representation arrangement, thus the Company does not lease or own the space in which Joe's products are sold.
The Company's previous headquarters and manufacturing facilities were located in Springfield, Tennessee. The Springfield facilities are currently owned by Leaseall Management, Inc. ("Leaseall"), a wholly owned subsidiary of Innovo Group, Inc. The main Springfield complex is situated on seven acres of land with approximately 220,000 square feet of usable space, including 30,000 square feet of office space and 35,000 square feet of cooled manufacturing area. A warehouse annex contained 30,000 square feet. First Independent Bank of Gallatin, Tennessee holds a First Deed of Trust on the Springfield real property. The Springfield facilities are currently being leased with approximately 15% of the facilities being leased as of December 1, 2001.
On May 25,2001, the Company sold the Company's Good Deal Mall property located in Lake Worth, FL for gross proceeds of $1,175,000 to an outside third party. After the extinguishment of $657,000 of debt associated with the property, paying sales commissions, closing fees and property taxes, the Company recognized a small book gain on the sale of the property. The Good Deal Mall was originally established by the Company to serve as a retail outlet for the Company's products.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits and other contingencies in the ordinary course of its business. The Company does not believe that it is probable that the outcome of any individual action will have a material adverse effect, or that it is likely that adverse outcomes of individually insignificant actions will be sufficient enough, in number or magnitude, to have a material adverse effect in the aggregate on the Company's financial condition.
In December 1991, a former employee filed suit against the Company, Patricia Anderson-Lasko and others alleging breach of an employment agreement and conversion of his interest in certain property rights (Michael J. Tedesco v. Innovo, Inc., et al., Case No. 91-64033, District Court of Harris County, Texas, 164th Judicial Circuit). Following an appeal and a second trial, a final judgment was rendered against Innovo for $194,045 on August 17, 1998. Thereafter, 20,000 shares of Common Stock that had been held in the registry of the court, as security during the appeal and subsequent trial, were released to the plaintiff. During the second quarter 2001, the Company reached an agreement with the plaintiff whereas the judgment was settled for $205,000 and the outstanding 20,000 shares of Common Stock previously released to the plaintiff.
In December 1999, the American Apparel Contractors Association Workers' Compensation Fund filed suit against the Company's Thimble Square subsidiary for approximately $13,000 plus interest of 1.5% per month from the due date (American Apparel Contractors Association Workers' Compensation Self-Insured Fund v. Thimble Square and Innovo Group). This amount represents the allocation to Thimble Square of the excess workers' compensation claims paid under the plan. The Company has not accrued for the disputed funds in this case and does not believe that Company has any liability associated with the claim.
In March 2001, the Company received notice from Z-Tex, a former vendor of the Company, claiming that the Company owes Z-Tex $36,054 based on a payment arrangement the two parties entered into in May of 1998. The claim was settled during the second quarter of 2001 for $18,000.
During the fourth quarter of 2001, Levi Strauss & Co. filed a trademark infringement suit against Joe's Jeans, Inc. and Innovo Group Inc.. Levi's is alleging that the stitching and pocket design on Joe's Jeans jeans is in violation of the Levi's trademarked stitching design. While the Company believes that it has meritous defenses to Levi's claims, the Company has concluded that it is not financially advantageous to defend against Levi's claims. As such, the Company, through its counsel, has approached Levi's with the proposed modifications to the stitching on the Joe's Jeans jean's pockets and other terms and conditions under which the Company would be willing to settle the claims. Levi's has agreed in principal to the modifications, and the Company believes that the suit will be settled consistent therewith. The Company does not believe there will be any monetary consequences as a result of the suit other than the legal fees required to defend against the suit.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of a security holders during the Company's fourth fiscal quarter.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently traded under the symbol "INNO" on the Nasdaq SmallCap Market maintained by The Nasdaq Stock Market, Inc ("Nasdaq"). The following sets forth the high and low bid quotations for the common stock in such market for the periods indicated. This information reflects inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. No representation is made by the Company that the following quotations necessarily reflect an established public trading market in the Common Stock.
Fiscal 2001 High Low
First Quarter $1.156 $0.813 Second Quarter 1.12 1.03 Third Quarter 2.06 1.23 Fourth Quarter 2.67 2.25
Fiscal 2000 High Low
First Quarter $1.59	 $1.03 Second Quarter 2.12 0.87 Third Quarter 1.43 0.81 Fourth Quarter 1.18 0.78
Fiscal 1999	 High Low
First Quarter $3.94	 $1.09 Second Quarter 2.56 1.31 Third Quarter 2.75 1.09 Fourth Quarter 3.00 1.50
As of March 1, 2002, there were approximately 900 record holders of the Common Stock.
The Company has never declared or paid a cash dividend and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In deciding whether to pay dividends on the Common Stock in the future, the Company's Board of Directors will consider factors it deems relevant,including the Company's earnings and financial condition and its capital expenditure requirements.
In July 1997, the Securities and Exchange Commission and Nasdaq announced revised standards for listing on the Nasdaq SmallCap Market that required that a company's listed securities trade for not less than $1.00 per share and that the company have net tangible assets (total assets, excluding goodwill, minus total liabilities) of at least $2,000,000. The change became effective in February 1998.
Although the Company will continually use its best efforts to maintain its Nasdaq SmallCap listing, there can be no assurance that it will be able to do so. If in the future, the Company is unable to satisfy the Nasdaq criteria for maintaining listing, its securities would be subject to delisting, and trading, if any, the Company's securities would thereafter be conducted in the over-the-counter market, in the so-called "pink sheets" or on the National Association of Securities Dealers, Inc. ("NASD") "Electronic Bulletin Board." As a consequence of any such delisting, a stockholder would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices, of the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below (includes the notes hereto) sets forth a summary of selected consolidated financial data. The selected consolidated financial data should be read in conjunction with the related consolidated financial statements and notes thereto.
(1) The amounts for 1998 and 1997 represent the operations of Thimble Square. Thimble Square's operations were discontinued during the fourth fiscal quarter of 1998.
(2) Represents gains from the early extinguishment of debt in 1997 and the loss from the early extinguishments of debt in 2000.
(3) Amount includes a $300,000 write down o f long-term assets in 1998 and a $145,000 write down of long-term assets in 1999 as well as $293,000 for the termination of a capital lease and $100,000 for the settlement of a lawsuit in 1999, and a $600,000 write down of long-term assets in 2000.
ITEM 7.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Historically, the Company's operating losses have resulted from inadequate sales, limited production capacity, high internal production and operational costs and inadequate working capital. Management has been addressing these issues in an attempt to make the Company profitable. The Company has made significant changes in the operational and financial structure of the Company and believes that the changes discussed below will significantly improve the Company's ability to obtain profitability.
In 2001, the Company took advantage of the operational restructuring that occurred during the prior year. In 2000, the Company entered into a supply and distribution agreement with the Commerce Investment Group and its affiliates. Under the terms of the agreement, the Company will purchase from the Commerce Investment Group all of the products the Company previously manufactured domestically and the Commerce Investment Group will distribute all of the Company's products.
This group of transactions is significant because a large number of the historical problems of the Company can be attributed to the limited production and distribution capabilities of the Company's previous manufacturing operations, the overhead associated therewith and the lack of competitive pricing due to the higher cost of domestically manufactured goods.
Furthermore, these transactions allowed the Company to significantly reduce the headcount of the Company and downsize its operations, reducing its operational fixed expenses. The resulting operating model is one that is based on outsourcing all non-core competency functions to third parties. The Company believes that this structure will provide the Company with the necessary foundation to successfully support its operations going forward.
Additionally, during 2000 the Company entered into various equity transactions which have allowed the Company to meet its financial demands during 2001. As a result of these transactions, the Company has been able to reduce its debt and interest expense, decrease payables and increase its cash on hand. The equity transactions referred to above, while greatly improving the Company's financial health, may represent a change in control for income tax purposes which would have the effect of substantially limiting the availability and utilization of the Company's net operating losses for income tax purposes.
The Company's increase in revenues for 2001 is attributable to the Company's entry into the apparel business through the creation of the Company's two new subsidiaries Joe's Jeans, Inc. ("Joe's") and Innovo-Azteca Apparel, Inc. ("IAA"). Joe's markets high-end fashion products to both domestic and international retailers. IAA markets and sources knit apparel products for the private label market. As the Company moves forward, the Company anticipates that its apparel divisions will play a significant role in the Company's growth process. The growth is expected to come from within the Company's existing apparel divisions as well as through licensing agreements and acquisitions.
While the Company's revenues on an existing product line basis were flat for the year, the Company has established the groundwork that it believes will lead to growth in 2002. The Company has greatly increased its presence in the craft market as a result of the Company's ability to provide an improved product at a lower cost. Furthermore, in 2001 the Company obtained the licensing rights for Bongo accessories, and subsequently therewith, successfully launched a line of Bongo bags in the retail market. While the Company continues to develop its other accessory product lines, the Company has begun to place additional focus on the fashion market and private label customers thus allowing the Company to maximize its expertise in developing and sourcing fashion accessory products.
The developments in 2001 have postured the Company to move forward. The Company has addressed its production and financial shortcomings and has begun to take the necessary steps to generate the revenues necessary to pull the Company to profitability.
Results of Operations
The following table sets forth certain statement of operations data for the years indicated:
Years Ended
12/01/01 11/30/00 11/30/99 -------- -------- -------- Net Sales $ 9,292 $ 5,767 $10,837 Costs of Goods Sold 6,333 5,195 6,252 ------ ------ ------ Gross Profit 2,959 572 4,585
Selling, General & Administrative 3,191 4,147 4,963 Write down of long-term assets -- 600 145 Termination of a Capital Lease -- -- 293 Other -- 116 -- Depreciation & Amortization 167 250 287 ------ ------ ------
Loss from Operations (399) (4,451) (1,103)
Interest Expense (211) (446) (517) Other Income (expense) 81 (69) 279 ------ ------ ------ Loss Before Income Taxes and extraordinary items (529) (5,056) (1,341) Income Taxes 89 -- -- ------ ------ ------
Loss before extraordinary (618) (5,056) (1,341) ------ ------ ------
Extraordinary Item -- (1,095) -- ------ ------ ------ Net Loss $ (618) $(6,151) $(1,341)
Comparison of Fiscal Year Ended December 1, 2001, to Fiscal Year Ended November 30, 2000
Net sales for the year ended December 1, 2001 increased $3,525,000 or 61.1% from $5,767,000 in 2000 to $9,292,000 in 2001. While internal growth remained flat in 2001, the increase in sales can be attributed to the Company's two new apparel subsidiaries Joe's Jeans and Innovo Azteca Apparel (IAA). These two new apparel divisions accounted for combined sales of $3,650,000. Since the acquisitions of the licensing rights in February of 2001, Joe's Jeans sales for the period totaled $1,520,000. Additionally, IAA's revenues since August of 2001, totaled $2,130,000.
The Company's gross margin percentage increased from 9.9% in 2000 to 31.8% in 2001. The increase is attributable in part to a $300,000 inventory adjustment in 2000 for liquidated inventory, thus increasing the cost of goods. Also, as a result of closing its manufacturing and distribution operations, the Company wrote off $250,000 of capitalized overhead that was associated with its production facility and the manufacturing process. These adjustments, coupled with the advantages of the Company's strategic partners purchasing power on Innovo Inc.'s (II) crafts, improved pricing on II's products sourced out the Orient, and Joe's high-margins account for the increase in the gross margin percentage.
Selling, General and Administrative expenses decreased in 2001 by 23.1% from $4,147,000 in 2000 to $3,191,000 in 2001. The change in Selling, General and Administrative expense resulted primarily from the Company's new business model which attempts to outsource all non-core operating functions. Additional savings resulted from the Company's restructuring and reduction in headcount, which commenced in 2000 and ended in 2001.
Depreciation and Amortization expenses were not significantly different from 2000 to 2001 due to the lack of significant purchases of fixed assets and intangible assets during 1999.
Interest expense for the year ended December 1, 2001 decreased by $235,000 to $211,000 as a result of decreased borrowing from the Company's factoring facility and the Company's higher cash reserves offset by interest on $3.6 million of debt related to the knit division acquisition.
Other Income (expense) was income of $81,000 in 2001 compared to expense of $69,000 in 2000. The increase can largely be attributed to rental income of approximately $70,000 derived from tenants in the Company's former headquarters in Springfield, TN and other miscellaneous income of $12,000, offset by a $2,000 loss on the sale and/or disposal of the equipment resulting from the closure of the Company's manufacturing facility and sale of the Company's Florida property.
Comparison of Fiscal Year Ended November 30, 2000 to Fiscal Year Ended November 30, 1999
Net sales for the year ended November 30, 2000 decreased $5,070,000 or 46.8% from $10,837,000 in 1999 to $5,767,000 in 2000. The decrease in sales can largely be attributed to the Company's inability to meet customer demand as a result of labor and production shortages, a large premium order of $2.5 million placed in 1999 but not repeated in 2000, a decrease in the sales of clear backpacks and sports bags in 2000 compared to 1999, non-competitive pricing, an increase in customer discounts and allowances and the reduction in sales and marketing staff in an attempt to reduce costs and focus the Company's sales and marketing efforts on its core products and key customers.
Customer discounts and allowances recorded as a reduction of net sales increased by $590,000 during 2000. The increase is substantially due to the Company recording advertising and other allowances that are based on a percentage of a customer's sales as a reduction of net sales whereas in prior periods such amounts were recorded as selling expenses. The 1999 and 1998 statements of operations have not been adjusted to reflect the 2000 presentation of sales allowances as the information for those periods was not tracked by the Company in a manner that would allow for an accurate reclassification of prior period amounts and in any event management believes that such amounts were not material to the 1999 and 1998 statements of operations.
The Company's gross margin percentage decreased 32.4% from 42.3% in 1999 to 9.9% in 2000. The reduction is attributable to a decrease in the sales of high margin imported products in 2000 compared to 1999 and the high cost of goods manufactured and distributed domestically during the first 10 months of 2000. Additionally, with the closure of the Company's domestic manufacturing and distribution operations in October of 2000, the Company concluded that it was more cost effective to liquidate certain inventories as opposed to incurring the costs associated with shipping the products to the Company's new distribution center in Los Angeles, CA. Consequently, the Company took a $300,000 inventory adjustment for liquidated inventory thus increasing the cost of goods sold. The Company's cost of goods sold, as a result of closing its manufacturing and distribution operations, further increased in 2000 by $250,000 due to the write off of capitalized overhead that was associated with its production facility and the manufacturing process. In addition, during 2000, the Company recorded approximately $250,000 of expenses related to advertising allowances granted to its customers as a reduction of sales, as the allowances were based on a percentage of the customers' purchases.
