<PAGE>
As filed with the Securities and Exchange Commission on June 28, 1996.
Registration No. 333-03119
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNOVO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 5199 11-2928178
(State of other (Primary Standard (IRS Employer
jurisdiction of incorporation Industrial Classification Identification Number)
or organization) Code Number)
27 North Main Street
Springfield, Tennessee 37172
(615) 384-0100
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
Patricia Anderson-Lasko
INNOVO GROUP INC.
27 North Main Street
Springfield, Tennessee 37172
(615) 384-0100
(Address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As
soon as practicable after effective date of this Registration Statement.
If any of the securities being registered in this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC.
Cross Reference Sheet
(Pursuant to Rule 404 and Item 501(b) of Regulation S-K
Showing Location in Prospectus of Information Required
by Items of Form S-1 Registration Statement)
<S> <C> <C>
Item Registration Statement Item Caption or Location
Number and Heading in Prospectus
- ------------------------------------------------------------------------------------------------------------------
1. Forepart of the Registration Statement
and Outside Front Cover Page of Prospectus.................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................................................... Inside Front Cover Page,
Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.......................................... "Prospectus Summary,"
"The Company," "Risk
Factors," "Selected
Consolidated Financial
Data"
4. Use of Proceeds............................................................... Use of Proceeds
5. Determination of Offering Price............................................... Outside Front Cover Page,
"Market for the Company's
Securities and Related
Shareholder Matters"
6. Dilution...................................................................... Not Applicable
7. Selling Security Holders...................................................... "Selling Stockholders"
8. Plan of Distribution.......................................................... Outside Front Cover
Page
9. Description of Securities to be Registered.................................... "Description of Securities"
10. Interests of Named Experts and Counsel........................................ Not Applicable
11. Information with Respect to the Registrant.................................... "Prospectus Summary,"
"Risk Factors," "The
Company," "Dividend
Policy," "Capitalization,"
"Selected Financial Data,"
"Management's Discussion
and Analysis of Financial
Condition and Results of
Operations," "Business,"
"Management," "Principal
Stockholders," "Description
of Securities," Consolidated
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.............................................. Not Applicable
</TABLE>
<PAGE>
Legend for Preliminary Prospectus
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation of sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS
Preliminary Prospectus Dated June 28, 1996
Subject to Completion
INNOVO GROUP INC.
Common Stock
3,988,570 Shares by the Selling Stockholders
This Prospectus relates to 3,988,570 shares of the common stock,
$.01 par value (the "common stock") of Innovo Group Inc. (the "Company") to be
offered for sale to the public by certain existing stockholders (the "Selling
Stockholders"). Of such 3,988,570 shares, (i) 1,059,258 shares were issued
during fiscal 1996 in exchange for the extinguishment of certain debt, (ii)
194,499 shares were issued, or will become issuable, in consideration for
extensions of the maturity of, or as interest on, a working capital loan
originally obtained in July, 1994, (iii) 53,003 shares will be issued by the
Company to extinguish certain debt pursuant to an agreement that obligates the
creditor to take shares of common stock as payment upon the effectiveness of the
registration statement of which this Prospectus forms a part, (iv) 1,100,000
shares were issued in March, 1996 and April, 1996 upon the exercise of certain
outstanding stock purchase warrants, (v) 1,250,000 shares were issued, or may
become issuable, under the terms of a private placement completed in January,
1996, and (vi) 300,000 shares issuable upon the exercise, if any, of the
Company's outstanding Class E and Class G common stock purchase warrants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selling Stockholders" and "Description of Securities".
The holders of 1,914,286 shares of the common stock being offered
hereby have agreed to certain restrictions on the resale of those shares. See
"Selling Stockholders," and "Shares Eligible for Future Sale."
The distribution of the shares of common stock by the Selling
Stockholders may be effected in one or more transactions that may take place
through the over-the-counter market, including broker's transactions, privately
negotiated transactions or through sales to one or more dealers for resale of
such shares as principals at market prices prevailing at the time of the sale or
at prices related to such prevailing market prices or at negotiated prices.
Usual and customary or specifically negotiated brokerage fees or commissions may
be paid by the Selling Stockholders in connection with sales of the shares of
common stock. Certain Selling Stockholders have agreed to certain restrictions
on the resale of such shares over certain periods. See "Shares Available for
Future Sale".
The Company will not receive any of the proceeds from the sale of
the shares of common stock by the Selling Stockholders. All costs incurred in
the registration of the Selling Stockholders' shares of common stock are being
borne by the Company. See "Selling Stockholders".
The Selling Stockholders, directly or through agents, dealers or
underwriters to be designated from time to time may sell the shares of common
stock being offered by the Selling Stockholders from time to time on terms to be
determined at the time of sale. To the extent required, the number of shares of
common stock to be sold by the Selling Stockholders, the respective purchase
price and public offering price, the name of any agent, dealer or underwriter
and any applicable commissions or discounts with respect to a particular offer
are set forth herein. The Selling Stockholders reserve the sole right to accept
or reject, in whole or in part, any proposed purchases of the shares of common
stock being offered by them pursuant thereto. The Selling Stockholders and any
agents, dealers, or underwriters that (continued)
See "RISK FACTORS", beginning at page 11, regarding matters that
should be carefully considered by investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY PRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________, 1996
-------------
-2-
<PAGE>
participate with the Selling Stockholders in the distribution of the shares of
common stock may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended ("Securities Act"), any commissions received
by them and any profits on the resale of the common stock may be deemed to be
underwriting commissions or discounts under the Securities Act. Under applicable
rules and regulations promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and any person engaged in a distribution of
securities may not simultaneously bid for or purchase securities of the same
class for a period of two business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Rules
10b-2, 10b-5, 10b-6 and 10b-7, in connection with transactions in the shares of
common stock during the effectiveness of the Registration Statement of which
this Prospectus is a part. All of the foregoing may affect the marketability of
the shares of common stock. In connection with the offer and sale of the shares
of common stock, if any, by the beneficial owners thereof, such beneficial
owners have undertaken to deliver this Prospectus to the purchasers of such
securities in accordance with the Securities Act and to comply with applicable
provisions of the Exchange Act, including, without limitation, Rule 10b-6
thereunder, in connection with transactions in the Company's securities during
the effectiveness of the Registration Statement of which this Prospectus is a
part.
The Common Stock of the Company is currently quoted on the NASDAQ
SmallCap Market ("NASDAQ") under the symbol "INNO". On June 26, 1996, the
closing bid price and asked price of the Common Stock as reported by NASDAQ were
$1.03125 and $1.0625 per share, respectively.
-3-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
The Company
Innovo Group Inc. ("Innovo Group" or "the Company"), through its
operating subsidiaries, designs, manufactures and domestically markets various
canvas and nylon products, principally tote bags, sports bags, back packs, lunch
bags, stadium totes, and craft products for sale to various retailers and in the
premium and advertising specialty market. The Company also internationally
markets and distributes sports bags and backpacks.
The Company incurred losses from continuing operations of $67,000,
$7,905,000 and $661,000 in fiscal 1995, 1994 and 1993. Cash flows from
operations were negative $406,000 and $642,000 in fiscal 1994 and 1993,
respectively, and at February 29, 1996 the Company has an accumulated deficit of
$17.7 million. The Company is taking steps which it believes will allow it to
return to profitability and positive operating cash flows. However, the Company
may experience further losses and negative cash flows before these measures have
a material effect, and there can be no assurance that the Company will in fact
operate profitably. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Innovo, Inc. ("Innovo"), a wholly owned subsidiary, manufactures and
distributes utility, craft, fashion, sports and advertising specialty products.
Innovo's utility line is made up of canvas and nylon products, such as tote
bags, laundry, duffle and shoe bags and gift bags that are designed as
consumable products that respond to needs consumers encounter in every day life.
These products are generally produced with company designed artwork. For the
craft market Innovo produces canvas tote and laundry bags, aprons, children's
smocks and Christmas stockings with no design, which are sold (sometimes
packaged with paints or other materials) for sale as a craft project supply. The
fashion line features company designed canvas back packs, "day packs" (which
combine the features of a purse and a back pack), and tote bags, that attempt to
combine style and convenience to capitalize on the increasing trend towards more
casual dress.
Innovo's sports line consists of tote bags, lunch bags, fanny packs,
laundry, shoe and duffle bags and stadium totes. The majority of these products
display logos, insignia, names, mascots and other identifying characteristics of
professional or collegiate sports teams, or the United States Olympic Committee
("U.S.O.C."), under licenses, which are generally non-exclusive, held by Innovo
from various licensing entities including the National Football League, the NBA,
the National Hockey League, Major League Baseball, the U.S.O.C., and
approximately 130 colleges and universities. For the year ended October 31,
1995, 46% of the Company's sales from continuing operations represented the sale
of products bearing logos licensed by the colleges and universities, the
professional sports teams and the U.S.O.C. In fiscal 1996 Innovo will add
products that display the "Louisville Slugger" name and logo to its sports line,
and the Company is currently developing products, which will be marketed
beginning in the fourth quarter of fiscal 1996, under recently obtained or
agreed to licenses for the U.S. and international use of the logos, trademarks
and slogans of Anheuser-Busch Cos., Inc. and the European use of the Warner
Bros. Studios Looney Tunes(TM) characters. See "Business - Products" and
"Business - Licenses".
For the premium and advertising specialty markets the Company produces
both products that display professional sports team logos, and products that
bear the name, logo, slogan and/or design specifically requested by the
customer, who frequently provides the artwork to be used on such products.
Advertising specialty and premium customers are generally companies purchasing
products for distribution in promotions to employees and customers or for sale
as premium items. During the third quarter of fiscal 1994 the Company began to
also provide domestic manufacturing for other distributors of tote and sport
bags. See "Business - Products".
-4-
<PAGE>
During October 1994 the Company began steps designed to reduce its
operating expenses and capital requirements. The Company relocated to its owned
facility in Springfield, Tennessee the manufacturing operations it had
previously conducted in leased facilities in Sugarland, Texas. This
consolidation allowed the Company to eliminate the expense of the leased space
in Texas, and also allowed the elimination of certain shipping and duplicative
supervision costs. On July 31, 1995, the Company executed an agreement with
Accessory Network Group ("ANG") under which ANG succeeded to all of the rights
held by the Company's wholly owned subsidiary, NASCO Products, Inc. ("NASCO
Products") to market and distribute in the United States the National Football
League, NBA, Major League Baseball and National Hockey League logoed sports
bags, back packs and equipment bags previously imported to and distributed in
the U.S. by NASCO Products. The agreement did not cover the international rights
under the National Football League, NBA, Major League Baseball and National
Hockey League licenses. NASCO Products International, Inc. ("NPI International")
continues to sell products internationally. Additionally, the agreement has no
effect on Innovo's marketing and sale of its domestically manufactured
sports-licensed products, and the Company retained all the domestic rights to
the United States Olympic Committee, college and Major League Baseball Players
Association products, which are now being manufactured domestically by Innovo
and marketed as part of its product line.
For each license ANG is paying NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining $650,000
is being paid, without interest, in monthly installments equal to 5% of ANG's
aggregate sales of the licensed products, with final payment due July 31, 1998.
ANG assumed all of NASCO Products' obligations under the licenses, including the
payment of royalties and minimum royalties. NASCO Products also transferred to
ANG its existing inventory of these products, for which ANG paid approximately
67% of NASCO Products' cost, or approximately $307,000. Such payments are being
made by ANG over a six month period which will end May, 1996.
In addition, ANG will make an ongoing annual payment to NASCO Products
of 2% of sales under each of the National Football League, Major League Baseball
and National Hockey League licenses, and 1% of sales under the NBA license, up
to aggregate sales of $15 million, and 1.5% and .5% of sales thereafter. The
payments will continue for forty years unless a license expires or is terminated
and is not renewed or reinstated within twelve months.
During fiscal 1993 and 1994 the Company's marketing emphasis was placed
on the U.S. retail market for its sports licensed products. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets. The Company hopes that this will
allow it to increase sales and lessen its dependence on sports licensed
products. The Company will also pursue opportunities to provide domestic
manufacturing for other tote and sports bag distributors. The Company will
attempt to achieve growth in the sales of its sports logoed products through the
acquisition of new licenses, such as the U.S.O.C. license and related
cross-licenses for products that display Warner Bros. "Looney Tunes" characters
or the "Cabbage Patch Kids" characters together with the U.S.O.C. five-ring
Olympic logo, the "Louisville Slugger" license acquired in November, 1995, and
the Anheuser-Busch and Warner Bros. licenses acquired in fiscal 1996, and by the
development of new products and distribution for college logoed merchandise.
Over the longer term the Company is looking to achieve growth through increase
in the sales of the sports logoed bags and backpacks it designed, under its
international license rights, for the international market, where U.S.
professional sports have achieved increased exposure and popularity, and from
the introduction of Innovo's fashion line in the international market. However,
there can be no assurance that any of these strategies will produce increased
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
-5-
<PAGE>
The Company estimates that the products sold by its continuing
operations are carried in over 4,500 retail outlets. The Company's marketing
efforts are conducted principally by its own sales and marketing staff and
through its network of approximately 20 marketing organizations having
approximately 60 independent sales representatives. The Company sells to retail
accounts such as mass merchandisers, department stores, mail order companies,
grocery stores and drugstore chains, including K Mart Apparel Corp., Wal-Mart
Stores, Inc., Target, J.C. Penney Company, Inc., Sears Roebuck and Co., Walgreen
Co., and Michael's Stores, Inc., and advertising specialty accounts. See
"Business - Marketing and Customers".
On April 12, 1996, the Company acquired 100% of the outstanding common
stock of Thimble Square, Inc. ("Thimble Square") for an aggregate of $1.1
million, paid by the issuance of shares of the restricted common stock of the
Company. In a concurrent transaction, Thimble Square acquired from its
stockholders a plant it had previously leased from them in exchange for (a)
$300,000 paid by the issuance of shares of the restricted common stock of Innovo
Group, and (b) the issuance by Thimble Square of $200,000 of unsecured notes
payable, without interest, on August 31, 1996 (with certain prepayments required
in the event of certain refinancings or asset sales by Thimble Square). The
purchase prices are subject to downward adjustment based on the results of an
audit of Thimble Square's December 31, 1995 financial statements, and the
appraisal of its property and equipment, which are to be completed by June 30,
1996.
A total of 2,745,098 shares of the Company's common stock were issued
to effect the acquisition. However, at the time of the acquisition Thimble
Square owned 1,080,000 shares of the Company's common stock as a result of the
January, 1996 manufacturing agreement between the companies (see Note 5 of Notes
to Condensed Consolidated Financial Statements). As a result of the acquisition,
Innovo Group reacquired, and retired, those shares, and the net increase in the
number of shares of Innovo Group common stock outstanding was 1,665,098 shares.
Thimble Square manufactures and markets ladies' ready-to-wear at-home,
sleep and lounge wear from plants in Pembroke and Baxley, Georgia. Its products
are sold to mail order companies, retailers and through mail order distribution.
Thimble Square also provides "sew-only" manufacturing for other distributors of
private-label sleep and lounge wear; in those instances, the customer provides
the raw materials, and Thimble Square manufactures the products to the
distributor's specifications. Thimble Square's sales for its fiscal year ended
December 31, 1995 were approximately $3 million. Innovo Group intends to attempt
to increase Thimble Square's sales by using Innovo's marketing and sales
functions to market its products to major mass merchants and other retailers
with whom Innovo already has relationships, and to which Thimble Square has not
had material sales. The Company may also utilize Thimble Square's mail order
distribution to market Innovo's products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Acquisition of Thimble
Square," and Pro Forma Condensed Consolidated Financial Statements.
Innovo began operations in April, 1987. In August, 1990, Innovo merged
into Elorac Corporation, a so called "blank check" company, which was renamed
Innovo Group. In fiscal 1991 the Company acquired the business of NASCO, Inc.
("NASCO"), a manufacturer, importer and distributor located in Springfield,
Tennessee, through two separate transactions. In the first transaction, the
retail bag division of NASCO was acquired by a wholly-owned subsidiary of the
Company in June 1991. The retail bag division of NASCO, renamed NASCO Products
upon its purchase, manufactured and imported a line of canvas and nylon sports
bags, backpacks, equipment bags, fanny packs, athletic caps and other sporting
goods products imprinted or embroidered with emblems and logos licensed from a
variety of licensors, such as Major League Baseball, the National Hockey League,
the National Football League and the NBA.
In the second transaction, all of the outstanding shares of common
stock of NASCO (the assets
-6-
<PAGE>
of which included the 75,000 shares of the Company's common stock transferred in
the prior transaction) were acquired by the Company in August 1991. NASCO,
subsequently renamed Spirco, was also engaged in the marketing of fundraising
programs to school and youth organizations. The fundraising programs involved
the sale of magazines, gift wraps, food items and seasonal gift items. Effective
April 30, 1993, the Company sold the youth and school fundraising business of
Spirco to QSP, Inc. ("QSP"), which is a wholly-owned subsidiary of The Readers
Digest Association, Inc. The Company received initial proceeds of $1.5 million
in fiscal 1993, and additional payments from QSP of $1,445,000 in fiscal 1994.
Spirco had incurred significant trade debt from the fiscal 1992 losses
it incurred in marketing fundraising programs, and its continuing operations of
supplying school spirit products to companies that market such programs was not
producing sufficient cash flow to significantly reduce these obligations and
liabilities incurred by Spirco prior to its acquisition which were not disclosed
at that time. On August 27, 1993, Spirco filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code. Innovo Group, Innovo and NASCO Products were not
parties to the filing. Spirco's plan of reorganization was confirmed by the
court on August 5, 1994, and became effective on November 7, 1994. Under the
plan, administrative claims were paid in cash from funds borrowed under the
Company's bank credit facility. Leasall Management, Inc. ("Leasall"), a newly
formed subsidiary of Innovo Group, acquired Spirco's equipment and plant and
assumed the related equipment and mortgage debt, which Innovo Group had
previously guaranteed, and Spirco was merged into Innovo Group which as a result
acquired direct ownership of its other assets. Spirco claims which had been
guaranteed by Innovo Group received full payment through the issuance of 222,000
shares of Innovo Group common stock. Additionally, 584,000 shares of Innovo
Group common stock were issued to a trust ("the Class 3 Trust") which is selling
those shares and distributing the proceeds to the Class 3 claimants, which are
federal, state and local taxing authorities that had claims for income, sales,
property and unemployment taxes. In general, Innovo Group will receive any
shares that are not required to satisfy the Class 3 claims. All claims that
ranked below secured claims, including general unsecured claims and the claims
of Innovo Group, Innovo and NASCO Products for advances to Spirco, received no
distribution. The shares of Innovo Group common stock issued in Spirco's
reorganization are freely-tradeable; however, the plan of reorganization
restricted each recipient (including the Class 3 Trust) to resales of no more
than 10 percent of the shares received during any 30 day period until November
10, 1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Reorganization of Spirco".
The principal executive offices of the Company are located at 27 North
Main Street, Springfield, Tennessee 37172. Its telephone number is (615)
384-0100. Unless the context requires otherwise, "the Company" refers to Innovo
Group Inc. and its subsidiaries, and "Innovo Group" refers to Innovo Group Inc.
-7-
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Common Stock Offered by Selling Stockholders....................... 3,988,570 shares
Securities Outstanding
Common Stock (1)............................................... 17,481,827 shares
Common Stock Purchase Warrants................................. 448,950 warrants
Use of Proceeds.................................................... The Company will not receive any of the
proceeds from the sale of the shares offered
by the Selling Stockholders.
The proceeds from any exercise of the Class E or
Class G common stock purchase warrants will be
added to general working capital.
NASDAQ Symbol...................................................... INNO
<FN>
(1) Excludes (i) 448,950 shares of common stock issuable upon the exercise of
outstanding common stock purchase warrants, (ii) 100,000 shares of common
stock reserved for issuance pursuant to the exercise of options under the
Company's Stock Option Plan, under which 3,000 options are outstanding,
(iii) 308,225 shares of common stock held by trusts established under the
Plan of Reorganization of Spirco, and (iv) 200,000 shares of common stock
pledged by the Company to secure its appeal bond in the Tedesco litigation.
See "The Company", "Business - Legal Proceedings", "Description of
Securities", Note 2 of Notes to Consolidated Financial Statements and Notes
4 and 5 of Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
The following table (including the notes thereto) sets forth a summary
of selected consolidated financial information for the Company. This summary of
selected consolidated financial data is derived from and qualified in its
entirety by reference to the consolidated financial statements and the notes
thereto and should be read in conjunction therewith, as well as in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Results of operations for interim periods are not necessarily
indicative of results to be expected for a full year.
<TABLE>
<CAPTION>
Ten Months Three Months Ended Pro Forma
Year Ended October 31, Ended ----------------------- Year Ended
----------------------------------- October 31, February 29, January 31, October 31,
1995 1994 1993 1992 1991(1) 1996 (7) 1995 1995 (8)
---- ---- ---- ---- ------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 5,276 $ 8,028 $ 12,468 $ 12,768 $ 10,437 $ 1,319 $ 1,115 $ 8,327
Gross Profit 1,468 2,984 5,470 3,869 4,431 587 597 2,034
Operating income (loss) (1,666) (2,405)(2) 447 (854) 646 (155) (104) (1,742)
Income (loss) from continuing
operations (67)(3) (7,905)(4) (661)(4) (843) 717 (161) (311) (267)
Income (loss) from discontinued
operations (5) (626) (685) (7,268) (2,117) 707 - (187)
Extraordinary gain (loss) (6) (258) 699 - - - - -
Net income (loss) (951) (7,891) (7,929) (2,896) 1,424 (161) (498)
Income (loss) per share from
continuing operations $ (.03) $ (3.99) $ (.63) $ (.79) $ .81 $ (.02) $ (.15) $ (.05)
Income (loss) per share from
discontinued operations (.24) (.34) (6.92) (1.95) .80 - (.08)
Extraordinary gain (loss) per share(.09) .35 - - - - -
Net income (loss) per share (.36) (3.98) (7.55) (2.74) 1.61 (.02) (.23)
Weighted average common shares
and common share equivalents
outstanding 2,616 1,982 1,050 1,055 884 6,716 2,134 5,361
</TABLE>
As of February 29, 1996
-----------------------
Actual Pro Forma (8)
------ -------------
Total Assets $ 7,502 $ 9,793
Long-term debt 2,322 2,958
Stockholders' Equity 1,238 2,087
- ------------------
(1) Includes the effect of the acquisition of NASCO Products and Spirco, each
accounted for by using the purchase method. The Company acquired NASCO
Products in June 1991 and Spirco in August 1991. The fundraising program
marketing operations of Spirco were subsequently sold in May 1993 and the
import operations of NASCO Products were sold in July 1995, and are
classified as discontinued operations. See Note 3 of Notes to Consolidated
Financial Statements.
(2) Operating expenses for fiscal 1994 incudes the effect of plant consolidation
charges of $470,000 ($.20 per share) relating to the consolidation of the
Company's manufacturing facilities. See Note 1(j) of Notes to Consolidated
Financial Statements.
(3) Includes other income of $1.9 million from the settlement of litigation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Includes the effect of additions to the deferred tax valuation allowance of
$3,679,000 ($1.86 per share) and $624,000 ($.59 per share) in fiscal 1994
and 1993, respectively.
(5) Reflects the operations and July 1995 sale of the import operations of NASCO
Products, the operations and May 1993 sale of the fundraising program direct
marketing operations of Spirco and
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<PAGE>
the operations and loss from the disposal of NASCO Sportswear, Inc.
("Sportswear"). See Note 3 of Notes to Consolidated Financial Statements.
(6) Represents gain and losses resulting from the Chapter 11 reorganization of
Spirco. See Note 2 of Notes to Consolidated Financial Statements.
(7) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year ended on October 31. The
results of operations and cash flows for the transition period of November
1, 1995 to November 30, 1995 are separately presented herein. See Condensed
Consolidated Financial Statements.
(8) Pro forma for the effects of the acquisition of Thimble Square, which was
completed on April 12, 1996. Pro forma income from continuing operations
data is stated as if the acquisition had taken place on November 1, 1994.
Pro forma balance sheet data is stated as if the acquisition had taken place
on February 29, 1996. The pro forma financial information is not necessarily
indicative of the actual future results of operations or financial position.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Acquisition of Thimble Square," and Pro Forma Condensed
Consolidated Financial Statements.
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RISK FACTORS
In addition to other information contained in this Prospectus,
prospective investors should carefully consider the following factors in
evaluating the Company and its business before purchasing the securities offered
hereby.
Losses from Operations; Negative Cash Flow; Adverse Operating History;
Possibility of Future Losses and Negative Cash Flows. The Company had losses
from continuing operations of $67,000, $7,905,000 and $661,000 for the years
ended October 31, 1995, 1994 and 1993. Operating cash flows were a negative
$406,000 and $642,000 for fiscal 1994 and 1993. At February 29, 1996, the
Company had an accumulated deficit of $17.7 million. There can be no assurance
that the Company will operate profitably in the future.
Recent Decrease in Revenues. The Company experienced 34.3% and 35.6%
declines in net sales from continuing operations in fiscal 1995 and 1994,
respectively. The Company believes that these declines in sales have been due to
a weakening of the retail environment, the magnifying effects of the baseball
and hockey strikes, its lack of working capital, which has prevented it from
purchasing the raw materials to fill orders for domestically produced products
and required it to therefore reject or cancel orders. The Company believes that
there is sufficient demand for its products to allow it to regain its prior
sales levels over the long-term if it is able to obtain sufficient working
capital for domestic raw material purchases and product development. The Company
has taken steps to achieve these arrangements, but there can be no assurance
that these steps will succeed in arresting the decline in sales, or achieving an
increase in sales. Additionally, the completion of the sale of NASCO Products'
domestic operations to ANG produced a decline in revenues and, initially,
operating profits, and continued or further weakening in the retail environment
could result in further declines in sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Shift in Product Focus. In fiscal 1995 and continuing in fiscal 1996,
the Company has shifted its emphasis to developing new products and marketing
programs for its products in the fashion, utility, and craft lines and for the
premium and advertising speciality markets. The Company hopes that this will
allow it to increase sales and lessen its dependence on sports licensed
products. Previously, a significant portion (46% in fiscal 1995) of the
Company's net sales have been of sports licensed products. There can be no
assurance that the Company will be successful in its attempts to increase sales
of other products, and the shift in the Company's emphasis could result in a
decrease in sales of sports licensed products.
Dependence upon Contractual Relationships and Certain Products. The
Company's sales are dependent to some degree upon the contractual relationships
it establishes with licensors to exploit, on a generally non-exclusive basis,
proprietary rights in well known logos, marks and characters, as well as league
and team logos and marks licensed by Major League Baseball, the National
Football League, the NBA, the National Hockey League, and major colleges and
universities. The sale of products licensed from professional sports leagues,
colleges and universities and the U.S.O.C. represented 46% of the Company's net
sales from continuing operations in fiscal 1995. Although the Company believes
it will continue to meet all of its material obligations under such license
agreements, there can be no assurance that such licensing rights will continue
or will be available for renewal on favorable terms to the Company. The
Company's failure to obtain new licenses or extensions on current licenses or
the Company's inability to sell such products, for any reason, could have a
significant negative impact on the Company's business. See "Business - Products"
and "Business - Licensing Agreements."
Need for Additional Financing. The Company's principal working capital
financing is derived from a factoring agreement with Riviera Finance. Under the
agreement Riviera Finance advances 80% of the balance of assigned accounts
receivable of Innovo, up to a maximum of $750,000. Previously the Company's
principal credit facility was with NBD Bank ("NBD") pursuant to an agreement
under which NBD advanced specified percentages of the eligible accounts
receivable and inventories of Innovo and NASCO Products. Innovo repaid its
outstanding borrowings in April, 1995 and in April, 1995 entered into an
agreement with Riviera Finance for the factoring of Innovo's accounts
receivable. NBD agreed to continue to advance against the accounts receivable
and inventories of NASCO Products through July 31, 1995, at which time NBD began
to retain all collections on NASCO Products pre-July 31, 1995 sales to satisfy
the outstanding balance. These collections, and the payments the Company will
received from ANG, are pledged to satisfy (i) the outstanding balance due to
NBD, and (ii) the remaining principal due on the Company's July 1994 working
capital loan, which as of February 29, 1996 are approximately
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$205,000 and $407,000, respectively. Should those sources be insufficient to
repay those obligations, the Company would be required to devote other cash
resources to their repayment.
To pursue its business plans, the Company needs to obtain a credit
facility having appropriate borrowing rates and limits, either by obtaining a
new facility to replace the current agreement with Riviera Finance, or by
negotiating revised terms with Riviera Finance. Should the Company be unable to
obtain such a credit facility, it might not have the working capital necessary
to finance the inventory and accounts receivable investments called for by its
present or anticipated future levels of sales. In that case, the Company might
have to forgo sales opportunities, and could lose customers as a result.
Substantially all of the Company's assets are pledged to secure various
borrowings. To the extent the Company's assets continue to be pledged to secure
outstanding indebtedness, such assets are unavailable to secure additional debt
financing, which may adversely affect the Company's ability to borrow in the
future. Accordingly, there is no assurance that the Company will be able to
secure such financing. The Company's failure to obtain such additional financing
could materially adversely affect the Company's operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Seasonality. The Company's business is seasonal due to the nature of
many of the Company's products, which are subject to highest consumer demand in
the late summer and early fall. The Company will typically receive the majority
of its orders during the first half of the calendar year, while the greatest
volume of shipments and sales are made in the late summer and fall. As a result,
the Company's cash flow is not consistent throughout the fiscal year, and the
Company's annual earnings have been and are expected to continue to be dependent
on the results of operations for the third and fourth quarters of its fiscal
year. Unfavorable economic conditions affecting retailers during the fall and
holiday seasons in any year could have a material adverse effect on the
Company's results of operations for the year. The Company is likely to
experience periods of negative cash flow throughout each year and a drop-off in
business commencing each December. There can be no assurance that the effect of
such seasonality will diminish in the future. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations - Seasonality."
Dependence on Key Management. The Company is substantially dependent
upon the continued employment of Patricia Anderson-Lasko, its Chairman of the
Board, President and Chief Executive Officer. Ms. Anderson-Lasko is currently
employed under a four-year employment contract with the Company, which expires
on October 31, 1997 but which is terminable by either the Company or Ms.
Anderson-Lasko for cause. Although Innovo currently maintains $3,000,000 in the
aggregate of "key-man" life insurance on the life of Ms. Anderson-Lasko,
$950,000 of this key-man insurance was pledged to collateralize certain loans to
the Company. Pursuant to certain undertakings given to the United States Small
Business Administration ("SBA") in connection with the SBA's guarantee of a
$950,000 loan to Spirco by First Independent Bank, Gallatin, Tennessee, The
Company is prohibited from purchasing any additional key-man insurance on Ms.
Anderson-Lasko without the written consent of the SBA. The loss of this key
executive could materially adversely affect the Company's operations.
Competition. The marketplace for the Company's products is highly
competitive, and the Company is not a dominant factor in any of the markets in
which it competes. The Company competes with other manufacturers, importers and
distributors of textile products and casual apparel. Although the manufacture
and sale of sports logoed products such as the Company's requires a license, the
Company's licenses are non-exclusive and the Company does not have any control
over the granting of additional licenses by the licensing entities. Other
manufacturers, importers and distributors with greater financial, research,
staff and marketing resources than the Company could decide to enter the
business of manufacturing, importing and distributing competitive products.
There is no assurance that the Company could compete effectively with such
competitors. The Company's ability to sell its products is
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dependent upon the price and quality of its products and its ability to meet its
customers' schedules. See "Business - Competition".
Suppliers. The raw materials for the products produced domestically by
the Company are generally purchased from a small number of suppliers. During
fiscal 1995 the Company utilized single sources to purchase substantially all of
the raw materials for these products. The Company has no long-term supply
agreement with any supplier of domestic raw materials. The Company believes that
alternative sources of supplies are available in the United States for its
unfinished items. However, in the event the Company was unable to obtain
alternative sources of supplies on comparable terms, the Company's financial
condition could be materially adversely affected. See "Business - Suppliers."
Litigation. The Company is involved from time to time in litigation
arising in the ordinary course of its business or as the result of the
bankruptcy filings by Spirco and Sportswear. With the exception of the Tedesco
litigation discussed below, while the damages sought in some of these actions,
are material, on the basis of the nature of the actions, the amounts sought, and
in some cases the lack of prosecution by the plaintiffs, 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 and
magnitude, to have a material adverse effect in the aggregate. In Michael J.
Tedesco v. Innovo, Inc., Innovo Group Inc., Rick Binet, and Patricia
Anderson-Lasko, f/k/a Patricia M. De Alejandro, the Company is appealing a
$700,000 judgement awarded by a jury for employment benefits, including stock
compensation, it found to be due to an ex-employee who it nonetheless found had
been properly terminated for cause. The Company will vigorously appeal the
decision. If, however, the Company is not able to reverse or substantially
reduce the amount of the award, either through appeal or through the negotiation
of a settlement, the satisfaction of the judgement, which will not be an
insurable claim, would have a material adverse effect on the Company and its
financial condition. See "Business - Legal Proceedings".
Voting Control by Existing Stockholders; Anti-takeover Provisions. The
Company's executive officers, directors and its affiliates beneficially own or
have voting control of approximately 23.5% of the issued and outstanding common
stock. Because of their stock ownership and/or positions with the Company, these
persons have been and will continue to be in a position to greatly influence the
election of directors and thus control of the affairs of the Company.