Selling, General and Administrative expenses decreased in 2000 by 16.4% from $4,963,000 in 1999 to $4,147,000 in 2000. The change in Selling, General and Administrative expense resulted primarily from decreases in both fixed and variable costs as the Company downsized due to a lack of working capital as well as expense savings realized as a result of the closing of the Company's manufacturing facilities. In addition, as discussed above the Company's Selling, General and Administrative expenses decreased by approximately $250,000 as a result of the reclassification of advertising allowances as a reduction of sales and not as a component of Selling, General and Administrative expenses. As a result of closing its manufacturing and distribution facilities in 2000, the Company incurred $116,000 of expenses associated with the factory shutdown.
Under the guidelines of SFAS 121 the Company recorded a $600,000 impairment loss representing a valuation adjustment on a building and parcel of real estate the Company owns. The property and improvements are currently listed for sale and the Company is currently in negotiations with multiple buyers who are interested in purchasing the property. Due to the fact the Company ceased manufacturing and no longer used certain manufacturing equipment, the Company incurred $99,000 of other expense upon the disposal of the manufacturing machinery and equipment in 2000.
Depreciation and Amortization expenses were not significantly different from 1999 to 2000 due to the lack of significant purchases of fixed assets and intangible assets during 1998.
Interest expense for the year ended November 30, 2000 decreased by $71,000 to $446,000 as a result of decreased borrowing from the factor due to decreased sales and lower average outstanding indebtedness due to the conversion of $2,000,000 of debt to equity.
Other Income (expense) was expense of $69,000 in 2000 compared to income of $280,000 in 1999. The decrease can largely be attributed to the fact that in 1999 the Company received income under a warehousing agreement between the Company and Z. Metro, Inc., an unrelated company. Other expense in 2000 is comprised of the income derived from tenants in the Company's former headquarters in Springfield, TN and royalties paid to the Company pursuant to a licensing arrangement with the Accessory Network Group, offset by a $99,000 loss on the sale and/or disposal of the equipment resulting from the closure of the Company's manufacturing facility. The Company does not expect to receive royalties from the Accessory Network Group in 2001 due to the decrease in sales by the Accessory Network Group of the licensed products subject to the licensing agreement. In addition, the Company incurred $99,000 of other expense in 2000 related to the disposal of fixed assets.
Seasonality
The Company's business is seasonal. The majority of the marketing and sales activities take place from late fall to early spring. The greatest volume of shipments and sales are generally made from late spring through the summer, which coincides with the Company's second and third fiscal quarters and the Company's fiscal year. Cash flow is strongest in the Company's third and fourth fiscal quarters. During the first half of the calendar year, the Company incurs the expenses of maintaining corporate offices, administrative, sales employees, and developing the marketing programs and designs for the majority of its sales campaigns. Inventory levels also increase during the first half of the year in anticipation of sales during the third and fourth quarters. Consequently, during the first half of each calendar year, corresponding to the Company's first and second fiscal quarters, the Company utilizes substantial working capital and its cash flows are diminished, whereas the second half of the calendar year, corresponding to the Company's third and fourth fiscal quarters, generally provides increased cash flows and the build-up of working capital.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flows from operations, including credit from vendors and borrowings from the factoring of accounts receivables and cash obtained from the sale of the Company's Common Stock.
The Company relied on three primary sources to fund operations during fiscal 2001:
1.	An accounts receivable factoring agreement with CIT Group, Inc. ("CIT") 2.	Cash reserves 3.	Trade credit with its domestic and international suppliers
Cash used in operating activities was $632,000 for the year ended December 1, 2001. The use of cash primarily resulted from the Company's net loss, an increase in accounts receivables of $882,000 and a reduction in accounts payable and accrued expenses of $1,064,000 offset by a decrease in inventory of $933,000 and an increase in amounts due to related parties of $698,000.
The Company's principal credit facility for working capital is its accounts receivable factoring arrangements. The Company, through its subsidiaries, entered into factoring agreements with CIT. According to the terms of the agreements, the subsidiaries have the option to factor their receivables with CIT on a non-recourse basis. The agreements call for a 0.8% factoring fee on invoices factored with CIT and a per annum rate equal to the prime rate plus 0.25% on funds borrowed against the factored receivables. The CIT agreements may be terminated by CIT with 60 days notice by CIT, or on the anniversary date, by the Company provided 60 days written notice is given.
The following table sets forth the Company's contractual obligations and commercial commitments as of December 1, 2001:
Contractual Obligations Payments Due by Period Total Less than 1-3 4-5 After 5 1 year years years years ----- --------- ----- ----- ----- Long Term Debt $4,225 $ 845 $2,454 $ 926 $ -- Operating Leases 425 78 144 84 119 Other Long Term Obligations-Minimum Royalties 73 23 50 -- --
The Company believes that the existing factoring relationships and cash reserves should provide sufficient working capital to fund operations during fiscal 2002 and the Company's internal growth. However, due to the seasonality of the Company's business and negative cash flow during certain periods during the year, the Company may be required to obtain additional capital through debt or equity financing. The Company believes that any additional capital, to the extent needed, may be obtained from the sale of equity securities or through short-term working capital loans. However, there can be no assurance that this or other financing will be available if needed. The inability of the Company to be able to fulfill any interim working capital requirements would force the Company to constrict its operations. The Company intends to pursue acquisitions which may result in the Company raising additional capital through debt or equity financing.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, (FAS 141) and No. 142, (FAS 142), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 1, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company has applied the non-amortization provisions of FAS 141 for acquisitions occurring after June 30, 2001 and will apply the provisions of the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the non- amortization provisions of the Statement is not expected to result in a material change to net income. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard sets forth the impairment of long-lived assets, whether they are held and used or are disposed of by sale or other means. It also broadens and modifies the presentation of discontinued operations. The standard will be effective for the Company's fiscal year 2003, although early adoption is permitted, and its provisions are generally to be applied prospectively. The Company is in the process of evaluating the adoption of this standard, but does not believe it will have a material impact on its consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes its exposure to market risk is relatively low. The Company has no investments in derivative instruments. Transactions with foreign customers and suppliers are made in U.S. currency. The Company's primary exposure to market risk relates to outstanding borrowings with variable interest rate terms associated with the factoring of the Company's receivables.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" for the Company's financial statements and notes thereto, and the financial statement schedule filed on part of this report.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the persons elected as Directors of the Company as of February 12, 2002.
Name Age Position with the Company
Samuel J. (Sam) Furrow Sr. (2) 60 Chairman of the Board, and Director
Patricia Anderson-Lasko	 42	 Chief Executive Officer; Director
Samuel J. (Jay) Furrow, Jr. 28 President, Director and Acting Chief Financial Officer
Daniel A. (Dan) Page (1)(2) 51 Director
Marc B. Crossman (1) 30 Director
John G. Looney, MD (1)(2) 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.
Following is information with respect to the business experience for at least the last five years and certain other information regarding each of the nominees for election as a Director.
Samuel J. (Sam) Furrow became a Director in April 1998 and the Company's Chairman and Chief Executive Officer in October 1998. He served as Chief Executive Officer until December, 2000, when Ms. AndersonLasko resumed that position. Mr. Furrow has also been the Chairman of Furrow Auction Company (a real estate and equipment sales company) since April 1968, Chairman of Furrow- Justice Machinery Corporation (a six-branch industrial and construction equipment dealer) since September 1983, Owner of Knoxville Motor Company- Mercedes Benz since December 1980 and of Land Rover of Knoxville since July 1997. Mr. Furrow has been a Director of Southeastern Advertising Inc. (an advertising agency) since April 1968, a Director of First American National Bank since September 1993, and of Goody's Family Clothing, Inc, a publicly traded retail clothing store chain, since 1995. Sam Furrow is Jay Furrow's father.
Patricia Anderson-Lasko has been President and a Director of the Company since August 1990 and President of the Company's Innovo, Inc. subsidiary since she founded that company in 1987. From August 1990 until August 1997, Ms. Anderson-Lasko was also the Chairman and Chief Executive Officer of the Company, and she reassumed to title of Chief Executive Officer in December, 2000.
Daniel A. Page was the chief operating officer of the Company from August 1997 through April 1999 and has been a Director of the Company since August 1997. From June 1993 until August 1997, Mr. Page was the principal operating and executive officer of Southeast Mat Company, a privately held manufacturer of automobile floor mats. Prior thereto Mr. Page was the president of Tennessee Properties Company, a privately held real estate development company.
Samuel J. (Jay) Furrow, Jr. became the Company's Vice President for Corporate Development and In-House Counsel in July 1998 and a Director in January 1999. He has also served as the Company's Chief Operating Officer since April 1999 and its Acting Chief Financial Officer since August 2000. Mr. Furrow is an attorney. Prior to joining the Company, Mr. Furrow attended the Southern Methodist University School of Law beginning in August of 1995 and graduating with a J.D. in May 1998. Mr. Furrow attended Vanderbilt University beginning in 1991 and graduating with a BS degree in Political Science in 1995. Jay Furrow is Sam Furrow's son, and the President of StanRo Development, a real estate development company. Mr. Furrow assumed the role of President in December of 2000.
Marc B. Crossman has been a Director since January 1999. Mr. Crossman has also been a Vice President and Equity Analyst with J.P. Morgan Securities Inc., New York, New York, since January 1999, and was previously a Vice President and Equity Analyst with CIBC Oppenheimer Corp. from September 1997 through January 1999 and an Associate and Equity Analyst with Dain Rauscher Wessels from November 1994 through September 1997.
John G. Looney, MD has been a Director since August 1999. Dr. Looney is a psychiatrist employed by the Duke Medical Center since 1986. Dr. Looney just completed a role as Medical Director of Peninsula Behavioral Health, a multi- hospital psychiatric treatment system in East Tennessee. He was responsible for building the clinical programs of this large enterprise. Dr. Looney is currently working with Carolinas' Medical Center in Charlotte, North Carolina, pursuant to a contract between the Duke Medical Center and Carolinas' Medical Center. He also participates in a variety of venture capital investments independent of Duke, Carolinas' Medical Center and the Company.
Each of the Company's Directors is elected at the annual meeting of stockholders and serves until the next annual meeting and until a successor has been elected and qualified or their earlier death, resignation or removal. 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.
Commerce and Mizrachi Group Stock Purchase Agreements
In connection with investments by the Commerce Investment Group during August 2000, the Company has agreed to appoint to the Board of Directors and each of it committees one person designated by Mr. Guez. Mr. Guez has not designated a Board member at this time. In connection with additional investments made in 2000, Mr. Guez is entitled to designate two additional Board members. The Company has also agreed to appoint to the Board of Directors and each of it committees one person designated by Mr. Mizrachi. Mr. Mizrachi has not appointed a member at this time. The Company has also amended its Bylaws to provide that the number of Company directors will be between three and seven, with the exact number to be specified by the Board of Directors, until November 1, 2000, and that from November 2, 2000 until November 1, 2003, the number of members of the Board of Directors will be between three and twelve, with the exact number to be designated by the Board of Directors.
Corporate Governance and Other Matters
The Board of Directors conducts its business through meetings and through its committees. The Board of Directors acts as a nominating committee for selecting candidates to stand for election as Directors. Other candidates may also be nominated by an y stockholder, provided such other nomination(s) are submitted in writing to the Secretary of the Company no later than 120 days prior to the anniversary date of the prior year's annual meeting of stockholders at which Directors were elected, or such earlier date as the Board of Directors may allow, together with the identity of the nominator and the number of shares of the Company's stock owned, directly and indirectly, by the nominator. No such nominations have been received as of the date hereof in connection with the Annual Meeting.
The Board of Directors currently has two committees, the Audit Committee and the Executive Compensation Committee.
The Audit Committee is primarily responsible for (i) monitoring the integrity of the Company's financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance, (ii) monitoring the independence and performance of the Company's independent auditors and internal auditing department, and (iii) providing an avenue of communication among the independent auditors, management, the internal auditing department, and the Board. The Audit Committee has a charter that details its duties and responsibilities. The current members of the Audit Committee are Dr. Looney and Messrs. Page and Crossman. The Executive Compensation Committee reviews and recommends the compensation arrangements for management of the Company. The current members of the Executive Compensation Committee are Dr. Looney and Messrs. Page and Sam Furrow. The Executive Compensation Committee also administers the Company's 2000 Employee Stock Incentive Plan and 2000 Director Stock Incentive Plan.
Pursuant to Nasdaq listing requirements, Innovo maintains an Audit Committee of its Board of Directors that is composed of three directors. As permitted by a listing requirements exception, two of the committee members are "independent" under Nasdaq guidelines while the third member, Dan Page, is not independent under the guidelines becuase he has been an Innovo employee within the prior three years. With the remaining Board members being current employee's of the Company and due to Mr. Page's operational knowledge of the Company, Innovo's Board of Directors determined that it is in the best interest of the Company and its stockholders that Mr. Page serve as a member of the Audit Committee and we are providing this letter to you to inform you of that determination as specified by the listing requirements.
Each of Messrs. Guez and Mizrachi is entitled to designate members of each Board committee. See "Commerce and Mizrachi Group Stock Purchase Agreements" above.
During the year ended December 1, 2001, the Board of Directors held 2 meetings. During the same period, the Executive Compensation Committee met once and the Audit Committee met 5 times. No incumbent Director attended fewer than 75% of the total number of meetings of the Board of Directors and committees of the Board of Directors on which he served.
Director Compensation
Directors who are not employees of the Company do not currently receive a cash fee for attending meetings of the Board of Directors or its committees. Mr. Page received a grant of nonqualified stock options to purchase 120,000 shares of Common Stock at an exercise price of $3.31 per share upon becoming a Director in August 1997. All of such options are vested.
Sam Furrow received a grant of nonqualified stock options to purchase 100,000 shares of Common Stock at an exercise price of $4.75 per share upon becoming a Director in March 1998. Jay Furrow received a grant of nonqualified stock options to purchase 100,000 shares of Common Stock at an exercise price of $4.75 per share upon becoming a Director in February 1999. Mr. Crossman received a grant of nonqualified stock options to purchase 100,000 shares of Common Stock at an exercise price of $4.75 per share upon becoming a Director in February 1999. The options vest and become exercisable at the rate of 2,083 shares per month served.
Each non-management member of the Board of Directors also receives annual compensation in the form of options to buy Common Stock with a nominal initial value of $10,000. Each option has an exercise price equal to one-half of the market price on the date of grant, and covers a number of shares equal to $10,000 divided the exercise price per share. See "2000 Director Stock Option Plan" below.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation paid to the Chief Executive Officers of the Company during 2001 and to the other executive officer of the Company who received annual compensation in excess of $100,000 during 2001 (the "Named Executive Officers") during fiscal years 2001, 2000 and 1999.
(1) No executive officers received or held restricted stock awards during fiscal 2001, 2000, or 1999.
(2) Mr. Sam Furrow's employment by the Company began in October 1998 with no salary and served as CEO until December 2000. Mr. Furrow received a grant of nonqualified stock options to purchase 100,000 shares of Common Stock at an exercise price of $4.75 per share upon becoming a Director in March 1998. The options vest and become exercisable at the rate of 2,083 per month through 2002.
(3) During fiscal 1999 Ms. Anderson-Lasko received life insurance benefits in the aggregate amounts of $509. Ms. Anderson-Lasko became CEO in December 2000.
Option Grants. During 2001, Pat Anderson and Jay Furrow received 300,000 and 150,000 options priced at $1.25 with an expiration date of June 5, 2005.
Aggregated Option/SAR Exercised in 2001 and Year-end Option/SAR Values
(1) Based on a closing price per share of $1.96 for the Common Stock on December 1, 2001 as reported by the Nasdaq SmallCap Market.
2000 Employee Stock Incentive Plan
The 2000 Employee Stock Incentive Plan (the "2000 Employee Plan") provides for the grant of options to officers, employees and consultants of the Company and its affiliates (an Affiliate"). The 2000 Employee Plan continue in effect until March 2010, unless terminated earlier. Options granted under the 2000 Employee Plan may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options.
The 2000 Employee Plan was adopted by the Company's Board of Directors on March 12, 2000 and approved by stockholders at the 1999 annual meeting. Up to 2,000,000 shares of Common Stock, subject to adjustment as provided in the 2000 Employee Plan, may be issued under the 2000 Employee Plan.
2000 Director Stock Incentive Plan
The 2000 Director Stock Incentive Plan (the "2000 Director Plan") provides for the automatic grant of options to directors of the Company and its affiliates and subsidiaries (an "Affiliate") in place of director's fee payable in cash. The 2000 Director Plan will continue in effect until September 2010, unless terminated earlier. Options granted under the 2000 Director Plan are nonqualified stock options.
The 2000 Director Plan was adopted by the Company's Board of Directors on September 13, 2000 and approved by stockholders at the 1999 annual meeting. A total of 500,000 share of Common Stock, subject to adjustment as provided in the 2000 Director Plan, may be issued pursuant to the 2000 Director Plan.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of March 1, 2002 concerning beneficial ownership of Common Stock by (1) each person or entity known by the Company to beneficially own more than 5% of the outstanding Common Stock, (2) each Director and nominee for election as a Director of the Company, (3) each Named Executive Officer, and (4) all Directors and executive officers of the Company as a group. The information as to beneficial ownership has been furnished by the respective stockholders, Directors and executive officers of the Company, and, unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned.
Name and 		 Shares Beneficially Owned (1) Offices				 Number			 Percent
Samuel J. (Sam) Furrow 3,496,114(2)(9) 18.9% Chairman and Director 2633 Kingston Pike, Suite 100 Knoxville, Tennessee 37919
Hubert Guez 6,746,637(3) 31.3% 5804 East Slauson Avenue Commerce, California 90040
Patricia Anderson-Lasko	 550,000(4) 3.56% Chief Executive Officer and Director 2633 Kingston Pike, Suite 100 Knoxville, Tennessee 37919
Daniel A. (Dan) Page 472,774(5)(9) 3.55% Director 2633 Kingston Pike, Suite 100 Knoxville, Tennessee 37919
Samuel J. (Jay) Furrow, Jr. 1,588,701(6) 9.62% President and Acting Chief Financial Officer, and Director; 2633 Kingston Pike, Suite 100 Knoxville, Tennessee 37919
Marc B. Crossman 117,684(7)(9) * Director 2633 Kingston Pike, Suite 100 Knoxville, Tennessee 37919
John G. Looney, MD 160,041 1.06% Director 2633 Kingston Pike, Suite 100 Knoxville, Tennessee 37919
Joseph Mizrachi 2,738,500(8) 15.5% 6971 N. Federal Highway, #203 Boca Raton, Florida 33487
Joe Dahan 653,809(10) 4.19% 5900 S. Eastern Commerce, CA 90040
All Executive Officers 7,039,123(2)(4)(5)(6)(7) 32.1% and Directors as a Group (7 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. Percentages are calculated based on 14,921,264 shares outstanding as of March 1, 2002.
(2) Includes 100,000 shares subject to currently exercisable options and 750,000 shares subject to exercisable warrants with a 3-year term expiring October 2003 and an exercise price of $2.10 per share.
(3) Includes 500,000 shares held of record by SHD Investments, LLC, of which Mr. Guez's brother is the Manager, 250,000 shares held of record by each to two trusts for Mr. Guez's sons and of which Mr. Guez's mother is trustee, and 1,863,637 held of record by Commerce Investment Goup, LLC, of which Mr. Guez is the Manager (collectively, the "Commerce Group"). Mr. Guez disclaims beneficial ownership the shares held by SHD Investments, LLC and the trusts for his sons. Also includes 3,000,000 shares subject to immediately exercisable warrants with a purchase price of $2.10 per share and 200,000 shares subject to warrants with a purchase price of $2.10 per share that become exercisable over two years. Also included is 700,000 shares owned by Azteca Production International, Inc., of which Mr. Guez is an owner.
(4) Includes 250,000 shares purchased by Ms. Anderson-Lasko pursuant to the 1997 Stock Purchase Right Award, awarded to her in February 1997. Under the terms of the 1997 Stock Purchase Right Award, Ms. Anderson-Lasko was permitted to, and elected to, pay for the purchase of the 250,000 shares (the "1997 Award Shares") by the execution of a non-recourse note (the "Note") to the Company for the exercise price of $2.8125 per share ($703,125) in the aggregate). The Note is due, without interest, on April 30, 2002, and is collateralized by the 1997 Award Shares purchased therewith. Ms. Anderson-Lasko may pay or prepay (without penalty) all or any part of the Note by (i) the payment of cash, or (ii) the delivery to the Company of other shares of Common Stock (other than the 1997 Award Shares) that Ms. Anderson-Lasko has owned for a period of at least six months, which shares would be credited against the Note on the basis of the closing bid price for the Common Stock on the date of delivery. The 1997 Award Shares will be forfeited and returned (at the rate of one shares per $2.8125) to the Company to the extent the Note is not paid on or before its maturity; accordingly, the number of shares owned by Ms. Anderson-Lasko could decrease in the future.
Also includes 300,000 shares subject to exercisable options pursuant to a 400,000 option grant of nonqualified options made in June 2001 with an exercise price of $1.25 per share and expiring June 5, 2005.
(5) Includes 120,000 shares subject to exercisable options at an exercise price of $3.315 per share and expiring August 2002.
(6) Includes 100,543 shares subject to currently exercisable options and 750,000 shares subject to currently exercisable warrants with a 3-year term expiring October 2003 and an exercise price of $2.10 per share.
Also includes 150,000 shares subject to exercisable options pursuant to a 200,000 option grant of nonqualified options made in June 2001 with an exercise price of $1.25 per share and expiring June 5, 2005.
(7) Includes 75,543 shares subject to currently exercisable options expiring February 2004 and with an exercise price of $4.75 per share.
(8) Includes 10,000 shares of common stock owned by the wife of Joseph Mizrachi, Cheryl Mizrachi through CJ Rahm, LP and includes 1,241,000 warrants to purchase shares of common stock (including 16,000 warrants owned by the wife of Joseph Mizrachi, Cheryl Mizrachi through CJ Rahm, L.P.).
(9) Includes 25,164 shares subject to exercisable 20-year term options granted under the Company's 2000 Director Stock Incentive Plan in lieu of cash directors' fees with an exercise price of $0.39 per share. See "2000 Director Stock Incentive Plan" below.
(10) Includes 500,000 shares as to which Mr. Dahan, President of the Joes Jeans subsidiary, shares beneficial ownership and 153,809 shares subject to options exercisable at a price of $1 per share until February 7, 2003.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy requiring that any material transactions between the Company and persons or entities affiliated with officers, Directors or principal stockholders of the Company be on terms no less favorable to the Company than reasonably could have been obtained in arms' length transactions with independent third parties.
Anderson Stock Purchase Agreement. Pursuant to the 1997 Stock Purchase Right Award awarded to her in February 1997, Ms. Anderson-Lasko purchased 250,000 shares of Common Stock (the "1997 Award Shares") with payment made by the execution of a non-recourse note (the "Note") to the Company for the exercise price of $2.8125 per share ($703,125 in the aggregate). The Note is due, without interest, on April 30, 2002, and is collateralized by the 1997 Award Shares. Ms. Anderson-Lasko may pay or prepay (without penalty) all or any part of the Note by (i) the payment of cash, or (ii) the delivery to the Company of other shares of Common Stock (other than the 1997 Award Shares) that Ms. Anderson-Lasko has owned for a period of at least six months, which shares would be credited against the Note on the basis of the closing bid price for the Common Stock on the date of delivery.
Sam Furrow and Affiliate Loans. During the period from January 1999 to June 2000, Sam Furrow and affiliated companies made a total 24 loans in an aggregate amount of $1,933,000 to the Company primarily to finance the Company's import of product from the Orient and general operations. Each of the loans was unsecured and provided for interest compounding annually at a rate of from 8.5% to 10.0%. Most of the loans provided for a six-month term. The Board of Directors determined in each instance that the loans were made on fair terms and conditions that were more favorable to the Company than could be obtained from third parties.
Of the amounts loaned by Sam Furrow and his affiliates, a total of $1,200,000 has been exchanged for Common Stock as described below under "Debt to Equity Conversions." As of December 15, 2000, all amounts owed by the Company to Sam Furrow and affiliated companies has been paid off in its entirety.
Dan Page Loans. During the period from February 1999 to March 1999, Dan Page made a total five loans in an aggregate amount of $200,000 to the Company primarily to finance the Company's import of product from the Orient and general operations. Each of the loans was unsecured and provided for interest compounding annually at a rate of from 10.0%. The loans provided for a six-month term. The Board of Directors determined in each instance that the loans were made on fair terms and conditions that were more favorable to the Company than could be obtained from third parties.
All of the $200,000 loaned Dan Page to the Company has been exchanged for Common Stock as described below under "Debt to Equity Conversions."
Debt to Equity Conversions. On February 26, 1999, Sam Furrow and Dan Page each exchanged $150,000 of the indebtedness owed by the Company to him for 75,000 restricted shares of common stock, or a price of $2.00 per share. On the date that the Company's Board of Directors approved the debt exchanges, the average closing sale price for the Common Stock as reported by Nasdaq for the prior 30 days was $2.00.
Jay Furrow acquired $50,000 of the indebtedness owed by the Company to Sam Furrow on April 26, 1999 and exchanged that amount for restricted Common Stock at a price of $1.00 per share on that date. On the same date, a third party acquired $50,000 of the indebtedness owed by the Company to Dan Page and exchanged that amount for restricted Common Stock at a price of $1.00 per share. On the date that the Company's Board of Directors approved those debt exchanges, the average closing sale price for the Common Stock as reported by Nasdaq for the prior 15 days was $1.43.
On February 28, 2000, Sam Furrow exchanged $500,000 of the indebtedness owed by the Company to him for 423,729 restricted shares of common stock, or a price of $1.18 per share. On the date that the Company's Board of Directors approved the debt exchange, the closing sale price for the Common Stock as reported by Nasdaq was $1.15.
On August 11, 2000, Sam and Jay Furrow converted $1 million of outstanding Company debt owed to third parties that it had previously assumed and an additional $500,000 of Company debt that was previously owed to the Furrows for 1,363,637 shares of common stock, or $1.10 per share, and warrants to purchase 1,500,000 shares of Common Stock that have a three-year term and an exercise price of $2.10 per share. The debt conversion to equity had been required by the Commerce Group as a condition to making their Phase I investment in th e Company. The Furrows have also agreed to make the issuance of the purchased warrants subject to stockholder approval.
The $1.0 million of converted debt that had been assumed by the Furrows and that had previously been guaranteed by him consisted of $650,000 owed to Commerce Capital, Inc., a Nashville, Tennessee based finance company unrelated to the Commerce Group, and $350,000 owed to First Independent Bank of Gallatin.
With respect to each of the debt to equity conversions discussed above, the Board of Directors determined that the purchases of Common Stock were made on fair terms and conditions and were in the Company's best interests in order to increase the Company's net tangible assets for Nasdaq listing compliance purposes and considering recent trading prices and a reasonable discount due to the restricted nature of the issued shares. All of the shares issued pursuant to the debt conversions were subject to registration rights, and resales of all of such shares are now subject to effective registration statements.
Facility Lease Arrangements. On October 7, 1998, the Company entered into a Warehouse Lease Agreement with Furrow-Holrob Development II, LLC pursuant to which the Company leased 78,900 square feet of production and office space. The "triple net" lease provided for an annual base rental rate of $2.00 per square foot, or $157,800 annually, plus a pro rata share of real estate taxes, insurance premiums and common area expenses, with an initial five-year term and two Company five-year renewal options (subject to agreement on any change in the base rental rate). The Board of Directors, with Mr. Furrow excusing himself from deliberations and not voting, unanimously approved the Warehouse Lease greement. The agreement was terminated on July 1, 2000 pursuant to the Company's restructuring in 2000.
New Facility Lease Arrangements. The Company has entered into a new lease for space with a company owned by Sam Furrow. The space is approximately 5,000 square feet consisting of the first floor of a two-story building located in downtown Knoxville, Tennessee, with a monthly rental of $3,500 triple net.
Commerce Investment Group. Commerce Investment Group is a related party to the Company as a result of the fact that Commerce Investment Group, directly or indirectly, owns more than 10% of the Company's outstanding common stock. Pursuant to the supply and distribution agreements entered into with Commerce Investment Group and its affiliates, the Company in 2001 purchased $5,216,000 of the goods its sold to customers from Commerce. In addition, the Company paid $382,000 to a Commerce affiliate for the distribution of the Company's products to its customers and $137,000 to Commerce Investment Group for operational services. These services included but where not limited to accounts receivable collections, certain general accounting functions, inventory management and distribution logistics. Additionally, this charge included the allocation associated with the Company occupying space in Commerce's Commerce, CA facility and the use of general business machines and communication services. The Company from time to time will advance or loan funds to Commerce for use in the production process of the Company's goods or for other expenses associated with the Company's operations. The Company believes that all the transactions conducted between the Company and Commerce where completed on terms that where competitive and at market rates.
JD Design, LLC. Joe's, pursuant to the license agreement entered into with JD Design, LLC underwhich the Company obtained the licensing rights to Joe's Jeans, is obligated to pay Joe Dahan a 3% royalty on the net sales of all products bearing the Joe's Jeans or JD trademark or logo. For fiscal 2001, this amount totaled $46,000.