Additionally, the Company's by-laws limit the ability of stockholders to call a
meeting of the stockholders. The Company's employment contract with its chief
executive officer contains provisions that could require the payment of
significant compensation in the event employment terminates after a change in
control that is not approved by the board of directors, and the price at which
the Company could be required to repurchase certain shares of its common stock
would significantly increase in the event of such a change in control. Further,
the Certificate of Incorporation authorizes the board of directors to issue
additional shares of common stock, up to the authorized capitalization of 30
million shares, without further stockholder approval. The issuance of common
stock may have the affect of delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting and other rights of
the holders of common stock. These contractual obligations and by-law
provisions, and any issuance of common stock, could have the effect of
discouraging a takeover of the Company, and therefore may adversely affect the
market price and liquidity of the Company's securities. The Company is also
subject to a Delaware statute regulating business combinations that may hinder
or delay a change in control of the Company. The anti-takeover provisions of the
Delaware statute may adversely affect the market price and liquidity of the
Company's securities.
Lack of Protection of Intellectual Property. The Company possesses
certain proprietary information with respect to which it currently has no
patent, copyright or trademark protection. With the exception of Ms.
Anderson-Lasko, none of the Company's executive officers, directors or employees
has executed any confidentiality or noncompete agreement with the Company. There
can be no assurance that the
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Company will be successful in maintaining the confidentiality of its proprietary
information or barring others from exploitation of intellectual property rights
claimed by the Company. If such proprietary information were to be disclosed, it
could have a materially adverse effect on the Company's business.
Dividends. The Company has not paid any dividends nor does it
anticipate paying any dividends on its Common Stock in the foreseeable future.
The Company's operating subsidiaries are currently restricted as to the payment
of dividends to the Company. It is the Company's present policy to retain
earnings, if any, for use in the development and expansion of the Company's
business.
Shares Eligible for Future Sale. Of the 17,481,827 shares of common
stock of the Company outstanding as of the date of this Prospectus, 1,619,339
shares are restricted securities, as that term is defined in Rule 144
promulgated under the Securities Act, and an additional 1,872,327 shares are
owned by affiliates of the Company. Absent registration under the Securities
Act, the sale of such 3,491,666 shares is subject to Rule 144, as promulgated
under the Securities Act. In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of common stock for at
least two years is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class, or, if the common stock is quoted on NASDAQ, the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the shares of
common stock for at least three years is entitled to sell such shares under Rule
144 without regard to any of the volume limitations described above.
Additionally, (i) the holders of 148,950 warrants for the purchase of shares of
common stock hold registration rights which entitle them to certain demand and
"piggy-back" registration of the shares issuable upon the exercise of such
warrants, (ii) the Class 3 Trust established under Spirco's plan of
reorganization presently holds 308,225 shares which are freely-tradeable, and
which will be sold by the Class 3 Trust to the extent necessary to satisfy Class
3 claims, and (iii) the Company has secured its appeal bond in the Tedesco
litigation with 200,000 shares of its common stock which are fully tradeable and
which the court or the plaintiff would have the right to sell if the Company
losses its appeal and is thus unable to satisfy the judgement through other
means, or otherwise defaults on the bond. No assurance can be made as to the
effect, if any, that sales of shares of common stock or the availability of such
shares for sale will have on market prices prevailing from time to time.
Nevertheless, the possibility that substantial amounts of common stock may be
sold in the public market may adversely affect prevailing market prices for the
Company's securities and could impair the Company's ability to raise capital in
the future through the sale of equity securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Reorganization
of Spirco," "Business Legal Proceedings," and "Shares Eligible for Future Sale."
Possible Delisting of Securities from NASDAQ; Risks of Low-Priced
Stocks. The Company's common stock is currently listed on NASDAQ SmallCap
Market. At present, the minimum maintenance criteria for NASDAQ are $2 million
in assets, $1 million in stockholders' equity, a minimum bid price of $1.00 (or
alternatively stockholders' equity of $2 million), at least one market maker,
300 shareholders, a 100,000 share public float, and $200,000 in market value for
the public float.
Between March, 1995 and July, 1995 the Company's common stock traded on
the NASDAQ SmallCap Market pursuant to a temporary exemption from the
stockholders' equity, bid price and current Exchange Act reporting criteria. In
November, 1995 the Company's common stock traded on the NASDAQ SmallCap Market
pursuant to a temporary exemption from the stockholders' equity requirement. The
Company's stockholders' equity increased to above the required $1 million during
the first quarter of fiscal 1996, at which time the Company no longer required
such exemption, and, on a pro forma basis reflecting the acquisition of Thimble
Square, was above $2 million as of February 29, 1996.
Additionally, from November, 1995 until May, 1996, the Company's common
stock traded at prices below $1.00. The Company was able to maintain its NASDAQ
listing because, at the end a grace period provided in the NASDAQ's rule (in
April, 1996) it was able to demonstrate that, on a pro forma basis including the
effect of the acquisition of Thimble Square, its stockholders' equity was above
$2 million. Since May 20, 1996, the Company's common stock has traded at prices
above $1.00; however, there can be no assurance that such price level will be
maintained.
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If the Company is unable to satisfy NASDAQ maintenance criteria for listing in
the future, its securities will be subject to being delisted, and trading, if
any, in the Company's securities would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or on the National
Association of Securities Dealers, Inc. ("NASD") "Electronic Bulletin Board". As
a consequence of such delisting, an investor would likely find it more difficult
to dispose of, or to obtain accurate quotations as to the prices of, the
Company's securities. With respect to the minimum bid price requirement, if the
Company's stockholders' equity were to fall below the $2 million requirement due
to operating losses, or for other reasons, the Company might be required to
effect a reverse split of the number of authorized, issued and outstanding
common shares if it desired to maintain its NASDAQ listing. While such a reverse
split would likely allow the Company to increase the bid price to above $1.00
and thus maintain its NASDAQ listing, market prices after a reverse split
invariably do not maintain a level reflective of the pre-reverse split price and
the reverse split ratio. Accordingly, investors could lose value if such a
reverse split became necessary.
Penny Stock Regulation. The Securities and Exchange Commission (the
"Commission") has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange or system, or securities of
issuers that meet certain net asset or average revenue tests). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Commission that provides information about penny stocks
and the nature and level or risks in the penny stock market. The broker-dealer
must also provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations and
broker-dealer and salesperson compensation information must be given to the
customer orally or in writing prior to effecting the transaction and must be
given in writing before or with the customer's confirmation. In addition, the
penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If the Company's securities become subject to the penny stock
rules, the holders of its securities may find it more difficult to sell such
securities.
The Company believes that its common stock is outside the definitional scope of
a penny stock because it is listed on the NASDAQ, and because the Company's net
revenues over the last three years have exceeded the definitional threshold.
However, in the event the common stock were subsequently to become characterized
as a penny stock, the market liquidity for the Company's securities could be
severely and adversely affected. In such event, the regulations on penny stocks
could limit the ability of broker-dealers to sell the Company's securities, and,
thus, the ability of holders to sell their securities in the secondary market.
Board of Directors Ability to Authorize a Reverse Stock Split. Pursuant
to a resolution approved by the Company's stockholders on July 25, 1994, the
board of directors has the authority to effect, at its discretion, one or more
reverse splits of the number of shares of common stock authorized, issued and
outstanding. Pursuant to that resolution on June 8, 1995 the board of directors
elected to effect a one-for- ten reverse stock split, which was effective June
19, 1995. A reverse stock split effected pursuant to the resolution could have
the effect of reducing the numbers of record and beneficial owners of the
Company's common stock, since any stockholder that, based on the reverse split
ratio selected by the
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board of directors, was entitled to receive less than one share would instead
receive a cash payment for the fractional share, and would cease to be a
stockholder of the Company. Under the rules of the Commission, a Company may
suspend its obligation to file periodic and other reports under the Exchange Act
if the number of holders of record of its common stock falls below 300. Although
the June 19, 1995 reverse stock split did not, and the Company currently
believes that it is unlikely that any future reverse stock split effected
pursuant to the proposal would, reduce the number of record holders to below
300, and although the board of directors presently would not plan to discontinue
filing reports under the Exchange Act even if the number of record holders did
fall below 300 for so long as there continued to be a public market for the
common stock, if a reverse stock split effected pursuant to the resolution did
have such an effect, the board of directors could, at its discretion and without
further stockholder action, elect to suspend filing reports under the Exchange
Act. A suspension of the Company's reporting under the Exchange Act would
decrease the amount of information about the Company available to current
investors, and would exempt the Company from the Commission's requirements
concerning the form of proxy solicitation materials. Additionally, it would
result in the delisting of the Company's common stock from the NASDAQ, since the
listing requirements of the National Association of Securities Dealers, Inc.
("NASD") require, among other things, the filing of reports under the Exchange
Act. The NASD also requires, among other things, that there be at least 300
beneficial owners, and 100,000 publicly held shares, of any class of common
stock traded on the NASDAQ. If the Company's common stock was delisted from the
NASDAQ, it could continue to trade in the over-the-counter market; however, such
market is generally less liquid than the NASDAQ, and the value and liquidity of
a stockholder's investment could be adversely affected. However, as previously
indicated, the board of directors would not currently plan to discontinue filing
reports under the Exchange Act. Additionally, the Company currently believes
that it is unlikely that a reverse stock split effected pursuant to this
resolution would cause the Company to no longer meet the other NASDAQ listing
requirements described above.
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THE COMPANY
The Company, through its operating subsidiaries, designs, manufactures
and domestically markets various canvas and nylon products, principally tote
bags, sports bags, back packs, lunch bags, stadium totes, and craft products for
sale to various retailers and in the premium and advertising specialty market.
The Company also internationally markets and distributes sport bags and
backpacks.
Innovo, a wholly owned subsidiary, manufactures and distributes
utility, craft, fashion, sports and advertising specialty products. Innovo's
utility line is made up of canvas and nylon products, such as tote bags,
laundry, duffle and shoe bags and gift bags that are designed as consumable
products that respond to needs consumers encounter in every day life. These
products are generally produced with company designed artwork. For the craft
market Innovo produces canvas tote and laundry bags, aprons, children's smocks
and Christmas stockings with no design, which are sold (sometimes packaged with
paints or other materials) for sale as a craft project supply. The fashion line
features company designed canvas back packs, "day packs" (which combine the
features of a purse and a back pack), and tote bags, that attempt to combine
style and convenience to capitalize on the increasing trend towards more casual
dress.
Innovo's sports line consists of tote bags, lunch bags, fanny packs,
laundry, shoe and duffle bags and stadium totes. The majority of these products
display logos, insignia, names, mascots and other identifying characteristics of
professional or collegiate sports teams, or the U.S.O.C., under licenses, which
are generally non-exclusive, held by Innovo from various licensing entities
including the National Football League, the NBA, the National Hockey League,
Major League Baseball, the U.S.O.C., and approximately 130 colleges and
universities. For the year ended October 31, 1995, 46% of the Company's sales
from continuing operations represented the sale of products bearing logos
licensed by the colleges and universities, the professional sports teams and the
U.S.O.C. In fiscal 1996 Innovo will add products that display the "Louisville
Slugger" name and logo to its sports line, and the Company is currently
developing products, which will be marketed beginning in the fourth quarter of
fiscal 1996, under recently obtained or agreed to licenses for the U.S. and
international use of the logos, trademarks and slogans of Anheuser-Busch Cos.,
Inc. and the European use of the Warner Bros. Studios Looney Tunes(TM)
characters.
For the premium and advertising specialty markets the Company produces
both products that display professional sports team logos, and products that
bear the name, logo, slogan and/or design specifically requested by the
customer, who frequently provides the artwork to be used on such products.
Advertising specialty and premium customers are generally companies purchasing
products for distribution in promotions to employees and customers or for sale
as premium items. During the third quarter of fiscal 1994 the Company began to
also provide domestic manufacturing for other distributors of tote and sport
bags.
During October 1994 the Company began steps designed to reduce its
operating expenses and capital requirements. The Company relocated to its owned
facility in Springfield, Tennessee the manufacturing operations it had
previously conducted in leased facilities in Sugarland, Texas. This
consolidation allowed the Company to eliminate the expense of the leased space
in Texas, and also allowed the elimination of certain shipping and duplicative
supervision costs. On July 31, 1995, the Company executed an agreement with ANG
under which ANG succeeded to all of the rights held by the Company's wholly
owned subsidiary, NASCO Products to market and distribute in the United States
the National Football League, NBA, Major League Baseball and National Hockey
League logoed sports bags, back packs and equipment bags previously imported to
and distributed in the U.S. by NASCO Products. The agreement did not cover the
international rights under the National Football League, NBA, Major League
Baseball and National Hockey League licenses. NPI International continues to
sell products internationally. Additionally, the agreement has no effect on
Innovo's marketing and sale of its domestically manufactured sports-licensed
products, and the Company retained all the domestic rights to the United States
Olympic Committee, college and Major League Baseball Players Association
products, which will now be manufactured domestically by Innovo and marketed as
part of its product line.
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For each license ANG will pay NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining $650,000
is being paid, without interest, in monthly installments equal to 5% of ANG's
aggregate sales of the licensed products, with final payment due July 31, 1998.
ANG assumed all of NASCO Products' obligations under the licenses, including the
payment of royalties and minimum royalties. NASCO Products also transferred to
ANG its existing inventory of these products, for which ANG paid approximately
67% of NASCO Products' cost, or approximately $307,000. Such payments are being
made by ANG over a six month period which will end May, 1996.
In addition, ANG will make an ongoing annual payment to NASCO Products
of 2% of sales under each of the National Football League, Major League Baseball
and National Hockey League licenses, and 1% of sales under the NBA license, up
to aggregate sales of $15 million, and 1.5% and .5% of sales thereafter. The
payments will continue for forty years unless a license expires or is terminated
and is not renewed or reinstated within twelve months.
During fiscal 1993 and 1994 the Company's marketing emphasis was placed
on the U.S. retail market for its sports licensed products. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets. The Company hopes that this will
allow it to increase sales and lessen its dependence on sports licensed
products. The Company will also pursue opportunities to provide domestic
manufacturing for other tote and sports bag distributors. The Company will
attempt to achieve growth in the sales of its sports logoed products through the
acquisition of new licenses, such as the U.S.O.C. license and related
cross-licenses for products that display Warner Bros. "Looney Tunes" characters
or the "Cabbage Patch Kids" characters together with the U.S.O.C. five-ring
Olympic and the Anheuser-Busch and Warner Bros. licenses acquired in fiscal
1996, Olympic logo, the "Louisville Slugger" license acquired in November, 1995,
and the Anheuser-Busch and Warner Bros. licenses acquired in fiscal 1996, and by
the development of new products and distribution for college logoed merchandise.
Over the longer term the Company is looking to achieve growth through increase
in the sales of the sports logoed bags and backpacks it designed, under its
international license rights, for the international market, where U.S.
professional sports have achieved increased exposure and popularity, and from
the introduction of Innovo's fashion line in the international market. However,
there can be no assurance that any of these strategies will produce increased
sales.
The Company estimates that the products sold by its continuing
operations are carried in over 4,500 retail outlets. The Company's marketing
efforts are conducted principally by its own sales and marketing staff and
through its network of approximately 20 marketing organizations having
approximately 60 independent sales representatives. The Company sells to retail
accounts such as mass merchandisers, department stores, mail order companies,
grocery stores and drugstore chains, including K Mart Apparel Corp., Wal-Mart
Stores, Inc., Target, J.C. Penney Company, Inc., Sears Roebuck and Co., Walgreen
Co., and Michael's Stores, Inc., and advertising specialty accounts.
On April 12, 1996, the Company acquired 100% of the outstanding common
stock of Thimble Square for an aggregate of $1.1 million, paid by the issuance
of shares of the restricted common stock of the Company. In a concurrent
transaction, Thimble Square acquired from its stockholders a plant it had
previously leased from them in exchange for (a) $300,000 paid by the issuance of
shares of the restricted common stock of Innovo Group, and (b) the issuance by
Thimble Square of $200,000 of unsecured notes payable, without interest, on
August 31, 1996 (with certain prepayments required in the event of certain
refinancings or asset sales by Thimble Square). The purchase prices are subject
to downward adjustment based on the results of an audit of Thimble Square's
December 31, 1995 financial statements, and the appraisal of its property and
equipment, which are to be completed by June 15, 1996.
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A total of 2,745,098 shares of the Company's common stock were issued to
effect the acquisition. However, at the time of the acquisition Thimble Square
owned 1,080,000 shares of the Company's common stock as a result of the January,
1996 manufacturing agreement between the companies (see Note 5 of Notes to
Condensed Consolidated Financial Statements). As a result of the acquisition,
Innovo Group reacquired, and retired, those shares, and the net increase in the
number of shares of Innovo Group common stock outstanding was 1,665,098 shares.
Thimble Square manufactures and markets ladies' ready-to-wear at-home,
sleep and lounge wear from plants in Pembroke and Baxley, Georgia. Its products
are sold to mail order companies, retailers and through mail order distribution.
Thimble Square also provides "sew-only" manufacturing for other distributors of
private-label sleep and lounge wear; in those instances, the customer provides
the raw materials, and Thimble Square manufactures the products to the
distributor's specifications. Thimble Square's sales for its fiscal year ended
December 31, 1995 were approximately $3 million. Innovo Group intends to attempt
to increase Thimble Square's sales by using Innovo's marketing and sales
functions to market its products to major mass merchants and other retailers
with whom Innovo already has relationships, and to which Thimble Square has not
had material sales. The Company may also utilize Thimble Square's mail order
distribution to market Innovo's products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Acquisition of
Thimble Square," and Pro Forma Condensed Consolidated Financial Statements.
Innovo began operations in April, 1987. In August, 1990, Innovo merged
into Elorac Corporation, a so called "blank check" company, which was renamed
Innovo Group. In fiscal 1991 the Company acquired the business of NASCO, a
manufacturer, importer and distributor located in Springfield, Tennessee,
through two separate transactions. In the first transaction, the retail bag
division of NASCO was acquired by a wholly-owned subsidiary of the Company in
June 1991. The retail bag division of NASCO, renamed NASCO Products upon its
purchase, manufactured and imported a line of canvas and nylon sports bags,
backpacks, equipment bags, fanny packs, athletic caps and other sporting goods
products imprinted or embroidered with emblems and logos licensed from a variety
of licensors, such as Major League Baseball, the National Hockey League, the
National Football League and the NBA.
In the second transaction, all of the outstanding shares of common
stock of NASCO (the assets of which included the 75,000 shares of the Company's
common stock transferred in the prior transaction) were acquired by the Company
in August 1991. NASCO, subsequently renamed Spirco, was also engaged in the
marketing of fundraising programs to school and youth organizations. The
fundraising programs involved the sale of magazines, gift wraps, food items and
seasonal gift items. Effective April 30, 1993, the Company sold the youth and
school fundraising business of Spirco to QSP, which is a wholly-owned subsidiary
of The Readers Digest Association, Inc. The Company received initial proceeds of
$1.5 million in fiscal 1993, and additional payments from QSP of $1,445,000 in
fiscal 1994.
Spirco had incurred significant trade debt from the fiscal 1992 losses
it incurred in marketing fundraising programs, and its continuing operations of
supplying school spirit products to companies that market such programs was not
producing sufficient cash flow to significantly reduce these obligations and
liabilities incurred by Spirco prior to its acquisition which were not disclosed
at that time. On August 27, 1993, Spirco filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code. Innovo Group, Innovo and NASCO Products were not
parties to the filing. Spirco's plan of reorganization was confirmed by the
court on August 5, 1994, and became effective on November 7, 1994. Under the
plan, administrative claims were paid in cash from funds borrowed under the
Company's bank credit facility. Leasall, a newly formed subsidiary of Innovo
Group, acquired Spirco's equipment and plant and assumed the related equipment
and mortgage debt, which Innovo Group had previously guaranteed, and Spirco was
merged into Innovo Group which as a result acquired direct ownership of its
other assets. Spirco claims which had been guaranteed by Innovo Group received
full payment through the issuance of
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<PAGE>
222,000 shares of Innovo Group common stock. Additionally, 584,000 shares of
Innovo Group common stock were issued to the Class 3 Trust which is selling
those shares and distributing the proceeds to the Class 3 claimants, which are
federal, state and local taxing authorities that had claims for income, sales,
property and unemployment taxes. In general, Innovo Group will receive any
shares that are not required to satisfy the Class 3 claims. All claims that
ranked below secured claims, including general unsecured claims and the claims
of Innovo Group, Innovo and NASCO Products for advances to Spirco, received no
distribution. The shares of Innovo Group common stock issued in Spirco's
reorganization are freely-tradeable; however, the plan of reorganization
restricted each recipient (including the Class 3 Trust) to resales of no more
than 10 percent of the shares received during any 30 day period until November
10, 1995.
The principal executive offices of the Company are located at 27 North
Main Street, Springfield, Tennessee 37172. Its telephone number is (615)
384-0100. Unless the context requires otherwise, "the Company" refers to Innovo
Group Inc. and its subsidiaries, and "Innovo Group" refers to Innovo Group Inc.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares of common stock offered by the Selling Stockholders.
The Company would receive proceeds of approximately $109,000 if all of
the Class E and Class G common stock purchase warrants are exercised; however,
there can be no assurance that any of the Class E or Class G common stock
purchase warrants will be exercised. The proceeds from any exercise of the Class
E or Class G common stock purchase warrants will be added to general working
capital.
DIVIDEND POLICY
The Company has never declared or paid a dividend on its common stock.
The Company intends to retain its earnings to finance the growth and development
of its business and does not expect to declare or pay any cash dividends on its
common stock in the foreseeable future. The declaration of dividends is within
the discretion of the Company's board of directors, which will review this
dividend policy from time to time. See "Risk Factors - Dividends."
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<PAGE>
MARKET FOR THE COMPANY'S SECURITIES
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded on the NASDAQ SmallCap
Market under the symbol "INNO". The following sets forth the high and low bid
quotations for the Company's common stock in such market for the periods
indicated. This information, which has been adjusted to reflect the one-for- ten
reverse stock split effected in June, 1995, reflects inter-dealer prices,
without retail mark-up, markdown or commissions, and may not necessarily
represent actual transactions. No representation is made by the Company that the
below quotations necessarily reflect an established public trading market in the
Company's common stock.
High Low
---- ---
Fiscal 1994
-----------
First Quarter (November to January) $ 11 7/8 $ 5 5/8
Second Quarter (February to April) 17 1/2 5 5/16
Third Quarter (May to July) 7 3/16 3 1/8
Fourth Quarter (August to October) 4 11/16 2 3/16
Fiscal 1995
-----------
First Quarter (November to January) 3 1/8 15/16
Second Quarter (February to April) 4 1/16 1 1/4
Third Quarter (May to July) 2 7/8 1 1/2
Fourth Quarter (August to October) 2 1/4 1
November 1995 (1) 1 1/8 1/2
Fiscal 1996
-----------
First Quarter (December to February) 7/8 7/32
Second Quarter (March to May) 2 3/16 17/64
Third Quarter (through June 26, 1996) 1 3/4 15/16
(1) Effective November 1, 1995 the Company changed its fiscal year to end
on November 30. Previously the Company's fiscal year had ended on
October 31.
As of May 31, 1996, there were approximately 780 record holders of the
Company's common stock.
Under the rules of the NASDAQ, a company must, among other things,
maintain total assets of $2 million, stockholders' equity of $1 million, a
minimum bid price of $1 (or alternatively stockholders' equity of $2 million),
and must remain current in the filing of reports under the Securities Exchange
Act of 1934 (the "Exchange Act") in order to continue trading on the NASDAQ
SmallCap Market. Between March and June, 1995, and again in November, 1995, the
Company's common stock traded on the NASDAQ SmallCap Market pursuant to
temporary exemptions granted while the Company took steps to comply, in March
1995 with the stockholders' equity, bid price and Exchange Act reporting
criteria, and in November 1995 with the stockholders' equity requirement. The
Company's stockholders' equity increased to above the required $1 million during
the first quarter of fiscal 1996, at which time the Company no longer required
such exemption, and, on a pro forma basis reflecting the acquisition of Thimble
Square, was above $2 million as of February 29, 1996. Additionally, from
November, 1995 until May, 1996, the Company's common stock traded at prices
below $1.00. The Company was able to maintain its NASDAQ listing because, at the
end a grace period provided in the NASDAQ's rule (in April, 1996) it was able to
demonstrate that, on a pro forma basis including the effect of the acquisition
of Thimble Square, its stockholders' equity was above $2 million. Since May 20,
1996, the Company's common stock has traded at prices above $1.00; however,
there can be no assurance that such price level will be maintained. If the
Company's stockholders' equity were to fall below $2 million due to operating
losses, or for other reasons, and the Company's stock was not trading at prices
above $1.00, the Company could face delisting unless it took action to either
increase the minimum bid price to $1.00, or to increase its stockholders' equity
to above $2 million. Although the Company will continually use its best efforts
to maintain its NASDAQ SmallCap listing, there can be no assurance that it will
be able to do so.
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<PAGE>
If, in the future, the Company is unable to satisfy NASDAQ maintenance
criteria for listing, its securities would be subject to being delisted, and
trading, if any, in the Company's securities would thereafter be conducted in
the over-the-counter market in the so-called "pink sheets" or on the National
Association of Securities Dealers, Inc. ("NASD") "Electronic Bulletin Board". As
a consequence of any such delisting, a stockholder would likely find it more
difficult to dispose of, or to obtain accurate quotations as to the prices, of
the Company's common stock.
The Company has never declared or paid a dividend and does not
anticipate paying dividends on its common stock in the foreseeable future. In
deciding whether to pay dividends on the common stock in the future, the
Company's Board of Directors will consider factors it deems relevant, including
the Company's earnings and financial condition and its working capital
expenditure requirements.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
February 29, 1996.
As of February 29, 1996
-----------------------
(in thousands)
Actual Pro Forma (4)
------ -------------
Notes payable (1) $ 1,410 $ 1,704
Subordinated notes payable 185 185
Long-term debt, including
current maturities of $168
and pro forma $233 (1) 2,322 2,958
------- -------
Total Debt (1) 3,917 4,847
------- -------
Class 3 Trust (2) 236 236
------- -------
Stockholders' Equity:
Common Stock, $.01 par value;
30,000,000 shares authorized,
8,451,551 and pro forma 10,116,649
shares issued (3) 85 101
Stock subscription 118 118
Additional paid-in capital 21,174 22,007
Deficit (17,713) (17,713)
Treasury stock (119,691 shares) (2,426) (2,426)
------- -------
Total Stockholders' Equity 1,238 2,087
------- -------
Total Capitalization $ 5,391 $ 7,170
======= =======
- ----------
(1) See Notes 4 and 5 of Notes to Consolidated Financial Statements for
information regarding the Company's debt.
(2) Represents Class 3 claims in the reorganization of Spirco (with
disputed claims included based on the estimated amount to be allowed)
to be satisfied with the proceeds from the sale of shares of the
Company's common stock held by the Class 3 Trust. See Note 2 of Notes
to Consolidated Financial Statements.
(3) Excludes (i) 448,950 shares of common stock issuable upon the
exercise of outstanding Common Stock Purchase Warrants, (ii) 100,000
shares of common stock reserved for issuance pursuant to the exercise
of options under the Company's Stock Option Plan, under which 3,300
options are outstanding, (iii) 308,225 shares of common stock held by
trusts established under the Plan of Reorganization of Spirco, and (iv)
200,000 shares of common stock pledged by the Company to secure its
appeal bond in the Tedesco litigation. Also excludes 1 million shares
issued in March, 1996 upon the exercise of outstanding common stock
purchase warrants. See "The Company", "Business - Legal Proceedings",
"Description of Securities", Note 2 of Notes to Consolidated Financial
Statements and Notes 4 and 5 of Notes to Condensed Consolidated
Financial Statements.
(4) Pro forma for the effects of the acquisition of Thimble Square, which
was completed on April 12, 1996, as if the acquisition had taken place
on February 29, 1996. See "Management's Discussion
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<PAGE>
and Analysis of Financial Condition and Results of Operations -
Acquisition of Thimble Square," and Pro Forma Condensed Consolidted
Financial Statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected consolidated financial data as of and for the
fiscal years ended October 31, 1995, 1994, 1993 and 1992, and for the ten months
ended October 31, 1991 are derived from the consolidated financial statements of
the Company, which have been audited by BDO Seidman, LLP, independent certified
public accountants. The selected consolidated financial data presented below for
the three months ended February 29, 1996 and January 31, 1995 is derived from
the Company's unaudited consolidated financial statements for those periods and
reflect, in management's opinion, all adjustments necessary for a fair
presentation of the consolidated financial position and results of operations
for those periods. Results of operations for interim periods are not necessarily
indicative of results to be expected for the full year. All of the information
presented herein should be read in conjunction with the consolidated financial
statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Ten Months Three Months Ended Pro Forma
October 31, Ended --------------------- Year Ended
-------------------------------------------- October 31, February 29, January 31, October 31,
Income Statement Data: 1995 1994 1993 1992 1991(1) 1996 (10) 1995 1995 (11)
--------------------------------------------- -----------------------------------------------
(000's except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 5,276 $ 8,028 $12,468 $12,768 $10,437 $ 1,319 $ 1,115 $ 8,327
Cost of Goods Sold 3,808 5,044 6,998 8,899 6,006 732 518 6,293
Gross Profit 1,468 2,984 5,470 3,869 4,431 587 597 2,034
Operating Expenses 3,134 5,389 (2) 5,023 4,723 3,785 742 701 3,776
Income (loss) from operations (1,666) (2,405) 447 (854) 646 (155) (104) (1,742)
Interest expense (511) (821) (960) (836) (12) (121) (104) (644)
Income (loss) before income taxes (67)(3) (4,124) (223) (1,622) 1,083 (161) (311) (267)
Income (loss) from
continuing operations (67)(3) (7,905)(4) (661)(4) (843) 717 (161) (311) (267)
Income (loss) per share
from continuing operations (.03) (3.99) (.63) (.79) .81 (.02) (.15) (.05)
Supplemental loss per share from
continuing operations (5) - (3.77) (.14) - - - -
Income(loss) from discontinued
operations (6) (626) (685) (7,268) (2,117) 707 - (187)
Income(loss) per share from
discontinued operations (6) (.24) (.34) (6.92) (1.95) .80 - (.08)
Extraordinary gain (loss) (7) (258) 699 - - - - -
Extraordinary gain (loss) per share (.09) .35 - - - - -
Net income (loss) (951) (7,891) (7,929) (2,896) 1,424 (161) (498)
Net income (loss) per share (.36) (3.98) (7.55) (2.74) 1.61 (.02) (.23)
Cash dividends declared
per common share - - - - - - -
Weighted Average Shares of
Common Stock and Common Stock
Equivalents Outstanding 2,616 1,982 1,050 1,055 884 6,716 2,134 5,361
Pro Forma
February 29,
1996
------------
Balance Sheet Data:
Total Assets $ 5,667 $11,143 $ 19,351 $29,957 $19,199 $ 7,502 $ 9,723 $ 9,793
Long-Term Debt 1,565 1,514 1,759 1,962 190 2,322 1,507 2,958
Common Stock Issuable (8) - - 2,911 - - - - -
Redeemable Common Stock (9) - 1,423 1,423 - - - 1,423 -
Stockholders' Equity (230) (2,372) 951 7,520 9,953 1,238 (2,588) 2,087
- ----------
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<PAGE>
<FN>
(1) Includes the effect of the acquisition of NASCO Products and Spirco, each
accounted for by using the purchase method. The Company acquired NASCO
Products in June 1991 and Spirco in August 1991. The fundraising program
marketing operations of Spirco were subsequently sold in May 1993 and the
import operations of NASCO Products were sold in July, 1995, and are
classified as discontinued operations. See Note 3 of Notes to Consolidated
Financial Statements.
(2) Operating expenses for fiscal 1994 include plant consolidation charges of
$470,000 ($.20 per share) relating to the consolidation of the Company's
manufacturing facilities. See Note 1(j) of Notes to Consolidated Financial
Statements.
(3) Includes other income of $1.9 million from the settlement of litigation.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Continuing Operations".
(4) Includes the effect of additions to the deferred tax valuation allowance
of $3,679,000 ($1.86 per share) and $624,000 ($.59 per share) in fiscal
1994 and 1993, respectively.
(5) Represents net loss per share adjusted to treat as outstanding from the
date of the loans the 229,720 shares of common stock issued in fiscal 1994
to extinguish certain borrowings. See Note 4 of Notes to Consolidated
Financial Statements.
(6) Reflects the operations and July 1995 sale of the import operations of
NASCO Products, the operations and May 1993 sale of the fundraising
program direct marketing operations of Spirco and the operations and loss
from the disposal of Sportswear. See Note 3 of Notes to Consolidated
Financial Statements.
(7) Represents gains and losses resulting from the Chapter 11 reorganization
of Spirco. See Note 2 of Notes to Consolidated Financial Statements.
(8) Represents obligations extinguished subsequent to October 31, 1993 by the
issuance of common stock. See Note 7(a) of Notes to Consolidated Financial
Statements.
(9) Represents 189,761 shares of common stock, which were issued in September
1993 to extinguish $1,423,000 of debt and accrued interest, which the
Company could have been required to repurchase at $7.50 per share between
January 1994 and April 1995. See Note 7(b) of Notes to Consolidated
Financial Statements.
(10) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year ended on October 31. The
results of operations and cash flows for the transition period of November
1, 1995 to November 30, 1995 are separately presented herein. See
Condensed Consolidated Financial Statements.