Azteca Production International, Inc. In the third quarter of fiscal 2001, the Company acquired Azteca Productions International, Inc.'s knit division and formed the subsidiary Innovo-Azteca Apparel, Inc.. Pursuant to equity transactions completed in 2000, the principals of Azteca Production International, Inc. became affiliates of the Company. The Company purchased the knit division's customer list, the right to manufacture and market all of the knit division's current products and entered into certain non-compete and non-solicitation agreements and other intangible assets associated with the knit division. As consideration, the Company issued to Azteca, 700,000 shares of Company's common stock valued at $1.27 per share based upon the closing price of the common stock on August 24, 2001, and promissory notes in the amount of $3.6 million.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. Reference is made to the Index to Financial Statements and Schedule on age for a list of financial statements and the financial statement schedule filed as part of this report. All other schedules are omitted because they are not applicable or the required information is shown in the Company's financial statements or the related notes thereto.
(b) Reports on Form 8-K
On September 10, 2001, the Company filed a Current Report on Form 8-K reporting completion of the first phase of a two phase acquisition of Azteca Production International Inc.'s ("Azteca") kint apparel division.
On November 7, 2001, the Company filed an amendment to its Current Report on Form 8-K filed on September 10, 2001, to include financial statements of the Knit Division of Azteca International, Inc., as required by Item 7(a) Financial Statements of Business Acquired.
(c) Exhibits
Exhibit Reference Number Description No.
3.1 Fifth of Amended and Restated Certificate of Incorporation of Registrant. 10.73
3.2 Amended and Restated Bylaws of Registrant.* 4.2(5)
4.1 Article Four of the Registrant's Amended and Restated Certificate of Incorporation (included in Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.3 Note executed by NASCO, Inc. and payable to First Independent Bank, Gallatin, Tennessee in the principal amount of $950,000 dated August 6, 1992.* 10.21 (2)
10.4 Deed of Trust between NASCO, Inc. and First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.22 (2)
10.5 Authorization and Loan Agreement from the U.S. Small Business Administration, Nashville, Tennessee dated July 21, 1992.* 10.23 (2)
10.6 Indemnity Agreement between NASCO, Inc. and First Independent Bank, Gallatin, Tennessee.* 10.24(2)
10.7 Compliance Agreement between NASCO, Inc. and First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.25 (2)
10.8 Assignment of Life Insurance Policy issued by Hawkeye National Life Insurance Company upon the life of Patricia Anderson-Lasko to First Independent Bank, Gallatin, Tennessee dated July 31, 1992.* 10.26 (2)
10.9 Guaranty of Patricia Anderson-Lasko on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.27 (2)
10.10	 Guaranty of Innovo Group Inc. on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.28 (2)
10.11 Guaranty of Innovo, Inc. on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.29 (2)
10.12	 Guaranty of NASCO Products, Inc. on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.30 (2)
10.22	 Form of Common Stock Put Option.* 10.61 (6)
10.28 License Agreement dated January 24, 1994 between NFL Properties Europe B.V. and NASCO Marketing, Inc.* 10.66 (9)
10.29		License Agreement dated July 7, 1997 between National Football League Properties, Inc. and Innovo Group Inc.
10.32	 Form of Amendment to Common Stock Put Option.* 10.72 (9)
10.33	 Agreement dated July 31, 1995 between NASCO Products, Inc. and Accessory Network Group, Inc.* 10.1 (11)
10.36 License Agreement dated August 9, 1995 between Innovo, Inc. and NHL Enterprises, Inc.* 10.49 (12)
10.37 License Agreement dated August 9, 1995 between NASCO Products International, Inc. and NHL Enterprises, B.V.* 10.50 (12)
10.38 License Agreement dated December 15, 1995 between Major League Baseball Properties, Inc. and Innovo Group Inc.* 10.51 (12)
10.39	 License Agreement dated October 6, 1995 between Major League Baseball Properties and NASCO Products International, Inc.* 10.52 (12)
10.40	 omitted
10.41 omitted
10.42 Merger Agreement dated April 12, 1996 between Innovo Group Inc. and TS Acquisition, Inc. and Thimble Square, Inc. and the Stockholders of Thimble Square, Inc.* 10.1 (13)
10.43 Property Acquisition Agreement dated April 12, 1996 between Innovo Group Inc., TS Acquisition, Inc. and Philip Schwartz and Lee Schwartz.* 10.2 (13)
10.45	 License Agreement between Innovo Group Inc. and Warner Bros. dated June 25, 1996.* 10.45(15)
10.46	 License Agreement between Innovo Group Inc. and Walt Disney dated September 12, 1996.* 10.46(15)
10.47	 Indenture of Lease dated October 12, 1993 between Thimble Square, Inc. and Development Authority of Appling County, Georgia* 10.47(15)
10.48 Lease dated October 1, 1996 between Innovo, Inc. and John F. Wilson, Terry Hale, and William Dulworth* 10.48(15)
10.49	 Incentive Stock Option between Samuel J. Furrow, Jr. and Innovo Group Inc.* 10.49(16)
10.50 Incentive Stock Option between Samuel J. Furrow and Innovo Group Inc.* 10.50(16)
10.51 Incentive Stock Option between Robert S. Talbott and Innovo Group Inc.* 10.51(16)
10.53	 Manufacturing and Distribution Agreement between Nasco Products International and Action Performance Companies, Inc.* 10.53(16)
10.56 Sale Agreement of property in Pembroke, GA between Thimble Square and H.N. Properties, L.L.C.* 10.56(16)
10.57 Lease Agreement between Furrow-Holrob Development, L.L.C. and Innovo Group, Inc.* 10.57(16)
10.59 Promissory Note dated October 29, 1999 between Innovo Group Inc and Samuel J. Furrow* 10.59(17)
10.60 Promissory Note dated November 22, 1999 between Innovo Group Inc and Samuel J. Furrow* 10.60(17)
10.61	 License Agreement with Roundhouse* 10.61(17)
10.62 License Agreement with Paws, Inc.* 10.62(17)
10.63 Commerce Investment Group, LLC Common Stock and Warrant Purchase Agreement* 10.63(18)
10.64 Commerce Investment Group, LLC Purchase Warrant Agreement* 10.64(18)
10.65 Investor Rights Agreement pertaining to the Commerce Investment Group, LLC Common Stock and Warrant Purchase Agreement* 10.65(18)
10.66 Commerce Investment Group, LLC Purchase Warrant Agreement* 10.66(18)
10.67 Legal Opinion of Sims, Moss, Kline and Davis, LLP* 10.67(18)
10.68 Business Plan* 10.68(18)
10.69	 Transfer Instructions pertaining to the delivery of the Common Stock and Warrants purchased by Commerce Investment Group, LLC* 10.69(18)
10.70	 Disclosure Schedule* 10.70(18)
10.71 Samuel Furrow, Jr. Stock Purchase Agreement 10.71(18)
10.72	 Samuel Furrow, Sr. Common Stock Purchase Agreement10.72(18)
10.73	 Fifth of Amended and Restated Certificate of Incorporation of Registrant 10.73
10.74	 Mizrachi Group Stock Purchase Agreement 10.74
10.75 Mizrachi Group Investor Rights Agreement 10.75
10.76 Mizrachi Group Warrant Agreement A 10.76
10.77 Mizrachi Group Warrant Agreement B 10.77
10.78 Mizrachi Group Transaction Disclosure Schedule 10.78
10.79 JD Design, LLC Common Stock and Warrant Purchase Agreement 10.79 (20)
10.80 JD Design, LLC Stock Purchase Warrant 10.80 (20)
10.81 Employment Agreement, Joe Dahan 10.81(20)
10.82	 Option Agreement, Joe Dahan 10.82 (20)
10.83 Joe's Jeans Licensing Agreement 10.83 (20)
10.84 Innovo-Azteca Apparel, Inc. Purchase Agreement 2.1 (21)
21 Subsidiaries of the Registrant* 21 (13)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Ernst & Young, LLP
_________________________
* Certain of the exhibits to this Report, indicated by an asterisk, are incorporated by reference to other documents on file with the Securities and Exchange Commission with which they were physically filed, to be part hereof as of their respective dates. Documents to which reference is made are as follows:
(1) Amendment No. 4 Registration Statement on Form S-18 (No. 33-25912-NY) of ELORAC Corporation filed October 4, 1990.
(2) Amendment No. 2 to the Registration Statement on Form S-1 (No. 33-51724) of Innovo Group Inc. filed November 12, 1992.
(3) Annual Report on Form 10-K of Innovo Group Inc. (file no. 0-18926) for the year ended October 31, 1993.
(4) Current Report on Form 8-K of Innovo Group Inc. (file no. 0-18926) dated May 10, 1993 filed May 25, 1993.
(5) Registration Statement on Form S-8 (No. 33-71576) of Innovo Group Inc. filed November 12, 1993.
(6) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended October 31, 1993.
(7) Amendment No. 2 to the Registration Statement on Form S-1 (No. 33-77984) of Innovo Group Inc. filed July 25, 1994.
(8) Amendment No. 4 to the Registration Statement on Form S-1 (No. 33-77984) of Innovo Group Inc. filed August 18, 1994.
(9) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended October 31, 1994.
(10) Registration Statement on Form S-8 (No. 33-94880) of Innovo Group Inc. filed July 21, 1995.
(11) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated July 31, 1995 filed September 13, 1995.
(12) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended October 31, 1995.
(13) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated April 12, 1996, filed April 29, 1996.
(14) Registration Statement on Form S-1 (No. 333-03119) of Innovo Group Inc., as amended June 28, 1996.
(15) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended November 30, 1996.
(16) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended November 30, 1998.
(17) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended November 30, 1999.
(18) Current Report on Form 8-K/A of Innovo Group Inc. (file 0-18926) dated September 15, 2000.
(19) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended November 30, 2000.
(20)	Quarterly Report on Form 10-Q of Innovo Group Inc. (file 0-18926) dated April 15, 2001.
(21)	Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated September 10, 2001.
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 --------------------- Pat Anderson Chief Executive Officer
					 March 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature and Title Date
/s/ Patricia Anderson-Lasko March 1,2002 - --------------------------- Patricia Anderson-Lasko Chief Executive Officer and Director
/s/Samuel J. Furrow, Sr. March 1,2002 - ------------------------ Samuel J. Furrow, Sr. Chairman of the Board and Director
/s/ Samuel J. Furrow, Jr. March 1,2002 - ------------------------- Samuel J. Furrow, Jr. President, Acting CFO and Director
/s/ Marc B. Crossman March 1,2002 - -------------------- Marc B. Crossman Director
/s/ Daniel Page March 1,2002 - --------------- Daniel Page Director
/s/ Dr. John Looney March 1,2002 - ------------------- Dr. John Looney Director
Innovo Group and Subsidiaries
Index to Consolidated Financial Statements
Audited Financial Statements:	 Page
Report of Independent Auditors, Ernst & Young LLP Report of Independent Auditors, BDO Seidman, LLP
Consolidated Balance Sheets at December 1, 2001 and November 30, 2000 Consolidated Statements of Operations for the years ended December 1, 2001, and November 30, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 1, 2001, and November 30, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 1, 2001, and November 30, 2000 and 1999 Notes to Consolidated Financial Statements Schedule II - Valuation of Qualifying Accounts
Report of Independent Auditors
Board of Directors Innovo Group Inc.
We have audited the accompanying consolidated balance sheets of Innovo Group Inc. and subsidiaries as of December 1, 2001 and November 30, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 1, 2001 and November 30, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovo Group Inc. and subsidiaries as of December 1, 2001 and November 30, 2000 and the consolidated results of their operations and their cash flows for the years ended December 1, 2001 and November 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP Los Angeles, California February 8, 2002
Report of Independent Certified Public Accountants
Board of Directors Innovo Group Inc.
We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Innovo Group Inc. and subsidiaries for the year ended November 30, 1999. We have also audited the accompanying schedule of valuation and qualifying accounts as of and for the year ended November 30, 1999. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. 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 and schedule. We belive that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Innovo Group Inc. and subsidiaries for the year ended November 30, 1999, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP - -------------------- BDO Seidman, LLP
Atalanta, Georgia January 13, 2000, except for Notes 11 and 14, as to which the date is March 8, 2000
Innovo Group Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
December 1, November 30, 2001 2000 ---- ---- Assets Current assets: Cash and cash equivalents $ 292 $ 1,179 Accounts receivable and due from factor, net of allowance for uncollectible accounts of $164 (2001) and $36 (2000) 1,466 712 Inventories 2,410 3,343 Prepaid expenses and other assets 180 94 ------ ------- Total current assets 4,348 5,328
Property, plant and equipment, net 973 56 Assets held for sale -- 2,028 Intangible assets, net 4,926 -- Other assets -- 4 ------ ------ Total assets $10,247 $ 7,416 ------ ------ ------ ------
Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 697 $ 1,761 Due to related parties 806 108 Notes payable -- 449 Current maturities of long-term debt 845 94 ------ ------ Total current liabilities 2,348 2,412
Long-term debt, less current maturities 3,380 1,246
Commitments and contingencies
Stockholders' equity: Preferred stock, $0.10 par value: Authorized shares - 5,000 Issued and outstanding shares - none -- -- Common stock, $0.10 par value: Authorized shares - 40,000 Issued and outstanding shares - 14,921 (2001) and 13,721 (2000) 1,491 1,371 Additional paid-in capital 40,277 38,977 Accumulated deficit (34,079) (33,461) Promissory note - officer (703) (703) Treasury stock (2,467) (2,426) ------ ------ Total stockholders' equity 4,519 3,758 ------ ------ Total liabilities and stockholders' equity $10,247 $ 7,416 ------ ------ ------ ------ See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended December 1 November 30 2001 2000 1999 ---- ---- ----
Net sales $ 9,292 $ 5,767 $10,837 Cost of goods sold 6,333 5,195 6,252 ------ ------ ------ Gross profit 2,959 572 4,585
Operating expenses: Selling, general and administrative 3,191 4,147 4,963 Restructuring and other charges: Asset impairment -- 600 145 Termination of capital lease -- -- 293 Other -- 116 -- Depreciation and amortization 167 250 287 ------ ------ ------ 3,358 5,113 5,688 ------ ------ ------ Loss from operations (399) (4,541) (1,103)
Interest expense (211) (446) (517) Other income (expense), net 81 (69) 279 ------ ------ ------ Loss before income taxes and extraordinary item (529) (5,056) (1,341) Income taxes 89 -- -- ------ ------ ------ Loss before extraordinary item (618) (5,056) (1,341) Loss on early extinguishments of debt -- (1,095) -- ------ ------ ------ Net loss and comprehensive loss $ (618) $(6,151) $(1,341) ------ ------ ------ ------ ------ ------
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Operations (continued)
(In thousands, except per share data)
Year ended December 1 November 30 2001 2000 1999 ---- ---- ----
Loss per share - basic and diluted: Loss before extraordinary items $ (.04) $ (0.62) $ (0.22) Extraordinary item -- (0.13) -- ------ ------ ------ Net loss $ (.04) $ (0.75) $ (0.22) ------ ------ ------ ------ ------ ------
Weighted average shares outstanding - basic and diluted 14,315 8,163 5,984
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except number of shares)
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 1 November 30 2001 2000 1999 ---- ---- ----
Operating activities Net loss $ (618) $(6,151) $(1,341) Adjustment to reconcile net loss to cash used in operating activities from continuing operations: Loss from discontinued operations -- -- 1 Loss on early extinguishments of debt -- 1,095 -- Stock options and warrants issuanced for services and compensation 86 -- 64 Loss on disposal of fixed assets 2 99 -- Depreciation and amortization 167 250 287 Asset impairment -- 600 145 Change in allowance for bad debt 128 (117) 86 Termination of capital lease -- -- 293 Changes in current assets and liabilities: Accounts receivable (882) 566 (539) Inventories 933 (1,375) (867) Prepaid expenses and other (86) 45 264 Accounts payable and accrued expenses (1,064) 282 (473) Due to related parties 698 108 -- Other 4 -- (44) ----- ----- ----- Cash used in operating activities of continuing operations (632) (4,598) (2,124) Cash used in operating activities of discontinued operations -- -- (11) ----- ----- ----- Net cash used in operating activities (632) (4,598) (2,135)
Investing activities Capital expenditures (61) (76) (161) Net proceeds from sale of fixed assets 1,082 43 246 Purchase of Knit Division (36) -- -- ----- ----- ----- Cash provided by (used in) investing activities 985 (33) 85
Financing activities Additional borrowings -- 1,420 710 Repayments of notes payable and long-term debt (1,164) (644) (530) Treasury stock purchases (41) -- -- Proceeds from issuance of common stock, net (35) 5,034 792 ----- ------ ----- Net cash (used in) provided by financing activities (1,240) 5,810 972 ----- ----- ----- Net (decrease) increase in cash and cash equivalents (887) 1,179 (1,078) Cash and cash equivalents, at beginning of year 1,179 -- 1,078 ----- ----- ----- Cash and cash equivalents, at end of year $ 292 $1,179 $ -- ----- ----- ----- ----- ----- -----
Supplemental disclosures of cash flow information: Cash paid for interest $ 110 $ 415 $ 493
See accompanying notes.