(11) Pro forma for the effects of the acquisition of Thimble Square, which was
completed on April 12, 1996. Pro forma income from continuing operations
data is stated as if the acquisition had taken place on November 1, 1994.
Pro forma balance sheet data is stated as if the acquisition had taken
place on February 29, 1996. The pro forma financial information is not
necessarily indicative of the actual future results of operations or
financial position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Acquisition of Thimble Square," and
Pro Forma Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has incurred losses from continuing operations in each of the
last three fiscal years, principally as the result of a lack of adequate working
capital and lower than expected sales. In fiscal 1994 the Company's sales were
significantly affected by a weak retail environment and the coinciding decline
in sports licensed sales caused by the baseball and hockey strikes, and the
resulting shortfall from prior year and projected sales levels caused a $2.5
million decline in gross profit from continuing operations and was the principal
reason for the fiscal 1994 loss from operations. The increase in the loss from
continuing operations between fiscal 1993 and the year ended October 31, 1994
also results from the fiscal 1994 write-down of deferred tax assets originally
recorded principally in 1991 and 1992. The indirect effects of the losses
incurred by Spirco's discontinued school fundraising marketing operations,
including the absorption of capital resources by those operations, also
contributed to the losses from continuing operations.
Fiscal 1995 sales were also adversely affected by the continuing weakness
in the retail sector, and by a shortage of working capital. The Company had
projected that its sale of the NASCO Products imported product line would
provide it with both immediate working capital and the ability to obtain more
traditional accounts receivable and inventory financing, as the terms originally
negotiated with the buyer provided for an all cash payment with which the
Company could have retired certain existing borrowings. However, shortly before
the completion of the sale, the buyer, ANG, advised the Company that it would be
unable to obtain financing. The Company decided to proceed with the sale to ANG,
under revised terms that allow ANG to pay the purchase over a three year period,
because the preceding process of obtaining league approvals, which had been
proceeding since March, 1995, had made it impractical for the Company to alter
its restructuring strategy and remain in the import business.
Fiscal 1995 results also reflect effects of the Company's 1994 strategy
of emphasizing sports licensed products in its marketing. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets. The Company believes that these new
products and programs, and the approach of the 1996 Summer Games, will have a
positive impact on fiscal 1996 sales. However, there can be no assurance that
fiscal 1996 sales will increase, as actual results can be affected by the
Company's ability to obtain the working capital it will need to support any
sales increases, and by presently unknown developments in the retail sector or
in the Company's financial and competitive positions. Additionally, to the
extent that sales in fiscal 1996 increase as the result of sales of Olympic
products, it is likely that such sales would not reocurr thereafter; the Company
will attempt to replace the sales of Olympic products, and maintain any higher
level of sales, through increased sales of craft products, new fashion products,
and products developed under new licenses.
The Company's capital resources have been below the necessary level since
fiscal 1992, when it was forced to abandon a planned $7.5 million preferred
stock offering because NASCO's former auditors would not furnish required
financial information. Subsequent efforts to raise capital through private
placements in fiscal 1993 did not yield sufficient proceeds, and market
conditions, the bankruptcy reorganization of Spirco and the Company's losses
prevented the Company from pursuing a public offering during fiscal 1994.
Additionally, the Company's losses caused NBD Bank ("NBD"), its principal
lender, to reduce the amounts available under the bank credit facility. The lack
of adequate working capital caused the Company to lose sales in fiscal 1993 and
1994 because it caused delays in the receipt of imported products, caused
domestic production delays, and limited investments in marketing and product
development.
In fiscal 1994 the Company began a restructuring, which continued
throughout fiscal 1995, designed to reduce the Company's working capital needs
and allow the elimination of certain overhead expenses.
-27-
<PAGE>
Effective November 1, 1994 the Company closed its Sugarland, Texas manufacturing
facility and consolidated all domestic operations to its owned facility in
Springfield, Tennessee. This consolidation allowed the Company to eliminate the
expense of the leased space in Texas, which approximated $20,000 per month, and
also allowed the elimination of certain shipping and duplicative supervision
costs. In connection with the plant consolidation the Company recorded a charge
of $470,000 during fiscal 1994. The charge included $152,000 for the remaining
payments under the Sugarland, Texas lease and $40,000 relating to the employees
who were not relocated to Springfield, Tennessee. See Note 1(j) of Notes to
Consolidated Financial Statements.
The Company executed the agreement which resulted in the sale of NASCO
Products' imported product line of sports bags, back packs and equipment bags
displaying the logos of National Football League, NBA, Major League Baseball and
National Hockey League teams on July 31, 1995. The agreement did not cover the
college or U.S.O.C. license rights held by NASCO Products, NASCO Products'
international license rights, or any of Innovo's license rights. Domestically
marketed U.S.O.C. and college logoed products will now be manufactured
domestically by Innovo and marketed as a part of its product line, and the
Company will continue its international distribution through NPI International.
The disposed of product line was imported, and therefore required the
Company to make substantial investments to order and purchase inventory several
months ahead of expected sales. Increasing competition and continued soft demand
for these products caused the Company to incur operating losses in order to sell
the imported inventories, and the Company's decision to sell the product line
reflects its conclusion that these market conditions were likely to continue for
some time, as a result of which near-term profitability was unlikely. The
disposal of this portion of the Company's business is intended to eliminate
these losses and the capital requirements relating to the import operations, and
to allow the Company to utilize the proceeds from the sale to reduce other
obligations and invest in the development of new products and distribution
channels for its continuing operations. As the result of the disposal, the
Company's continuing operations will be concentrated around its domestic
manufacturing capabilities and its international license rights, which the
Company views as its strategic strengths.
The completion of the sale reduces the Company's revenues significantly.
The Company is attempting to offset the initial decline in revenues through both
reductions in operating expenses and increases in sales by the continuing
operations. In late July and early August, 1995, concurrent with the sale to
ANG, the Company made or scheduled personnel reductions that are estimated to
reduce payroll costs by $300,000 annually. The management and administrative
structure retained after these reductions represents a level of costs that the
Company has chosen to continue in anticipation of, and to generate, increased
sales. The Company recognizes that its fiscal 1995 level of sales would not
allow it to operate profitably without additional significant expense
reductions, and if sales increases are not achieved, it will further restructure
to accomplish those cost reductions. Over the long-term the Company hopes that
its reduced capital and operating needs will allow it to increase sales by
increasing its investment in the development of new and updated products and
distribution channels for Innovo.
Management believes that these steps, once fully implemented, will assist
the Company in returning to profitability by allowing cost reductions, a
concentration on exploiting the Company's domestic manufacturing capability and
international license rights, and by reducing the Company's exposure to the
adverse effects of sales and working capital shortfalls. However, the Company
will continue to encounter difficulties in regaining profitability if it is
unable to obtain the working capital required to support higher sales levels, or
those higher sales levels fail to materialize due to continuing or deepening
retail weakness.
Acquisition of Thimble Square
As discussed elsewhere herein, on April 12, 1996, the Company acquired
100% of the outstanding
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<PAGE>
common stock of Thimble Square for an aggregate of $1.1 million, paid by the
issuance of shares of the restricted common stock of the Company. In a
concurrent transaction, Thimble Square acquired from its stockholders a plant it
had previously leased from them in exchange for (a) $300,000 paid by the
issuance of shares of the restricted common stock of Innovo Group, and (b) the
issuance by Thimble Square of $200,000 of unsecured notes payable, without
interest, on August 31, 1996 (with certain prepayments required in the event of
certain refinanings or asset sales by Thimble Square). The purchase prices are
subject to downward adjustment based on the results of an audit of Thimble
Square's December 31, 1995 financial statements, and the appraisal of its
property and equipment, which are to be completed by June 30, 1996.
A total of 2,745,098 shares of the Company's common stock were issued to
effect the acquisition. However, at the time of the acquisition Thimble Square
owned 1,080,000 shares of the Company's common stock as a result of the January,
1996 manufacturing agreement between the companies (see Note 5 of Notes to
Condensed Consolidated Financial Statements). As a result of the acquisition,
Innovo Group reacquired, and retired, those shares, and the net increase in the
number of shares of Innovo Group common stock outstanding was 1,665,098 shares.
On a pro forma basis, assuming that the acquisition had been completed on
November 1, 1994, and after pro forma adjustments to reflect (i) increases in
depreciation and amortization resulting from recording the Thimble Square assets
acquired at fair value, and (ii) the effects of certain compensation and fringe
benefit arrangements that became effective upon the completion of the
acquisition, the Company and Thimble Square would have reported sales of
$8,327,000 and a loss from continuing operations of $267,000 (see Pro Forma
Condensed Consolidated Financial Statements). However, the Company does not
believe that the pro forma results are necessarily indicative of the effects the
acquisition of Thimble Square will have on its consolidated results of
operations. The pro forma results do not include adjustments for additional cost
savings which the Company believes can be achieved through changes to Thimble
Square's manufacturing operations, and through the use of Thimble Square's
facilities to manufacture Innovo's products during periods of peak production.
Additionally, as discussed elsewhere herein, the Company plans to use Innovo's
existing marketing and sales functions to market Thimble Square's products
through the Company's existing network of marketing organizations and sales
representatives, and to the mass merchant customers with which the Company has
existing relationships. Thimble Square previously has not made significant use
of outside sales representatives, or had significant sales to Innovo's
customers, and has instead relied principally on the marketing and sales efforts
of its own personnel. While there can be no assurance, the Company believes that
these new marketing and sales efforts could, over time, generate material
increases in Thimble Square's sales. However, the implementation of such steps
may require a period of several months, and therefore sales increases would not
be immediate. At Thimble Square's present level of sales, it is anticipated that
its operations will not have a material effect on the Company's 1996 results of
operations.
Change In Fiscal Year
Effective November 1, 1995 the Company changed its fiscal year end to
November 30. Previously, the Company's fiscal year ended on October 31. As a
result, the results of operations for the first quarter of fiscal 1996
(December, 1995 through February, 1996) may, in some respects, lack
comparability to the results of operations for the first quarter of fiscal 1995
(November, 1994 to January, 1995). The results of operations and cash flows for
the transition period of November 1, 1995 to November 30, 1995 are separately
presented in the condensed consolidated financial statements included herein.
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<PAGE>
Results of Continuing Operations
Three months ended February 29, 1996 compared to three months ended
January 31, 1995
Sales for the first quarter of fiscal 1996 increased by $204,000, or
18.3%, to $1,319,000, from $1,115,000 for the three months ended January 31,
1995. The first quarter of fiscal 1996 includes the month of February due to the
change in fiscal year. Sales for the month of February, 1995 were $414,000.
During fiscal 1995 the Company developed new products for its fashion, utility
and craft lines, seeking to lessen its dependence on sports licensed products.
Sales for the first quarter increased due to the Company's new craft products,
and its recapture of certain craft accounts from import suppliers, and from
sales of the Company's U.S. Olympic Team products. The Company's order book as
of February 29, 1996 was approximately 70% higher than at February 28, 1995
principally as the result of increased craft and utility product orders. The
Company will begin to actively market its fashion line during the second quarter
of fiscal 1996; however, material sales are not anticipated in fiscal 1996.
Gross profit as a percentage of sales was 44.5% for the first quarter
of fiscal 1996 compared to 53.5% for the three months ended January 31, 1995.
Because of the seasonality of the Company's business, certain fixed
manufacturing costs must be allocated between interim periods on the basis of
projected sales. Prior to fiscal 1996 the Company utilized all projected sales
to project production in each quarter and allocate fixed manufacturing costs
between interim periods. Beginning in fiscal 1996, the allocation of fixed
manufacturing costs between interim periods is being based on production
projections that reflect only confirmed or customer planned orders. The Company
anticipates that as a result quarterly gross profit percentages will vary less
than in fiscal 1995, when the gross profit percentages for the first half of the
year were significantly higher than those for the second half of the year.
Selling, general and administrative expenses decreased to 49.4% of
sales for the three months ended February 29, 1996 from 52.7% for the first
quarter of fiscal 1995. SG&A increased by $64,000, due principally to additional
personnel. The majority of the Company's SG&A expenses are fixed, and
accordingly the Company anticipates that SG&A expenses as a percentage of sales
will decrease additionally with any additional increases in sales. As previously
discussed, the management and administrative structure retained after the
reductions made at the time of the sale of NASCO Products' domestic operations
to ANG represents a level of costs that the Company has chosen to continue in
anticipation of, and to generate, increased sales, and if sales increases are
not achieved, the Company will further restructure to accomplish additional cost
reductions.
The loss from operations was $155,000 for the three months ended February
29, 1996 as compared to a loss from operations of $104,000 for the first quarter
of fiscal 1995. The effect of the increase in sales in the first quarter of
fiscal 1996 was offset by the decline in the gross profit percentage, which was
lower in the current period for the reasons discussed above.
Interest expense increased by $17,000 for the three months ended February
29, 1996, as compared to the quarter ended January 31, 1995, principally as the
result of higher interest rates. Other income of $115,000 was recognized during
the first quarter of fiscal 1996; in the three months ended January 31, 1995,
other expense was $103,000. As a result of the forgoing, the loss from
continuing operations for the three months ended February 29, 1996 was $161,000,
or $.02 per share, compared to $311,000, or $.15 per share, for the first
quarter of fiscal 1995.
Fiscal 1995 compared to Fiscal 1994
Sales from continuing operations for fiscal 1995 were $5,276,000, a
decline of $2,752,000 from sales from continuing operations of $8,028,000 for
fiscal 1994. Innovo's products, which represent the principal portion of the
Company's continuing operations, include both sports licensed and utility items.
Fiscal
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<PAGE>
1995 sales of utility products continued to be affected by a weak retail sector,
and by the Company's 1994 strategy of emphasizing sports licensed products in
its marketing. During the third quarter of fiscal 1995 Innovo completed the
development of updated utility products, and a new fashion line, which the
Company began to market in the fourth quarter of fiscal 1995 and the first
quarter of fiscal 1996. Innovo's sales of domestically manufactured sports
licensed items continued during fiscal 1995 to be negatively affected by the
overall slow down in the market for sports licensed merchandise, which in part
was triggered by the 1994 baseball strike. Although Major League Baseball
resumed play in April, the rate at which the market for sports licensed products
will recover remains uncertain. Additionally, marketing efforts for the
Company's college logoed sports bags and backpacks were interrupted pending the
decision as to whether the college products would be continued domestically by
Innovo or included in the sale to ANG. However, in the fourth quarter of fiscal
1995 the Company began to receive increased orders and interest in its Olympic
licensed products, including the new products developed under recently obtained
cross-licenses with the U.S.O.C. and Warner Bros. Studios and the U.S.O.C. and
Original Appalachian Artworks, and sales increases from these products could
positively affect fiscal 1996.
Gross profit as a percentage of sales was 27.8% for the year ended October
31, 1995 compared to 37.2% for fiscal 1994. The change in the gross profit
percentage reflects the affect of lower sales, which increased the per unit
absorption of fixed manufacturing costs and adversely effected the gross profit
percentage. The effect was partially offset by the cost savings being achieved
from the Company's fourth quarter fiscal 1994 consolidation of its manufacturing
operations. The fiscal 1995 gross profit percentage was also affected by
incentive pricing used to reduce college logoed inventory levels and provide
liquidity. Management believes that sales can regain their fiscal 1994 levels
without requiring a significant increase in fixed costs, and that sales
increases could therefore positively affect gross profit percentages unless
variable costs increase significantly.
Selling, general and administrative expenses ("SG&A") declined by
$1,377,000 to $2,728,000 for fiscal 1995. Commissions paid to the Company's
independent sales representatives and royalties paid on the sale of licensed
products are significant components of SG&A, and will vary due to changes in
sales, changes in the portion of sales generated "in-house", and changes in the
mix of sales among the Company's licensed and unlicensed products. For fiscal
1995, commissions were 1.2% of sales, compared to 3.1% in fiscal 1994, and
royalties were 3.5% of sales compared to 3.7% of sales in fiscal 1994. Overall,
commissions and royalties decreased by $294,000. Other SG&A declined by
$1,083,000, and equaled 47% of sales in fiscal 1995 compared to 44% of sales for
the year ended October 31, 1994. The principal components of the decline in
other SG&A were reductions in salary costs ($240,000), legal and professional
expenses ($490,000), rent ($255,000) and bad debt allowances ($128,000).
Although fixed personnel and overhead costs were reduced in fiscal 1995, as a
percentage of sales SG&A was higher in fiscal 1995 due to the decline in sales.
The Company believes that any future increases in sales, to at least the fiscal
1994 level, would be accomplished without a proportionate increase in SG&A
expense. Depreciation expense declined from $814,000 in fiscal 1994 to $406,000
in fiscal 1995 principally due to the complete depreciation, during fiscal 1994
and 1995, of machinery and other equipment acquired in the Company's fiscal 1991
acquisition of Spirco and the fiscal 1994 write-off of the unamortized leasehold
improvements upon the Company's closure of its Sugarland, Texas facility.
The fiscal 1995 loss from operations of $1,666,000 was $739,000 lower than
the operating loss for the year ended October 31, 1994. Operating expense
reductions of $2.3 million offset the decline in gross profits of $1.5 million,
resulting in the decline in the operating loss.
Interest expense declined by $310,000 for fiscal 1995 when compared to the
year ended October 31, 1994, mainly as the result of lower borrowings under the
Company's accounts receivable and inventory borrowing facilities. However, the
effect of lower borrowings was partially offset by higher interest rates, and by
the interest expense on the $600,000 working capital loan obtained in July,
1994.
During the second quarter of fiscal 1995 the Company recognized other
income of $1.9 million for the net proceeds it received upon the settlement of
its lawsuit against the former auditors of Spirco (then NASCO). The Company had
sued the accountants alleging, among other things, misstatements in the
financial statements of NASCO for pre-acquisition periods. The accountants did
not admit any wrong doing in settling the lawsuit.
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<PAGE>
Fiscal 1994 compared to Fiscal 1993
Net sales from continuing operations for fiscal 1994 declined $4,440,000
from fiscal 1993. Sales to the retail market declined by $2,295,000, from
$10,032,000 in fiscal 1993 to $7,737,000 in fiscal 1994, while sales to the
school market serviced by Spirco declined by $2.1 million from $2,436,000 in
fiscal 1993 to $291,000 in fiscal 1994.
Sales to the retail sector are highly seasonal, with the majority (67% in
fiscal 1994 and 63% in fiscal 1993) occurring during the second half of the
Company's fiscal year. The majority of the shortfall of 1994 retail market sales
compared to those in 1993 occurred in the fourth quarter (August to October).
That period saw an increase in the weakness being experienced in the apparel and
sporting goods segments of the retail sector. The effects of that retail
weakness on the Company's sales were magnified by the strikes by the players of
Major League Baseball and the National Hockey League. For fiscal 1994 the
Company had adopted a strategy that emphasized its sports logoed products, and
it anticipated that increases in the sales of these products would offset any
sales declines for Innovo's generic products caused by the focus on the licensed
products. However, the baseball and hockey strikes had a significant impact on
sales of all sports logoed products throughout the sports licensed industry, and
with respect to the Company resulted in the fourth quarter of 1994 cancellation
or loss of sales of approximately $1.2 million of Innovo domestically produced
Major League Baseball and NHL products. Fiscal 1994 sales were also adversely
effected by the trucker's strike, which prevented shipments and production for
the month of April, 1994, and by a continuing lack of working capital.
The majority of the $2.1 million decline in sales to the school market was
experienced in the first quarter of fiscal 1994. In fiscal 1993, Spirco marketed
jackets through its sales force, and sales for the first quarter of 1993
included $956,000 from a school jacket program run during that period. In fiscal
1994, QSP, which now markets to the schools formerly serviced by Spirco, decided
not to run Spirco's jacket program. Additionally, QSP did not maintain its
originally indicated efforts to distribute the Company's bag products in its
market.
Gross profit as a percentage of sales was 37.2% for fiscal 1994 compared
to 43.9% for the 1993 year. The decline in the overall gross profit percentage
was due to the unusually high margin school market sales in fiscal 1993. The
gross profit on the remaining sales was 37.6% in fiscal 1994 and 39.0% in fiscal
1993. Innovo instituted some price increases in fiscal 1994, which had the
effect of increasing sales by approximately $156,000. Additionally, Innovo was
able to lower both fixed and variable production costs in fiscal 1994 by
consolidating certain operations and re-engineering products. In fiscal 1994
$1.1 million of Innovo's sales resulted from certain orders to domestically
produce sport and tote bags for another distributor of those products. The
Company accepted the contract, and will pursue other such contracts, as a means
of using its domestic manufacturing capability as a source of revenue
enhancement. Generally the gross profit percentage on these sales will be lower
than on the sales of the products the Company distributes itself, and the
decline in the gross profit percentage was due to the significance of these
orders to 1994 sales. However, on these sales the Company does not incur
commissions, royalties, and other costs incurred in selling to the retail
sector, as a result of which selling costs are also lower.
Selling, general and administrative expenses decreased $250,000 in fiscal
1994. For fiscal 1994, commissions were 3.1% of sales compared to 4.7% in 1993.
Royalties were 3.7% of sales in fiscal 1994 and 4.7% in fiscal 1993. Sales of
licensed sports logoed products represented 30.8% of total sales in fiscal 1994
compared to 27.4% in fiscal 1993. Overall, commissions and royalties were
$542,000, or 6.8% of sales in fiscal 1994, compared to $1,235,000, or 9.4% of
sales in fiscal 1993. The $693,000 decrease in royalties and commissions between
fiscal 1993 and fiscal 1994 was offset by a $443,000 increase in
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<PAGE>
other SG&A, due principally to higher collection allowances caused by the
weakness in the retail sector, and continuing high legal expenses. SG&A as a
percentage of sales increased to 51.1% in fiscal 1994 from 34.9% in fiscal 1993
due to the decrease in sales.
The loss from operations for fiscal 1994 was $2,405,000, compared to
income from operations of $447,000 for fiscal 1993. The principal reason for the
change was the decline in sales.
Interest expense declined by $139,000 for fiscal 1994 compared to fiscal
1993, mainly as the result of lower borrowings under the Company's bank credit
facility. The April 5, 1994 extinguishment of $1.8 million of interest bearing
debt produced interest savings of approximately $122,000. However, that savings
was partially absorbed by the effect of the increases in short-term interest
rates that occurred during fiscal 1994.
Other income (expense) changed from income of $280,000 in fiscal 1993 to
expense of $898,000 for the year ended October 31, 1994. The fiscal 1994 amount
includes $300,000 of costs associated with the preparation of a public offering
of the Company's securities which was charged to expense when the Company
decided not to proceed with an offering and loan fees of $213,000 from the fees
the Company incurred in connection with the renewals of its agreement with NBD.
During fiscal 1994 the Company recorded an increase of $3,679,000 in the
deferred tax asset valuation allowance, as a result of which the results of
continuing operations reflect tax expense of $3.7 million for the year. The
increase in the valuation allowance was recorded due to the Company's continuing
losses, and the difficulty in projecting future results in light of the
Company's restructuring and the potential for continuing effects from the
baseball players' strike.
The loss from continuing operations was $7,905,000 or $3.99 per share for
fiscal 1994 compared to $661,000 or $.63 per share for fiscal 1993. After
eliminating the effect of the plant consolidation charges from fiscal 1994, and
the write-down of deferred taxes from both years, the comparable per share
amounts were losses of $2.09 per share in fiscal 1994 and $.03 in fiscal 1993.
Results of Discontinued Operations
Sales for the discontinued NASCO Products operations decreased by $3.2
million in fiscal 1995, from $5,937,000 to $2,777,000, and decreased by $302,000
in fiscal 1994, from $6,239,000 to $5,937,000. The declines in sales in fiscal
1995 and fiscal 1994 reflected the effects of the weakness in the sporting goods
sector of the retail sector, and the effects of the baseball and hockey strikes.
The negative effect of those factors was partially offset by sales the Company
made at discounted prices to reduce its investment in imported inventory. NASCO
Products' fiscal 1995 sales were also impacted by a decline in marketing efforts
which took place during, and as a result of, the negotiations with ANG.
Additionally, sales for fiscal 1995 represent only sales through July 31, 1995,
or for nine months.
The gross profits from the discontinued NASCO Products operations were
8.8%, 22.0% and 23.5% of sales for fiscal 1995, 1994 and 1993, respectively. The
fiscal 1995 and 1994 gross profit percentages were adversely affected by the
sales made at discounted prices to reduce inventory. In reaction to the decline
in industry-wide sales of sports licensed products which began in the last part
of 1994 and continued into 1995, NASCO Products, like many of the other
sports-licensed distributors, offered significant discounts and affected several
bulk sales at discounted prices in order to reduce inventory levels. In fiscal
1993, the gross profit percentage was negatively impacted by costs of
approximately $443,000 incurred to air freight the supplier's late deliveries to
the U.S., and by inventory reserves of $244,000 recorded for selling costs to be
incurred in reducing inventory in fiscal 1994.
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<PAGE>
The SG&A relating to NASCO Products' discontinued operations equaled
37.6%, 44.1% and 45.9% of sales in fiscal 1995, 1994 and 1993, respectively. The
percentage decreased in fiscal 1995, as compared to fiscal 1994, due to lower
commissions, as the majority of fiscal 1995 sales were made to accounts serviced
directly by the Company. Fiscal 1993 SG&A was impacted by price allowances of
$390,000 provided to customers because of the late receipt and delivery of the
imported products.
The Company recognized a gain from the sale of NASCO Products' domestic
operations of $301,000 during the third quarter of fiscal 1995. The gain
reflects the recording of the payments to be received from ANG over the next
three years at their present value, discounted at 10% per annum.
Upon completion of the sale of Spirco's fundraising program direct
marketing operations to QSP, the Company terminated its employment and
contracted relationships with its approximately 80 fundraising salespersons and
also eliminated 33 management, administrative and equivalent full-time support
positions. Approximately 55 Spirco fundraising salespersons accepted employment
offers from QSP, and, under the sales agreement, Spirco's rights under the
non-competition, confidentiality and non-solicitation agreements with those
salespersons were transferred to QSP.
The Company received the initial $1.5 million from QSP in fiscal 1993. The
loss from the disposal of the discontinued operations for fiscal 1993 includes
an operating loss of $1.7 million incurred in the second half of fiscal 1993
during the phase-out of the fundraising program marketing operations, and a
provision of $180,000 for the loss to be incurred in disposing of Sportswear.
During the third quarter of fiscal 1993, the Company accrued $579,000 of
additional costs for the disposal of the discontinued operations. This accrual
resulted from higher than originally estimated costs to fulfill Spirco's
obligation to transfer its fundraising program marketing records onto QSP's data
processing system.
During fiscal 1994 the Company received additional proceeds from QSP of
$1,445,000.
Reorganization of Spirco
As described in Note 2 of Notes to Consolidated Financial Statements, the
plan of reorganization for Spirco under Chapter 11 of the U.S. Bankruptcy Code
was confirmed on August 5, 1994 and became effective on November 7, 1994.
Generally Spirco's plan of reorganization provided for the full payment of all
claims ranking above general unsecured claims, with claims ranking below general
unsecured claims receiving no distribution. With the exception of administrative
expenses, which were paid in cash with funds borrowed under the Company's bank
credit facility, the claims were or are being paid through the issuance of
Innovo Group common stock. Spirco's equipment and plant were transferred to
Leasall, which assumed the related debt, and Spirco was merged into Innovo
Group, which acquired direct ownership of its other assets.
On the effective date a total of 222,000 shares of common stock were
issued to satisfy the secured claims, and those that Innovo Group had guaranteed
("Class 8 claims"). Additionally, 584,000 shares were issued to a trust (the
"Class 3 Trust"), which will sell those shares and distribute the proceeds to
satisfy the claims of the Class 3 creditors, which were federal, state and local
taxing authorities. As of the date hereof, the Class 3 Trust had sold 377,000
shares for net proceeds of $602,000, and had remaining 207,000 shares to satisfy
claims of approximately $755,000 (including disputed claims of $605,000, which
the Company estimates will result in allowed claims of $150,000). Any shortfall
must be paid by Innovo Group in cash, with interest at 7% per annum, in
installments between November 1995 and November 1999; conversely, any shares
remaining unsold by the Class 3 Trust after the full satisfaction of the claims
will, in general, be returned to the Company. Accordingly, the precise number of
shares, or other consideration, issued pursuant to Spirco's plan of
reorganization will not be known until the Class 3 Trust has completed its sale
of shares. On the basis of the sales by the Class 3 Trust
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<PAGE>
through May 31, 1996, the market price of the Company's common stock on that
date and the estimated amount of disputed claims that will be allowed, the
proceeds from the sale of shares by the Class 3 Trust will be sufficient to
satisfy all Class 3 claims. See Note 2 of Notes to Consolidated Financial
Statements and Note 6 of Notes to Condensed Consolidated Financial Statements.
The implementation of Spirco's plan of reorganization resulted in a fiscal
1994 extraordinary gain of $699,000 (net of taxes of $429,000) from the
extinguishment of the unsecured and other claims that did not receive any
distribution under the plan of reorganization. In fiscal 1995 the Company
recorded extraordinary charges of $258,000 for changes in the estimates of
certain allowed claims. For financial reporting purposes the Class 3 claims are
being reported as satisfied as the Class 3 Trust sells the shares of common
stock and distributes the proceeds to the claimants (see Note 2 of Notes to
Consolidated Financial Statements). Accordingly, the full impact of the plan of
reorganization will not be reflected in the consolidated balance sheet until
that process is complete, which should occur in fiscal 1996. On an overall
basis, Spirco's plan of reorganization will have had the effect of eliminating
liabilities of approximately $3.4 million and increasing stockholders' equity by
approximately $2.5 million.
The majority of Spirco's creditors were related to its discontinued
fundraising program operations and are not suppliers to the Company's continuing
operations. Spirco had continued during its reorganization to make the scheduled
payments on its mortgage debt, and the implementation of the plan of
reorganization resulted in a significant reduction in the amount and periodic
payments for the equipment debt assumed by Leasall. Additionally, the Company's
creditors had, since March, 1994, been generally aware that unsecured Spirco
creditors would receive little or no distribution. Accordingly, the
implementation of the plan did not have a material adverse effect on the
Company's liquidity. Additionally, the implementation of Spirco's plan of
reorganization did not have a material impact on the Company's results of
continuing operations.
Seasonality
The Company's business is seasonal. The greatest volume of shipments and
sales are made in the late summer and fall. During the first half of the
calendar year, the Company incurs the expenses of maintaining corporate offices,
administrative, sales and production employees, and developing the marketing
programs and designs for the ensuing sales campaigns. Inventory levels also
increase during the first half of the year. Consequently, during the first half
of each calendar year, corresponding to the Company's second and third 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 fourth and first fiscal quarters, generally provides increased
cash flows and the build-up of working capital.
The following table presents unaudited quarterly consolidated financial
data for the four quarters in each of the years ended October 31, 1995 and 1994.
The Company believes all necessary adjustments have been included in the amounts
stated below to present fairly the following selected quarterly information when
read in conjunction with the consolidated financial statements appearing
elsewhere herein. The information includes all normal recurring adjustments the
Company considers necessary for a fair presentation thereof, in accordance with
generally accepted accounting principles.
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<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------
1995 1994
--------------------------------------------------------------------------------------------------
January 31, April 30,(1) July 31, October 31,
January 31, April 30, July 31,(2) October 31,(3)
---------- ----------- -------- ----------- ----------- ---------- ----------- --------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 1,115 $ 1,249 $ 1,638 $ 1,274 $ 1,564 $ 1,064 $ 3,516 $ 1,884
Gross profit 597 633 385 (147) 652 461 1,084 787
Income (loss) from
continuing operations (311) 1,927 (601) (1,082) (271) (102) (2,042) (5,490)
Earnings (loss) per share
from continuing operations (.15) .77 (.22) (.37) (.17) (.06) (1.05) (2.40)
<FN>
(1) The results for the second quarter of fiscal 1995 include a $1.9
million gain from the settlement of litigation.
(2) The results for the third quarter of fiscal 1994 include the effects of
a $1,500,000 increase in the deferred tax valuation allowance.
(3) The results for the fourth quarter of fiscal 1994 include the effects
of a $470,000 plant consolidation charge and a $2,179,000 increase in
the deferred tax valuation allowance.
</FN>
</TABLE>
Liquidity and Capital Resources
The Company has financed its operations and its debt reductions through
the issuance of common stock, borrowings and internally generated cash flow.
External financing sources required repayment of $1,787,000, $1,058,000 and
$1,682,000 in fiscal 1995, 1994 and 1993 respectively, while operations provided
(absorbed) cash flow of $1,704,000, $(406,000) and $(642,000) during those
periods.
Cash flows from operations of $1,704,000 in fiscal 1995 were generated
principally from a $4.4 million reduction in inventories. The inventory and
accounts receivable reductions both principally resulted from the Company's exit
from its import operations. The cash flows generated from those sources allowed
the Company to reduce current liabilities, including notes payable, by $5.5
million.
The fiscal 1994 net loss of $7.9 million included significant non-cash
charges for depreciation and amortization, the write-down of deferred tax assets
and the write-off of costs incurred in prior years. As a result, the cash flow
absorbed by operations, $406,000, was $7.5 million less than the net loss.
Inventories were essentially unchanged; although the Company reduced its
investment in imported sports- logoed inventories by offering discounts, the
resulting decrease in inventory was offset by the purchases of mostly blank
sports bags the Company imported in the second and third quarters of fiscal 1994
in order to obtain adequate supplies of these products before the exhaustion of
the Chinese export quotas.
For fiscal 1993 the cash absorbed by operations was significantly less
than the net loss due to the non-cash nature of the loss from the disposal of
Spirco's fundraising program marketing operations, and an approximate $5.3
million reduction in accounts receivable, which resulted from the
discontinuation of sales to schools, and improved collections. However, since
the Company's credit facility requires it to apply 80% of its collection of
accounts receivable to reduce borrowings, the cash inflows generated by the
reduced levels of accounts receivable were largely offset by cash outflows to
reduce debt.
Operating cash flows were a negative $659,000 for the first quarter of
fiscal 1996 principally as the result of an approximate $566,000 reduction in
accounts payable and accrued expenses. The Company financed the reduction in
accounts payable and accrued expenses with $450,000 obtained for the sale of
shares of its common stock, and new notes payable borrowings of $300,000. The
Company undertook these financings, to reduce trade debt, in order to improve
its ability to obtain the trade credit from its suppliers in anticipation of
increases in sales and resulting increases in raw materials requirements. The
restricted liquidity that the Company experienced throughout fiscal 1995
continued during the first quarter of fiscal 1996.
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<PAGE>
The Company's long-range financing plans were interrupted in November 1992
when a planned $7.5 million public offering of convertible preferred stock had
to be withdrawn when the former auditors of Spirco advised the Company that such
firm would not consent to the use in the registration statement for that
offering of its report on the 1990 Spirco financial statements. The Company's
inability to complete the planned public offering prevented it from repaying
$2,000,000 of 12% Subordinated Collateralized Notes (the "Subordinated
Collateralized Notes") that had been issued in June 1992 as bridge financing
pending the completion of the public convertible preferred stock offering.
Because the Company could not undertake a public offering as originally planned,
it was required to attempt to fulfill its financing plans by other means. In
March, 1993 the Company undertook, through a placement agent, a $7.5 million
private placement of debt. Indications from the placement agent were that the
Company could expect the receipt of the minimum proceeds of $3.5 million in
mid-April, 1993. However, the placement agent did not complete the offering as
indicated. A subsequent private placement of 55,000 units, each comprised of one
share of common stock and one $30 common stock purchase warrant exercisable
through July 31, 1996, produced net proceeds of $1,127,000, but that offering
was not completed until June 1993.
To compensate for the inability to pursue its fall 1992 public offering,
and the delay and eventual noncompletion in the March 1993 private debt
offering, the Company took the following steps to raise an aggregate of
approximately $2.7 million of debt and equity capital: (i) the sale of 61,100
shares of restricted common stock in seven private transactions with
unaffiliated accredited investors for aggregate proceeds of $620,000, (ii) the
receipt of loans from affiliates aggregating $900,000, and (iii) the receipt of
loans from unaffiliated investors aggregating $1.2 million. In September 1993,
the Company issued 189,761 shares of its common stock to retire $1,339,000 of
the loans ($690,000 from unaffiliated lenders and $649,000 from affiliated
lenders) together with $84,000 of accrued interest.
On April 5, 1994 the Company completed an equity for debt exchange in
which (i) 216,128 shares of common stock were issued to extinguish $1.7 million
of the Subordinated Collateralized Notes and related accrued interest of
$191,000, (ii) 6,334 shares of common stock were issued to extinguish $50,000 of
other notes payable and accrued interest of $5,400 and (iii) 26,328 shares of
common stock were issued to satisfy $185,000 of other obligations. Several of
the holders of the debt exchanged for common stock were also holders of the
units sold by the Company in its June, 1993 private placement, and both the
Subordinated Collateralized Notes and units had been placed by the same
placement agents. As a result, in order to obtain agreement to the debt
conversion, the Company also agreed to revise the terms of the June, 1993
private placement by issuing 53,000 shares of common stock to increase to two
shares the number of shares included in the units sold, decrease to $20 the
exercise price of the 53,000 Class B warrants included in the units, and extend
the term of the warrants until July 31, 1997. As a result, the Company issued an
aggregate of 301,789 shares, which were recorded in stockholders' equity at the
amount of debt extinguished ($2,132,000). In addition, in other transactions
during fiscal 1994 the Company (i) issued an aggregate of 153,424 shares of
common stock to extinguish liabilities totaling $672,000 (including 115,700
shares issued to reimburse a principal stockholder for personally pledged shares
sold by creditors to reduce the Company's obligations to the creditors - see
Note 11(a) of Notes to Consolidated Financial Statements), (ii) issued 62,750
shares of common stock in exchange for services, (iii) issued 110,000 shares of
common stock for aggregate cash proceeds of $475,000, (iv) issued 247,097 shares
of common stock in connection with the implementation of Spirco's plan of
reorganization, and (v) issued 80,000 shares of common stock in connection with
a $600,000 working capital loan obtained in July 1994. The proceeds from the
$600,000 working capital loan were used to reduce past due royalties and
commissions.
During fiscal 1993 and 1994 the Company's principal credit facility was
with NBD. The terms of the
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facility in effect during fiscal 1994, which were contained in two extension and
forbearance agreements dated November 10, 1993 and July 20, 1994, provided for
aggregate borrowings up to $4,401,000. Actual advances were limited by a
collateral formula which allowed draws up to (a) 80% of the eligible accounts
receivable of Innovo and NASCO Products and (b) 27% (reduced to 9.4% in July,
1994) of the cost (or market value, if lower) of the inventories of Innovo and
NASCO Products. Interest was paid monthly at 4% above NBD's prime rate.
The substantial majority of the borrowings the Company historically
obtained under the NBD credit facility have been supported by, and needed to
finance, the accounts receivable of NASCO Products and Innovo and the imported
inventories of NASCO Products. The domestic raw materials and finished goods
inventories of Innovo have not supported or required significant borrowings
because the time that elapses from Innovo's purchase of raw materials to its
completion and shipment of finished goods is relatively short, resulting in
generally low inventory levels.
In April, 1995 Innovo entered into an accounts receivable factoring
agreement with Riviera Finance under which the Company obtains advances of 80%
of assigned Innovo accounts receivable. Riviera Finance will charge 1% of each
invoice assigned plus 2% per month of average outstanding advances. At the same
time the Company paid $936,000 to NBD to eliminate the then outstanding
borrowings on Innovo's existing accounts receivable and inventory. The payment
to NBD was funded from net proceeds of $1.9 million which the Company received
in March 1995 upon the settlement of its lawsuit against the former auditors of
Spirco (then NASCO). NBD agreed to continue to advance funds against the
accounts receivable and inventories of NASCO Products at the rate of 70% and
9.4%, respectively, through July 31, 1995. Effective August 1, 1995, NBD began
to apply to the balance due it all of the proceeds from the collection of NASCO
Products' accounts receivable, and payments being received by NASCO Products
from ANG. As of January 15, 1996, approximately $210,000 remains outstanding
under the NBD credit facility, which will be satisfied principally from payments
received from ANG. The Company used $258,000 of the proceeds from this
settlement to eliminate accrued interest (through April 15, 1995) and reduce to
$407,000 the balance outstanding on the July 1994 $600,000 working capital loan.
In connection with the payment the Company obtained an extension of the maturity
of the remainder of the loan to the earlier of October 15, 1995 or the repayment
of NBD's advances to NASCO Products. The Company agreed to increase the interest
rate on the loan to 20% and issue an aggregate of 69,500 shares of common stock
to the lenders for the extension.
As previously discussed, the Company had anticipated throughout its
negotiations with ANG that it would receive an all cash settlement upon the
completion of the sale. The receipt of those funds at that time would have
allowed the Company to eliminate the balances due NBD, and the balance due on
the July, 1994 working capital loan. Based on discussions the Company had with
potential lenders, such repayments would have allowed the Company to replace the
Riviera factoring facility with an accounts receivable and inventory financing
facility that would have provided the Company with the working capital necessary
to accept certain orders and operate more efficiently. However, as the result of
having to finance ANG's purchase, the Company was unable to take these actions,
and was forced to both take other steps to obtain some of the needed working
capital, and to operate at a lower working capital level.
The initial extension of the July, 1994 working capital loan expired in
October, 1995. In April, 1996, the Company and the lenders completed an
agreement to extend the maturity of the working capital loan to October 31,
1996. The lenders were granted a security interest, subordinate to NBD's, in the
payments to be received from ANG, which will be used to retire the working
capital loan once NBD has been fully repaid. The Company issued 50,000 shares of
common stock to obtain the extension, and is issuing an additional 6,250 shares
each month while balances under the working capital loan remain outstanding. The
interest rate on the working capital loan was reduced to 16% per annum
retroactively to October, 1995.
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In fiscal 1995 the Company issued 119,813 shares of common stock to
reduce by $128,000 the balance of notes payable outstanding at October 31, 1994,
and issued 187,049 shares upon the resolution of Class 8 claims in Spirco's
reorganization proceeding that were in dispute when the plan was initially
implemented (see "- Reorganization of Spirco"). Additionally, the Class 3 Trust
sold 359,049 shares of common stock for proceeds of $590,000, which were
distributed to the Class 3 claimants, and $350,000 of debt and related accrued
interest was tendered as payment for up to 375,000 shares of common stock that
will be issued to the former creditor over the period November, 1995 to May,
1996. The Company completed the issuance of the maximum 375,000 shares in
fulfillment of the entire subscription in May, 1996.
In November, 1995 the Company (i) received cash proceeds of $240,000
from the exercise of 750,000 common stock purchase warrants, and (ii) issued 1
million $.01 unregistered Class C common stock purchase warrants in connection
with its acquisition of real property that it is developing as a retail antiquie
and flea market facility. The Class C warrants were exercised in March, 1996.
The Company also obtained a $300,000 short term working capital loan, which
bears interest at 12% per annum and is collateralized by the common stock of NPI
International. In January, 1996, the Company completed the sale of 834,000
shares of common stock for cash proceeds of $250,000. In February, 1996 the
Company completed an additional private placement in which it received cash
proceeds of $250,000 for the issuance of 2,272,730 units. Each unit was
comprised of one share of restricted common stock and one Class D restricted
common stock purchase warrant, exercisable for two years at 50 percent of the
exercise date market price (25 percent if the Company's common stock is not then
traded on the NASDAQ or the New York or American Stock Exchange) of the
Company's common stock. In April and May 1996, the Class D warrants were
exercised for aggregate proceeds of $398,000. Additionally, the Company during
the period March 1, 1996 to the date hereof issued an aggregate of 2,543,750
shares of common stock in private placements for aggregate cash proceeds of
$950,000. From November 1, 1995 to May 31, 1996 the Class 3 Trust sold an
additional 167,814 shares, receiving proceeds of $224,000 which was distributed
to Class 3 claimants or is being held by the Class 3 Trust to satisfy disputed
Class 3 claims as there are resolved. In April, 1996 the Company completed an
agreement to restructure the one Subordinated Collateralized Note that remained
outstanding (see Note 4 of Notes to Consolidated Financial Statements).
In January, 1996, prior to the start of the discussions that led to the
Company's April 12, 1996 acquisition of Thimble Square, Innovo Group and Thimble
Square entered into a manufacturing agreement purusant to which the Company
issued 1,200,000 shares of its common stock to Thimble Square to prepay $400,000
of manufacturing services it would be entitled to on an as needed basis through
July, 1997. The Company agreed to prepay for the manufacturing services in order
to assure itself of the availability at a fixed price of the manufacturing
capacity it projected it will require to fulfill demand for its U.S. Olympic
Team products in the months immediately preceding the 1996 Summer Games, and to
capitalize on the opportunity to conserve cash as the result of Thimble Square's
willingness to accept payment in common stock. As the result of the Company's
April 12, 1996 acquisition of Thimble Square, the Company obtained ownership of
Thimble Square's plants (through its ownership of Thimble Square), and as a
result thereof will have that capacity available to fulfill its production
requirements. As a result of the Company's April 12, 1996 acquisition of Thimble
Square, the Company's prepayment, and Thimble Square's liability to perform
services, will offset each other in the preparation of consolidated financial
statements. At the time of the acquisition Thimble Square owned 1,080,000 shares
of Innovo Group common stock (120,000 shares having been transferred by Thimble
Square to pay a finder's fee on the January, 1996 agreement), and the Company
reacquired those shares and will reduce its consolidated stockholders' equity to
reflect their retirement. The working capital with which to perform the
manufacturing that Thimble Square might have obtained through the sale, or other
use, of those Innovo Group shares will now no longer be available to it from
that source, and the Company, as discussed below, will have to obtain any
working capital needed for this purpose through other methods. See Pro Forma
Condensed Consolidated Financial Statements.
On an overall basis the Company's liquidity was materially restricted
during fiscal 1995 and 1994.
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As previously discussed, this reduced liquidity adversely impacted operating
results by preventing the Company from fulfilling customer orders, and by
causing higher than normal interest expense. The Company's capital resources
were below planned levels due to the inability to complete the public offering
and the delay in and eventual reduced proceeds from privately placing
securities. Additionally, this shortfall in capital resources prevented the
Company from obtaining a new bank credit facility having more traditional
advance rates, and the reductions in the advance rates under the extensions of
the NBD facility further absorbed operating cash flows.
The Company believes that the restructuring of its operations as
previously described will produce a closer matching of the levels of needed and
available working capital. While, as a result, the Company believes that on an
overall basis cash will be sufficient to fund planned operations for fiscal 1996
it is anticipated that cash flows from operations may not be sufficient during
the second or third quarters of 1996 due to the seasonality of its sales and
business, the need to purchase materials for second and third quarter orders,
which would produce positive cash flows in the fourth quarter upon the shipment
of the products and the collection of the accounts receivable, and the effect
the increase in the level of orders is having on that requirement, the working
capital requirements of Thimble Square (as discussed above), and the need to
devote NASCO Products' cash flows to the NBD and working capital loans. The
Company may be able to fulfill a portion of these interim working capital
requirements through the remortgaging of one or both of Thimble Square's plants.
However, additionally, the Company may need to continue during this period to
supplement its operating cash flows, as it did in the first quarter of fiscal
1996, through borrowings or the issuance of equity securities. An inability to
obtain such interim working capital, as well as a failure of the retail
environment to improve in the manner projected by the Company, could force the
Company to further constrict operations and/or attempt to significantly
restructure its obligations.
Innovo Group is a holding company the principal assets of which are the
common stock of the operating subsidiaries. As a result, to satisfy its
obligations Innovo Group is dependent on cash obtained from the operating
subsidiaries, either as loans, repayments of loans made by Innovo Group to the
subsidiary, or distributions, or on the proceeds from the issuance of debt or
equity securities by Innovo Group. The NBD credit facility contains certain
restrictions on advances or distributions from NASCO Products to Innovo Group;
however, NASCO Products' cash flow, which is comprised of the receipt of the
payments from ANG, is being devoted to the repayment of the NBD credit facility.
Upon such repayment, NASCO Products will no longer have such a restriction, and
the remaining payments from ANG will be available to repay the July 1994 working
capital loan. Leaseall's first mortgage loan contains similar restrictions;
however, Leaseall's activities are limited to the ownership of the Company's
real property. Innovo's debt agreements do not restrict advances or
distributions to Innovo Group.
Other
Inflation has not had a significant impact on the operations or financial
position of the Company.
The Company has no material commitments or plans for capital expenditures.
The Company has certain commitments for minimum royalty payments and may, under
certain circumstances, be required to repurchase certain shares of its common
stock. See Notes 7(b) and 8 of Notes to Consolidated Financial Statements.
As described in Note 8 of Notes to Consolidated Financial Statements, the
Company is currently appealing a jury award of $700,000 granted to a former
employee. The Company believes that the ultimate outcome of this litigation is
unlikely to result in a material loss. However, although the Company believes
that it has meritorious appeal arguments, there can be no assurance that the
appeal, or a settlement if one is pursued and effected, will eliminate or
substantially reduce the award. The Company intends to pursue its appeal to the
fullest extent permitted, and accordingly, it is unlikely that any judgement
would become final and subject to satisfaction before 1997. In the event the
Company was, after all appeals, required to satisfy the judgement or a material
portion thereof, it is likely that to do so the Company would be required to
issue debt or equity securities, or to seek to have the plaintiff accept debt or
equity securities. Although the plaintiff would required to accept the 200,000
shares of the Company's common stock that is presently pledged as an appeal
bond, the plaintiff would not be required to accept additional debt or equity
securities to the extent that the value of such 200,000 shares was less than the
amount of the judgement. Accordingly, failure to eliminate or substantially
reduce the award through the appeal, or a settlement, could, if it occurred,
have a material adverse effect on the Company. Also see Item 3 - "Legal
Proceedings".
Certain of the Company's sales are to foreign customers. Sales to foreign
customers are generally negotiated in U.S. dollars, and are settled at shipment,
so that the exchange rate risk for these transactions is not significant. The
Company does not utilize foreign currency contracts or other derivative
instruments.
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BUSINESS
Overview
The Company, through its operating subsidiaries, designs, manufactures and
domestically markets various canvas and nylon products, principally tote bags,
sports bags, back packs, lunch bags, stadium totes, and craft products for sale
to various retailers and in the premium and advertising specialty market. The
Company also internationally markets and distributes sport bags and backpacks.
Innovo, a wholly owned subsidiary, manufactures and distributes utility,
craft, fashion, sports and advertising specialty products. Innovo's utility line
is made up of canvas and nylon products, such as tote bags, laundry, duffle and
shoe bags and gift bags that are designed as consumable products that respond to
needs consumers encounter in every day life. These products are generally
produced with company designed artwork. For the craft market Innovo produces
canvas tote and laundry bags, aprons, children's smocks and Christmas stockings
with no design, which are sold (sometimes packaged with paints or other
materials) for sale as a craft project supply. The fashion line features company
designed canvas back packs, "day packs" (which combine the features of a purse
and a back pack), and tote bags, that attempt to combine style and convenience
to capitalize on the increasing trend towards more casual dress.
Innovo's sports line consists of tote bags, lunch bags, fanny packs,
laundry, shoe and duffle bags and stadium totes. The majority of these products
display logos, insignia, names, mascots and other identifying characteristics of
professional or collegiate sports teams, or the U.S.O.C., under licenses, which
are generally non-exclusive, held by Innovo from various licensing entities
including the National Football League, the NBA, the National Hockey League,
Major League Baseball, the U.S.O.C., and approximately 130 colleges and
universities. For the year ended October 31, 1995, 46% of the Company's sales
from continuing operations represented the sale of products bearing logos
licensed by the colleges and universities, the professional sports teams and the
U.S.O.C. In fiscal 1996 Innovo will add products that display the "Louisville
Slugger" name and logo to its sports line, and the Company is currently
developing products, which will be marketed beginning in the fourth quarter of
fiscal 1996, under recently obtained or agreed to licenses for the U.S. and
international use of the logos, trademarks and slogans of Anheuser-Busch Cos.,
Inc. and the European use of the Warner Bros. Studios Looney Tunes characters.
See "-Licensing Agreements".
For the premium and advertising specialty markets the Company produces
both products that display professional sports team logos, and products that
bear the name, logo, slogan and/or design specifically requested by the
customer, who frequently provides the artwork to be used on such products.
Advertising specialty and premium customers are generally companies purchasing
products for distribution in promotions to employees and customers or for sale
as premium items. During the third quarter of fiscal 1994 the Company began to
also provide domestic manufacturing for other distributors of tote and sport
bags. See "- Products".
During October 1994 the Company began steps designed to reduce its
operating expenses and capital requirements. The Company relocated to its owned
facility in Springfield, Tennessee the manufacturing operations it had
previously conducted in leased facilities in Sugarland, Texas. This
consolidation allowed the Company to eliminate the expense of the leased space
in Texas, and also allowed the elimination of certain shipping and duplicative
supervision costs. On July 31, 1995, the Company executed an agreement with ANG
under which ANG succeeded to all of the rights held by the Company's wholly
owned subsidiary, NASCO Products to market and distribute in the United States
the National Football League, NBA, Major League Baseball and National Hockey
League logoed sports bags, back packs and equipment bags previously imported to
and distributed in the U.S. by NASCO Products. The agreement did not cover the
international rights under the National Football League, NBA, Major League
Baseball and National Hockey League licenses. NPI International continues to
sell products internationally. Additionally, the agreement has no effect on
Innovo's marketing and sale of its
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domestically manufactured sports-licensed products, and the Company retained all
the domestic rights to the United States Olympic Committee, college and Major
League Baseball Players Association products, which are now being manufactured
domestically by Innovo and marketed as part of its product line.
For each license ANG is paying NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining $650,000
is being paid, without interest, in monthly installments equal to 5% of ANG's
aggregate sales of the licensed products, with final payment due July 31, 1998.
ANG assumed all of NASCO Products' obligations under the licenses, including the
payment of royalties and minimum royalties. NASCO Products also transferred to
ANG its existing inventory of these products, for which ANG paid approximately
67% of NASCO Products' cost, or approximately $307,000. Such payments are being
made by ANG over a six month period which will end May, 1996.
In addition, ANG will make an ongoing annual payment to NASCO Products of
2% of sales under each of the National Football League, Major League Baseball
and National Hockey League licenses, and 1% of sales under the NBA license, up
to aggregate sales of $15 million, and 1.5% and .5% of sales thereafter. The
payments will continue for forty years unless a license expires or is terminated
and is not renewed or reinstated within twelve months.
During fiscal 1993 and 1994 the Company's marketing emphasis was placed
on the U.S. retail market for its sports licensed products. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets. The Company hopes that this will
allow it to increase sales and lessen its dependence on sports licensed
products. The Company will also pursue opportunities to provide domestic
manufacturing for other tote and sports bag distributors. The Company will
attempt to achieve growth in the sales of its sports logoed products through the
acquisition of new licenses, such as the U.S.O.C. license and related
cross-licenses for products that display Warner Bros. "Looney Tunes" characters
or the "Cabbage Patch Kids" characters together with the U.S.O.C. five-ring
Olympic logo, the "Louisville Slugger" license acquired in November, 1995, and
the Anheuser-Busch and Warner Bros. licenses acquired in fiscal 1996, the
development of new products and distribution for college logoed merchandise, and
by increasing its market share of purchases directly by the professional sports
teams of logoed products used in team promotions. Over the longer term the
Company is looking to achieve growth through increase in the sales of the sports
logoed bags and backpacks it designed, under its international license rights,
for the international market, where U.S. professional sports have achieved
increased exposure and popularity, and from the introduction of Innovo's fashion
line in the international market. However, there can be no assurance that any of
these strategies will produce increased sales.
The Company estimates that the products sold by its continuing operations
are carried in over 4,500 retail outlets. The Company's marketing efforts are
conducted principally by its own sales and marketing staff and through its
network of approximately 20 marketing organizations having approximately 60
independent sales representatives. The Company sells to retail accounts such as
mass merchandisers, department stores, mail order companies, grocery stores and
drugstore chains, including K Mart Apparel Corp., Wal-Mart Stores, Inc., Target,
J.C. Penney Company, Inc., Sears Roebuck and Co., Walgreen Co., and Michael's
Stores, Inc., and advertising specialty accounts.
Thimble Square, which the Company acquired on April 12, 1996, manufactures
and markets ladies' ready-to-wear at-home, sleep and lounge wear from plants in
Pembroke and Baxley, Georgia. Its products are sold to retailers and through
mail order distribution. Thimble Square also provides "sew- only" manufacturing
for other distributors of private-label sleep and lounge wear; in those
instances, the customer provides the raw materials, and Thimble Square
manufactures the products to the distributor's specifications. Thimble Square's
sales for tis fiscal year ended December 31, 1995 were approximately $3 million.
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Products
Innovo is a domestic manufacturer that designs and markets a wide variety
of canvas, nylon and mesh tote bags, laundry, duffle, lunch and shoe bags,
stadium totes, fanny packs and other textile products such as aprons, Christmas
stockings, totes and children's smocks. One of Innovo's early products was the
E.A.R.T.H. bag ("EVERY AMERICAN'S RESPONSIBILITY TO HELP") which was a design
developed and registered by Innovo. These canvas totes, which are fabric and
therefore reusable, are marketed as an environmentally conscious alternative to
plastic and paper bags. Sales of E.A.R.T.H. bags have become less significant
over the last three years, and Innovo's products now represent a broad line of
canvas and nylon bags and aprons.
Innovo's utility line products include canvas and nylon tote bags and
laundry, duffle and shoe bags that utilize designs and artwork developed either
in-house or through independent contractors. In fiscal 1995 Innovo developed
gift totes and bags to add to this line. Innovo's sports line is sold to retail
and premium customers and is comprised of tote, duffle and laundry bags that
include logos licensed from the four major professional sports leagues, colleges
and universities and the U.S.O.C. In fiscal 1996 products displaying the
"Louisville Slugger" name and logo will be added to Innovo's sports line. For
advertising specialty customers Innovo custom designs canvas and nylon products
and adopts the customer's logo, design or slogan for application to the stock or
custom designed product. Finally, Innovo's products are produced without
artwork, and are sold to the craft products market (sometimes packaged with
paints or other supplies) as a product for craft projects (the creation and
application of a design by the customer) and as a craft supply.
To attempt to capitalize on the growing trend towards more casual
dress, Innovo has developed a fashion line that features higher style back
packs, "day packs" (which combine the features of a purse and a back pack), and
tote bags. The Company introduced these products to its customers in fiscal
1995. However, the marketing of fashion products follows seasonal buying
patterns, with retailers generally purchasing in January through March for
spring sales, and in May through July for the fall season. Additionally, in many
instances fashion items are purchased by different buyers than the Company's
other products. Accordingly, material sales of fashion products, if any, will
not occur until the early part of fiscal 1997.
NPI International designs, and distributes licensed sports products
internationally to sporting goods chains, sporting goods departments of mass
merchandisers and department stores, mail order catalog companies and grocery
and drug store chains. Its line of products consists primarily of a variety of
gym, equipment and duffle bags and backpacks imprinted or embroidered with the
marks, logos and mascots of a variety of college and professional sports teams
pursuant to licenses with organizations representing the merchandising interests
of those teams.
Thimble Square designs, manufactures and distributes moderately priced
ladies' nylon, polyester and cotton at-home, lounge and sleep wear. Its products
include sleep shirts, nightgowns, teddies, house coats, pajamas and warm-up type
suits. Thimble Square also provides "sew-only" services for other distributors
of similar products. For these customers Thimble Square cuts, sews and packages
the products using fabric supplied by the customer.
Growth Strategy and Product Development
The Company believes that growth in its business can be accomplished both
by the expansion of the sales of its existing products, both through its
existing channels of distribution and by developing new channels of
distribution, and through the development or acquisition of new product designs
and the acquisition of new licenses. The Company spent approximately $205,000 on
the design and acquisition of new products and the acquisition of new licenses
in fiscal 1995, and management anticipates that in fiscal 1996 such expenditures
will increase to approximately $250,000.
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Sales of the Company's existing products has been negatively affected
by the Company's lack of working capital, which has restricted the nature and
extent of its advertising, the development of new or updated products and the
development of its distribution channels. The Company's emphasis during fiscal
1993 and 1994 was on the U.S. retail market for its sports licensed products.
The Company devoted fiscal 1995 to shifting its emphasis to developing new
products and marketing programs for Innovo's non-sports licensed products, and
to the premium and advertising specialty markets, to attempt to increase sales
through these channels and lessen the Company's dependence on sports licensed
products. The Company will continue to attempt to achieve growth in the sale of
sports licensed products through the sale of products marketed under new
licenses, such as the U.S.O.C. license and related cross-licenses for products
that display Warner Bros. "Looney Tunes" characters or the "Cabbage Patch Kids"
characters together with the U.S.O.C. five-ring Olympic logo, the "Louisville
Slugger" license, and the Anheuser-Busch and Warner Bros. licenses acquired in
fiscal 1996, and by the development of new products and distribution for college
logoed merchandise. Additionally, the Company looks for longer term growth to
come from international sales from the exploitation of the international rights
in the Company's license agreements by increasing sales of a line of sports
logoed bags it has designed for and introduced to the overseas markets, where
the increased exposure to U.S. professional sports has caused logoed products
such as the Company's to become fashion rather than utility items, and from the
introduction of Innovo's fashion line in the international market. However,
there can be no assurance that increased marketing expenditures will produce
increases in domestic or international sales.
The Company also continually evaluates the market potential for the sale
of products displaying the logos of professional sports teams, sports
organizations, and sporting or special events, or character depictions, that are
not currently licensed. Those evaluations involve both situations where a
license has been offered to the Company, and where the Company itself identifies
a logo or character that may have market potential. Where such an evaluation
indicates a sufficient likelihood of market acceptance, the Company attempts to
negotiate and obtain a license from the owner of the logo or character. In
fiscal 1995 the Company obtained cross-licenses allowing it to display the
"Looney Tunes" and "Cabbage Patch Kids" characters, together with the U.S.O.C.
five-ring Olympic logo, on its U.S. Olympic Team products, and the "Louisville,
Slugger" license. There can be no assurance that the Company will be able to
obtain other new licenses, or to renew existing licenses, on favorable terms.
The Company plans to attempt to increase Thimble Square's sales by using
Innovo's existing marketing capabilities to develop Thimble Square's products
into coordinated product lines, and by using the Company's existing network of
sales representatives, and established relationships with major mass merchants,
to market Thimble Square's products to distribution channels that are not
represented in Thimble Square's existing customer base. While there can be no
assurance, the Company believes that, over time, such steps could lead to a
material increase in Thimble Square's sales.
The Company also continually seeks to develop new designs in-house or
design new products, and to grow through the acquisition of new products or, as
in the case of Thimble Square, other business having operations compatible with
the Company's. As of the date hereof, the Comapny has not identified any
additional potential acquisitions.
Marketing and Customers
During fiscal 1995, the Company's continuing operations involved sales to
approximately 1,100 retail accounts, which included a mix of mass merchandisers
such as K Mart and Target, sporting goods stores, craft stores, department
stores, drug stores and other retail accounts. Generally the Company's retail
accounts are serviced by independent sales representatives, which are
compensated on a commission basis and are monitored by sales managers employed
by the Company. Certain of the Company's accounts are serviced directly by the
Company.
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In marketing its products the Company attempts to emphasize the price
range quality of its products, its ability to assist customers in designing
marketing programs, and the high sell-through its products have historically
achieved. To assist customers in achieving a higher sell-through of its sports
team (professional and college) logoed products, the Company tracks the retail
sales by team logo for various geographic areas. The Company then uses this
information to assist customers in selecting the optimum mix of team logos for
their market. The Company has an electronic data interchange system that allows
certain larger customers to place orders directly.
Thimble Square has historically marketed its products, using its own
executive personnel, principally to mail order companies and certain discount
retailers. Additionally, through an arrangement representing major oil companies
such as Amoco and Texaco, Thimble Square's products are also marketed directly
to consumers through inserts included in mailings to credit card holders. For
those sales, and some of its mail order company customers, Thimble Square
provides mail order fulfillment. Thimble Square's "sew-only" sales generally
result from contacts directly between Thimble Square's executive personnel and
the customers. As previously discussed, the Company intends to utilize Innovo's
existing marketing and sales units to restructure and expand Thimble Square's
marketing.
The Company is not dependent upon a single customer or a few customers,
the loss of any one or more of which would have a material adverse effect on the
Company. No single customer accounted for 10% of the Company's net sales from
continuing operations during fiscal 1995. For its year ended December 31, 1995,
three of Thimble Square's customers, Crown Tex (a sew-only customer), Carol
Wright, and Fingerhut, accounted for 34.5%, 37.0% and 18.7%, respectively, of
Thimble Square's sales. On a pro forma basis, those customers would have
accounted for 12.6%, 13.5%, and 6.8% of consolidated net sales. The loss of any
or all of these customer would adversely affect Thimble Square and the Company.
Backlog
The Company's customers generally submit written purchase orders (which
have often been preceded by verbal purchase indications) from two to ten weeks
in advance of the requested shipping date, with the interval varying depending
on the customer's practices and other circumstances. At February 29, 1996, the
Company's order book, which represents these purchase orders, approximated $1.5
million, compared to approximately $880,000 at February 29, 1995. Since the
timing of order submissions, compared to shipping dates, varies, and because the
Company does also on occasion receive orders for immediate shipment, the order
book may not directly coordinate to the sales to be made in the next quarter.
Seasonality
The Company's business is seasonal. The majority of orders are received
during the first half of the calendar year, while the greatest volume of
shipments and sales are made in the late summer and fall. During the first half
of the calendar year, the Company incurs the expense of maintaining corporate
offices, administrative, sales and production employees, and developing the
marketing programs and designs for the ensuing sales campaigns. Inventory levels
also increase during the first half of the year. Consequently, during the first
half of each calendar year, corresponding to the Company's second and third
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 fourth and first fiscal quarters, generally
provides increased cash flows and the build-up of working capital. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality."
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<PAGE>
Manufacturing
Innovo's products are manufactured domestically in facilities owned and
operated by the Company. Innovo manufactures its domestic products from an
inventory of unfinished fabric rolls. The Company utilizes automatic six-color
silk-screening machines to permanently imprint its own, its customers' or
licensors' designs onto its various products. Using its in-house design staff
and its computer graphic equipment, the Company has the capacity to produce new
product samples within one day. The Company owns six-color silk-screening
machines, sewing equipment as well as various other machines for packaging and
finishing. The Company believes that its current manufacturing capacity,
including that available to it at Thimble Square, is sufficient for Innovo's
projected production over the next twelve months.