Innovo Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 1, 2001
1. Business Description
Innovo Group Inc. (the Company) is a holding company, the principal assets of which are its wholly owned operating subsidiaries, Innovo, Inc. (Innovo), Joe's Jeans, Inc. (Joe's) and Innovo Azteca Apparel, Inc. (IAA) . The Company also operated one other subsidiary, NASCO Products International, Inc. (NP International) which ceased operations in 2000.
Innovo designs, markets, sources and distributes fashion and sports licensed nylon and canvas bags and products, for the retail, premium and advertising specialty markets. Under licensing agreements, the Company's sports lines feature the designs of major sports leagues and collegiate teams. The Company's primary customers include major retailers such as Wal-Mart, Michael's, Hobby Lobby, Dollar General, Goody's and Joanne's.
Joe's designs, markets and sources high end apparel products which are sold for better retailer and specialty boutiques. IAA designs, markets and sources knit tops and other general apparel items which are sold to retailers or to branded apparel distributors.
The Company operates in two business segments. Sales to the top two customers accounted for 25% and 23%, of the Company's net gross sales in fiscal 2001; and the top two customers accounted for 42% and 11%, respectively of the Company's net gross sales, in fiscal 2000; and the top two customers accounted for 27.1% and 27%, respectively of the Company's net sales in fiscal 1999.
During fiscal year 2001, the Company changed its fiscal year end from November 30 of each year to the Saturday closest to November 30. For fiscal year 2001, the year ended on December 1, 2001.
Restructuring of Operations
During fiscal 2000, the Company restructured its operations to focus on its core product categories with the highest volume and profit margin. The Company also raised additional working capital and converted certain indebtedness to equity (see Note 14). The restructuring was undertaken as a condition to the equity investment by Commerce Investment Group, LLC (Commerce), a strategic investment partner (see Note 11). In an effort to reduce product costs and increase gross profit, the Company shifted manufacturing to third-party foreign manufacturers and has outsourced the distribution function to Commerce to increase the effectiveness of the distribution network and reduce freight costs. In September 2000, the Company completed the closure of its Knoxville, Tennessee, manufacturing and distribution operations and realigned these functions in accordance with terms under certain s upply and distribution agreements with Commerce.
These agreements provide for Commerce or its designated affiliates to manufacture and supply specified products to the Company at agreed upon prices. In addition, Commerce provides distribution services to the Company for an agreed upon fee, including warehousing, shipping and receiving, storage, order processing, billing, customer service, information systems, maintenance of inventory records, and all direct labor and management services. These agreements, which expire in 2002, may be renewed for consecutive two-year terms unless terminated by either party with 90 days notice. Purchases of goods and services during the initial term are subject to a minimum of $3,000,000 (see Note 14). No minimum obligation is required for the renewal periods. Purchase prices for goods and services for subsequent periods will be renegotiated in good faith at the time of renewal based on increases in material and labor costs.
Pursuant to the Commerce transaction and related agreements, the Company relocated its distribution operations to Los Angeles, California, and transitioned its manufacturing needs to Mexican production facilities operated by an affiliate of Commerce. The Company continues to maintain a small sales and administrative staff in Knoxville.
In addition to the forgoing, the Company also terminated the operations of NP International during fiscal 2000, which had been profitable and approved a plan to dispose of certain real property which was not central to the Company's ongoing operations.
In connection with these restructuring activities, the Company incurred certain one-time charges. These charges include loss on disposal of fixed assets, salaries and other costs to exit the Knoxville operations, relocation costs, loss on inventory liquidation and impairment charges related to real properties held for disposal. Inventory liquidation losses totaling $300,000 are included in cost of goods sold and the loss on sale of fixed assets of $99,000 is included as a component of other expense in the accompanying consolidated statements of operations for the year ended November 30, 2000. The remaining charges have been included in Restructuring and other charges in the accompanying consolidated statements of operations for the year ended November 30, 2000.
The Company has experienced recurring operating losses and negative cash flows from operations in recen t years. It is dependent on credit arrangements with suppliers and factoring agreements for working capital needs. From time to time, the Company has obtained short-term working capital loans from senior members of the management and the Board of Directors, and conducted equity financing through private placements (see Notes 11 and 14).
Based on the foregoing, the investments by Commerce and other investors, and the anticipated operating results of the Company, including the results of the acquisition of Joe's and IAA during the year ended December 1, 2001, the Company believes that existing working capital is sufficient to fund operations and required debt reductions during fiscal 2002. Management also believes that any additional capital, to the extent needed, could be obtained from the sale of equity securities or short-term working capital loans. In addition to the restructuring activities discussed above, management continues to take steps to improve profitability and liquidity by introducing new products lines, and by endeavoring to control and minimize fixed costs.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates affect the evaluation of contingencies, and the determination of allowances for accounts receivable and inventories. Actual results could differ from these estimates.
Revenue Recognition
Revenues are recorded on the accrual basis of accounting when the Company ships products to its customers. Sales returns must be approved by the Company and are typically only allowed for damaged goods. Such returns have historically not been material.
During the years ended December 1, 2001 and November 30, 2000, allowances for co-op and other advertising programs when calculated as a percentage of sales to a customer have been recorded as a reduction of gross sales. In prior years all advertising allowances were recorded as a components of selling, general and administrative expenses.
Shipping and Handling Costs
During the year ended November 30, 2000, the Company outsourced its distribution function to Commerce. Shipping and handling costs include costs to warehouse, pick, pack and deliver inventory to customers. In certain cases the Company is responsible for the cost of freight to deliver goods to the customer. Shipping and handling costs were approximately $172,000 for the year ended December 1, 2001, and are included in selling, general and administrative expenses.
Loss Per Share
Loss per share is computed using weighted average common shares and dilutive common equivalent shares outstanding. Potentially dilutive securities consist of outstanding options and warrants. Potentially dilutive securities have been excluded from the calculation of the diluted loss per share for the three years ended December 1, 2001 as their effect would have been anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred, except for brochures and catalogues which are capitalized and amortized over their expected period of future benefits. Catalogues and brochures are included in prepaid expenses and other current assets. Advertising expenses included in selling, general and administrative expenses were approximately $114,000 and $8,000 for the periods ended December 1, 2001 and November 30, 2000, respectively.
Financial Instruments
The fair values of the Company's financial instruments (consisting of cash, accounts receivable, accounts payable, notes payable, long-term debt and notes payable) do not differ materially from their recorded amounts because of the relatively short period of time between origination of the instruments and their expected realization.
The Company neither holds, nor is obligated under, financial instruments that possess off-balance sheet credit or market risk.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the years ended November 30, 2000 and 1999, the Company recorded impairment charges of $600,000 and $145,000, respectively, related to certain real and personal properties (see Note 3).
Cash Equivalents
The Company considers all highly liquid investments that are both readily convertible into known amounts of cash and mature within 90 days from their date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, accounts receivable and amounts due from factor. The Company maintains cash and cash equivalents with various financial institutions. Its policy is designed to limit exposure to any one institution. The Company performs periodic valuations of the relative credit rating of those financial institutions that are considered in the Company's investment strategy.
Concentrations of credit risk with respect to accounts receivable are limited due to the number of customers comprising the Company's customer base. However, at December 1, 2001, $535,000 of total non- factored accounts receivables, (or 57%) were due from four customers. The Company does not require collateral for trade accounts receivable, and, therefore, can be at risk for up to $949,000 if these customers fail to pay. The Company provides an allowance for estimated losses to be incurred in the collection of accounts receivable. Such losses have been within management's expectations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets and includes capital lease amortization. Leasehold improvements are amortized over the lives of the respective leases or the estimated service lives of the improvements, whichever is shorter. Routine maintenance and repairs are charged to expense as incurred. On sale or retirement, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and any related gain or loss is included in the determination of income.
Reclassifications
Certain reclassifications have been made to prior year consolidated financial statements to conform to the current year presentation.
Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, (FAS 141) and No. 142, (FAS 142), "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 1, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company has applied the non-amortization provisions of FAS 141 for acquisitions occurring after June 30, 2001 and will apply the provisions of the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the non-amortization provisions of the Statement is not expected to result in a material change to net income. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This standard sets forth the impairment of long-lived assets, whether they are held and used or are disposed of by sale or other means. It also broadens and modifies the presentation of discontinued operations. The standard will be effective for the Company's fiscal year 2003, although early adoption is permitted, and its provisions are generally to be applied prospectively. The Company is in the process of evaluating the adoption of this standard, but does not believe it will have a material impact on its consolidated financial statements.
3. Acquisitions
On August 24, 2001, Innovo Group Inc. through its newly formed subsidiary Innovo Azteca Apparel Inc. (IAA) completed the first phase of a two phase acquisition (the Acquisition) of Azteca Production International, Inc.'s (Azteca) knit apparel division (Knit Division). Azteca is an affiliate of Commerce. Pursuant to the terms of the first phase closing, the Company has purchased the Knit Division's customer list, the right to manufacture and market all of the Knit Division's current products and entered into certain non-compete and non-solicitation agreements and other intangible assets associated with the Knit Division (Phase I Assets). As consideration for the Phase I Assets, the Company has issued to Azteca, 700,000 shares of Company's common stock valued at $1.27 per share based upon the closing price of the common stock on August 24, 2001, and promissory notes in the amount of $3.6 million.
The second phase of the Acquisition called for the Company to purchase for cash the inventory of the Knit Division prior to November 30, 2001, with the consideration not to exceed $3 million. The acquisition of the inventory was subject to the Company obtaining adequate financing. The Company did not complete the second phase of the acquisition prior to the expiration date.
The Acquisition was accounted for under the purchase method of accounting for business combinations pursuant to FAS 141. Accordingly, the accompanying consolidated financial statements include the results of operations and other information for the Knit Division for the period from August 24, 2001 through December 1, 2001.
The Acquisition was consummated to allow the Company to continue its expansion into various segments of the apparel industry. The Company believes that the acquisition of the Knit Division, its customer list and certain personnel, will permit the Company to expand its customer base and product offerings. In the event that the sales of the Knit Division do not reach $10.0 million during the 18 month period following the closing date of the Acquisition, any remaining unpaid principal of the $1.0 million promissory note shall be reduced by an amount equal to the sum of $1.5 million less 10% of the net sales of the Knit Division during the 18-month period following the closing date.
The purchase price of $4,521,000, including acquisition costs of $36,000, have been allocated to the non-compete agreement ($250,000) and the remainder to goodwill ($4,271,000). The non-compete agreement will be amortized over two years, based upon the term of the agreement. The total amount of the goodwill is expected to be deductible for income tax purposes.
The following table shows the Company's unaudited pro forma consolidated results of operations for the fiscal years ended December 1, 2001 and November 30, 2000 assuming the Acquisition had occurred at the beginning of the respective year (in thousands):
(Unaudited) Pro Forma Year Ended
December 1, November 30, 2001 2000 ---------- -----------
Net sales $ 17,243 $ 23,649
Loss before extraordinary item $ (406) $ (3,589)
Net loss $ (406) $ (4,684)
Loss per share: Basic and diluted $ (0.03) $ (0.53)
The pro forma operating results do not reflect any anticipated operating efficiencies or synergies and are not necessarily indicative of the actual results which might have occurred had the operations and management of the companies been combined during the last two fiscal years.
Joe's Jeans License
On February 7, 2001, the Company acquired the licensing rights to the Joe's Jeans label from JD Design, LLC (JD), along with the right to market the previously designed product line and existing sales orders, in exchange for 500,000 shares of the Company's common stock and, if certain sales objectives are reached, a warrant, with a four year term, granting JD the right to purchase 250,000 share of the Company's common stock at a price of $1.00 per share. Additionally, the designer of the Joe's Jeans line, joined the Company as an employee and has received an option, with a four year term, to purchase 250,000 shares of the Company's common stock at $1.00 per share, vesting over 24 months. Under the terms of the license, the Company is required to pay a royalty of 3% of net sales, with a dditional royalty amounts due in the event the Company exceeds certain minimum sales and gross profit thresholds. No additional royalty was required for the period ended December 1, 2001.
The purchase price of $480,000 was determined based upon the fair value of the 500,000 shares issued in connection with the acquisition. The entire purchase price was allocated to licensing rights which is being amortized over the 10 year term of the license.