The principal materials used in Innovo's products include canvas, nylon,
mesh and webbing. The Company buys raw materials in bulk for the products it
manufactures domestically. The Company has generally concentrated its purchases
of raw materials for domestic manufacturing among a small number of suppliers,
and during fiscal 1995 purchased the majority of each type of raw material it
uses from single suppliers. Although the Company does not have any long-term
agreements with these or other suppliers, it has to date been able to obtain
suppliers to satisfy its raw material requirements despite its lack of working
capital. Management believes that if its current suppliers were unable to supply
the necessary raw materials in sufficient quantities or on acceptable price
terms, alternative suppliers would be readily available on comparable price
terms and delivery schedules. In the event the Company was unable to find such
alternative suppliers at competitive prices and on a timely basis, its
operations could be materially adversely affected.
Thimble Square manufactures its products at an owned plant in Pembroke,
Georgia, and at a leased facility in Baxley, Georgia. Thimble Square's products
are cut and sewn from plain and printed rolls of nylon, polyester and cotton
using owned cutting, sewing and finishing equipment.
Licensing Agreements
The Company currently holds the licensing rights for the depiction on
its products of the names, characters, symbols, designs, logos, trademarks and
visual representations owned or licensed by or through the National Football
League, Major League Baseball, the National Hockey League, the NBA,
approximately 130 major colleges and universities, the U.S.O.C., the individual
players of the National and American baseball leagues, the "Louisville Slugger"
name and logo and the logos, trademarks and slogans of Anheuser-Busch Cos., Inc.
Additionally, the Company has reached agreement with Warner Bros. Studios on the
terms of a license, which is currently being prepared, for the use of the Looney
Tunes(TM) characters on products marketed in Europe. Generally, the licenses are
granted on a non-exclusive basis, for a term of two years. The Company continues
to seek licensing rights for designs of various sports teams, sports
organizations, sporting or special events, and for popular characters seen on
television, in motion pictures and in print media. Sales of licensed products
accounted for 46% of net sales from continuing operations for 1995.
Typically, a license agreement is effective for a two-year term for the
use of particular characters or designs of the licensor on some or all the
Company's products. A royalty is paid to the licensor that is usually a
percentage of net sales, with a minimum annual guarantee for the license period.
Except for the U.S.O.C. license, the royalty rates range from 5% to 10.5% and
the minimum annual guarantees range from $5,000 to $100,000. Some license
agreements grant the licensor broad termination rights, and most of the license
agreements grant the licensor the right to terminate the license in the event
minimum sales targets are not reached, if the Company does not diligently
manufacture and sell the licensed products, or for the breach of any material
term of the license agreement by the Company. The expiration dates of the
current license agreements range from 1996 to 1997. Generally, the renewal
provisions of the license agreements provide that the licensee may, at its
option, renew the license for an additional one-
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<PAGE>
or two-year term, provided certain conditions are satisfied. Historically,
licenses have been terminated by the Company due to decreased sales or
popularity, rather than by the licensors. Management of the Company believes
that the Company is in substantial compliance with the terms of all material
licenses, and that all material licenses will be renewed.
Each license agreement grants the Company either an exclusive or
non-exclusive license for use in connection with specific products and/or
specific territories. The license agreements with the major professional sports
licensing organizations are generally non-exclusive. However, the Company's
experience has been that while the licenses are non-exclusive, the licensing
entities generally limit the number of licenses they grant for any particular
line of products. Thus, direct competition is limited by the availability of
licenses.
In April 1993 the Company obtained a license from the U.S.O.C. to
manufacture and market within the United States canvas tote bags, and nylon
sports bags, back- packs, duffle bags and cush-n-carry bags bearing the logos of
the 1996 U.S. Olympic Summer Teams. The Company will be the only wholesale
manufacturer and distributor of these items, and although any of the "major"
corporate U.S. Olympic Team Sponsors, such as J.C. Penney or Coca-Cola, would
also have the right to display the U.S. Olympic Team logos on a tote or sports
bag, the Company believes that it is unlikely that any of these sponsors will
choose to do so or, if they do, significantly compete with the Company. The
license agreement also allows the Company to use the designation of "official
licensee" of the U.S.O.C. and the 1996 U.S. Olympic Summer Team. Additionally,
the agreement requires that the U.S.O.C. use reasonable efforts to obtain from
the Company the supply of such products that it uses in connection with its
fundraising efforts. The license with the U.S.O.C. is for a term that expires
December 31, 1996, with a provision that at that time the Company and the
U.S.O.C. will negotiate with respect to a continuation of a merchandising
association for a period ending December 31, 2000. The royalty rates range from
8% to 12.5%, with minimum royalties of $40,000 in 1995 and $150,000 in 1996. In
fiscal 1995 the Company obtained related "cross-license" agreements with the
U.S.O.C. and Warner Bros. Studios, and the U.S.O.C. and Original Appalachian
Artworks. The Warner Bros. Studios cross-license allows the Company to
manufacture and market products that display "Looney Tunes" characters, such as
Bugs Bunny, Daffy Duck, Road Runner and Wiley E. Coyote, and the five-ring
U.S.O.C. logo. The Original Appalachian Artworks agreement allows the Company's
products to display the five-ring U.S.O.C. logo with OlympiKids(TM) characters,
which are the Cabbage Patch Kids engage in Olympic sports.
In May, 1996, Innovo obtained a license that allows it to manufacture
and market products in the United States, Europe, Central America and the Far
East that display any of the logos, slogans or trademarks, including future
logos, slogans or trademarks, of Anheuser-Busch. Anheuser-Busch brews Budweiser,
Bud Light, Bud Ice, Michelob and other beers. The license is for an initial term
expiring June 30, 1997 and provides for a royalty of 8% of net sales.
In May, 1996 the Company also reached an agreement with Warner Bros.
Consumer Products, an affiliate of Warner Bros. Studios, on the terms of a
license that will allow the Company to market in Europe backpacks, sports bags,
tote bags, wallets and waistpacks that display the Warner Bros. Looney Tunes tm
characters. The agreement, which forms the basis for a definitive license that
is currently being prepared, also licenses the Company's NPI International
subsidiary to distribute in Europe sports bags, backpacks and tote bags that
display art based on the Warner Bros. Movie "Space Jam," which will star
basketball player Michael Jordan and is currently scheduled to be released in
the fall of 1997. The general and "Space Jam" licenses with Warner Bros. will
have initial terms expiring October 30 and December 31, 1997, respectively, and
will provide for a royalties of 13.5% and 15.5%, respectively, of net sales.
The current license between the National Football League and the
Company, dated July, 1994, allows Innovo to manufacture and distribute a variety
of tote bags, lunch bags, laundry and duffle bags, fanny packs and other nylon
and canvas products throughout the United States. NPI International is licensed
to manufacture and distribute similar products, and a variety of sports bags and
backpacks, through the member states of the European Economic Community and
European Free Trade Area (collectively "Europe") and in the United Kingdom. Each
license provides that the Company may renew the licenses for an additional two
years provided that the Company has performed all of its obligations under the
current license. The royalty rates are 9.0% of net sales in the United States
and 10% of net sales in the United Kingdom and Europe. The licenses for the
United States, the United Kingdom and Europe require minimum guaranteed annual
royalties of $100,000, $15,000, and $10,000, respectively. The National Football
League may terminate any of the licenses if the Company fails to manufacture and
distribute the licensed products for a period of thirty days. The current
National Football League licenses expired on March 31, 1996; however, the
Company has received from the National Football League renewal contracts, which
are currently being finalized, that extend the licenses through March 31, 1997
on similar terms.
The Company's current license with the NBA, which is for a two-year term
expiring July, 1996, allows Innovo to manufacture and distribute throughout the
United States nylon and canvas tote bags, lunch
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<PAGE>
bags, shoe bags, laundry bags and cush-n-carry's that bear the names and logos
of the NBA teams, and the logos for the NBA All-Star Weekend and the NBA Finals.
The license provides for the payment of a royalty of 10% of net sales, with a
minimum royalty of $25,000 for the twelve months ending July 31, 1996.
Additionally, the Company must expend on approved advertising and promotion a
minimum of 2% of sales, but not less than $5,000, during the 1996 contract year.
A separate license that expires July, 1996 allows NPI International to
distribute these products, and sports bags and backpacks, throughout Europe,
including the United Kingdom.
Competition
The textile bag and sports bag industries are fragmented and highly
competitive. The Company competes against baggage manufactures and importers
that distribute lines of generic tote and utility bags, sports bags and
backpacks, a large number of smaller companies that produce tote and utility
bags with various designs or for the advertising specialty market, and sporting
goods manufacturers, such as Reebok, Nike and Adidas, that produce or license
the manufacture of sports bags bearing their names and logos. The Company's
sports licensed products also compete against other products, principally
sporting apparel, that display the names and logos of the teams in the major
professional sports leagues. In all areas the Company does not hold a dominant
competitive position, and its ability to sell its products is dependent upon the
price and quality of its products, the anticipated popularity of its designs or
the logos its products bear, and its ability to meet its customers' delivery
schedules.
The Company believes that it is competitive in each of the above-described
areas with companies producing goods of like quality and pricing, and that new
product development, product identity through marketing, promotions and low
price points will allow it to maintain its competitive position. In addition,
the Company's ability to manufacture its products domestically and fill orders
promptly without the delays experienced by companies whose sole or predominant
source of products are outside the United States, are important aspects of
keeping it competitive in the textile product industry. However, some of the
Company's competitors possess substantially greater financial, technical and
other resources than the Company. Moreover, some of these competitors possess
greater marketing capabilities than the Company, including the ability to
implement more extensive advertising campaigns.
The ladies at-home, sleep and lounge wear market in which Thimble Square
competes is also fragmented and highly competitive, and Thimble Square competes
against a large number of similar companies. Thimble Square does not hold a
dominant competitive position, and its ability to sell its products is dependent
upon the price and quality of its products, the anticipated popularity of its
designs, and its ability to meet its customers' delivery schedules. Some of
Thimble Square's competitors possess substantially greater financial, technical
and other resources than Thimble Square. Moreover, some of these competitors
possess greater marketing capabilities than Thimble Square including the ability
to implement more extensive advertising campaigns.
Intellectual Property
Innovo utilizes the E.A.R.T.H. BAG "EVERY AMERICAN'S RESPONSIBILITY TO
HELP" trademark, which it believes to be a readily identifiable and distinctive
mark that is an important factor in selling tote bags imprinted with this mark
and in identifying Innovo and distinguishing its tote bags from those of others.
Although sales of products bearing the "E.A.R.T.H." trademark have declined in
the last three years, the Company considers such trademark to be a valuable
asset, and has registered it with the United States Patent and Trademark Office.
The Company and CI Sport Inc. ("CI"), an unaffiliated entity, jointly own
trademarks for "The Show" and "Team Play". The Company and CI obtained
trademarks for these names to be able to use them for
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<PAGE>
product lines developed under the Company's license from the Major League
Baseball Players Association ("MLBPA") for the use of the names, nicknames,
likenesses, signatures, pictures and playing records of each active American or
National League Player who has entered into a commercial agreement with the
MLBPA. The Company obtained the license from the MLBPA in fiscal 1994, but has
delayed the introduction of these products due to the continuing consumer
reaction to the 1994 baseball players strike. The Company has also obtained
trademark protection for "Trading T's" and "Stat Caps", products that would be
marketed as a part of those product lines.
Employees
As of May, 1996, the Company employed 195 full-time personnel at the
Springfield, Tennessee facility, comprised of 13 persons in management, 10
persons in general administration and 172 persons in manufacturing and
production. Due to varying seasonal demands, the work force fluctuates within a
range of approximately 100 to 200 employees through any given year. As of May
31, 1996 Thimble Square employed 114 full-time personnel in Pembroke and Baxley,
Georgia, comprised of 4 persons in management and administration and 110 persons
in production. Thimble Square's work force fluctuates from 25 to 150 employees.
Management considers its relationship with its employees to be excellent. None
of the Company's employees is party to a collective bargaining agreement. There
has never been any material interruption of operations due to labor
disagreements.
Insurance
The Company maintains general liability insurance. While the Company
believes its insurance policies are adequate in amount and coverage for its
current operations, there can be no assurance that the coverage maintained by
the Company is sufficient to cover all future claims or will continue to be
available in adequate amounts or at a reasonable cost.
Properties
The Company's headquarters, manufacturing and distribution facilities are
located in Springfield, Tennessee, where Leasall owns three buildings. The main
complex is situated on seven acres of land with approximately 220,000 square
feet of usable space, including 30,000 square feet of office space and 35,000
square feet of cooled manufacturing area. The warehouse annex contains 30,000
square feet. A separate 2,700 square foot one story administrative office is
currently not being used and the Company is attempting to sell or lease it.
First Independent Bank of Gallatin, Tennessee holds a First Deed of Trust on the
real property located in Springfield.
In November, 1995 the Company acquired a 32,000 square foot building,
situated on three acres of land, in Lake Worth, Florida. The Company has
developed preliminary plans to develop the site as "Valued Treasures," a retail
center featuring antique and flea market lessees, including a retail outlet for
the Company's products. The Company is currently finalizing an agreement that
would grant an equity participation in the property in exchange for development
and operating management.
Thimble Square owns a 40,000 square foot manufacturing and distribution
facility in Pembroke, Georgia, which is subject to liens held by The First Bank
of Coastal Georgia, the Bryan County Development Authority, Inc. and the
Business Development Corporation of Georgia, Inc. In addition, Thimble Square
leases a 21,000 square foot manufacturing facility in Baxley, Georgia for an
annual rental of $36,000. The lease runs through August, 2000 and provides
Thimble Square with a bargain purchase option.
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<PAGE>
Legal Proceedings
The Company is a party to lawsuits in the ordinary course of its business.
While the damages sought in some of these actions are material, the Company does
not believe that it is probable that the outcome of any individual action will
have a material adverse effect, or that it is likely that adverse outcomes of
individually insignificant actions will be sufficient enough, in number or
magnitude, to have a material adverse effect in the aggregate.
In December 1991, Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc.,
Rick Binet, and Patricia Anderson-Lasko, f/k/a Patricia M. DeAlejandro, Cause
No. 91-064033, was filed in the 164th Judicial District Court of Harris County,
Texas. Tedesco's allegations included fraud, tortious interference, breach of
his employment agreement with Innovo and conversion of his "property interest in
the E.A.R.T.H. trademark, idea, concept, and product lines. . . ." Tedesco
claimed in excess of $13.5 million in monetary damages and sought a declaratory
judgment and an accounting relative to his claim that he was the owner of the
"E.A.R.T.H." trademark.
In August, 1994, the trial court granted the Company's motion for partial
summary judgement and directed verdicts with respect to certain of Tedesco's
claims, including those concerning his ownership of an interest in the
"E.A.R.T.H." trademark, or the existence of a partnership with the Company to
jointly own the trademark, and the state court jury returned findings in favor
of the Company on the remainder of the plaintiff's claims concerning the
trademark as well as his claims for wrongful termination, fraud and conspiracy.
However, the jury awarded Tedesco approximately $700,000, of which $50,000 was
assessed against Innovo Group and $650,000 was assessed against Innovo,
including pre-judgement interest and attorney's fees, on the theory that he was
entitled to have received certain employment benefits, including employee stock
awards, during, and after, the term of his employment. The Company has filed an
appeal of the jury's finding, on the grounds, among others, that its finding
that Tedesco was entitled to employment benefits, including stock compensation,
after the date of his termination was inconsistent with its finding that the
plaintiff was properly terminated, and therefore the jury's award is improper as
a matter of law. In connection with the appeal, the Company has pledged to the
trial court as an appeal bond 200,000 shares of its unissued common stock. The
Company also has, and may continue, to seek to settle the litigation if its
believes that the terms of a settlement, when compared with the costs and risks
of an appeal, are favorable.
The Company believes that it has meritorious appeal arguments. However,
there can be no assurance that the Company's appeal will succeed, or that
alternatively the litigation can be settled on terms manageable to the Company.
The need to satisfy the plaintiff's award in the event of an unsuccessful appeal
would have a material adverse impact on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Other."
In April, 1996, the Company received notice that a foreign manufacturer
that had supplied imported products to NASCO Products asserts that it is owed
approximately $300,000 in excess of the amount recorded by NASCO Products. NASCO
Products and the supplier had previously reached an agreement on the balance
owed (which is the balance recorded), as well as an arrangement under which the
schedule for the Company's payments reducing that balance would be based on
future purchases from that supplier of products distributed internationally by
NPI International. The Company disputes the supplier's claim, and believes that
it has affirmative defenses, including the supplier's subsequent refusal to
accept and fill NPI International orders on terms contained in the agreement.
NASCO Products sold its operations in July, 1995 and that company currently has
no operations or unencumbered assets. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General, -- Liquidity and
Capital Resources."
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the directors
and executive officers of the Company as of the date of this prospectus.
Name Age Position
- ---- --- --------
Patricia Anderson-Lasko (1) (2) 37 Chairman of the
Board, President,
Chief Executive
Officer and Director
Terrance J. Bond 39 Controller
Felix Lee 47 Vice President
of Manufacturing of
Innovo and Director
Eleanor V. Schwartz 63 Director; Designer for
Thimble Square
Alexander K. Miller (3) 50 Director
Reino C. Lanto, Jr. (1) (2) 53 Director
Marvin M. Williamson (1)(2)(3) 58 Director
- ------------------------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Stock Option Committee of the Board of Directors.
Patricia Anderson-Lasko has been Chairman, President Chief Executive Officer
and a director of the Company since August 1990, and President of Innovo since
her founding of that company in 1987.
Terrance J. Bond joined the Company as Controller in April 1993. From November
1988 until he joined Innovo Group, Mr. Bond was Director of Corporate Accounting
at United Merchants and Manufacturers, Inc.
Felix Lee has been a director of the Company since August 1990 and Vice
President of Manufacturing of Innovo since June 1989. From July 1981 through May
1989, Mr. Lee was plant manager at Industria Nacional De Artefactes, S.A., a
luggage manufacturer in Panama City, Republic of Panama, where his
responsibilities included production and manufacturing.
Eleanor V. Schwartz became a director of the Company in April, 1996 upon the
completion of the Company's acquisition of Thimble Square. Mrs. Schwartz,
together with her husband, Philip Schwartz, founded Thimble Square in 1985, and
since that time has been a director of Thimble Square and its principal
designer. Mrs. Schwartz has over 35 years of experience in the buying, design
and marketing of ladies apparel.
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<PAGE>
Alexander K. Miller has been a director of the Company since December 1991.
From June 1993 to December 1994, Mr. Miller also served as the Vice-President of
Administration of the Company. Prior and subsequent to that period Mr. Miller
also served the Company on a consulting basis. From 1986 to 1993, he was a
member of the faculty of California State Polytechnic University in San Luis
Obispo, California, where he taught business administration.
Reino C. Lanto, Jr. has been a director of the Company since August 1990. He
is an attorney licensed to practice in Illinois and has been a partner in the
law firm of Wilson & Lanto since November 1982.
Marvin M. Williamson has been a director of the Company since August 1990.
From April 1982 to June 1987, he was a Vice President and Mortgage Sales Manager
for First Boston Corp. in New York City. From June 1987 through August 1990 he
was Vice President of Mortgage Sales for Greenwich Capital, Greenwich,
Connecticut. From August 1990 to April 1991 Mr. Williamson was a Senior Vice
President with Alliance Funding Co. in Montvale, New Jersey. In April 1991 he
left Alliance Funding Co. to establish his own business, Marvin Williamson
Associates, a mortgage investment brokerage and consulting firm in New Canaan,
Connecticut. Mr. Williamson is currently a registered representative of First
Sentinel Securities Ltd., a member firm of the National Association of
Securities Dealers, Inc.
Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting or until his successor has
been elected and qualified. Vacancies in the Board of Directors are filled by a
majority vote of the remaining members of the Board of Directors.
Executive officers of the Company are elected on an annual basis and serve at
the discretion of the Board of Directors.
The following sets forth certain information concerning key employees who are
not directors or executive officers of the Company:
Name Age Position
- ---- --- --------
Joseph Assad 45 Vice President of
Retail Sales and
Marketing
James Webb 50 Product Manager
Joseph Assad has been Vice President of Retail Sales and Marketing of the
Company since August 1992. From September, 1991 to August, 1992, Mr. Assad was
Vice President of Sales of SGI in Cranston, Rhode Island.
James Webb has been Product Manager of the Company since February, 1992. For
more than five years prior thereto Mr. Webb was Vice-President of Merchandising
for B&E Sales Company.
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Executive Compensation
The following table sets forth summary information concerning compensation
paid or accrued by or on behalf of the Company's chief executive officer. No
other executive officers of the Company received total annual salary and bonus
exceeding $100,000 for fiscal year 1995:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
===================================================================================================================================
Long Term Compensation
-------------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------------------
Other
Annual Restricted LTIP All Other
Compen- Stock Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus($) ($) ($) (1) (#) ($) ($)
- -------- ---- ---------- -------- ------ ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Patricia Anderson- 1995 175,000(2) - 1,346(3) 0 0 0 -
Lasko 1994 175,000 - 2,791(3) 0 0 0 -
President, Chief 1993 175,000 - 3,594(3) 0 0 0 -
Executive Officer,
and Chairman of the
Board
===================================================================================================================================
<FN>
(1) No executive officer received or held restricted stock awards during or at
the end of fiscal 1995, 1994 or 1993, or received, exercised or held stock
options during or at the end of fiscal 1995, 1994 or 1993.
(2) At the request of the Company Ms. Anderson-Lasko deferred the payment of
$51,000 of her fiscal 1995 salary until fiscal 1996.
(3) During fiscal 1995, 1994 and 1993 Ms. Anderson-Lasko received life
insurance benefits in the aggregate amount of $1,346, $2,019 and $2,019,
respectively, and, in fiscal 1994 and 1993, health insurance benefits in
the aggregate amount of $772 and $4,500, respectively. Ms. Anderson-Lasko
received an automobile allowance of $1,575 in fiscal 1993.
</FN>
</TABLE>
Compensation of Directors
No compensation is paid for membership on the board of directors or on any
committee of the board of directors. All directors receive reimbursement of
expenses, if any, incurred in attending board of directors and committee
meetings.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Ms. Anderson-Lasko and Messrs. Lanto and Williamson served on the
Compensation Committee of the Company during fiscal 1995. Although Ms.
Anderson-Lasko, the Company's President, Chief Executive Officer and Chairman of
the Board, served on the Company's Compensation Committee, she did not
participate in any decisions regarding her own compensation as an executive
officer. Messrs. Lanto and Williamson are not officers of the Company.
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<PAGE>
Employment Agreements
In September 1993 the Company entered into a revised employment agreement
with Patricia Anderson-Lasko. The agreement expires in October 1997, but
provides that its terms may be extended for additional one-year periods,
starting in October 1995, at the election of the parties. The employment
agreement provides that Ms. Anderson-Lasko shall be employed as the Chief
Executive Officer of the Company at an annual base salary of $175,000 and shall
be eligible for such increases in salary, other bonuses and payments as the
Board of Directors should direct. Ms. Anderson-Lasko is also entitled to receive
a mortgage loan from the Company of up to $100,000 to assist her in purchasing a
principal residence near the Company's Springfield, Tennessee offices. Such
loan, which has not been made as of the date hereof, shall bear interest at 3%
per annum, and will be payable over fifteen years.
The employment agreement of Ms. Anderson-Lasko contains provisions
requiring certain severance payments in the event (i) the Company terminates her
employment other than for cause, death or disability or (ii) Ms. Anderson-Lasko
terminates the contract after a change in control, or as the result of a breach
of the agreement by the Company, including a change in her responsibilities or
authorities not provided for in the contract. In such event, Ms. Anderson-Lasko
is entitled to a severance payment equal to the greater of three times the
annual salary in effect at the date of termination or such annual salary
multiplied by the number of years remaining in the term (including extensions
thereof) of the contract. For purposes of the contracts, a change in control is
defined to occur if any "person" (as such term is used in Sections 13(d) and 14
(d) of the Securities Exchange Act of 1934) (the "Exchange Act") (but excluding
the Company, its existing officers and directors and any other individual,
entity or group whose acquisition of control is approved in advance by the
board) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities issued by the Company
representing 30% or more of the combined voting power of the Company's
then-outstanding securities, or if during any period of two consecutive years
during the term of the agreement, individuals who at the beginning of such
period constitute the board cease for any reason to constitute at least a
majority thereof, unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then in office who were directors at the beginning
of the period.
In April, 1996, Thimble Square and Eleanor V. Schwartz entered into an
employment agreement that provides for annual compensation of $46,800 over a
three year term that expires in April, 1999. The agreement provides that in the
third year Mrs. Schwartz shall not be required to devote more than 500 hours to
the affairs of the Company, and also provides for the continuation of Mrs.
Schwartz's salary payments, for the lesser of one year or the remaining term of
the contract, in the event of Mrs. Schwartz's death or disability.
Stock Option Plan
The Company has adopted a stock option plan (the "Plan") pursuant to which
an aggregate of 100,000 shares of common stock had been reserved for issuance to
officers, directors, consultants and employees of the Company and its
subsidiaries upon exercise of non-qualified options and exercise of "incentive
stock options" (within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended) issuable under the Plan. The primary purpose of the Plan is
to attract and retain capable executives, consultants and employees by offering
them stock ownership in the Company. The Plan was originally adopted by the
board of directors on December 11, 1991, and amended and ratified by the board
of directors on April 10, 1992. The Plan was approved by the Company's
shareholders at the annual meeting of shareholders on May 28, 1992.
The Plan is administered by the Stock Option Committee (the "Committee")
appointed by the Company's Board of Directors. The current members of the
Committee are Messrs. Lanto and
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Williamson. No member of the Committee will be eligible to participate in a
grant of options pursuant to the Plan.
The Committee will determine, among other things, the persons to be granted
options, the number of shares subject to each option and the option price. The
exercise price of any incentive stock option granted under the Plan to an
eligible employee must be equal to the fair market value of the shares on the
date of grant and, with respect to persons owning more than 10% of the
outstanding common stock, the exercise price may not be less than 110% of the
fair market value of the shares underlying such option on the date of grant. The
exercise price for non-qualified options must be at least 50% of the fair market
value of the shares on the date of issue. The Committee will determine the terms
of each option and the manner in which it may be exercised. No option may be
exercisable more than ten years after the date of grant, except for those held
by optionee who own more than 10% of the Company's common stock, which may not
be exercisable more than five years after the date of grant. Options are not
transferable except upon the death of the optionee.
The board of directors may amend the Plan from time to time; however,
without stockholder approval, the Plan may not be amended to: (i) increase the
aggregate number of shares subject to the Plan; (ii) materially increase the
benefits accruing to participants under the Plan; (iii) change the class of
individuals eligible to receive options under the Plan; or (iv) extend the term
of the Plan.
As of the date hereof, the Company has outstanding options to acquire a
total of 3,000 shares of the Company's common stock by officers and other
employees of the Company under the Plan. No options granted under the Plan have
been exercised.
Stock Bonus Plan
The board of directors has authorized and may in the future authorize the
issuance of restricted stock to certain employees of the Company.
Spirco Stock Bonus Plan
As of July 31, 1991, Spirco had a stock bonus plan and related stock bonus
trust (collectively, the "Spirco Plan") in place that provided for the
contribution of a percentage of earnings of Spirco to the Spirco Plan on a
yearly basis. By amendment dated as of December 31, 1991, Spirco revised the
Spirco Plan to provide that after that date, no contributions would be made to
the Spirco Plan.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's common stock as of the date hereof by (i) each of the
Company's executive officers or directors or who is a stockholder, (ii) each
person known to the Company to be the beneficial owner of more than five percent
of the outstanding shares of the common stock, and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned (1)
----------------------------------------------------------
Name Number Percent
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Patricia Anderson-Lasko 463,772 (2) (3) (4) 2.7%
27 North Main Street
Springfield, TN 37172
Alexander K. Miller - -
27 North Main Street
Springfield, TN 37172
Terrance Bond 1,000 (5) *
27 North Main Street
Springfield, TN 37172
Felix Lee 1,050 (6) *
27 North Main Street
Springfield, TN 37172
Reino C. Lanto, Jr. 61,286 (7) *
235 North Garrard St.
Rantoul, Il 61866
Marvin M. Williamson 2,000 *
53 Fitch Lane
New Canaan, CT 06840
Lee Schwartz 1,372,549 (8) 7.9%
206 Early Street
Savannah, GA 31404
Eleanor and Philip Schwartz 2,745,098 (8) (9) 15.7%
23362 Water Circle
Boca Raton, FL 33486
Mathew T. Mulhern 834,000 (10) (11) 4.8%
119 Rockland Ave.
Northvale, NJ 07647
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<PAGE>
William T. and Virginia C. Williams 1,000,000 5.7%
2800 S. Ocean Blvd.
Boca Raton, FL 33432
William Sloan 892,472 (12) 5.0%
301 East Hundred Road
Chester, Virginia 23832
All Executive Officers 4,108,206 (2) (3) (4) (5) (6) (7) (9) (13) 23.5%
and Directors as a Group
(6 persons)
- -----------------
* Less than 1%.
<FN>
(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 stock options or common stock
purchase warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of that owner but are not deemed
outstanding for the purpose of computing percentage ownership of any
other beneficial owner shown in the table. Shares outstanding and
eligible to vote exclude (i) 152,728 shares held by trusts established
under Spirco's plan of reorganization (see Note 2 of Notes to
Consolidated Financial Statements) and (ii) 200,000 shares held as an
appeal bond for the Company's appeal of the Tedesco litigation (see
Note 8 of Notes to Consolidated Financial Statements). Under the terms
of the Trust and the bond, such shares are not eligible to vote.
(2) The total for Ms. Anderson-Lasko includes 75,000 shares transferred to
her under the terms of a stock transfer agreement between Ms.
Anderson-Lasko and a private investor. Substantively all of the
consideration for these share was delivered in the form of a
non-recourse promissory note due August, 1996 that is secured by the
escrow of the shares. Under the terms of the stock transfer agreement,
as Ms. Anderson-Lasko makes payments under the promissory note, a pro
rata portion of the escrowed shares are released to her. If Ms.
Anderson-Lasko fails to pay a portion of the promissory note when due,
a pro rata portion of its shares will be returned to the private
investor. As the result of this agreement, the number of shares and
percentage of common stock owned by Ms. Anderson-Lasko could decrease
in the future.
(3) Includes 79,432 shares owned by DWL International, a corporation in
which Ms. Anderson-Lasko's spouse, Donald W. Lasko, holds a controlling
interest. Ms. Anderson-Lasko has no, and disclaims beneficial ownership
of any, interest in DWL International and the shares owned by it.
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<PAGE>
(4) Pursuant to a July, 1994 agreement between Mr. Bauman and the Company
and Ms. Anderson- Lasko, Mr. Bauman has agreed to certain limitations
on the number of shares of the Company's common stock he may resell in
any month until August, 1996, and Mr. Bauman has granted to Ms.
Anderson-Lasko an irrevocable proxy to vote any and all shares of the
Company's common stock that he may own at any time. The total for Ms.
Anderson-Lasko includes the 25,332 shares owned by Mr. Bauman that Ms.
Anderson-Lasko has the power to vote pursuant to this agreement.
(5) Consists of 1,000 shares subject to options exercisable by Mr. Bond.
(6) Includes 50 shares currently held by Mr. Lee and 1,000 shares subject
to options exercisable by Mr. Lee.
(7) Consists of 32,735 shares owned by Jeanene Lanto, the wife of Mr.
Lanto, and 28,551 shares owned by a trust for the benefit of Jeanene
Lanto of which Mr. Lanto is the trustee, as to all of which Mr. Lanto
disclaims any beneficial ownership.
(8) Pursuant to a voting agreement between Lee Schwartz, Eleanor Schwartz
and Philip Schwartz, Lee Schwartz and Philip Schwartz have granted to
Eleanor Schwartz the power to vote any shares owned by them for so long
as Eleanor Schwartz is a member of the Company's board of directors.
(9) Includes 1,372,549 shares, owned by Lee Schwartz, that Eleanor Schwartz
has the power to vote pursuant to the voting agreement between Lee
Schwartz, Eleanor Schwartz and Philip Schwartz.
(10) Mathew Mulhern ("Mulhern") purchased 834,000 shares of the Company's
common stock from Thimble Square in January, 1996. Pursuant to the
agreement between Thimble Square and Mulhern, Thimble Square may be
required to transfer up to 416,000 shares to Mulhern depending on the
average price for the Company's common stock as reported by the NASDAQ
SmallCap Market for the period February 20, 1996 to the date six months
following the date of this Prospectus. As a result of the Company's
April, 1996 acquisition of Thimble Square, the obligation to transfer
additional shares has become an obligation of the Company to issue
additional shares to Mulhern. As the result of this agreement the
number of shares and percentage of common stock owned by Mulhern could
increase in the future.
(11) Pursuant to an agreement between the Company and Mulhern, Mulhern has
agreed to vote the shares owned by him in accordance with the
recommendations of the Company's board of directors.
(12) Includes 250,000 shares that Mr. Sloan has the right to acquire upon
the exercise of outstanding common stock purchase warrants.
(13) Includes the 834,000 share held by Mulhern which Mulhern has agreed to
vote in accordance with the recommendations of the Company's board of
directors. See note (11) above.
<FN>
</TABLE>
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth (i) the amount and percentage of
shares of common stock beneficially owned by each Selling Stockholder prior to
this offering, (ii) the number of such shares being offered by each Selling
Stockholder to the public from time to time pursuant hereto and (iii) the amount
and percentage of shares of common stock owned beneficially by each of the
Selling Stockholders upon completion of this offering (assuming the sale by the
Selling Stockholders of all the shares of common stock offered by means of this
prospectus).