Joe's Jeans did not have substantial operations prior to the acquisition by the Company. The Company's acquisition of Joe's Jeans was done to allow the Company to expand its apparel offerings and to broaden the Company's customer base to include specialty boutiques and high end retail stores.
(e) Loss per share
Loss per share is computed using weighted average common shares and dilutive common equivalent shares outstanding. Potentially dilutive securities consist of outstanding options and warrants. Potentially dilutive securities were not considered in the computation of weighted average common shares as their effect would have been antidilutive.
On September 13, 1998 the Company declared a reverse stock split of which one share of new Common Stock was exchanged for ten shares of old Common Stock. All share and per share amounts have been restated to reflect the effects of the reverse stock split.
Capitalization policy
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 $24,000, $2,000 and $182,000 in fiscal 1999, 1998 and 1997 respectively.
(g) Financial Instruments
The fair values of the Company's financial instruments (consisting of cash, accounts receivable, accounts payable, notes payable, long-term debt and notes payable officer) do not differ materially from their recorded amounts.
The Company neither holds, nor is obligated under, financial instruments that possess off-balance sheet credit or market risk.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"; as amended, is effective for all fiscal years beginning after June 15, 2000. This statement requires recognition of all derivative contracts as either assets or liabilities in the balance sheet and the measurement of them at fair value. If certain conditions are met, a derivative may b e specifically designated as a hedge, the objective of which is to match the timing of any gains or losses on the hedge with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. The adoption of the new standard on January 1, 2000 will not affect the Company's financial statements.
4. Inventories
Inventories are stated at the lower of cost, as determined by the first- in, first-out method, or market. Inventories consisted of the following (in thousands):
2001 2000 ----- -----
Finished goods $ 2,535 $ 1,071 Raw materials -- 2,350 ------ ------ 2,535 3,421 Less allowance for obsolescence and slow moving items (125) (78) ------ ------ $ 2,410 $ 3,343 ------ ------ ------ ------
5. Accounts Receivable
Accounts receivable consist of the following (in thousands):
2001 2000 ----- -----
Nonrecourse receivables assigned to factor $ 681 $ --
Nonfactored accounts receivable 949 748 Allowance for customer credits and doubtful accounts (164) (36) ----- ----- $1,466 $ 712 ----- ----- ----- -----
On June 1, 2001, the Company entered into accounts receivable factoring agreements with the CIT Group, Inc. (CIT) which may be terminated with 60 days notice by CIT, or on the anniversary date, by the Company provided 60 days written notice is given. Under the terms of the agreement, the Company has the option to factor receivables, with CIT on a non-recourse basis, provided that CIT approves the receivable in advance. The Company may at its option also factor non-approved receivables on a recourse basis. The Company continues to be obligated in the event of product defects and other disputes, unrelated to the credit worthiness of the customer. The Company has the ability to obtain advances against factored receivables up to 85% of the face amount of the factored receivables. The agreement calls for a 0.8% factoring fee on invoices factored with CIT and a per annum rate equal to the prime rate plus 0.25% on funds borrowed against the factored receivables.
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
Useful Lives (Years) 2001 2000 ------ ---- ----
Building, land and improvements 8-38 $ 1,248 $ -- Machinery and equipment 5-10 120 -- Furniture and fixtures 3-8 163 83 Transportation equipment 5 13 13 Leasehold improvements 5-8 4 -- ------ ----- 1,548 96 Less accumulated depreciation and amortization (575) (40) ----- ----- Net property, plant and equipment $ 973 $ 56 ----- ----- ----- -----
Depreciation expense aggregated $88,000 and $250,000 for the years ended December 31, 2001 and November 30, 2000.
Assets held for sale consisted of the following (in thousands):
2001 2000 ---- ----
Building, land and improvements $ -- $ 2,500 Less accumulated depreciation -- (472) ------ ------ Net assets held for sale $ -- $ 2,028 ------ ------ ------ ------
During fiscal 2000, the Company approved a plan to dispose of a retail property in Lake Worth, Florida, and its former headquarters and manufacturing facility in Springfield, Tennessee, via a third party sale. In connection with the plan of disposal, the Company recorded a charge of $600,000 in fiscal 2000 to reduce the carrying value of the Florida property to its estimated market value less costs to sell.
During fiscal year 2000, the Company sold its property located in Lake Worth, Florida for $1,175,000. The Company recorded a loss on the sale of the property of approximately $3,000 after consideration of the net book value, expenses associated with the property and property taxes.
During the fourth quarter of fiscal year 2001, the Company commenced a project to make certain repairs and improvements to the Springfield facility in an effort to increase the Company's ability to lease the remaining portions of the facility. In connection with the project, the Company determined that it will continue to attempt to lease the remaining portions of the property and will manage the property for the foreseeable future. The Company continues to have the property listed for sale, but has not received suitable offers. Accordingly, the Company intends to operate the property and no longer classifies the property as held for sale. At December 1, 2001, the related assets have been reclassified and are presented as components of property, plant and equipment, with a cost after writedowns of $1,248,000 and accumulated depreciation of $322,000.
The carrying value was net of a $145,000 charge recorded in 1999 to reduce the then carrying value of the property to its fair value in accordance with the provisions of SFAS No. 121.
During fiscal 1999, the Company terminated a capital lease on a building in Baxley, Georgia. The Company wrote off the remaining net book value of the capitalized lease and removed the remaining capitalized lease obligation resulting in a net charge to operations of $293,000.
7. Intangible Assets
Intangible assets resulting from acquisitions consist of the following (in thousands):
2001 2000 ---- ----
License rights $ 480 $ -- Covenant not to compete 250 -- ---- ---- 730 -- Accumulated amortization (75) -- ---- ---- 655 -- Goodwill 4,271 -- ----- ---- $4,926 $ -- ----- ---- ----- ----
8. Notes Payable
Notes payable consist of the following (in thousands):
2001 2000 ---- ---- Accounts receivable factoring facilities $ -- $ 411 Other -- 38 ---- ---- $ -- $ 449 ---- ---- ---- ----
At November 30, 2001, the Company's principal credit facility for working capital was its accounts receivable factoring arrangements. The Company factored the accounts receivable of one specific customer with recourse with Riviera Finance(Riviera) under an agreement effective July 1999. Under this agreement, Riviera advanced the Company 75% of the face value of each approved invoice, with 24% placed in a reserve account (for potential returns and uncollectible amounts) and 1% retained by Riviera as a fee. In addition to the 1% factoring fee, the Company payed a monthly fee of 0.5% of the maximum account or $5,000. This agreement had a maximum credit limit of $1,000,000 and was secured by the Company's tangible and intangible assets. This agreement was terminated during 2001 and replaced by the CIT agreement.
The Company also had another factoring facility with First American, which was terminated in July 2000. This agreement was replaced by a factoring facility with ING/KBK Acceptance Corporation (KBK), to provide financing for invoices not factored under the Riviera arrangement. The KBK agreement provided for factoring on 85% of the qualified receivables up to $5,000,000 on a non- recourse basis. The Company was charged a 2% fee on every invoice funded in addition to a per annum rate equal to KBK's base rate in effect on the date of the purchase of the invoice plus 2%.
Notes payable consisted of the following:
November 30, 1999 1998 ---- ---- (000's) (000's)
Accounts receivable factoring facility $ 510 $ 439 Bank credit facility 349 349
Other -- 126
Borrowings from Director 100 -- ----- ----- $ 959 $ 914
As of November 30, 1999, the Company had outstanding borrowings from a director totaling $100,000. This money was borrowed under two promissory notes bearing interest at 10%. These notes are due on June 30, 2000.
Under a factoring facility with First American National Bank ("First American"), First American advances 70% to 90% of approved invoices. There is no established limit on the total facility. First American charges Innovo 1% for the first 15 days an invoice is outstanding and .05% per day thereafter until paid, up to a maximum of 6%. The facility is secured by first position on accounts receivable and inventory. The agreement with First American terminates upon thirty day written notice from either party.
In July of 1999, the Company entered into an additional factoring arrangement with Riviera Finance ("Riviera") for the factoring of a specific customer's receivables. Under the agreement, Riviera advances the company 75% for each approved invoice with 24% placed in a reserve account and 1% retained by Riviera as a fee. In addition to the 1% factoring fee, the Company pays a monthly fee of 0.5% of the maximum account or $5,000. This agreement has a limit on borrowing of $1 million and expires on July 20, 2000.
As of November 30, 1998, Thimble Square had a note payable to a local bank that used the Pembroke, Georgia facility as collateral. This interest rate was 2.75 basis points over the prime rate per annum. The loan balance of approximately $126,000 was repaid when the Pembroke facility was sold in December 1998.
In December 1997 the Company entered into a revolving line of credit with a bank for $350,000 at a fixed rate of 9.5%. The line is secured by equipment and the personal guarantees of certain members of management. In December 1998, the Company renewed the line of credit through February 27, 2000 at an interest rate of 10.75%. The Company is currently in negotiation with the lender to renew the line of credit.
The weighted average interest rate on outstanding short-term borrowings was 11.4% and 11.1% at November 30, 1999 and 1998, respectively.
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
2001 2000 ---- ---- First mortgage loan on Springfield property $ 625 $ 673 Non-recourse first mortgage on Florida property -- 667 Promissory note to Azteca 1,000 -- Promissory note to Azteca 2,600 -- ----- ------ Total long-term debt 4,225 1,340 Less current maturities 845 94 ----- ----- $3,380 $1,246 ----- ----- ----- -----
The first mortgage loan is collateralized by a first deed of trust on real property in Springfield, Tennessee (with a carrying value of $925,000 at December 1, 2001), and by an assignment of key-man life insurance on the chief executive officer of the Company in the amount of $1 million. The loan bears interest at 2.75% over the lender's prime rate per annum (which was 7.50% and 9.50% at December 1, 2001 and November 30, 2000, respectively) and requires monthly principal and interest payments of $9,900 through February 2010. The loan is also guaranteed by the Small Business Administration (SBA). In exchange for the SBA guarantee, the Company, Innovo, NP International, and the chief executive officer of the Company have also agreed to act as guarantors for the obligations under the loan agreement.
In connection with the acquisition of the Lake Worth, Florida property, the Company had an $800,000 first lien non-recourse mortgaged secured by the property, which bore interest at 9.5% and required quarterly payments of $25,500. In connection with the sale of the property in 2001, the note was repaid.
In April 1998, the Company entered into a secured note with an unrelated third party bank (Commerce Capital, Inc.) for $650,000 at a rate of 13.5% per annum. In August 2000, the note was assumed by the Furrow Group, in exchange for the issuance of the Company's common stock and warrants (see Notes 11 and 14).
In connection with the acquisition of the Knit Division from Azteca (see Note 3), the Company issued promissory notes in the face amounts of $1.0 million and $2.6 million, that bear interest at 8.0% per annum and require monthly payments of $20,276 and $52,719, respectively. The notes have a five-year term and are unsecured.
The $1.0 million note is subject to adjustment in the event that the sales of the Knit Division do not reach $10.0 million during the 18 month term following the closing of the Acquisition. The principal amount shall be reduced by an amount equal to the sum of $1.5 million less 10% of the net sales of the Knit Division during the 18 months following the Acquisition.
In the event that the Company determines, from time to time, at the reasonable discretion of the Company's management, that its available funds are insufficient to meet the needs of its business, the Company may elect to defer the payment of principal due under the promissory notes for as many as six months in any one year (but not more than three consecutive months) and as many as eighteen months, in the aggregate, over the term of the notes. The term of the notes shall automatically be extended by one month for each month the principal is deferred, and interest shall accrue accordingly.
At the election of Azteca, the balance of the promissory notes may be offset against monies payable by Azteca or its affiliates to the Company for the exercise of issued and outstanding stock warrants that are owned by Azteca or its affiliates (including Commerce).
Principal maturities of long-term debt as of December 1, 2001 are as follows (in thousands):
2002 $ 845 2003 754 2004 816 2005 884 2006 736 Thereafter 190 ----- Total $4,225 ----- -----
10. Income Taxes
No provision for federal income tax has been provided for the last three fiscal years, as income tax benefits arising from net operating losses are offset by corresponding increases in the deferred tax asset valuation allowance. In 2001, the Company recorded a provision of approximately $89,000 related to state income and franchise taxes.
Net deferred tax assets result from the following temporary differences between the book and tax bases of assets and liabilities at (in thousands):
2001 2000 ---- ----
Deferred tax assets: Allowance for doubtful accounts $ 66 $ 5 Inventory reserves 87 25 Benefit of net operating loss carryforwards 7,163 6,002 ----- ----- Gross deferred tax assets 7,316 6,032 Valuation allowance (7,316) (6,032) ----- ----- Net deferred tax assets $ -- $ -- ----- ----- ----- -----
The reconciliation of the effective income tax rate to the federal statutory rate for the years ended is as follows (in thousands):
2001 2000 1999 ---- ---- ----
Computed tax benefit at the statutory rate (34)% (34)% (34)% State income tax 18% -- -- Change in valuation allowance 34% 34% 34% --- --- --- 18% -- -- --- --- --- --- --- ---
The Company has consolidated net operating loss carryforwards of approximately $39.8 million expiring through 2020. However, as the result of "changes in control" as defined in Section 382 of the Internal Revenue Code, a significant portion of such carryforwards may be subject to an annual limitation. Such limitation would have the effect of limiting to the future taxable income which the Company may offset through the year 2014 through the application of its net operating loss carryforwards.
11. Stockholders' Equity
Private Placements and Stock Issuance
During 2001, connection with the Acquisition of the Knit Division from Azteca (see Note 3), the Company issued 700,000 shares of its common stock, and in connection with the acquisition of the Joe's Jeans license from JD, the Company issued 500,000 shares of the Company's common stock and a warrant to purchase 250,000 shares of the Company's common stock at a price of $1.00 per share.
During fiscal 2000, the Company issued 1,787,365 shares of common stock and warrants to purchase an additional 1,500,000 shares of common stock at $2.10 per share to the Furrow Group in exchange for the Furrow Group's assumption of $1,000,000 of the Company's debt and the cancellation of $1,000,000 of indebtedness owed to members of the Furrow Group. The issuance of the shares of common stock and warrants resulted in a $1,095,000 charge for the extinguishment of debt.
During fiscal 2000, the Company issued 592,040 shares of its common stock and warrants to purchase an additional 102,040 shares at $1.75 per share to private investors for $600,000. In August and October 2000, the Company issued an aggregate of 2,863,637 shares of common stock to Commerce for $3,000,000 in cash. In addition, Commerce received warrants to purchase an additional 3,300,000 shares of common stock with warrants for 3,000,000 shares of common stock exercisable over a three-year period at $2.10 per share. The remaining warrants for 300,000 shares of common stock are subject to a two-year vesting period and can be exercised over a five-year period, once vested at $2.10 per share. The proceeds have been used to purchase inventory and services from Commerce and its affiliates and to repay certain outstanding debt (see Note 14). In October and November 2000, the Company issued an aggregate of 2,125,000 shares of common stock and warrants to purchase an additional 1,700,000 shares of common stock in private placements to JAML, LLC, Innovation, LLC and Third Millennium Properties, Inc. (the Mizrachi Group) for $1,700,000 in cash. The warrants expire three years from the date of issuance and are exercisable at $2 per share.