<TABLE>
<CAPTION>
Shares and
Warrants
Shares and Warrants Beneficially
Beneficially Shares Owned After
Owned Prior to the Offering Being The Offering
--------------------------------------- ------------
Name Shares Warrants Total % Offered Number %
---- ------ -------- ----- --- --------- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
John Dabal 13,893 (1) - 13,893 * 13,893 - -
Allan Flood 27,785 (1) - 27,785 * 27,785 - -
Anthony Kamin 41,679 (1) - 41,679 * 41,679 - -
Howard Kamin 13,893 (1) - 13,893 * 13,893 - -
Craig Lefferts 27,785 (1) - 27,785 * 27,785 - -
George Markelson 27,785 (1) - 27,785 * 27,785 - -
Timothy Teufel 13,893 (1) - 13,893 * 13,893 - -
William Teufel 13,893 (1) - 13,893 * 13,893 - -
Kevin Ward 13,893 (1) - 13,893 * 13,893 - -
Merritt Family Spendthrift
Trust (4) 329,972 - 329,972 1.9% 234,286 95,686 *
Richard Serbin 53,003 (2) 2,250 55,253 * 53,003 2,250 *
William Sloan 642,472 250,000 892,472 5.0% 892,472 - -
Mathew Mulhern (4) 1,250,000 (3) - 1,250,000 7.0% 1,250,000 - -
William T. and Virginia C.
Williams (4) 1,000,000 - 1,000,000 5.7% 1,000,000 - -
Douglas Fleck 100,000 - 100,000 * 100,000 - -
Quanta Corporation 182,500 50,000 232,500 1.3% 232,500 - -
Stuart Sutta, P.C. 31,810 - 31,810 * 31,810 - -
<FN>
* less than 1 percent
(1) Includes 2,679 shares for each of Messrs. Dabal, H. Kamin, T. Teufel,
W. Teufel and Ward, 5,357 shares for each of Messrs. Flood, Lefferts
and Markelson and 8,036 shares for Mr. A. Kamin, that each has agreed
to accept as a portion of the interest to be payable under the second
extension of the July 1994 working capital loan. See Note 4 of Notes to
Consolidated Financial Statements.
(2) Represents the shares the Company has the right to require Mr. Serbin
to accept in satisfaction of certain indebtedness to Mr. Serbin.
(3) Includes 416,000 shares representing the maximum number of additional
shares that the Company may be required to issue to Mulhern under the
terms of a January, 1996 agreement. See "Principal Stockholders."
(4) The Merritt Family Spendthrift Trust has agreed, as to 114,286 of the
shares being offered hereby, to limit resales to no more than 12,500
shares in any one week for a period of one year from the date of this
Prospectus. Mr. Mulhern has agreed, as to 1,000,000 of the shares being
offered hereby, to limit resales to no more than 25,000 shares in any
one week for a period of one year from the date of this Prospectus. Mr.
and Mrs. Williams have agreed, as to 800,000 of the shares being
offered hereby, to limit resales to no more than 12,500 shares in any
one week for a period of one year from the date of this Prospectus.
</FN>
</TABLE>
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<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
Pursuant to the Certificates of Incorporation, the Company is
authorized to issue 30 million shares of common stock, $.01 par value per share.
As of the date hereof, the Company had outstanding 17,481,827 validly issued,
fully paid and nonassessable shares of common stock.
Holders of the common stock are entitled to one vote for each
share held of record in each matter properly submitted to such holders for a
vote. Subject to the rights of the holders of any other outstanding series of
stock the board of directors of the Company may designate from time to time,
holders of common stock are entitled to receive their pro rata share of (i) any
dividends that may be declared by the board of directors out of assets legally
available therefore, and (ii) any excess assets available upon the liquidation,
dissolution, or winding up of the Company.
The board of directors may issue the additional shares of common
stock, up to the authorization of 30 million shares, without soliciting
additional stockholder approval. The existence of authorized but unissued shares
of the Company's common stock could tend to discourage or render more difficult
the completion of a hostile merger, tender offer or proxy contest. For example,
if in the due exercise of its fiduciary obligations, the board of directors were
to determine that a takeover proposal was not in the best interest of the
Company and its stockholders, the ability to issue additional shares of stock
without further stockholder approval could have the effect of rendering more
difficult or costly the completion of the takeover transaction, by diluting the
voting or other rights of the proposed acquiror or insurgent stockholder group,
by creating a substantial voting block in hands that might support the position
of the board of directors, by effecting an acquisition that might complicate or
preclude the takeover, or otherwise.
Preferred Stock
The Company does not presently have an authorized class of
preferred stock.
Common Stock Purchase Warrants
The Company conducted a private placement offering that closed in
June 1992 whereby the Company issued 20 units, each unit consisting of a
$100,000 12% Subordinated Collateralized Note ("Subordinated Notes") and Class A
common stock purchase warrants exercisable for 4,500 shares of the common stock.
As a result of this offering, the Company originally issued Class A common stock
purchase warrants to purchase in the aggregate 95,000 shares of the Company's
Common Stock. Each Class A common stock purchase warrant originally entitled the
holder to purchase one share of common stock at an exercise price of $45 per
share for a term expiring at 5:00 pm Central time on May 15, 1994. However, as a
result of the delay in the public offering planned for the fall of 1992 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources"), the Company was unable to redeem
the Subordinated Notes on or before December 1, 1992, and as a result the
exercise price of the Class A common stock purchase warrants was automatically
reduced to $30. In June 1993 the Company sought extensions of the maturity date
of the Subordinated Notes to March 31, 1994. The holders of an aggregate of
$1,125,000 principal amounts of the Subordinated Notes agreed to such extension,
in return for which the Company (i) extended until July 31, 1996 the expiration
date of the 56,250 Class A common stock purchase warrants originally issued in
the units purchased by such holders and (ii) issued to such holders, on a
pro-rata basis, an additional 5,625 Class A warrants having terms identical to
the common stock purchase warrants. In March, 1994 in connection with the
conversion of Subordinated Notes into shares of common stock, the Company agreed
to extend the expiration date of the common stock purchase warrants until July
31, 1997.
As of the date hereof, there are outstanding as the result of the
June 1992 private placement
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<PAGE>
offering an aggregate of 93,950 Class A common stock purchase warrants, of which
91,700 are exercisable at $30 per share, expire on July 31, 1997 and of which
2,250, exercisable at $2 per share, expire March 31, 1997.
In June, 1993 the Company undertook a private placement of units
comprised of one share of restricted common stock and one Class B common stock
purchase warrant, exercisable at $30 per share through July 31, 1996. An
aggregate of 55,000 units were sold, resulting in the issuance of 55,000 Class B
common stock purchase warrants. In March, 1994 the exercise price of 53,000 of
these Class B common stock purchase warrants was reduced to $20 and the period
for exercise extended until July 31, 1997.
In November, 1995 the Company issued 1 million Class C common
stock purchase warrants in connection with its acquisition of the Florida
property (see "Business - Properties"). The Class C common stock purchase
warrants were exercised in April, 1996 and the resale of the shares issued on
the exercise thereof is being registered by means of the registration statement
of which this Prospectus forms a part.
In February, 1996 the Company undertook a private placement of
2,272,730 units, each unit comprised of one share of restricted common stock and
one Class D common stock purchase warrant. The Class D common stock purchase
warrants are exercisable through February 1, 1998 at a per share price equal to
50 percent of the market price of the Company's common stock as of the date of
exercise (25 percent if the Company's common stock is not then listed on the
NASDAQ or on the New York or American stock exchanges. In April and May, 1996,
the Class D warrants were exercised for aggregate proceeds of $398,000.
In April, 1996, in connection with the restructuring of a
defaulted Subordinated Collateralized Note and the settlement of a judgement
obtained by the holder, the Company issued 250,000 Class E common stock purchase
warrants. The Class E common stock purchase warrants are exercisable at a price
of $.30125 per share through April, 1999. The resale of the shares issuable upon
the exercise , if any, of the Class E common stock purchase warrants is being
registered by means of the registration statement of which this Prospectus forms
a part.
In April, 1996, the Company issued 100,000 Class F common stock
purchase warrants as payment of a commission relating to its November, 1995
acquisition of the Florida property. The Class F common stock purchase warrants
are exercisable at $.01 per share through April, 1998. The Class F common stock
purchase warrants were exercised in April, 1996, for proceeds of $1,000, and the
resale of the shares issued upon the exercise of the Class F common stock
purchase warrants is being registered by means of the registration statement of
which this Prospectus forms a part.
In May, 1996, the Company issued 50,000 Class G common stock purchase
warrants, together with 187,500 shares of its common stock, in satisfaction of
certain liabilities aggregating approximately $56,000. The Class G common stock
purchase warrants are exercisable at a price of $.28 per share through May,
1998. The resale of the shares issued is being registered by means of the
registration statement of which this Prospectus forms a part, and the resale of
the shares issuable upon the exercise, if any, of the Class G common stock
purchase warrants is being registered by means of the registration statement of
which this Propsectus forms a part.
The exercise price of the common stock purchase warrants is
subject to adjustment based on anti-dilution provisions that are triggered upon
a stock dividend, stock split, reverse stock split, reorganization,
reclassification, consolidation, merger or sale of all or substantially all of
the Company's assets. Certain common stock purchase warrants have certain
"demand" and "piggy back' registration rights. See -"Registration Rights."
Certain Provisions Relating to Share Acquisitions
Section 203 of the Delaware General Corporation Law generally
prevents a corporation from entering into certain business combinations with an
interested stockholder (defined as any person or entity that is the beneficial
owner of at least 15% of a corporation's voting stock) or its affiliates for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) the transaction is approved by the
board of directors of the corporation prior to such business combination, (ii)
the interested stockholder acquires 85% of the corporation's voting stock in the
same transaction in which it exceeds 15%, or (iii) the business combination is
approved by the
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<PAGE>
board of directors and by a vote of two-thirds of the outstanding voting stock
not owned by the interested stockholder. The Delaware General Corporation Law
provides that a corporation may elect not to be governed by Section 203. The
Company has made no such election and is therefore governed by Section 203. Such
anti-takeover provision may have an adverse effect on the market for the
Company's securities.
Registration Rights
The holders of the Class A and Class B common stock purchase
warrants are entitled to certain demand and piggy-back registration rights with
respect to the share of common stock issuable upon the exercise of those common
stock purchase warrants. These rights provide generally that upon the request of
the holders of a majority of the Class A common stock purchase warrants and/or
the request of holders of a majority of the Class B common stock purchase
warrants, the Company shall as soon as practicable give written notice of such
request to all holders of such common stock purchase warrants and thus as soon
as practicable thereafter shall file a registration statement covering the
number of shares as to which the holders of such common stock purchase warrants
have requested registration, provided however that the Company is not obligated
to file a registration statement if registration is not requested for at least
30% of the shares issuable upon its exercise of the Class A common stock
purchase warrants, or 30% of the shares issuable upon the exercise of the Class
B common stock purchase warrants. Additionally, the holders of the Class A and
Class B common stock purchase warrants are entitled to the "piggy-back"
registration of the underlying shares of common stock if the Company proposed to
register any of its securities under the Securities Act, except that, among
other conditions, the underwriters of any offering have the right to limit the
number of shares included in such registration.
In connection with the April, 1996 acquisition of Thimble Square,
the Company agreed to file, as soon as practicable, a registration statement for
the resale of the 2,745,098 shares issued as a part of the acquisition
consideration. Such registration statement will be filed once the audited
financial statements for Thimble Square are available, which is expected to be
in June, 1996.
Indemnification and Limitation of Liability
The Company's Amended and Restated Certificate of Incorporation
provides that the Company shall indemnify its officers and directors to the
fullest extent permitted by Delaware law, including some instances in which
indemnification is otherwise discretionary under Delaware law. The Amended and
Restated Certificate of Incorporation, amended immediately prior to the
completion of this offering, also provides that, pursuant to Delaware law, the
Company's directors shall not be liable for monetary damages for breach of the
director's fiduciary duty of care to the Company and its stockholders. This
provision does not eliminate the duty of care, and , in appropriate
circumstances, equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities for environmental laws.
As present, there is no pending litigation or proceeding involving
a director or officer of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any officer or director.
Transfer and Warrant Agent
The transfer agent for the Company's common stock is American
Security Transfer, Lakewood, Colorado.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of the date hereof, 17,481,827 shares of common stock are issued and
outstanding, and an additional 448,950 shares of common stock are issuable upon
exercise of the common stock purchase warrants. Of the shares of common stock
outstanding, 1,619,339 shares are "restricted securities" as defined under the
Securities Act, and 148,950 of the shares issuable upon the exercise of the
common stock purchase warrants would, when issued, be restricted securities.
Additionally, another 1,872,327 shares are owned by affiliates. Such 3,491,666
shares, and the 148,950 shares issuable upon the exercise of such warrants, may
not be sold unless they are registered under the Securities Act or are sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144 under the Securities Act.
In general, Rule 144 allows a stockholder who has beneficially
owned restricted shares for at least two years (including persons who may be
deemed "affiliates" of the Company under Rule 144) to sell a number of shares
within any three-month period that does not exceed the greater of 1% of the then
outstanding shares of the Company's common stock or the average weekly trading
volume in the over-the-counter market during the four calendar weeks preceding
the filing of a Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain manner-of-sale provisions and notice requirements, and
to the availability of current public information about the Company. A
stockholder who is deemed not to have been an "affiliate" of the Company for at
least 90 days and who has beneficially owned his restricted shares for at least
three years would be entitled to sell his shares under Rule 144 without regard
to these requirements.
As of the date hereof, the two year holding period had been
satisfied with respect of 17,740 restricted shares which could therefore be sold
subject to the volume limitations of Rule 144, and the three year holding period
had been satisfied with respect to 79,806 shares held by non-affiliates and
could therefore be sold without compliance with the volume restrictions under
Rule 144.
On June 27, 1995 the Commission published for public comment
proposed rules that would shorten the two and three year holding periods under
Rule 144 to one and two years, respectively. If such proposed rules were
currently in effect, the number of shares which could be sold subject to the
volume limitations of Rule 144 would not increase, and the number of shares that
could be sold without compliance with the volume restrictions of Rule 144 would
increase by 17,740 shares.
Pursuant to the July, 1994 agreement between Jerome Bauman and the
Company, Mr. Bauman agreed to restrict the resale of the shares owned by him
(25,332 as of the date hereof) to 7,100 shares per month through July, 1996.
The Merritt Family Spendthrift Trust, one of the Selling Stockholders,
has agreed, as to 114,286 of the shares being offered hereby, to limit resales
to no more than 12,500 shares in any one week for a period of one year from the
date of this Prospectus. Mr. Mulhern, another of the Selling Stockholders, has
agreed, as to 1,000,000 of the shares being offered hereby, to limit resales to
no more than 25,000 shares in any one week for a period of one year from the
date of this Prospectus. Mr. and Mrs. Williams, another of the Selling
Stockholders, have agreed, as to 800,000 of the shares being offered hereby, to
limit resales to no more than 12,500 shares in any one week for a period of one
year from the date of this Prospectus.
There has been only a limited public trading public market for the
common stock of the Company. Sales of substantial amounts of shares of common
stock, pursuant to Rule 144, or otherwise, could adversely affect any market for
the common stock.
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EXPERTS
The consolidated financial statements and schedule of the Company
included in this Prospectus and in the Registration Statement have been audited
by BDO Seidman, LLP, independent certified public accountants, to the extent and
for the periods set forth in their reports appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other filed
information can be inspected and copied, at prescribed rates, at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549-1004, and the following regional
offices of the Commission: New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and Chicago Regional Office, 3190 Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies thereof can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549.
The Company has filed with the Commission a Registration Statement
on Form S-1, of which this Prospectus constitutes a part, under the Securities
Act, with respect to the shares of common stock offered hereby. This Prospectus
does not contain all of the information included in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the company and the shares of common stock, reference is hereby made to the
Registration Statement, including the exhibits and schedules thereto. Statements
contained in this Prospectus concerning the provisions or contents of any
contract, agreement or any other document referred to herein are summaries that
are not necessarily complete. With respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matters involved, and each
such statement shall be deemed qualified in its entirety by such reference to
the copy of the applicable document filed with the Commission. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C., and copies of all or any part thereof may be obtained from
such office, upon payment of the fees prescribed by the Commission.
The Company furnishes its security holders with annual reports
containing consolidated audited financial statements as soon as practicable
after the end of each fiscal year and such interim reports as the Company may
determine. The Company's fiscal year ends on November 30.
-64-
<PAGE>
<TABLE>
<CAPTION>
Innovo Group Inc.
Consolidated Financial Statements
---------------------------------
Fiscal Periods Ended October 31, 1995, 1994, and 1993
- -----------------------------------------------------
<S> <C>
Report of Independent Certified Public Accountants..................................................................... F- 2
Consolidated Balance Sheets............................................................................................ F- 3
Consolidated Statements of Operations.................................................................................. F- 4
Consolidated Statements of Stockholders' Equity........................................................................ F- 5
Consolidated Statements of Cash Flows.................................................................................. F- 6
Notes to Consolidated Financial Statements............................................................................. F- 7
Interim Periods Ended February 29, 1996 and January 31, 1995 (Unaudited)
- ------------------------------------------------------------------------
Condensed consolidated balance sheets as of February 29, 1996 and October 31, 1995..................................... F-24
Condensed consolidated statements of operations for the three months ended
February 29, 1996 and January 31, 1995 and for the one month ended November 30, 1995................................... F-25
Condensed consolidated statements of cash flows for the three months ended
February 29, 1996 and January 31, 1995 and for the one month ended November 30 1995.................................... F-26
Notes to condensed consolidated financial statements................................................................... F-27
Pro Forma Condensed Consolidated
Financial Statements (Unaudited)
--------------------------------
Introduction........................................................................................................... F-31
Pro Forma Condensed Consolidated Balance Sheet as of February 29, 1996................................................. F-32
Pro Forma Condensed Consolidated Statement of Operations for the year ended
October 31, 1995....................................................................................................... F-33
Notes to Pro Forma Condensed Consolidated Financial Statements......................................................... F-34
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We have audited the accompanying consolidated balance sheets of
Innovo Group Inc. and subsidiaries as of October 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended October 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Innovo Group Inc. and subsidiaries as of October 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended October 31, 1995, in conformity with
generally accepted accounting principles.
/s/BDO Seidman, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
January 26, 1996, except
for Note 4, as to which
the date is April 26, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(000's, except for share data)
October 31,
--------------------------
1995 1994
--------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 6 $ 4
Accounts receivable (Note 4) 1,524 1,905
Inventories (Note 4) 1,229 5,958
Prepaid expenses 406 552
------ -------
TOTAL CURRENT ASSETS 3,165 8,419
PROPERTY AND EQUIPMENT, net (Note 5) 2,126 2,466
OTHER ASSETS 376 258
------ -------
$ 5,667 $ 11,143
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4) $ 993 $ 3,085
Subordinated notes payable (Note 4) 235 235
Current maturities of long-term debt (Note 5) 143 140
Accounts payable 1,942 4,199
Accrued expenses 735 1,931
------ -------
TOTAL CURRENT LIABILITIES 4,048 9,590
LONG-TERM DEBT, less current maturities (Note 5) 1,422 1,374
OTHER 153 302
------ -------
TOTAL LIABILITIES 5,623 11,266
------ -------
COMMITMENTS AND CONTINGENCIES (Notes 2, 6 and 8)
REDEEMABLE COMMON STOCK (189,761 shares) (Note 7(b)) - 1,423
------ -------
CLASS 3 TRUST (Note 2) 274 826
------ -------
STOCKHOLDERS' EQUITY (Notes 2, 7(a) and (c)):
Common stock, $.01 par - shares
authorized 30,000,000; issued 3,050,062
in 1995 and 2,146,372 in 1994 30 21
Stock subscription (Note 4) 350 -
Additional paid-in capital 19,137 17,485
Deficit (17,358) (16,407)
Treasury stock, 53,072 and 77,119 shares (2,389) (3,471)
------ -------
TOTAL STOCKHOLDERS' EQUITY (230) (2,372)
------ -------
$ 5,667 $ 11,143
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(000's except earnings per share information)
Year ended October 31,
1995 1994 1993
---------------------------------------------
(as restated, Note 3)
<S> <C> <C> <C>
NET SALES $ 5,276 $ 8,028 $ 12,468
COST OF GOODS SOLD 3,808 5,044 6,998
------ ------- --------
Gross profit 1,468 2,984 5,470
OPERATING EXPENSES
Selling, general and administrative 2,728 4,105 4,355
Depreciation and amortization 406 814 668
Plant consolidation (Note 1(j)) - 470 -
------ ------- --------
Income (loss) from operations (1,666) (2,405) 447
INTEREST EXPENSE (511) (821) (960)
OTHER INCOME (EXPENSE), net (Note 1(k)) 2,110 (898) 280
------ ------- --------
Income (loss) before income taxes
(benefit) (67) (4,124) (233)
INCOME TAXES (BENEFIT) (Note 6) - 3,781 428
------ ------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (67) (7,905) (661)
------ ------- --------
DISCONTINUED OPERATIONS, NET OF TAXES (Note 3)
Results of discontinued NASCO Products
operations (927) (1,537) (1,215)
Gain on sale of NASCO Products operations 301 - -
Results of discontinued Spirco and
and Sportswear operations - - (1,796)
Gain (loss) on sale of Spirco
operations - 852 (4,257)
------ ------- --------
(626) (685) (7,268)
------ ------- --------
EXTRAORDINARY ITEM (Note 2) (258) 699 -
------ ------- --------
NET INCOME (LOSS) $ (951) $ (7,891) $ (7,929)
====== ======= =======
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.03) $ (3.99) $ (.63)
Discontinued operations (Note 3) (.24) (.34) (6.92)
Extraordinary item (Note 2) (.09) .35 -
------ ------- --------
Net income (loss) $ (.36) $ (3.98) $ (7.55)
====== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 2,616 1,982 1,050
====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(000's except for shares)
Common Stock Additional Retained
------------------ Stock paid-in earnings Treasury
Shares Amount Subscription capital (deficit) stock Total
-------- -------- ------------ ---------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 1, 1992 1,063,631 $ 10 $ - $11,554 $ (587) $(3,457) $ 7,520
Issuances of common stock 62,806 1 - 652 - - 653
Private placement of common stock and warrants 55,000 1 - 1,126 - - 1,127
Common stock offering costs - - - (412) - - (412)
Purchase of treasury stock - - - - - (14) (14)
Issuance of warrants to debenture holders (Note 4) - - - 6 - - 6
Net loss - - - - (7,929) - (7,929)
---------- ----- ------- -------- ------ -------- ------
BALANCE, October 31, 1993 1,181,437 12 - 12,926 (8,516) (3,471) 951
Issuance of common stock
Cash 110,000 1 - 474 - - 475
Services 62,750 1 - 306 - - 307
Stock award (Note 7(c)) 9,875 - - 81 - - 81
Extinguishment of debt (Notes 4 and 7(a)) 455,213 4 - 2,800 - - 2,804
Loan fees (Note 4) 80,000 1 - 299 - - 300
Spirco reorganization (Note 2) 247,097 2 - 700 - - 702
Costs of issuances - - - (584) - - (584)
Capital contribution (Note 7(a)) - - - 483 - - 483
Net loss - - - - (7,891) - (7,891)
---------- ----- ------- --------- ------ --------- ------
BALANCE, October 31, 1994 2,146,372 21 - 17,485 (16,407) (3,471) (2,372)
Issuance of common stock
Spirco reorganization (Note 2) 546,103 5 - 1,116 - - 1,121
Extinguishment of debt (Note 4) 119,873 1 350 127 - - 478
Loan extension (Note 4) 69,500 1 - 121 - - 122
Other 2,500 - - 9 - - 9
Costs of issuances - - - (60) - - (60)
Expiration of put options (Note 7(b)) 189,761 2 - 1,421 - - 1,423
Cancellation of treasury shares (24,047) - - (1,082) - 1,082 -
Net loss - - - - (951) - (951)
---------- ----- ------- ------------ -------- -------- -------
BALANCE, October 31, 1995 3,050,062 $ 30 $ 350 $ 19,137 $ (17,358) $(2,389) $ (230)
========= ===== ===== ======= ======== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(000's)
Year ended October 31,
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (951) $(7,891) $(7,929)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 412 822 1,323
Deferred income taxes - 4,630 (1,901)
Provision for uncollectible accounts 102 383 150
Loss (gain) on disposal of discontinued operations (395) (1,374) 3,532
Extraordinary gain or loss 258 (1,128) -
Changes in assets and liabilities (exclusive
of Sportswear transaction):
Accounts receivable 279 1,365 5,293
Inventories 4,430 (26) 979
Prepaid expenses (25) 33 (652)
Accounts payable (867) 37 (73)
Accrued expenses (1,032) 1,306 (893)
Income taxes payable - - (435)
Other (507) 1,437 (36)
------ ------ -------
Cash provided by (used in) operating activities 1,704 (406) (642)
------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19) (18) (25)
Increase (decrease) in other assets 4 - -
Proceeds from sale of discontinued operations 100 1,445 1,500
------ ------ -------
Cash provided by (used in) investing activities 85 1,427 1,475
------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes payable 356 612 392
Repayments of notes payable (1,970) (1,493) (3,068)
Repayments of long-term debt (113) (68) (360)
Proceeds from issuance of common stock - 475 1,780
Stock issuance costs (60) (584) (412)
Purchase of treasury stock - - (14)
------ ------ -------
Cash provided by (used in) financing activities (1,787) (1,058) (1,682)
------- ------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2 (37) (849)
CASH AND CASH EQUIVALENTS, at beginning of year 4 41 890
------ ------ -------
CASH AND CASH EQUIVALENTS, at end of year $ 6 $ 4 $ 41
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of business
------------------
Innovo Group Inc. ("Innovo Group") is a holding company, the principal
assets of which is the common stock of three operating subsidiaries, Innovo,
Inc. ("Innovo"), NASCO Products, Inc. ("NASCO Products") and NASCO Products
International, Inc. ("International"). Innovo Group and its wholly-owned
subsidiaries are referred to as "the Company".
Innovo is a domestic manufacturer and distributor of laundry and
utility bags, nylon lunch bags and fannypacks, stadium cushions, craft smocks,
aprons and cloth novelties for children. The subsidiary also manufactures and
distributes a reusable cloth shopping/carrying bag under the name E.A.R.T.H.
Bag. The subsidiary creates its own contemporary designs for its products and,
under certain licenses, has the right to display on its products certain
characters and the names and logos of the teams of the major professional sports
leagues, the U.S. Olympic teams, most major colleges and universities and the
individual players of the American and National baseball leagues. Innovo grants
credit to customers, substantially all of which are mass merchandisers or are in
the premium incentive industry.
NASCO Products imported a line of canvas and nylon sport bags,
backpacks, equipment bags, and other sporting goods products imprinted or
embroidered with emblems and logos licensed from various sports related
licensors, including the major professional sports teams, the U.S. Olympic
Committee, most major colleges and universities and the individual players of
the American and National baseball leagues. NASCO Products granted credit to
customers, substantially all of which are major retailers and mail order catalog
businesses. Effective July 31, 1995 the Company disposed of and discontinued the
import operations of NASCO Products (see Note 3).
International distributes in foreign, principally European markets, the
products manufactured by Innovo, as well as canvas and nylon sports bags and
backpacks, including those imprinted or embroidered with emblems and logos
licensed from various sports related licensors. International generally receives
payment at the time of shipment.
Spirco, Inc. ("Spirco"), formally known as NASCO, Inc. ("NASCO"), was a
wholly-owned subsidiary of Innovo Group until November, 1994, at which time it
was merged into Innovo Group. Spirco's principal products and markets included
magazines and food products which were sold directly to primary and secondary
schools for fundraising and school spirit programs and school and athletic bags,
jackets and athletic apparel displaying the logos of primary and secondary
schools, which were sold directly and indirectly to the schools, or their
students. Spirco discontinued marketing fundraising programs to school and youth
organizations in May 1993 (see Note 3). On August 27, 1993 Spirco filed for
protection under Chapter 11 of the Bankruptcy Code. Its plan of reorganization
was confirmed by the U.S. Bankruptcy Court on August 5, 1994 and became
effective on November 7, 1994 (see Note 2).
The Company operates in a single line of business. Except for fiscal
1994, when one customer accounted for 13.9% of net sales, no individual customer
accounted for more than 10% of sales in the years ended October 31, 1995, 1994
and 1993. Sales to foreign customers, principally in Europe, accounted for 27.5%
of sales from continuing operations in fiscal 1995.
F-7
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
-----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, except for the accounts of
NASCO Sportswear, Inc. ("Sportswear"), which are not included in the
consolidated financial statements for periods subsequent to April 30, 1994 (see
Note 3).
All significant intercompany transactions and balances have been
eliminated.
(c) 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:
October 31, October 31,
1995 1994
--------------------------
(000's) (000's)
Finished goods $ 601 $ 6,046
Work-in-process 177 34
Raw materials 469 637
------ -------
1,247 6,717
Less inventory reserve (18) (759)
------ -------
$ 1,229 $ 5,958
====== =======
(d) Property, plant, equipment, depreciation and amortization
---------------------------------------------------------
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided in amounts sufficient to allocate the cost of
depreciable assets to operations over their estimated useful lives using the
straight-line method. Leasehold improvements are amortized over the lives of the
respective leases or the estimated service lives of the improvements, whichever
is shorter. On sale or retirement, the asset cost and related accumulated
depreciation or amortization are removed from the accounts, and any related gain
or loss is included in the determination of income.
F-8
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
---------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
Property and equipment consisted of the following:
Useful
lives October 31, October 31,
(years) 1995 1994
------- ----------------------------
(000's) (000's)
Buildings, land and
improvements 8-20 $ 1,500 $ 1,500
Machinery and equipment 5-8 1,506 1,507
Furniture and fixtures 3-8 597 577
Transportation equipment 5 54 54
Leasehold improvements 5-8 3 3
------ -------
3,660 3,641
Less accumulated depreciation
and amortization (1,534) (1,175)
------ -------
Net property and equipment $ 2,126 $ 2,466
====== =======
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
The Company will adopt SFAS No. in its 1997 fiscal year. The adoption and
application of SFAS No. 121 is not expected to have a material effect on the
Company's consolidated financial statements.
(e) Other assets
------------
Included in other assets were intangibles which primarily consisted of
the values assigned to the Company's purchase of an assembled work force,
artwork, trade name and software in connection with its fiscal 1991 acquisitions
of NASCO Products and Spirco. These assets are amortized by the straight-line
method over useful lives ranging from three to thirty years. The intangible
assets relating to Spirco's fundraising program marketing operations and
Sportswear were charged off in fiscal 1993 as a component of the loss on the
sale of the discontinued operation and the amounts relating to the NASCO
Products trade name were charged off in fiscal 1995 as a reduction of the gain
on the sale of the discontinued operation (see Note 3).
The Company charges to expense in the year incurred costs to develop
new products and programs. Amounts charged to expense approximated $39,000,
$152,000 and $120,000 in fiscal 1995, 1994 and 1993, respectively.
Cost incurred in the issuance of debt securities or to obtain bank
financing are capitalized (included in other assets) and are amortized as a
component of interest expense using the level yield method.
(f) Income taxes
------------
The Company files a consolidated income tax return and provides for
income taxes under SFAS No. 109, "Accounting for Income Taxes." Under that
standard, deferred income taxes are provided for temporary differences arising
from differences between financial statement and federal income tax bases of
assets and liabilities.
F-9
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
--------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Revenue recognition
-------------------
Revenues are recorded on the accrual basis of accounting when the
Company ships products to its customers. The Company provides an allowance
($120,000 and $117,000 at October 31, 1995 and 1994, respectively) for estimated
losses to be incurred in the collection of accounts receivable.
(h) Earnings per share
------------------
Earnings (loss) per share are computed using weighted average common
shares and dilutive common equivalent shares outstanding. Common stock
equivalents consist of outstanding options and warrants. Certain common stock
equivalents were not considered in the computation of weighted average common
shares as their effect would have been antidilutive. For fiscal 1993 the shares
of common stock classified outside of stockholders' equity on the consolidated
balance sheet have been included in the computation of loss per share as the
redemption price was less than the market price throughout and at the end of the
year. For fiscal 1994 the market price of the Company's common stock was below
the redemption price for the majority of the year, and there have been included
as common stock equivalents in the number of shares that the Company would have
to issue, based on the year-end market price, to fund the redemption obligation.
On June 8, 1995 the Company declared a one-for-ten reverse stock split,
effective June 19, 1995. All share and per share amounts have been restated to
reflect the effects of the reverse stock split.
(i) Cash and cash equivalents
-------------------------
Cash and cash equivalents are generally comprised of highly liquid
instruments with original maturities of three months or less, such as treasury
bills, certificates of deposit, commercial paper and call and time deposits.
(j) Plant Consolidation
-------------------
In October, 1994 the Company began certain steps to restructure its
operations. Principal among these steps were the closing of its leased
manufacturing facility in Texas and the consolidation of its operations to
Tennessee. In connection with these steps the Company incurred expenses of
$470,000, which included the accrual of provisions of $152,000 for the remaining
obligations under its Texas lease, and $40,000 for the termination of employees
who were not relocated to Tennessee.
(k) Other Income (Expense)
----------------------
Other income in fiscal 1995 includes a $1.9 million gain from the
settlement from litigation. Other expense in fiscal 1994 includes $300,000 of
costs associated with the preparation of a public offering of the Company's
securities which was charged to expense when the Company decided not to proceed
with an offering.
F-10
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
---------------------------
NOTE 2 - REORGANIZATION OF SPIRCO
On August 5, 1994 the U.S. Bankruptcy Court for the Western District of
Pennsylvania issued an order confirming the plan of reorganization of Spirco,
and the confirmed plan was implemented and made effective on November 7, 1994.
Spirco had filed for reorganization under Chapter 11 of the Bankruptcy Code on
August 27, 1993. Innovo Group, Innovo and NASCO Products were not parties to the
filing.
Spirco's plan of reorganization established fourteen classes of
creditors which, with respect to the nature and amount of distribution, were
divided into six categories. Administrative expenses were paid in cash using
funds borrowed under the Company's bank credit facility (see Note 4). Spirco's
equipment and mortgage debt, which had been guaranteed by Innovo Group, were
assumed by Leasall Management, Inc. ("Leasall"), a newly formed subsidiary,
together with its acquisition of the collateral assets, and other Spirco
liabilities that were secured or that had been guaranteed by Innovo Group were
paid in full through the issuance of 222,000 shares of Innovo Group common stock
on the basis of $2.84 per share.
The claim of the Internal Revenue Service ("IRS") resulting from its
1991 examination of the 1986 and 1988 income tax returns of Spirco was satisfied
through the issuance to the IRS of 25,000 shares of common stock, in return for
which the IRS released its lien on 25,000 shares of Innovo Group treasury stock
owned by Spirco. Additionally, the IRS foreclosed on 30,000 shares of common
stock that had been personally pledged to it by the Company's president.
Priority claims for sales, property and unemployment taxes held by
state and local taxing authorities, estimated to total $826,000 after the
resolution of disputes, were contributed to a trust ("the Class 3 Trust") to
which Innovo Group issued 584,000 shares of common stock. Under the plan of
reorganization the Class 3 Trust, which is administered by an independent
trustee, is selling the shares of common stock and distributing the net proceeds
therefrom to the Class 3 claimants. If the proceeds from the sale of the shares
of common stock issued to the Class 3 Trust are not sufficient to pay the
allowed Class 3 claims, plus interest accruing at the rate of 7% per annum from
November 7, 1994, then Innovo Group will be required to pay the remaining amount
in installments with interest at 7% between November, 1995 and November, 1999.
To the extent the Class 3 claims are satisfied by the sale of less than all of
the shares issued to the Class 3 Trust, the shares remaining in the Class 3
Trust will be returned to Innovo Group. General unsecured creditors and claims
ranking below general unsecured creditors, including the claims of Innovo Group,
Innovo and NASCO Products for intercompany advances to Spirco, received no
distribution under the plan. During fiscal 1995 the Class 3 Trust received, and
distributed to the Class 3 claimants, $590,000 from the sale of 359,054 shares
of common stock. On the basis of the sales by the Class 3 Trust through January
15, 1996, the market price of the Company's common stock on that date and the
estimated amount of disputed claims that will be allowed, the Company would be
required to satisfy approximately $200,000 of remaining Class 3 claims in
installments after the Class 3 Trust completes the sale of its shares.
In connection with the implementation of Spirco's plan of
reorganization there are pending legal actions by certain creditors and former
employees of Spirco alleging various claims against Spirco together with the
existence of guarantee or alter ego liability on the part of Innovo Group. To
the extent a claimant is able to establish both the claim against Spirco and the
existence of Innovo Group liability, such claimant will be entitled to receive
Innovo Group
F-11
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
---------------------------
NOTE 2 - REORGANIZATION OF SPIRCO (concluded)
common stock in satisfaction of such claim on the basis of $2.84 per share.
Otherwise, no shares will be issued to such claimants by Innovo Group. Through
January 15, 1996 the Company issued 187,049 shares upon the settlement of
certain disputed claims. The Company is vigorously contesting the remaining
disputed claims, and believes that it is unlikely that their ultimate outcome
will result in the issuance of a material number of shares of common stock.
For financial reporting purposes the shares of common stock issued
pursuant to Spirco's plan of reorganization to satisfy the secured, Innovo Group
guaranteed and IRS claims have been recorded as issued on October 31, 1994 at a
value of $2.84 per share, which represents the per share value determined
pursuant to the plan of reorganization. The claims contributed to the Class 3
Trust are reflected as a separate item on the Company's consolidated balance
sheet based on the Company's estimate of the amounts that will be finally
allowed. As shares of common stock are sold by the Class 3 Trust, the
satisfaction of those claims and the issuance of those shares is being reflected
based on the net proceeds received and distributed by the Class 3 Trust.
The implementation of Spirco's plan of reorganization resulted in the
discharge of all of its remaining indebtedness. As a result, in fiscal 1994, the
Company recognized an extraordinary gain of $1,128,000, before related deferred
income tax expense of $429,000, representing principally the forgiveness of the
general unsecured claims that received no distribution under the plan. During
fiscal 1995 the Company recorded extraordinary charges of $258,000 for changes
in the estimates of allowed claims.
NOTE 3 - DISCONTINUED OPERATIONS
The components of income (loss) from discontinued operations are as
follows:
Year ended October 31,
------------------------------
1995 1994 1993
---- ---- ----
(000's)
Results of discontinued NASCO
Products operations $ (927) $(1,537) $(1,215)
Gain on sale of NASCO Products
operations 301 - -
Results of discontinued Spirco
and Sportswear operations - - (1,796)
Gain (loss) on sale of Spirco
operations - 852 (4,257)
------ ------ ------
$ (626) $ (685) $(7,268)
====== ====== ======
On July 31, 1995 the Company executed an agreement with Accessory
Network Group ("ANG") under which ANG succeeded to all of the rights held by
NASCO Products to market and distribute in the United States the National
Football League, NBA, Major League Baseball and National Hockey League logoed
sports bags, back packs and equipment bags NASCO Products previously imported
and distributed. The products marketed and sold under those license rights
F-12
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
------------------------
NOTE 3 - DISCONTINUED OPERATIONS (continued)
represented a separate class of products and previously issued 1994 and 1993
financial statements have been restated to report the results of those
operations as a component of discontinued operations.
For each license ANG will pay NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining $650,000
is payable, without interest, in monthly installments equal to 5% of ANG's
aggregate sales of the licensed products, with the final payment due July 31,
1998. ANG assumed all of NASCO Products' obligations under the licenses,
including the payment of royalties and minimum royalties. NASCO Products also
transferred to ANG its existing inventory of these products, for which ANG will
pay approximately 67% of NASCO Products' cost over a six month period. The gain
of $301,000 recognized in fiscal 1995 from the sale of the NASCO Products'
domestic operations reflects the recording of the payments to be received from
ANG over the next three years at their present value, discounted at 10% per
annum.
In addition, ANG will make an ongoing annual payment to NASCO Products
of 2% of sales under each of the National Football League, Major League Baseball
and National Hockey League licenses, and 1% of sales under the NBA license, up
to aggregate sales of $15 million, and 1.5% and .5% of sales thereafter. The
payments will continue for forty years unless a license expires or is terminated
and is not renewed or reinstated within twelve months.
The revenues and expenses relating to the disposed NASCO Products
imported product line were as follows:
Year ended October 31,
---------------------------------
1995 1994 1993
---- ---- -----
(000's)
Net sales $ 2,777 $ 5,937 $ 6,239
Cost of goods sold (2,532) (4,631) (4,771)
Selling, general and
administrative expenses (1,043) (2,619) (2,867)
Interest expense (79) (193) (180)
Other (50) (111) (106)
Income tax benefit - 80 470
------- ------ ------
Income (loss) from operations $ (927) $(1,537) $(1,215)
======= ====== ======
Effective April 30, 1993 the Company sold the youth and school
fundraising program direct marketing operations formerly conducted by Spirco.
The fundraising program marketing operations were purchased by QSP, Inc.
("QSP"), which is a wholly-owned subsidiary of The Reader's Digest Association,
Inc. Under the sale agreement, Spirco sold to QSP all of its rights under
agreements with fundraising organizations for pending programs, and its rights
under the non-competition, confidentiality and non-solicitation agreements with
approximately 55 Spirco fundraising salespersons who accepted employment with
QSP. QSP also received the salespersons' advance balances due to Spirco from
those salespersons that accepted employment offers from QSP. A separate
non-competition agreement between Innovo Group, Spirco and QSP provides that the
Company, Innovo and Spirco will not engage in the direct marketing of
fundraising programs to youth and school organizations, and will not solicit QSP
F-13
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
--------------------------------
NOTE 3 - DISCONTINUED OPERATIONS (concluded)
employees for a period of five years. QSP did not assume any liabilities from
Spirco.
The sales agreement provided that QSP would pay Spirco 25% of
the gross sales, as defined in the sales agreement, received by QSP between July
1, 1993 and June 30, 1994 from fundraising programs sold to former Spirco
fundraising customers or by former Spirco salespersons. The minimum sales price
was $0.5 million, which Spirco received on May 10, 1993. In addition, Innovo
Group received $1.0 million under the non-competition agreement. During fiscal
1994 Spirco received additional payments of $1,445,000 from QSP.
On August 27, 1993, Sportswear filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. The Company subsequently decided to
discontinue the operations of Sportswear and dispose of its assets. Accordingly,
Sportswear's bankruptcy proceeding was converted to Chapter 7 and on April 17,
1994 the assets of Sportswear were transferred to the Trustee appointed by the
bankruptcy court to be liquidated for the benefit of Sportswear's creditors.
Innovo Group, Innovo, NASCO Products and Spirco were not directly liable for
Sportswear's debts, and the Company believes that it is remote that those
companies will be deemed to have guaranteed any material, unsatisfied Sportswear
liabilities; accordingly, effective April 30, 1994 the Company removed
Sportswear's assets and liabilities from its consolidated balance sheet. The
Company had previously provided for the excess of Sportswear's assets over its
liabilities, which was not material. Sportswear had been engaged in contract
embroidery and the manufacture and sale, in local markets, of embroidered
athletic apparel. The revenues and operating results of Sportswear were not
separately material.
The Company had acquired the Spirco and Sportswear operations
in August 1991 and June 1992, respectively. The operations of Spirco sold to
QSP, and those of Sportswear, represented sales to separate classes of
customers, and are reported as discontinued operations. The following presents
the revenues and expenses relating to the discontinued operations of Spirco and
Sportswear:
Year ended October 31,
---------------------------------
1995 1994 1993
--------- --------- -------
(000's)
Net sales $ - $ - $ 5,211
Cost of sales and operating expenses - - (7,506)
Interest expense - - (65)
Income tax benefit - - 564
-------- ------- -------
Income (loss) from operations $ - $ - $ (1,796)
======== ======= =======
The gain or loss on the disposals of Spirco and Sportswear are net of
income tax expense (benefit) of $522,000 and $(1,295,000) in fiscal 1994 and
1993, respectively, and includes a phase-out operating loss of $1,925,000 in
fiscal 1993.
Interest expense was allocated to the discontinued operations in
accordance with EITF 87-24, which provides for allocating interest to a
discontinued operation based on the relationship of the net assets employed in
the discontinued operation to the Company's consolidated net assets.
F-14
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
----------------------
NOTE 4 - NOTES PAYABLE AND SUBORDINATED NOTES PAYABLE
Notes payable consisted of the following:
October 31, October 31,
1995 1994
---------------------------------
(000's) (000's)
Innovo factoring facility $ 356 $ -
Bank credit facility 202 1,913
Working capital loan 407 600
Other 28 572
------ -------
$ 993 $ 3,085
====== =======
Innovo borrows under an accounts receivable factoring facility with
Riviera Finance ("Riviera") under which Riviera advances 80% of assigned Innovo
accounts receivable. The factoring facility provides for advances up to
$750,000. Riviera charges 1% of each invoice assigned plus 2% per month of
outstanding advances. Borrowings under the facility are collateralized by
assigned Innovo accounts receivable, which aggregated $445,000 at October 31,
1995.
Previously Innovo and NASCO Products borrowed under a bank credit
facility with NBD Bank ("NBD"). The bankruptcy filings by Spirco and Sportswear
in August, 1993 constituted events of default under the agreement in force at
that date. A forbearance agreement was executed November 10, 1993, and did not
waive these or other prior defaults but included an agreement by the lending
bank not to exercise its rights resulting from prior defaults under the original
agreement and previous extensions provided there are no future events of
default. Under the November 10, 1993 agreement, NBD agreed to continued funding
through May 10, 1994 absent any future events of default. The NBD facility was
again extended on July 20, 1994, and again in April, 1995 at which time (i) NBD
agreed to extend, until July 31, 1995, the terms of its agreement with NASCO
Products (except that the advance rate on accounts receivable was reduced to
70%) and (ii) the Company repaid the amounts borrowed from NBD by Innovo.
Effective August 1, 1995 NBD began to apply to the balance due it all proceeds
from the collection of NASCO Products accounts receivable, and all payments
being received from ANG (see Note 3). NASCO Products' accounts receivable of
$212,000 at October 31, 1995, and future payments from ANG, will first be
applied to extinguish the balance due to NBD, and then to repay the remaining
balance on the $600,000 working capital loan obtained in July, 1994 from a group
of unaffiliated lenders.
Borrowings under the bank credit facility bear interest at 4% over the
NBD's prime rate (8.75% at October 31, 1995). Substantially all assets are
pledged under the agreement, and the transfer of any funds from the operating
subsidiaries to the parent company is prohibited without the prior consent of
the lender. Substantially all operating assets are at the subsidiary level, as
the parent company currently acts as a holding company and does not have any
operations.
The July 1994 working capital loan bears interest payable quarterly at
4% above NBD's prime rate, and the loan is collateralized by a security
interest, subordinate to those held by Riviera and NBD, in the Company's
accounts receivable and inventory. As consideration for
F-15
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
------------------------
NOTE 4 - NOTES PAYABLE AND SUBORDINATED NOTES PAYABLE (continued)
making the loan the lenders received 80,000 shares of common stock, valued at
$300,000 on the basis of the then market price. In January 1995 the Company
obtained an extension of the maturity of the working capital loan until the
earlier of October 15, 1995 or the repayment of NBD's advances. At that time the
interest rate on the working capital loan was reset at 20% per annum, and the
Company issued 69,500 shares of its common stock as an extension fee. In
January, 1996 the lenders agreed in principle to extend the maturity of the
working capital loan until October 31, 1996 in exchange for (i) the issuance of
50,000 shares of common stock and (ii) the issuance, each month that there
remain outstanding borrowings, of an additional 6,250 shares of common stock.
The final agreement, which also reduced the interest rate to 16% per annum
retroactively to October, 1995, was executed in April, 1996.
The weighted average interest rate on outstanding short-term borrowings
was 19.6% and 13.0% at October 31, 1995 and 1994.
In June 1992, Innovo Group issued $2,000,000 of 12% Subordinated
Collateralized Notes (the "Subordinated Collateralized Notes") due on or before
December 1, 1992, together with common stock purchase warrants to purchase an
aggregate of 90,000 shares of the Company's common stock at a price of $45 per
share on or before May 15, 1994 (the exercise price of these warrants decreased
to $30 per share when the Company did not redeem the Subordinated Collateralized
Notes on or before December 1, 1992). The Company received extensions of the
maturity of the Subordinated Collateralized Notes until March 31, 1993, and
subsequently the holders of $1,125,000 of the Subordinated Collateralized Notes
agreed to extend the maturity until March 31, 1994. In exchange for the second
extensions, the Company extended to July 31, 1996 the expiration date of the
56,250 warrants held by such noteholders, and issued to them an additional 5,625
common stock purchase warrants having identical terms.
On April 5, 1994 the Company completed an equity for debt exchange in
which (i) 216,128 shares of common stock were issued to extinguish $1.7 million
of the Subordinated Collateralized Notes and related accrued interest of
$191,000, (ii) 6,334 shares of common stock were issued to extinguish $50,000 of
other notes payable and accrued interest of $5,400 and (iii) 26,327 shares of
common stock were issued to satisfy $185,000 of other obligations. Several of
the holders of the debt exchanged for common stock were also holders of the
units sold by the Company in its June, 1993 private placement, and both the
Subordinated Collateralized Notes and the units had been placed by the same
placement agents. As a result, in order to obtain agreement to the debt
conversion, the Company also agreed to revise the terms of the June, 1993
private placement by issuing 53,000 shares of common stock to increase to two
shares the number of shares included in the units sold, decrease to $20 the
exercise price of the 53,000 warrants included in the units, and extend the term
of the warrants until July 31, 1997. Subsequent to fiscal 1995 the Company
converted $50,000 of the remaining Subordinated Collateralized Notes into a term
obligation. In April, 1996, the Company and the holder of the one remaining
Subordinated Collateralized Note, on which there remained due principal and
accrued interest of approximately $288,000, reached an agreement under which (i)
$144,000 of the amount owing was converted into a 14% term note due in
installments through May, 1997, and (ii) $144,000 is being retired through the
issuance of 498,515 shares of common stock and 250,000 Class E common stock
purchase warrants.
F-16
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
------------------------------
NOTE 4 - NOTES PAYABLE AND SUBORDINATED NOTES PAYABLE (continued)
As a result of the April 5, 1994 exchange, the Company issued an
aggregate of 301,789 shares, which have been recorded in stockholders' equity at
the amount of debt extinguished ($2,132,000). Costs and expenses of the exchange
of $270,000 have been charged against stockholders' equity. No gain or loss was
recognized.
During fiscal 1995 the Company issued an aggregate of 119,873 shares of
common stock to extinguish an aggregate of $128,000 of unsecured notes payable,
which were past due, and restructured $50,000 of the remaining Subordinated
Collateralized Notes as a long-term note. Additionally, in October 1995 the
holder of unsecured notes aggregating $319,000 tendered the notes, and accrued
interest of $31,000, as a subscription for shares of the Company's common stock.
Under the subscription agreement the Company will issue shares over a six month
period ending May, 1996 that have an aggregate value of approximately $350,000,
on the basis of 75 percent of the market prices at the times the shares are
issued, subject to a maximum of 375,000 shares.
During fiscal 1993 the Company obtained additional short-term
borrowings of $1,339,000. Those borrowings, together with interest accrued at
10% per annum, (including $45,900 paid to related parties on loans of $649,000
from such affiliates) were repaid in September 1993 through the issuance of
189,761 shares of restricted common stock (see Note 7 (b)).
If the common stock issued or to be issued to extinguish these notes
and Subordinated Collateralized Notes had been outstanding, in lieu of the
loans, from the date of each loan, the loss per share from continuing operations
and net loss per share for fiscal 1994 and 1993 would have been reduced by $.22
and $.49 per share, respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following:
October 31, October 31,
1995 1994
-----------------------------
(000's) (000's)
Notes payable to ICON Cash Flow Partners,
L.P., Series D ("ICON") $ 355 $ 475
Note payable to bank 895 909
Capitalized lease obligation 315 130
------ ------
Total long-term debt 1,565 1,514
Less current maturities (143) (140)
------ ------
$ 1,422 $ 1,374
====== ======
The ICON loan bears interest at 11% and is collateralized by all the
equipment and personal property located at the Company's main office in
Springfield, Tennessee. The loan was originally obtained by Spirco, and was
assumed by Leasall in connection with the implementation of Spirco's plan of
reorganization (see Note 2). Innovo and NASCO Products
F-17
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
------------------------------
NOTE 5 - LONG-TERM DEBT (concluded)
have each guaranteed the obligations of Leasall under this loan.
In August 1992, Spirco obtained a loan from a bank in the original
principal amount of $950,000, bearing interest at the bank's prime interest rate
plus 2.75% (prime rate was 8.75% at October 31, 1995), payable in monthly
installments of $8,250, including principal and interest, beginning October 1,
1992, with the remaining amount due on or before August 6, 2012. This loan is
collateralized by a First Deed of Trust on real property in Springfield,
Tennessee and by an assignment of key-man life insurance on the president of the
Company in the amount of $950,000. In order for the loan to be guaranteed by the
Small Business Administration, Innovo Group, Innovo, NASCO Products, and the
president of the Company agreed to act as guarantors for Spirco's obligations
under the loan agreement. Leasall assumed the loan and acquired the ownership of
the collateral in connection with the implementation of Spirco's plan of
reorganization (see Note 2).
Principal maturities of long-term debt as of October 31, 1995 are as
follows:
Year ending October 31, Amount
---------------------------------------------------------------
(000's)
1996 $ 143
1997 134
1998 132
1999 145
2000 147
Thereafter 864
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes included in net income (loss)
was as follows:
Year ended October 31,
1995 1994 1993
-------------------------------------
(000's)
Continuing operations:
Current (Federal) $ - $ - $ -
------- -------- --------
Deferred:
Federal - 3,781 380
State - - 48
------- -------- --------
Total - 3,781 428
------- ------- --------
Total continuing operations - 3,781 428
Discontinued operations - 442 (2,329)
Extraordinary item - 429 -
------- -------- ---------
Total income taxes (benefit) $ - $ 4,652 $ (1,901)
======= ======== =======
F-18
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
------------------------------
NOTE 6 - INCOME TAXES (continued)
Net deferred tax assets result from the following temporary differences
between the book and tax bases of assets and liabilities:
October 31, October 31,
1995 1994
-----------------------------
(000's) (000's)
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 41 $ 40
Inventory reserves 6 258
Intangibles - (40)
Property and equipment 239 243
Other 65 206
Benefit of net operating loss carryforwards 8,464 7,916
Benefit of capital loss carryforwards - 1,722
-------- -------
Gross deferred tax assets 8,815 10,345
Deferred tax assets valuation allowance (8,815) (10,345)
-------- -------
Net deferred tax assets $ - $ -
======== =========
Net increases in the valuation allowance for deferred taxes of
$5,767,000 and $2,085,000 were recorded in fiscal 1994 and 1993, respectively.
In the event the future realization of capital or net operating loss
carryforwards, or reductions in the valuation allowance, reduce the valuation
allowance below $1,801,000, such excess will, up to that amount, result in a
reduction of any remaining unamortized noncurrent intangible assets relating to
NASCO Products. Any excess of the unallocated benefit will result in a decrease
in income tax expense.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income from continuing operations as a result of the following
differences:
Year ended October 31,
-----------------------------------------
1995 1994 1993
-----------------------------------------
(000's)
Computed tax (benefit)
at the statutory rate $ (23) $(1,402) $ (79)
State income tax - - (14)
Change in valuation allowance 23 5,767 624
Other - (584) (103)
------ ------ ------
$ - $ 3,781 $ 428
====== ====== ======
The Company has consolidated net operating losses available to offset
future taxable income of $23.6 million. These losses expire through 2010 and are
not subject to any limitations on their utilization. Spirco has net operating
losses for federal tax purposes of approximately
F-19
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
-------------------------------
NOTE 6 - INCOME TAXES (concluded)
$4.7 million, of which $1.5 million expires in 2003, $1.1 million expires in
2005 and $2.1 million expires in 2006. Pursuant to the provisions of the 1986
Tax Reform Act, usage of these loss carryforwards is limited to approximately
$537,000 a year because of certain ownership changes that occurred in Spirco. A
subsidiary of the Company has state tax net operating loss carryforwards of
approximately $11.0 million to offset state taxable income. These carryforwards
expire in varying amounts between the years 1999 and 2005.
The Internal Revenue Service ("IRS") is currently conducting an
examination of Spirco's 1991 income tax return. The IRS has not yet issued an
audit report or assessment with respect to such returns, but it has
preliminarily indicated that it may seek to reclassify certain capital losses,
which would have the effect of increasing the taxes by $250,000. Such an
assessment, if made and sustained, would become a Class 3 claim under Spirco's
plan of reorganization, and would be subject to satisfaction (i) from the Class
3 Trust or (ii) by the Company in installments through November, 1999 (see Note
2). The outcome of this matter is not presently determinable and accordingly no
provision for any possible assessment has been recorded in the consolidated
financial statements.
NOTE 7 - STOCKHOLDERS' EQUITY
(a) Common Stock
During fiscal 1993 the Company issued an aggregate of 62,806 shares of
restricted common stock in private transactions with unaffiliated investors.
Aggregate net proceeds were $653,000. The Company also issued 55,000 units in a
private placement and received net proceeds of $1,127,500. Each unit consisted
of one share of restricted common stock and one warrant for the purchase of a
share of common stock, exercisable at $30 per share through July 31, 1996. In
connection with the restructuring of its Subordinated Notes (see Note 4), the
Company agreed to issue to each purchaser one additional share for each unit
purchased, to extend the period for the exercise of the warrants to July 31,
1997 and reduce the exercise price of the warrants to $20 per share.
In December, 1993 the Company reached an agreement with a vendor, which
had been owed approximately $1.3 million, under which the vendor (i) retained
proceeds of $483,000 from its sale of shares previously pledged by a principal
stockholder, (ii) received proceeds of $500,000 from its sale of 100,000 shares
previously pledged by the Company's president and (iii) received a $300,000
interest-free note due June, 1994 collateralized by the remaining 15,700 shares
previously pledged by the Company's president. The $483,000 was recorded as a
contribution to the Company's capital. In July and August, 1994, the vendor sold
the 15,700 pledged shares, applying the proceeds of $60,000 to reduce the note.
The Company's president was issued 115,700 shares to reimburse her in August,
1994. In other transactions in fiscal 1994 the Company, on April 5, 1994, issued
an aggregate of 301,789 shares of common stock to extinguish liabilities of
$2,132,000 (see Note 4) and in the fourth quarter issued 37,724 shares to reduce
outstanding notes payable by $112,000.
F-20
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
---------------------------------
NOTE 7 - STOCKHOLDERS' EQUITY (continued)
As of October 31, 1995 the Company has reserved 148,950 shares of
common stock for the following outstanding warrants:
Exercise Price Shares Expiration
-------------- ------ ----------
$20 53,000 July 1997
$30 2,000 July 1996
$2 2,250 March 1997
$30 91,700 July 1997
Subsequent to October 31, 1995 the Company (i) received cash proceeds
of $240,000 upon the exercise of warrants for the purchase of 750,000 shares of
common stock, and (ii) issued an option for the purchase of 1 million shares,
exercisable at $.01 per share through October, 1997, as part of the
consideration for the Company's purchase of a facility for a wholesale outlet
store.
(b) Redeemable Common Stock
In September 1993 the Company issued 189,761 shares of restricted
common stock to extinguish notes payable and accrued interest of $1,423,000. The
holders of such shares hold options ("put options") that allowed them to require
that the Company repurchase any or all of the shares at a price of $7.50 per
share, which represented the price at which the shares were issued and their
fair value at the time, at any time between January 1, 1994 and, as amended,
April 29, 1995. Additionally, the put options are exercisable at $30 per share
in the event of certain "changes in control" not approved by the board of
directors. The put options grant the Company a right of first refusal to
purchase any of the related shares upon the payment of the same price offered to
the holders by another party. Also, the Company can cancel the put options by
paying nominal consideration.
(c) Stock Compensation
The Company adopted a Stock Option Plan (the "Plan") in December 1991
(amended in April 1992) under which 100,000 shares of the Company's common stock
have been reserved for issuance to officers, directors, consultants and
employees of the Company under the terms of the Plan. The Plan will expire on
December 10, 2001.
The Plan provides for the issuance of "incentive stock options" (as
defined in the Internal Revenue Code) and non-qualified options to officers,
directors, consultants and employees of the Company. The exercise price of
incentive stock options must be equal to the fair market value of the underlying
common stock on the date of grant. The exercise price of non-qualified stock
options must be at least 50% of the fair market value of the common stock on the
date of issuance.
F-21
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
----------------------------
NOTE 7 - STOCKHOLDERS' EQUITY (concluded)
The following table summarizes the activity in the Plan for the periods
indicated:
Exercise
Options Price Options
Outstanding Per Share Exercisable
---------------------------------------------------
Outstanding at
November 1, 1992 48,750 $80 - 40 20,500
Canceled (43,950) $80 - 40
Granted 3,000 $ 10
------ --------
Outstanding at
October 31, 1993 7,800 $80 - 10 7,800
Canceled (4,800) $80 - 10
Granted 1,500 $ 3.80
------ --------
Outstanding at
October 31, 1994 4,500 $10 - $3.80 4,500
Canceled (1,500) $10
Granted - -
------- ---------
Outstanding at
October 31, 1995 3,000 $3.80 3,000
During fiscal 1994 the Company granted a restricted stock award of 9,875
shares having an aggregate value of $81,000. The award vested during fiscal
1994.
Spirco had a noncontributory employee stock bonus plan for its employees.
The plan was amended in fiscal 1992 to make contributions discretionary. No
contributions were made for fiscal 1993 or 1994.
Upon the effectiveness of SFAS No. 123 the Company will continue to
measure stock compensation expense based on the difference between the market
price of the Company's common stock and the exercise price of the employee stock
option. The application of the disclosure requirements of SFAS No. 123, which
will require the disclosure of pro forma earnings based on an option pricing
model measurement of stock compensation, would not have been material in fiscal
1995.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain property, buildings and equipment. Rental
expense for the years ended October 31, 1995, 1994 and 1993 was approximately
$50,000, $276,000 and $468,000, respectively. The minimum rental commitments
under noncancellable operating leases as of October 31, 1995 are as follows:
1996, $41,000; 1997, $18,000.
The Company displays characters, names and logos on its products under
license agreements that require royalties ranging from 8% to 12.5% of sales. The
agreements expire through 1996 and require annual advance payments (included in
prepaid expenses) and certain annual minimums. Royalties were $402,000, $823,000
and $1,155,000 for fiscal 1995, 1994 and 1993, respectively.
F-22
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
----------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
An executive officer has an employment agreement with the Company that
expires in October, 1997. The Company or the employee may terminate the
employment agreement at any time for cause. The agreement provides that, in the
event of a "change in control" not approved by the board of directors, any
breach or termination shall require the payment of severance benefits equal to
the greater of the annual salary payable for the remainder of the agreement's
term, or three times the annual salary under the agreement (presently $175,000).
In December 1991, a former employee filed suit against the Company and
others alleging breach of his employment agreement and conversion of his
interest in certain property rights of the Company. The complaint, as amended,
sought compensation damages of at least $13.5 million. In August, 1994 the trial
court granted the Company's motion for partial summary judgement and directed
verdicts with respect to certain of the former employee's claims, including
those concerning his ownership of an interest in the "E.A.R.T.H." trademark, or
the existence of a partnership with the Company to jointly own the trademark,
and the state court jury returned findings in favor of the Company on the
remainder of the plaintiff's claim concerning the trademark as well as his
claims for wrongful termination of employment. However, the jury awarded the
plaintiff approximately $700,000, of which $50,000 was assessed against Innovo
Group and $650,000 was assessed against Innovo, including pre-judgement interest
and attorney's fees, on the theory that he was entitled to have received certain
employment benefits, including employee stock awards, during, and after, the
term of his employment. The Company has appealed the jury's award, and in
connection therewith has pledged as an appeal bond 200,000 shares of its
unissued common stock. The Company believes that the ultimate resolution of the
case is unlikely to result in a material loss.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Year ended October 31,
------------------------------------
1995 1994 1993
------------------------------------
(000's)
Cash paid for interest $ 576 $ 454 $ 909
Cash paid for income taxes - - -
During fiscal 1995 the Company issued common stock and common stock
subscriptions to extinguish an aggregate of $1,599,000 in liabilities, as a loan
extension fee, and for stock awards. (See Notes 2, 4 and 7).
During fiscal 1994 the Company issued common stock to extinguish an
aggregate of $3,506,000 in liabilities, for services of $307,000, and in
consideration for a $600,000 working capital loan. See Notes 2, 4, 5 and 7.
In September 1993, the Company issued 189,761 shares of common stock to
extinguish debt and accrued interest of $1,423,000. In June 1993 the Company
issued 5,625 warrants for certain debt extensions (see Note 4). In fiscal 1993
the Company acquired equipment of $157,000 under a capital lease.