During fiscal 1999, the Company issued an aggregate of 250,000 shares of common stock to certain officers to extinguish $400,000 in outstanding debt and issued 45,000 shares of common stock to certain vendors as payment for payables in the amount of $91,564. The carrying value of the debt and trade payables approximated the fair value of the shares exchanged. During fiscal 1999, the Company also issued 571,000 shares of common stock to several individual investors in a private placement for consideration of $792,000.
Warrants
The Company has issued warrants in conjunction with various private placements of its common stock, debt to equity conversions, acquisitions and in exchange for services. All warrants are currently exercisable except for 150,000 warrants issued to Commerce in October 2000 which vest over 24 months from the grant date. At December 1, 2001, outstanding common stock warrants are as follows:
Exercise Price Shares Issued Expiration - ----- ------ ------ ----------
$1.80 7,407 September 1996 March 2002 $1.75 102,040 July 2000 August 2003 $2.10 4,800,000 October 2000 October 2003 $2.00 1,700,000 October 2000 October 2003 $1.00 250,000 February 2001 February 2005 $0.90 20,000 December 2000 December 2004 $1.50 100,000 March 2001 March 2004 $2.00 100,000 March 2001 March 2004 $2.50 50,000 March 2001 March 2004
All grants from 1996-2000 were made in connection with private placements of the Company's common stock except for warrants to purchase 1,500,000 shares at $2.10 per share issued in October 2000. These warrants were issued in connection with the extinguishment of the Company's indebtedness and were valued at $.73 per share using the Black-Scholes model on the date of grant (see Note 4).
During 2001, the Company issued a warrant to purchase 250,000 shares at a price of $1.00 per share, in the event that certain future sales performance criteria are met, (see Note 3).
During 2001, the Company also issued warrants to a company in exchange for certain services. Warrants to purchase 20,000, 100,000, 100,000 and 50,000, shares exercisable at $0.90, $1.50, $2.00 and $2.50 per share, respectively, which were vested on the date of issuance and have a term of three years, were issued in exchange for services which are to be rendered over a four-year term.
Stock Based Compensation
In March 2000, the Company adopted the 2000 Employee Stock Option Plan (2000 Employee Plan). Incentive and nonqualified options for up to 1,000,000 shares of common stock may be granted to employees, officers, directors and consultants. The 2000 Employee Plan limits the number of shares that can be granted to any employee in one year and the total market value of common stock which becomes exercisable for the first time by any grantee during a calendar year. Exercise price for incentive options may not be less than the fair market value of the Company's common stock on the date of grant and the exercise period may not exceed ten years. Vesting periods and option terms are determined by the Board of Directors. The 2000 Employee Plan will expire in March 2010.
In September 2000, the Company adopted the 2000 Director Stock Incentive Plan (2000 Director Plan), under which nonqualified options for up to 500,000 shares of common stock may be granted. Upon appointment to the board and annually thereafter during their term, each director will receive options for common stock with aggregate fair value of $10,000. These options are exercisable beginning one year from the date of grant and expire in ten years. Exercise price is set at 50% of the fair market value of the common stock on the date of grant. The discount is in lieu of cash director fees. The 2000 Director Plan will expire in September 2010.
During 1999, the Company issued options to purchase 457,500 shares of its common stock to employees, officers and board members. No options were granted in 2000.
During 2001, options were granted to purchase 832,564 shares of the Company's common stock exercisable at $0.39 per share for members of the Board of Directors and $1.00 to $1.25 per share for employees. Exercise price is at or above the fair value of the
Stock Based Compensation (continued)
common stock on the date of grant and ranges from $0.39 to $4.75 per share. Options are subject to vesting periods of zero to 48 months. In addition, during April 1998, an option to purchase 25,000 shares was granted to an employee of Commerce Capital, Inc. as additional collateral for the $650,000 loan to the Company. This option expires in 2003.
The Company follows the guidance set forth in APB No. 25 as it pertains to the recording of expenses from the issuance of incentive stock options. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recorded in conjunction with options issued to employees. Had compensation cost been determined based on the fair value of the options at the grant date and amortized over the option's vesting period, consistent with the method prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below (in thousands except per share information):
2001 2000 1999 ---- ---- ----
Net loss - as reported $ (618) $(6,151) $(1,341) Net loss - pro forma (1,072) (6,241) (1,687) Net loss per common share - as reported (.04) (0.75) (0.22) Net loss per common share - pro forma (.08) (0.76) (0.28)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2001, and 1999; expected volatility of 68% and 35%; risk-free interest rate of 6.0% and 6.17%; expected lives from one to four years and expected dividends of 0%. The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Stock option activity during the periods indicated is as follows:
(a) Common Stock
On September 13, 1998, the Company's Board of Directors approved a reverse one for ten stock split. All references to the number of shares and price per share have been adjusted to reflect the reverse split.
In September 1993 the Company issued 18,976 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 $75 per share. The put options continue to be exercisable at $300 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.
On August 4, 1997, the Company's president exercised a stock purchase right (the "Purchase Right") awarded her by the board of directors on February 12, 1997. The Purchase Right entitled her to purchase up to 400,000 shares of the Company's common stock during the period April 30, 1997, to April 30, 2002 at a price of $2.81 per share. The president paid for the shares by the delivery of a non-recourse promissory note, bearing no interest, due April 30, 2002. The promissory note is collateralized by the shares purchased therewith, which shares would be forfeited to the extent the note is not paid on or before maturity, and would be payable (including prepayable), in whole or in part, by the delivery to the Company of (i) cash or (ii) other shares of the Company's common stock that the president has owned for a period of at least six months, which shares would be credited against the note on the basis of the closing bid price for the Company's common stock on the date of delivery. Any dividends or distributions made with respect to shares collateralizing any unpaid note will be held in an escrow to be established for such shares and note until such time, if any, as the related promissory note is paid. In November 1997, 150,000 shares subject to this Purchase Right were returned to the Company for a pro-rata reduction in the note. Concurrently, the President relinquished any further rights to such 150,000 shares of common stock. At November 30, 1999, $703,000 remains outstanding under this promissory note. The promissory note, and the shares securing it, have been pledged by the Company to secure a $650,000 loan. See Note 6.
On August 13, 1997, the Company issued 675,000 shares of common stock to a group of investors ("the Smith Group") for $1,350,000 pursuant to a stock purchase agreement also dated August 13, 1997 between members of the Smith group, the Company and Patricia Anderson-Lasko. Concurrent with the execution of the stock agreement and in conjunction with employment agreements with key executives, the Company granted 292,500 in non-qualified stock options to those executives. Subject to vesting provisions, the options remain exercisable until August, 2002 at a price of $3.315 per share.
As of November 30, 1999, the Company has outstanding common stock purchase warrants as follows:
Class Exercise Price Shares Expiration - ----- -------------- ------ ---------- H $5.20 77,576 August 2001 			 $1.80 7,407 March 2002
On October 8, 1998, the Company sold 899,000 shares of common stock in a private placement to Furrow-Holrob Development II, L.L.C. for $1,798,000.
During 1998, the Company issued options to acquire 200,000 shares of common stock to two members of the Board of Directors. These shares are exercisable at $4.75 per share and vest at the rate of 2,083 per month for 48 months. As of November, 30, 1999, total number of shares vested under these option agreements was 79,167. These options were accounted for as employee grants. The options were issued at prices equal to fair market value at the time of the grant.
During December 1998, the Company issued 45,000 shares to certain vendors as payment for payables in the amount of $91,564 which approximated the fair value of the shares.
In February 1999, the Company issued an aggregate of 150,000 shares to two directors of the Company to convert $300,000 of debt. The $300,000 approximated the fair value of the shares.
During the second quarter of 1999, the Company issued 571,000 shares to several individual investors in a private placement for consideration of $792,000.
In 1999, the Company's shareholders approved the authorization of an additional 8,000,000 shares of Common Stock to increase the total authorized shares to 15,000,000 and the authorization of 6,000,000 shares of Preferred Stock.
12. Stock based compensation
	The Company adopted a Stock Option Plan (the "1991 Plan") in December 1991 (amended in April 1992) under which 10,000 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.
During 1998, the Company also issued options to acquire 25,000 shares of common stock to a member of management. These shares are exercisable at $3.33 per share and vest at the rate of 2,083 per month for 12 months. As of November 30, 1999, the total number of shares vested under this option agreement was 25,000.
During April 1998, an option to purchase 25,000 shares of Common Stock was granted to an employee of Commerce Capital as additional collateral for the $650,000 loan to the Company. This option expires in 2003.
The Company has reserved 685,417 shares for issuance upon the exercise of the outstanding common stock purchase warrants and options. As of November 30, 1999, 462,917 shares under option were vested.
The Company follows the guidance set forth in APB No. 25 as it pertains to the recording of expenses from the issuance of incentive stock options. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recorded in conjunction with options issued to employees. Had compensation cost been determined based on the fair value of the options at the grant date, consistent with the method prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
(000's except per share information)
1999 1998 1997 ---- ---- ----
Net income (loss) - as reported $(1,341) $(4,014) $(1,315) Net income (loss) - pro forma (1,687) (4,325) (1,496) Net income (loss) per common share - as reported (0.22) (0.87) (0.38) Net income (loss) per common share - pro forma (0.28) (0.94) (0.44)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1998 and 1999; expected volatility of 35%; risk-free interest rate of 6.17%; and expected lives from one to four years.
Stock option activity during the periods indicated is as follows:
Number Weighted-average of shares exercise price --------- -------------- Balance at November 30, 1997 292,500 $3.32 Granted 250,000 $4.14 Forfeited -- -- -------- -------------- Balance at November 30, 1998 542,500 $3.68 Granted 207,500 $4.64 Forfeited (64,583) ($4.75) ------- -------------- Balance at November 30, 1999 685,417 $3.89
Options exercisable at November 30, 1997 36,562 Options exercisable at November 30, 1998 255,722 Options exercisable at November 30, 1999 462,917
The weighted average fair value of options granted for the year ended November 30, 1997, 1998 and 1999 were $3.315, $1.54 and $1.70, respectively.
12. Commitments and Contingencies
Leases
The Company leases certain property, buildings, a showroom and equipment. Rental expense for the years ended 2001, 2000 and 1999 was approximately $107,000, $160,000 and $182,000, respectively. During September 2000, the Company entered into a lease agreement with a related party (Mabry Partner Partnership) to lease office space. The lease rate is $3,500 per month for approximately 5,000 square feet of office space, has a ten-year term and is cancelable with six months written notice (see Note 13).
The future minimum rental commitments under operating leases as of December 1, 2001 are as follows (in thousands):
2002 $ 78 2003 60 2004 42 2005 42 2006 and thereafter 203 --- Total future minimum lease payments $ 425
License Agreements
On March 26, 2001, the Company entered into a licensing agreement with Candies Inc. (Candies) pursuant to which the Company obtained the right to design, manufacture and distribute bags, belts and small leather/pvc goods bearing the Bongo trademark. The agreement is to terminate on March 31, 2003 unless the Bongo brand is sold in its entirety, in which case the licensing agreement would terminate immediately. The Company pays Candies a 5% royalty and a 2% advertising fee on the net sales of the Company's goods bearing the Bongo trademark. The Company is obligated to pay minimum royalties of $50,000 under the initial term of 24 months under the license agreement.
On February 7, 2001, in connection with the acquisition of the Joe's Jeans licensing rights, the Company entered into a ten-year license agreement which requires the payment of a royalty based upon 3% of net sales, subject to additional royalty amounts in the event certain sales and gross profit thresholds are met on an annual basis.
The Company displays names and logos on its products under license agreements that require royalties ranging from 7% to 17% of sales. The agreements expire through December 2002 and require annual advance payments (included in prepaid expenses) and certain annual minimum payments. Royalty expense was $132,000, $373,000 and $742,000 for the years ending December 1, 2001, and November 30, 2000 and 1999, respectively.
Litigation
The Company is involved from time to time in routine legal matters incidental to its business. In the opinion of the Company's management, resolution of such matters will not have a material effect on its financial position or results of operations.
(a) Leases
The Company leases certain property, buildings and equipment. Rental expense for the years ended November 30, 1999, 1998 and 1997 was approximately $182,000, $40,000 and $63,000 respectively. The minimum rental commitments under noncancellable operating leases as of November 30, 1999 are as follows: 2000, $218,180; 2001, $217,085; 2002, $211,811 and 2003, $176,509. During October of 1998, the Company entered into a lease agreement with a related party (Furrow- Holrob Development II, L.L.C.) to lease a production facility. The five year term began December 15, 1998 at a lease rate of $2 per square foot.
License Agreements
The Company displays characters, names and logos on its products under license agreements that require royalties ranging from 7% to 17% of sales. The agreements expire through 1999 and require annual advance payments (included in prepaid expenses) and certain annual minimums. Royalties were $742,000, $346,000, and $363,000 for fiscal 1999, 1998 and 1997, respectively.
(c)	Contingencies
The Company is a party to lawsuits and other contingencies 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 1999, the American Apparel Contractors Association Workers' Compensation Fund filed suit against the Company's Thimble Square subsidiary for $13,000 plus interest of 1.5% per month from the due date (American Apparel Contractors Association Workers' Compensation Self-Insured Fund v. Thimble Square and Innovo Group). This amount represents the allocation to Thimble Square of the excess workers' compensation claims paid under the plan. The Company has not accrued for the disputed funds in this case.
In November, 1999, the Company received a notice from the Internal Revenue Service ("IRS") asserting deficiencies in federal corporate income taxes for the Company's 19991 tax year. The total tax proposed by the IRS amounts to approximately $5.5 million plus interest. The Company believes that it has meritorious legal defenses to those deficiencies, as well as available net operating losses to offset any such deficiencies, and believes that the ultimate resolution of this matter will not have a material effect on the Company's financial statements.
In May, 1996, a foreign manufacturer that had previously supplied imported products to a nonoperating subsidiary, NASCO Products, filed suit against NASCO Products asserting that it is owed approximately $470,000, which was approximately $300,000 in excess of the amount previously recorded on the books of NASCO Products. NASCO Products and the supplier had previously reached an agreement on the balance owed (which was 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 denied the supplier's claims, and 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. This suit was settled and paid by the Company in 1999 for $200,000. The Company had previously recorded a liability of $170,000 for this suit and recorded the remaining settled amount in the third quarter of 1999.
In December 1991, a former employee filed suit against the Company, Patricia Anderson-Lasko and others alleging breach of an employment agreement and conversion of his interest in certain property rights (Michael J. Tedesco v. Innovo, Inc.., et al., Case No. 91-64033, District Court of Harris County, Texas, 164th Judicial Circuit). Following an appeal and a second trial, a final judgment was rendered against Innovo for $194,045.62 on August 17, 1998. Thereafter, 20,000 shares of Common Stock which has been held in the registry of the court, as security during the appeal and subsequent trial, were released to the plaintiff. If the sale of that stock does not generate sufficient net proceeds to pay the judgment, then Innovo will be liable for any shortfall. The Company monitors the price of its stock in the market and makes adjustments to the amount recorded in the financial statements as necessary.
In July 1992, a former employee filed suit against the Company and Spirco for alleging breach of an employment agreement and asserting other related claims (Wayne Copelin v. Innovo Group, Inc., et al., Case No. 11950, in the Chancery Court of Robertson County, Tennessee). When Spirco filed for bankruptcy in August 1993, the case proceeded against Innovo Group and a summary judgment of $100,000 was entered against it in March 1995. However, because the Copelin judgment was classified as a Class 8 Claim in the Spirco bankruptcy, the Company believed that the judgment was fully paid when it issued 35,211 shares of Common Stock to Copelin, in compliance with the confirmed Plan of Reorganization. When Copelin sought to enforce the judgment, Innovo Group, as the successor by merger to Spirco, brought a motion in the Spirco bankruptcy to enforce the terms of the Plan of Reorganization against Copelin. The bankruptcy judge granted the motion and permanently enjoined Copelin from enforcing the judgment in an order entered on October 18, 1996. Copelin appealed to the United States District Court and on April 13, 1998, the District Court reversed. The case was appealed to the United States Third Circuit Court of Appeals. This court upheld the previous courts ruling. The Company recorded the $100,000 liability as of November 30, 1999.
(d) Liquidity
The Company has experienced recurring operating losses and negative cash flows from operations. Management is currently taking steps to improve profitability by increasing the number of marketing personnel, introducing new products lines and by endeavoring to control and minimize fixed costs. The Company has taken several steps to improve liquidity during fiscal year 2000, as discussed in Note 13 Subsequent Events.
Based on the foregoing, the Company believes that working capital will be sufficient to fund operations and required debt reductions during fiscal 2000. The Company believes that any additional capital, to the extent needed, could be obtained from the sale of equity securities or short-term working capital loans. However, there can be no assurance that this or other financing will be available if needed. The inability of the Company to able to satisfy its interim working capital requirements would require the Company to constrict its operations and would have a materially unfavorable effect on the Company's financial statements.
13. Segment Disclosures
Current Operating Segments
During 2001, the Company began to operate in two segments, Crafts and Accessories, and the Apparel segment. The Crafts and Accessories segment represents the Company's historical line of business as conducted by Innovo. The Apparel segment is comprised of the operations of Joe's and IAA, both of which began in 2001, as a result of acquisitions. The operating segments have been classified based upon the nature of their respective operations, customer base and the nature of the products sold.
Prior to November 30, 2000, the Company had two reportable segments based on the business activities from which they earned revenues or incurred expenses. The revenue-generating operations were segregated into the domestic and international segments based on the geographic markets in which the Company's products were sold. These reportable segments were managed separately because they had different customers and distribution processes or had different business activities. During 2000, the Company significantly reduced its international sales efforts and ceased to operate as two reportable segments.
The Company evaluates performance and allocates resources based on gross profits, and profit or loss from operations before interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Information for each reportable segment during the three years ended December 1, 2001, are as follows (in thousands):
(A)	Other includes corporate expenses and assets and expenses related to real estate operations.
(B) November 30, 2000 Domestic International Total - ----------------- -------- ------------- -----
Revenues, net $ 5,686 $ 81	 $ 5,767 Gross profit 558 14 572 Depreciation and amortization 250 -- 250 Interest expense 446 -- 446 Extinguishment of debt 1,095 -- 1,095
Segment assets 7,413 3 7,416 Expenditures for segment assets 76 -- 76
(B)	Segment operating results include $600,000 charge for impairment of long-lived assets held for sale related to the Lake Worth, Florida, retail property.
(C) November 30, 1999 Domestic International Total - ----------------- -------- ------------- -----
Revenues, net $ 10,138 $ 699 $ 10,837 Gross profit 4,438 147 4,585 Depreciation 287 -- 287 Interest expense 517 -- 517
Segment assets 6,065 157 6,222 Expenditures for segment assets 126 -- 126
(C)	Segment operating results include a charge for impairment of long-lived assets held for use related to the Springfield, Tennessee, property ($145) and loss from the termination of a capital lease on the Baxley, Georgia, facility ($293).
Domestic International Corporate Total -------- ------------- --------- ----- Revenues (net) $ 6,351	 $ 1,550	 $ -- $ 7,901 Gross Profits 1,946 652		 -- 2,598 Depreciation 107 -- 160 267 Interest Expense -- -- 657 657
Segment Assets 2,312 211 6,645 9,168 Expenditures for Segment Assetes 35 -- 434 469
14. Related Party Transactions
The Company has adopted a policy requiring that any material transactions between the Company and persons or entities affiliated with officers, directors or principal stockholders of the Company be on terms no less favorable to the Company than reasonably could have been obtained in arms' length transactions with independent third parties.
Anderson Stock Purchase Agreement
Pursuant to a Stock Purchase Right Award granted in February 1997, the Company's chief executive officer purchased 250,000 shares of common stock (the Award Shares) with payment made by the execution of a non- recourse note (the Note) for the exercise price of $2.81 per share ($703,125 in the aggregate). The Note is due, without interest, on April 30, 2002, and is collateralized by the 1997 Award Shares. The Note may be paid or prepaid (without penalty) by (i) cash, or (ii) the delivery of the Company's common stock (other than the Award Shares) held for a period of at least six months, which shares would be credited against the Note on the basis of the closing bid price for the common stock on the date of delivery. At December 1, 2001, $703,000 remains outstanding under this promissory note.
Sam Furrow and Affiliate Loans
During the period from January 1999 to June 2000, Sam Furrow (Chairman of the Board of Directors) and affiliated companies made a total of 24 loans in an aggregate amount of $1,933,000 to the Company, primarily to finance the import of products from Asia and general operations. Each of the loans was unsecured and provided for interest compounding annually at a rate of from 8.5% to 10.0%. Most of the loans provided for a six-month term. Of the amounts loaned by Sam Furrow and his affiliates, $1,200,000 has been exchanged for common stock in 2000 and 1999 as described below under "Debt to Equity Conversions." As of December 15, 2000, all amounts owed by the Company to Sam Furrow and affiliated companies have been repaid.
Dan Page Loans
During the period from February 1999 to March 1999, Dan Page (a director of the Company) made a total of five loans in an aggregate amount of $200,000 to the Company primarily to finance the import of product from Asia and general operations. Each of the loans was unsecured, had a term of six months and provided for interest compounding annually at a rate of 10%. All of the $200,000 has been exchanged for common stock as described below under "Debt to Equity Conversions" below.
Debt to Equity Conversions
On February 28, 2000, notes payable to Sam Furrow totaling $500,000 were converted to 423,729 shares of common stock at $1.18 per share, which approximated its fair value on the date of conversion. Sam and Jay Furrow (collectively the Furrow Group) also assumed $1,000,000 of the Company's outstanding debt previously guaranteed by Sam Furrow. The debt consisted of $650,000 owed to Commerce Capital, Inc. (a Nashville, Tennessee, based finance company) and $350,000 owed to First Independent Bank of Gallatin. On August 11, 2000, the Furrow Group converted the $1,000,000 of assumed indebtedness and $500,000 of notes payable to Sam Furrow for 1,363,637 shares of common stock at $1.10 per share (its approximate fair value) and warrants to purchase an additional 1,500,000 shares. The warrants are exercisable over three years at $2.10 per share. The fair value of the warrants totaling $1,095,000 was recorded as a charge for the extinguishment of debt and a corresponding increase in additional paid-in capital. The conversion of the debt to equity was required by Commerce as a condition to its investment in the Company.
On February 26, 1999, Sam Furrow and Dan Page each exchanged $150,000 of the indebtedness owed by the Company for 75,000 shares of common stock, at a price of $2.00 per share. On April 26, 1999, Jay Furrow acquired $50,000 of the indebtedness owed by the Company to Sam Furrow and exchanged that amount for common stock at a price of $1.00 per share. On the same date, a third party acquired $50,000 of the indebtedness owed by the Company to Dan Page and exchanged that amount for common stock at a price of $1.00 per share.
With respect to each of the debt to equity conversions discussed above, the Board of Directors determined that the purchases of common stock were made on fair terms and conditions and were in the Company's best interests in order to increase the Company's net tangible assets for NASDAQ listing compliance purposes. The per share price approximated recent trading prices with a reasonable discount due to the restricted nature of the issued shares. All of the shares issued pursuant to the debt conversions are restricted and are subject to registration rights.
Purchases of Goods and Services
As required under the terms of the Commerce investment, the Company purchased $5,216,000 and $3,108,000, respectively, in goods, $382,000 and $196,000 in distribution services and $137,000 and $0 in operational services from Commerce during fiscal 2001 and 2000, respectively. These services included but were not limited to accounts receivable collections, certain general accounting functions,inventory management and distribution logistics. Additionally, this charge included the allocation associated with the Company occupying space in Commerce's Commerce, California facility and the use of general business machines and communication services. The Company from time to time will advance or loan funds to Commerce for use in the production process of the Company's goods or for other expenses associated with the Company's operations. The Company believes that all the transactions conducted between the Company and Commerce were completed on terms that where competitive and at market rates.
JD Design, LLC
Pursuant to the license agreement entered into with JD Design, LLC under which the Company obtained the licensing rights to Joe's Jeans, Joe's is obligated to pay a 3% royalty on the net sales of all products bearing the Joe's Jeans or JD trademark or logo. For fiscal 2001, this amount totaled $46,000.
Azteca Production International, Inc.
In the third quarter of fiscal 2001, the Company acquired Azteca Productions International, Inc.'s Knit Division and formed the subsidiary Innovo-Azteca Apparel, Inc. Pursuant to equity transactions completed in 2000, the principals of Azteca Production International, Inc. became affiliates of the Company. The Company purchased the Knit Division's customer list, the right to manufacture and market all of the Knit Division's currentproducts and entered into certain non-compete and non-solicitation agreements and other intangible assets associated with the Knit Division. As consideration, the Company issued to Azteca, 700,000 shares of Company's common stock valued at $1.27 per share based upon the closing price of the common stock on August 24, 2001, and promissory notes in the amount of $3.6 million.
Included in due to related parties is $806,000 at December 1, 2001 relating to amounts due to Commerce for goods and services described above, and accrued interest of $71,000 due to Azteca pursuant to the terms of the promissory notes.
Facility Lease Arrangements
On October 7, 1998, the Company entered into a Warehouse Lease Agreement with Furrow-Holrob Development II, LLC (a shareholder) to lease a 78,900-square-foot plant that housed the Company's executive offices and manufacturing, administrative and shipping facilities. The "triple net" lease provides for an annual base rental rate of $2.00 per square foot, or $157,800 annually, plus a pro rata share of real estate taxes, insurance premiums and common area expenses, with an initial five- year term and two five-year renewal options (subject to agreement on any change in the base rental rate). As required by the terms of the Commerce investment, the Warehouse Lease Agreement was terminated on July 1, 2000.
After the termination of the Warehouse Lease Agreement, the Company entered into a new office lease with a company owned by Sam Furrow. The "triple net" lease covers a 5,000-square-foot facility in downtown Knoxville, Tennessee, for $3,500 per month.
15. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the three years (in thousands, except per share amounts):
Quarter ended February 29 May 31 August 31 December 1 ----------- ------ --------- ----------
Net sales $ 1,153 $ 1,968 $ 2,625 $ 3,546 Gross profit 499 746 951 763 Loss before income taxes (103) 41 (16) (451) Net (income) loss (103) 41 (16) (540)
Loss per share (basic and diluted): $ (.01) $ .00 $ .00 $ (.04)
Quarter ended February 29 May 31 August 31 November 30(1) ----------- ------ --------- -----------
Net sales $ 812 $ 1,101 $ 3,579 $ 275 Gross profit 286 302 1,138 (1,154) Loss before extraordinary item (823) (740) (288) (3,205) Extraordinary item -- -- -- (1,095) Net loss (823) (740) (288) (4,300)
Per share (basic and diluted): Loss before extraordinary item $ (0.13) $ (0.10) $ (0.04) $ (0.35) Net loss (0.13) (0.10) (0.04) (0.48)
(1)	During the fourth quarter of fiscal 2000, the Company modified its accounting for sales discounts related to advertising allowances calculated as a percent of sales to a customer, resulting in the reclassification of approximately $250,000 previously reported as a component of selling, general and administrative expenses to reduce net sales. In addition, the Company recorded charges in the fourth quarter of $250,000 in cost of sales to write-off previously capitalized manufacturing overhead, $600,000 related to the write-down of land and buildings held for sale, $99,000 related to the loss on disposal of fixed assets related to the closure of the Company's manufacturing facility, $1,095,000 in connection with the issuance of common stock and warrants in exchange for the assumption and conversion of debt facilities, $300,000 in cost of sales related to the write down of inventory disposed of prior to the relocation of the Company's distribution facility and approximately $300,000 as a reduction of net sales in connection with other sales, returns and allowances.
Innovo Group Inc. and Subsidiaries
Schedule II Valuation of Qualifying Accounts
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Innovo Group Inc Knoxville, Tennessee.
We hereby consent to the incorporation by reference in the Registrations Statements on Form S-3 (Nos. 333-44330, 333-79505 and 333-35981) of our report dated January 13, 2001, except for Notes 11 and 14, as to which the date is March 8, 2000, relating to the consolidated financial statements and schedule of Innovo Group Inc. apprearing in the Company's Annual Report on Form 10-K for the year ended December 1, 2001.
/s/ BDO Seidman, LLP - --------------------------- BDO Seidman, LLP Atlanta, Georgia February 28, 2002
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements Form S-3 No. 333-44330, No. 333-79505 and No. 333-35981 of Innovo Group, Inc. and Subsidiaries and in the related Prospectus of our report dated February 8, 2002, with respect to the consolidated financial statements and schedule of Innovo Group, Inc. and Subsidiaries included in this Form 10-K for the year ended December 1, 2001.
/s/ ERNST & YOUNG LLP - --------------------- ERNST & YOUNG LLP
Los Angeles, California February 27, 2002