F-23
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(000's except for share data)
(Unaudited)
February 29, October 31,
ASSETS 1996 1995
- ------ ------------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 38 $ 6
Accounts receivable 1,354 1,524
Inventories 1,242 1,229
Prepaid expenses 482 406
------- ------
TOTAL CURRENT ASSETS 3,116 3,165
PROPERTY AND EQUIPMENT, net 3,556 2,126
OTHER ASSETS 830 376
------- ------
$ 7,502 $ 5,667
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Notes payable $ 1,410 $ 993
Subordinated notes payable 185 235
Current maturities of long-term debt 168 143
Accounts payable 853 1,942
Accrued expenses 1,258 735
------- ------
TOTAL CURRENT LIABILITIES 3,874 4,048
LONG-TERM DEBT, less current
maturities 2,154 1,422
OTHER - 153
------- ------
TOTAL LIABILITIES 6,028 5,623
------- ------
CLASS 3 TRUST 236 274
------- ------
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
30,000,000; issued 8,451,551 shares in
1996 and 3,050,062 shares in 1995 85 30
Stock subscription 118 350
Additional paid-in capital 21,174 19,137
Deficit (17,713) (17,358)
Treasury stock, 119,691 and 53,072 shares (2,426) (2,389)
------- ------
TOTAL STOCKHOLDERS' EQUITY 1,238 (230)
------- ------
$ 7,502 $ 5,667
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(000's except per share information)
Three months ended
---------------------------------- Transition Period
February 29, January 31, November 1-30,
1996 1995 1995 (Note 1)
------------------------------- ---------------
<S> <C> <C> <C>
NET SALES $ 1,319 $ 1,115 $ 281
COST OF SALES 732 518 166
------ ------ ------
Gross profit 587 597 115
OPERATING EXPENSES
Selling, general and administrative 652 588 233
Depreciation and amortization 90 113 31
------ ------ ------
Income (loss) from operations (155) (104) (149)
INTEREST EXPENSE (121) (104) (33)
OTHER INCOME (EXPENSE) - Net 115 (103) (12)
------ ------- ------
Income (loss) before income taxes (benefit) (161) (311) (194)
INCOME TAXES (BENEFIT): - - -
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (161) (311) (194)
DISCONTINUED OPERATIONS:
Results of discontinued NASCO
Products operations - (187) -
------- ------- -------
NET INCOME (LOSS) $ (161) $ (498) $ (194)
====== ====== ======
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.02) $ (.15) $ (.05)
Discontinued operation - (.08) -
-------- ------ --------
Net income (loss) $ (.02) $ (.23) (.05)
====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 6,716 2,134 3,846
====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-25
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(000's)
Three Months Ended
--------------------------- Transition period
February 29, January 31, November 1-30,
1996 1995 1995 (Note 1)
----------- ---------- ---------------
<S>
<C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (659) $ 555 $ (314)
------- ------ -------
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures (36) - (19)
------ ------ ------
Net cash provided by (used in)
investing activities (36) - (19)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 450 - 240
Repayments of long-term debt (31) (7) (12)
Additions to notes payable 312 - 105
Repayments on notes payable - (550) -
------ ------ ------
Net cash provided by (used in)
financing activities 731 (557) 333
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 36 (2) -
CASH AND EQUIVALENTS, (beginning of period) 2 4 2
------ ------ ------
CASH AND EQUIVALENTS, (end of period) $ 38 $ 2 $ 2
====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Innovo Group Inc. ("Innovo Group") and its wholly-owned subsidiaries
(collectively "the Company"). The condensed consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements and
the notes thereto should be read in conjunction with the consolidated financial
statements included elsewhere herein.
In the opinion of the management of the Company, the accompanying
unaudited condensed consolidated financial statements contain all necessary
adjustments to present fairly the financial position, the results of operations
and cash flows for the periods reported. All adjustments are of a normal
recurring nature.
The results of operations for the above periods are not necessarily
indicative of the results to be expected for the full year.
Effective November 1, 1995, the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year ended on October 31. The
results of operations and cash flows for the transition period of November 1,
1995 to November 30, 1995 are separately presented herein.
NOTE 2: DISCONTINUED OPERATIONS
On July 31, 1995 the Company executed an agreement with Accessory Network
Group ("ANG") under which ANG succeeded to all of the rights held by NASCO
Products to market and distribute in the United States the National Football
League, NBA, Major League Baseball and National Hockey League logoed sports
bags, backpacks and equipment bags NASCO Products previously imported and
distributed. The products marketed and sold under those license rights
represented a separate class of products and previously issued 1995 financial
statements have been restated to report the results of those operations as a
discontinued operation.
For each license ANG is paying NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining $650,000
is payable, without interest, in monthly installments equal to 5% of ANG's
aggregate sales of the licensed products, with the final payment due July 31,
1998. ANG assumed all of NASCO Products' obligations under the licenses,
including payment of royalties and minimum royalties. NASCO Products also
transferred to ANG its existing inventory of these products, for which ANG paid
approximately 67% of NASCO Products' cost over a six month period. The payments
to be received from the sale of the NASCO Products' domestic operations were
recorded at their present value, discounted 10% per annum.
F-27
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
------------------------------------------------------------------
(Unaudited)
NOTE 2: DISCONTINUED OPERATIONS (concluded)
In addition, ANG will make an ongoing annual payment to NASCO Products of
2% of sales under each of the National Football League, Major League Baseball
and National Hockey League licenses, and 1% of sales under the NBA license, up
to aggregate sales of $15 million, and 1.5% and .5% of sales thereafter. The
payments will continue for forty years unless a license expires or is terminated
and is not renewed or reinstated within twelve months.
<TABLE>
<CAPTION>
NOTE 3: INVENTORIES
Inventory consisted of the following:
February 29, October 31,
1996 1995
---- ----
(000's)
<S> <C> <C>
Finished goods $ 468 $ 601
Work-in-process 220 177
Raw materials 588 469
Inventory reserve (34) (18)
------ ------
Total $ 1,242 $ 1,229
====== ======
</TABLE>
<TABLE>
<CAPTION>
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT
(a) Notes Payable
Notes payable consisted of the following:
February 29, October 31,
1996 1995
---- ----
(000's)
<S> <C> <C>
Innovo factoring facility $ 410 $ 356
Bank credit facility 205 202
Working capital loan 407 407
NPI International loan 300 -
Other 88 28
------ ------
$ 1,410 $ 993
====== ======
</TABLE>
In December, 1995 the Company obtained a $300,000 short term loan
collateralized by the common stock of NPI International. The loan bears interest
at an annual rate of 12% and is due July 31, 1996.
(b) Long-Term Debt
In November, 1995 the Company acquired a facility which it is developing
as an indoor retail outlet featuring antique and flea market shops. The $1.5
million purchase price was paid by the issuance to the seller of (i) options to
purchase 1 million shares of the Company's common stock, exercisable at $.01 per
share through March, 1998, and (ii) an $800,000 first lien non-recourse mortgage
secured by the property. The mortgage is payable $25,500 quarterly, beginning
July 1, 1996; all unpaid principal, and interest (which accrues at the rate of
9.5% per annum) is due January, 2006. The stock option was exercised in March,
1996.
F-28
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
------------------------------------------------------------------
(Unaudited)
NOTE 5: STOCKHOLDERS' EQUITY
The changes in common stock, additional paid-in capital, and treasury
stock during the month of November, 1995 and during the first quarter of fiscal
1996 were as follows:
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------ Stock paid-in ---------------------
Shares Amount Subscription capital Shares Amount
------ ------ ------------ ------- ------ ------
(000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1995 3,050,062 $ 30 $ 350 $ 19,137 (53,072) $(2,389)
Issuances of common stock
Exercise of warrants 750,000 8 - 232 - -
Subscription agreement 60,793 1 (58) 57 - -
Spirco reorganization 18,000 - - 12 - -
Issuance of option (Note 4) - - - 700 - -
--------- ----- -------- -------- -------- --------
Balance, November 30, 1995 3,878,855 39 292 20,138 (53,072) (2,389)
Issuances of common stock
Cash 3,106,730 31 - 469 - -
Subscription agreement 185,336 2 (174) 172 - -
Spirco reorganization 80,630 1 - 57 - -
Manufacturing agreement 1,200,000 12 - 388 - -
Debt settlement - - - - (66,619) (37)
Issuance costs - - - (50) - -
--------- ----- --------- -------- -------- --------
Balance, February 29, 1996 8,451,551 $ 85 $ 118 $ 21,174 (119,691) $ (2,426)
========= === ======== ======= ======== =======
</TABLE>
In October, 1995 the holder of unsecured notes aggregating $319,000
tendered the notes, and accrued interest of $31,000, as a subscription for
shares of the Company's common stock. Under the subscription agreement the
Company is issuing shares over a six month period ending May, 1996 that have an
aggregate value of approximately $350,000, on the basis of 75 percent of the
market prices at the times the shares are issued, subject to a maximum of
375,000 shares.
In January, 1996, the Company entered into an agreement to obtain contract
manufacturing services, and issued to the contractor 1,200,000 shares of its
common stock as prepayment for $400,000 (approximately 57,000 hours) of
manufacturing operations which the Company may use on an as needed basis through
July 31, 1997.
During the first quarter of fiscal 1996 the Company settled an outstanding
obligation held by a creditor who had previously received 66,619 shares of
common stock as a partial payment. As a part of the settlement the creditor
returned the shares to the Company. The returned shares were recorded as
treasury stock at their market value.
In connection with the private placement of shares of its common stock,
for cash during the first quarter of fiscal 1996, the Company issued warrants
for the issuance of 2,272,730 shares of its common stock, exercisable through
January, 1998 at a per share price equal to 50% of the exercise date market
price of the Company's common stock (25% for any exercises occurring at a time
when the Company's common stock is not trading on the NASDAQ).
F-29
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (concluded)
------------------------------------------------------------------
(Unaudited)
NOTE 6: CONTINGENCIES
In December 1991, a former employee filed suit against the Company and
others alleging breach of his employment agreement and conversion of his
interest in certain property rights of the Company. The complaint, as amended,
sought compensation damages of at least $13.5 million. In August, 1994 the trial
court granted the Company's motion for partial summary judgement and directed
verdicts with respect to certain of the former employee's claims, including
those concerning his ownership of an interest in the "E.A.R.T.H." trademark, or
the existence of a partnership with the Company to jointly own the trademark,
and the state court jury returned findings in favor of the Company on the
remainder of the plaintiff's claim concerning the trademark as well as his
claims for wrongful termination of employment. However, the jury awarded to
plaintiff approximately $700,000, of which $50,000 was assessed against Innovo
Group and $650,000 was assessed against Innovo, including pre-judgement interest
and attorney's fees, on the theory that he was entitled to have received certain
employment benefits, including employee stock awards, during, and after, the
term of his employment. The Company has appealed the jury's award, and in
connection therewith has pledged as an appeal bond 200,000 shares of its
unissued common stock. The Company believes that the ultimate resolution of the
case is unlikely to result in a material loss.
Under the plan of reorganization of Spirco, Inc. ("Spirco") certain claims
were contributed to a trust ("the Class 3 Trust") to which Innovo Group issued
shares of its common stock. The Class 3 Trust, which is administered by an
independent trustee, is selling the shares of common stock and distributing the
net proceeds therefrom to the Class 3 claimants. If the proceeds from the sale
of the shares of common stock issued to the Class 3 Trust are not sufficient to
pay the allowed Class 3 claims, plus interest accruing at the rate of 7% per
annum from November 7, 1994, then Innovo Group will be required to pay the
remaining amount in installments with interest at 7% through November, 1999. On
the basis of the sales by the Class 3 Trust through May 31, 1996, the market
price of the Company's common stock on that date, and the estimated amount of
disputed claims that will be allowed (including the IRS assessment described
below), the proceeds from the sale of shares by the Class 3 Trust will be
sufficient to satisfy all Class 3 claims.
The Internal Revenue Service ("IRS") is currently conducting an examination
of Spirco's 1991 income tax return. In March, 1996 the IRS issued an audit
report with respect to such returns which proposed to reclassify certain capital
losses, which would have had the effect of increasing the taxes by $250,000. In
June, 1996, after considering additional information provided by the Company,
the IRS revised its audit report. On the basis of the revised report, the taxes
due on account of the examination would be less than the amount that the Company
has provided in its consolidated financial statements, as a result of which the
Company would recognize a gain if the IRS's audit is finalized on the basis of
its current conclusions. Any taxes payable would become a Class 3 claim under
Spirco's plan of reorganization, and would be subject to satisfaction (i) from
the Class 3 Trust or (ii) by the Company in installments through November, 1999
as described above.
In April, 1996, the Company received notice that a foreign manufacturer
that had supplied imported products to NASCO Products asserts that it is owed
approximately $300,000 in excess of the amount recorded by NASCO Products. NASCO
Products and the supplier had previously reached an agreement on the balance
owed (which is the balance recorded), as well as an arrangement under which the
schedule for the Company's payments reducing that balance would be based on
future purchases from that supplier of products distributed internationally by
NPI International. The Company disputes the supplier's claim, and believes that
it has affirmative defenses, including the supplier's subsequent refusal to
accept and fill NPI International orders on terms contained in the agreement.
NASCO Products sold its operations in July, 1995 and that company currently has
no operations or unencumbered assets (see Note 2, and Notes 3 and 4 of Notes to
Consolidated Financial Statements).
The Company is also a defendant in certain other legal actions arising
from normal business activities or the bankruptcy proceedings of Spirco.
Management believes that those actions are without merit or that the ultimate
liability, if any, resulting therefrom will not materially affect the Company's
consolidated financial position or results of operations.
F-30
<PAGE>
Innovo Group Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
-----------------------------------------------------------------
Introduction
As discussed elsewhere herein, on April 12, 1996, the Company acquired
100% of the outstanding common stock of Thimble Square for an aggregate of $1.1
million, paid by the issuance of shares of the restricted common stock of the
Company. In a concurrent transaction, Thimble Square acquired from its
stockholders a plant it had previously leased from them in exchange for (a)
$300,000 paid by the issuance of shares of the restricted common stock of Innovo
Group, and (b) the issuance by Thimble Square of $200,000 of unsecured notes
payable, without interest, on August 31, 1996 (with certain prepayments required
in the event of certain refinancings or asset sales by Thimble Square). The
purchase prices are subject to downward adjustment based on the results of an
audit of Thimble Square's December 31, 1995 financial statements, and the
appraisal of its property and equipment, which are to be completed by June 30,
1996.
A total of 2,745,098 shares of the Company's common stock were issued to
effect the acquisition. However, at the time of the acquisition Thimble Square
owned 1,080,000 shares of the Company's common stock as a result of the January,
1996 manufacturing agreement between the companies (see Note 5 of Notes to
Condensed Consolidated Financial Statements). As a result of the acquisition,
Innovo Group reaquired, and retired, those shares, and the net increase in the
number of shares of Innovo Group common stock outstanding was 1,665,098 shares.
The accompanying unaudited pro forma condensed consolidated financial
statements are presented to illustrate the effect on the Company's historical
financial position and results of operations of the consummation of the
acquisition of Thimble Square. The unaudited pro forma condensed consolidated
balance sheet has been prepared as if the acquisition had been consumated on
February 29, 1996. The unaudited pro forma condensed consolidated statement of
operations has been prepared as if the acquisition had been consummated on
November 1, 1994. The following pro forma financial information has been
prepared using Thimble Square's unaudited financial statements as of and for the
year ended December 31, 1995, and reflects management's current estimate of the
allocation of the purchase price, the actual allocation of which may differ
based on the results of the audit and appraisals discussed above.
The accompanying unaudited pro forma condensed consolidated financial
statements have been prepared for illustrative purposes only and are not
necessarily indicative of the Company's future financial position or results of
operations. Among other things, the unaudited pro forma condensed consolidated
statement of operations does not, except for the effect of certain employment
contracts with certain key employees of Thimble Square, reflect reductions in
Thimble Square's operating expenses, which the Company believes may be possible,
or any increases in Thimble Square's sales that the Company believes can be
obtained through the institution of a formal marketing and sales function. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Acquisition of Thimble Square".
F-31
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated
Balance Sheet
February 29, 1996
(unaudited)
(000's)
Innovo Thimble Pro Forma Pro
Group Square Adjustments Forma
----- ------ ----------- -----
ASSETS
- ------
<S> <C> <C> <C> <C>
Current
Cash and cash equivalents $ 38 $ - $ 38
Accounts receivable 1,354 27 1,381
Inventories 1,242 420 1,662
Prepaid expenses 482 40 (40) [B] 482
------ ------ ------
Total current assets 3,116 487 3,563
Property and equipment, net 3,556 515 1,385 [B] 5,456
Other Assets 830 424 (400) [A] 774
------ ------ ------
471 [B]
(551) [C]
$ 7,502 $ 1,426 $ 9,793
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Notes payable $ 1,410 $ 94 200 [B] $ 1,704
Subordinated notes payable 185 - 185
Current maturities of long-term debt 168 65 233
Accounts payable 853 175 1,028
Accrued expenses 1,258 138 135 [B] 1,531
Deferred revenue - 400 (400) [A] -
-------- ------ --------
Total current liabilities 3,874 872 4,681
Long-term debt 2,154 571 2,725
Other - 64 64
-------- ------ ------
Total liabilities 6,028 1,507 7,470
------ ------ ------
Class 3 Trust 236 - 236
------ ------- ------
Stockholders' equity
Common stock 85 - 27 [B] 101
(11) [C]
Stock subscription 118 - 118
Additional paid in capital 21,174 - 1,373 [B] 22,007
(540) [C]
Deficit (17,713) - (17,713)
Treasury stock (2,426) - (2,426)
Net assets of Thimble Square - (81) 81 [B] -
-------- ------ -------
Total stockholders' equity 1,238 (81) 2,087
------ ------ ------
$ 7,502 $ 1,426 $ 9,793
====== ====== ======
</TABLE>
See notes to pro forma condensed consolidated financial statements
F-32
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated
Statement of Continuing Operations
Year Ended October 31, 1995
(unaudited)
(000's except for per share information)
Innovo Thimble Pro Forma Pro
Group Square Adjustments Forma
----- ------ ----------- -----
<S> <C> <C> <C>
Net sales $ 5,276 $ 3,051 $ 8,327
Cost of sales 3,808 2,567 (82) [D] 6,293
------ ------ ------
Gross profit 1,468 484 2,034
Operating expenses
Selling, general and administrative 2,728 597 (75) [D] 3,250
Depreciation and amortization 406 23 97 [E] 526
------ ------ ------
Income (loss) from operations (1,666) (136) (1,742)
Interest expense (511) (133) (644)
Other income 2,110 9 2,119
------ ------- ------
Income (loss) from continuing operations $ (67) $ (260) $ (267)
====== ====== ======
Income (loss) from continuing operations
per share $ (.03) $ (.05)
====== ======
Weighted average shares outstanding 2,616 5,361
====== ======
</TABLE>
See notes to pro forma condensed consolidated financial statements
F-33
<PAGE>
Notes to Pro Forma Condensed
Consolidated Financial Statements
(unaudited)
Note 1 - Basis of Presentation
Reference is made to the "Introduction" at page F-31.
The Thimble Square financial statements as of and for the year ended
December 31, 1995 include the effect of adjustments recorded to reflect (i)
Thimble Square's January, 1996 receipt of 1.2 million shares of Innovo Group
common stock upon the execution of a manufacturing agreement between the
companies and (ii) the settlement, subsequent to December 31, 1995, of certain
amounts due from stockholders.
Note 2 - Pro Forma Adjustments
The pro forma adjustments to the condensed consolidated balance sheet are
as follows:
[A] To eliminate the intercompany balances (a prepaid asset of Innovo
Group, and deferred revenue of Thimble Square) resulting from the
January, 1996 manufacturing agreement.
[B] To reflect the acquisition of Thimble Square and the allocation
of the purchase price on the basis of the fair values of the
assets acquired and the liabilities assumed. The components of
the purchase price and its allocation to the assets and
liabilities of Thimble Square are as follows:
(000's)
Components of purchase price
Innovo Group common stock $ 1,400
Thimble Square notes payable 200
Acquisition costs 135
------
$ 1,735
=======
Allocation of purchase price
Net assets of Thimble Square $ (81)
Decrease prepaid expenses to fair value (40)
Increase in property and equipment to
fair value 1,385
Increase (decrease) in other assets to
fair value
Innovo Group common stock 227
Other assets (40)
Goodwill 284
-----
471 471
---
$ 1,735
=======
[C] To reflect the Innovo Group common stock owned by Thimble Square
as a reduction of consolidated stockholders' equity (reflected as
a reduction of common stock and paid in capital because the
shares will be transferred to Innovo Group and retired).
F-34
<PAGE>
Notes to Pro Forma Condensed
Consolidated Financial Statements - concluded
(unaudited)
Note 2 - Pro Forma Adjustments (concluded)
The pro forma adjustments to the condensed consolidated statement of
continuing operations are as follows:
[D] To adjust costs and expenses to reflect the termination of
certain personnel and certain fringe benefits, and the changes in
the salaries of other personal, effected concurrently with the
acquisition.
[E] To adjust depreciation and amortization to reflect the adjusted
bases of Thimble Square's assets. Goodwill resulting from the
acquisition will be amortized over a period of 10 years.
F-35
<PAGE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Prospectus in connection with the offer
made hereby and, if given or made, such information or representation must not
be relied upon. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates, or an offer to sell or the solicitation of an offer to buy
such securities in any jurisdiction in which such offer or solicitation may not
be legally made. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
3,988,570 Shares
by Selling Stockholders
TABLE OF CONTENTS
Page
Prospectus Summary..................... ----
Risk Factors...........................
The Company............................
Use of Proceeds........................ INNOVO GROUP INC.
Dividend Policy........................
Market for the Company's Securities
and Related Shareholder Matters......
Capitalization.........................
Selected Consolidated Financial
Data................................. ____________________
Management's Discussion and Analysis
of Financial Condition and Results PROSPECTUS
of Operations........................
Business............................... ____________________
Management.............................
Principal Stockholders.................
Selling Stockholders...................
Description of Securities..............
Shares Eligible for Future Sale........
Experts................................
Available Information..................
Index to Financial
Statements........................... F-1
__________, 1996
- ----------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC registration fee.................................... $472.78
NASD fee................................................ 25,124.64
Accounting fees and expenses............................ 10,000.00
Legal fees and expenses................................. 5,000.00
Printing and engraving expenses......................... 5,000.00
Blue Sky fees and expenses.............................. -
Transfer Agent and Register fee......................... -
Miscellaneous expenses.................................. 5,000.00
------------
..............................................$ 50,597.42
============
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, a
corporation may indemnify any of its directors and officers against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding (i) if any such person acted in good faith and in a manner
reasonably believed to be in or not opposed to be the best interests of the
corporation, and (ii) in connection with any criminal action or proceeding if
such person had no reasonable cause to believe such conduct was unlawful. In
actions brought by or in the right of the corporation, however, Section 145
provides that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of such persons's duty to the
corporation unless, and only to the extent that, the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
review of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper. Article Nine of the Company's Amended and
Restated Certificate of Incorporation requires that the Company indemnify its
directors and officers for certain liabilities incurred in the performance of
their duties on behalf of the Company to the fullest extent allowed by Delaware
law.
The Company's Amended and Restated Certificate of Incorporation
relieves its directors from personal liability to the Company or to stockholders
for breach of any such director's fiduciary duty as a director to the fullest
extent permitted by the Delaware General Corporation Law. Under Section
102(b)(7) of the Delaware General Corporation Law, a corporation may relieve its
directors from personal liability to such corporation or its stockholders for
monetary damages fore any breach of their fiduciary duty as directors except (i)
for a breach of the duty of loyalty, (ii) for failure to act in good faith,
(iii) for
II-1
<PAGE>
intentional misconduct or knowing violation of law, (iv) for willful or
negligent violations of certain provisions of the Delaware General Corporation
Law imposing certain requirements with respect to stock repurchases, redemptions
and dividends, or (v) for any transaction from which the director derived an
improper personal benefit.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or controlling persons of
the Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
Except as described in this section, no securities of the Company
have been sold by the Company within the past three years without registration
under the Securities Act of 1933, as amended (the "Securities Act"). All share
and per share amounts below have been restated to reflect the effects of the 1
for 10 reverse stock split effected June 19, 1995.
On January 14, 1993 the board of directors authorized the
issuance of 30,000 shares of Common Stock to accredited unaffiliated investors.
Net proceeds were $300,000. In issuing the stock, the Company relied upon the
exemption provided by Section 4(2) of the Securities Act.
On March 3, 1993, the board of directors authorized the issuance
of 30,000 shares of Common Stock to accredited unaffiliated investors. Net
proceeds were $300,000. In issuing the stock, the Company relied upon the
exemption provided by Section 4(2) of the Securities Act.
On June 15, 1993, the board of directors authorized the issuance
of 55,000 units, each unit comprised of one share of Common Stock and one Common
Stock Purchase Warrant. In issuing the units, the Company relied upon Section
4(2) and 4(6) of the Securities Act and Rules 502, 505 and 506 promulgated under
the Securities Act. The units were offered at $25.00 per unit, and net proceeds
were $1,375,000. J. Gregory & Company, Inc, and H.D. Brous & Co., Inc. acted as
the placement agents.
On September 26, 1993 the board of directors authorized the
issuance of 189,761 shares of Common Stock in return for the extinguishment of
$1,423,000 of debt and accrued interest. In issuing the stock, the Company
relied upon the exemption provided by Section 4(2) of the Securities Act.
On January 7, 1994 the board of directors authorized the issuance
of 100,000 shares of Common Stock. The shares were offered at $5.00 per share,
and net proceeds were $500,000. In issuing the shares, the Company relied upon
Sections 4(2) and 4(6) of the Securities Act and Regulation S promulgated under
the Securities Act.
On March 30, 1994, the board of directors authorized the issuance
of 251,130 shares in return for the extinguishment of $2,249,000 of debt,
accrued interest and other obligations. In issuing the stock, the Company relied
upon the exemption provided by Sections 3(a)(9) and 4(2) of the Securities Act.
On July 19, 1994 the board of directors authorized the issuance
of 12 units, each unit comprised of an 8.333% ($50,000) interest in the Bridge
Loan, and the right to receive $25,000 of the Company's equity securities. Net
proceeds were $600,000. In issuing the units, the Company relied upon Section
4(2) and 4(6) of the Securities Act and Rules 502, 505 and 506 promulgated under
the Securities Act.
II-2
<PAGE>
On August 25, 1994 the board of directors authorized the issuance
of the shares of common stock required to be issued under Spirco's plan of
reorganization. In issuing the stock the Company relied upon the exemption
provided by Section 1145 of the U.S. Bankruptcy Code.
On January 7, 1994 and August 18, 1994, the board of directors
authorized the issuance of 115,700 shares of common stock to Patricia
Anderson-Lasko to reimburse her for the shares of common stock pledged to GEM
(see "Certain Transactions"). In issuing the stock, the Company relied upon the
exemption provided by Section 4(2) of the Securities Act.
On October 24, 1994 the board of directors authorized the
issuance of a restricted stock award of 2,500 shares to Thomas Wood. In issuing
the stock the Company relied upon the exemption provided by Section 4(2) of the
Securities Act.
On May 15, 1995 the board of directors authorized the issuance of
69,500 shares of common stock in consideration for an extension of the maturity
of the July, 1994 $600,000 working capital loan. In issuing the shares the
Company relied upon the exemption provided by Section 4(2) of the Securities
Act.
On May 31, 1995 the board of directors authorized the issuance of
66,619 shares of common stock in exchange for the extinguishment of $125,000 of
debt. In issuing the shares the Company relied upon the exemption provided by
Section 4(2) of the Securities Act.
On October 18, 1995, the board of directors authorized the
issuance of up to 375,000 shares of common stock in consideration for a stock
subscription of $350,000, paid by the extinguishment of debt owed by the
Company. In issuing the shares the Company relied upon the exemptions provided
by Section 3(a)(9) and 4(2) of the Securities Act and Regulation S promulgated
under the Securities Act.
On November 14, 1995, the board of directors authorized the
issuance of Class C common stock purchase warrants for the purchase of 1 million
shares of common stock at $.01 per share through March, 1998. The Class C
warrants were issued in partial consideration for the purchase of real property.
The Class C warrants were exercised in March, 1996. In issuing the Class C
warrants, and in issuing the stock upon the exercise of the Class C warrants,
the Company relied upon the exemption provided by Section 4(2) of the Securities
Act.
On January 29, 1996, the board of directors authorized the
issuance of 2,034,000 shares of common stock in consideration for $250,000 in
cash and the prepayment of $400,000 of manufacturing services. In issuing the
stock the Company relied upon the exemption provided by Section 4(2) of the
Securities Act.
On January 30, 1996 the board of directors authorized the issuance of
2,272,730 shares of common stock and 2,272,730 Class D common stock purchase
warrants in consideration for $250,000 in cash. In April and May, 1996, the
Class D warrants were exercised for proceeds of $398,000. In issuing the shares,
the Class D warrants and the shares upon the exercise of the Class D warratns,
the Company relied upon the exemptions provided by Section 4(2) of the
Securities Act and Regulation S promulgated under the Securities Act.
II-3
<PAGE>
On April 4, 1996 the board of directors authorized the issuance
of 2,745,098 shares of common stock in connection with the acquisition of
Thimble Square. In issuing the shares the Company relied upon the exemption
provided by Section 4(2) of the Securities Act.
On April 29, 1996 the board of directors authorized the issuance
of 50,000 shares of common stock in consideration for an extension of the
maturity of the July, 1994 working capital loan, and of up to 74,000 shares of
common stock for interest during the extension period. In issuing the shares the
Company relied upon the exemption provided by Section 4(2) of the Securities
Act.
On April 29, 1996, the board of directors authorized the issuance
of 877,975 shares of common stock, 250,000 Class E common stock purchase
warrants and 50,000 Class G common stock purchase warrants in consideration for
the extinguishment of $263,000 of debt. In issuing the shares and the Class E
warrants, the Company relied upon the exemptions provided by Sections 3(a)(9)
and 4(2) of the Securities Act.
On April 29, 1996, the board of directors authorized the issuance
of 100,000 Class F common stock purchase warrants in consideration of a
commission payable related to the Company's acquisition of real property. On
April 30, 1996, the Class F common stock purchase warrants were exercised for
proceeds of $1,000. In issuing the Class F warrants and the shares upon the
exercise of the Class F warrants, the Company relied upon the exemption provided
by Section 4(2) of the Securities Act.
On May 16 and 20, 1996, the board of directors authorized the issuance
of 2,345,750 shares of common stock in consideration for $750,000 in cash. In
issuing the shares the Company relied upon the exemptions provided by Section
4(2) of the Securities Act and Regulation S promulgated under the Securities
Act.
On June 12, 1996, the board of directors authorized the issuance of
200,000 shares of common stock for cash proceeds of $200,000, and of 146,096
shares of common stock in exchange for the extinguishment of $171,000 of
indebtedness. In issuing the shares the Company relied upon the exemptions
provided by Section 4(2) of the Securities Act and Regulation D promulgated
under the Securities Act.
II-4
<PAGE>
Item 16. Exhibits, Financial Statement Schedules
(a) The following exhibits are filed as part of the
Registration Statement:
<TABLE>
<CAPTION>
Exhibit Index
Exhibit Reference
Number Description No.
<S> <C> <C> <C>
3.1 Form of Amended and Restated Certificate of Incorporation 3.1 (13)
of Registrant.*
3.2 Amended and Restated Bylaws of Registrant.* 4.2 (4)
4.1 Article Four of the Registrant's Amended and Restated
Certificate of Incorporation (included in Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.2 NASCO, Inc. Amended Stock Bonus Plan dated as of 10.6 (2)
December 31, 1991.*
10.3 Secured Credit Agreement between NBD Bank, N.A., and 10.12 (2)
NASCO Products, Inc. dated February 28, 1992.*
10.4 Negative Pledge Agreement between NBD Bank, N.A., and 10.13 (2)
Innovo, Inc. dated March 3, 1992.*
10.5 Negative Pledge Agreement between NBD Bank, N.A., and 10.15 (2)
NASCO Products, Inc. dated March 3, 1992.*
10.6 Guaranty by Innovo, Inc. in favor of NBD Bank, N.A. dated 10.16 (2)
February 28, 1992.*
10.7 Guaranty by NASCO Products, Inc. in favor of NBD Bank, 10.18 (2)
N.A. dated February 28, 1992.*
10.8 Limited Guaranty by Patricia Anderson-Lasko in favor of 10.19 (2)
NBD Bank, N.A. for the benefit of Innovo, Inc., NASCO, Inc.
and NASCO Products, Inc. dated February 28, 1992.*
10.9 Continuing Guaranty by Patricia M. Anderson in favor of 10.20 (2)
Sugar Creek National Bank for the benefit of Innovo, Inc.
dated April 19, 1991.*
10.10 Note executed by NASCO, Inc. and payable to First 10.21 (2)
Independent Bank, Gallatin, Tennessee in the principal
amount of $950,000 dated August 6, 1992.*
10.11 Deed of Trust between NASCO, Inc. and First Independent 10.22 (2)
Bank, Gallatin, Tennessee dated August 6, 1992.*
10.12 Authorization and Loan Agreement from the U.S. Small 10.23 (2)
Business Administration, Nashville, Tennessee dated July
21, 1992.*
10.13 Indemnity Agreement between NASCO, Inc. and First 10.24 (2)
Independent Bank, Gallatin, Tennessee.*
II-5
<PAGE>
Exhibit Reference
Number Description No.
10.14 Compliance Agreement between NASCO, Inc. and First 10.25 (2)
Independent Bank, Gallatin, Tennessee dated August 6,
1992.*
10.15 Assignment of Life Insurance Policy issued by Hawkeye 10.26 (2)
National Life Insurance Company upon the life of Patricia
Anderson-Lasko to First Independent Bank, Gallatin,
Tennessee dated July 31, 1992.*
10.16 Guaranty of Patricia Anderson-Lasko on behalf of NASCO, 10.27 (2)
Inc. in favor of First Independent Bank, Gallatin, Tennessee
dated August 6, 1992.*
10.17 Guaranty of Innovo Group Inc. on behalf of NASCO, Inc. in 10.28 (2)
favor of First Independent Bank, Gallatin, Tennessee dated
August 6, 1992.*
10.18 Guarant of Innovo, Inc. on behalf of NASCO, Inc. in favor of 10.29 (2)
First Independent Bank, Gallatin, Tennessee dated August
6, 1992.*
10.19 Guaranty of NASCO Products, Inc. on behalf of NASCO, 10.30 (2)
Inc. in favor of First Independent Bank, Gallatin, Tennessee
dated August 6, 1992.*
10.20 Note executed by NASCO, Inc. and payable to ICON Cash 10.36 (2)
Flow Partners, L.P., Series D, in the principal amount of
$750,000 dated August 7, 1992.*
10.21 Security Agreement between NASCO, Inc. and ICON Cash 10.37 (2)
Flow Partners, L.P., Series D dated August 7, 1992.*
10.22 Guaranty of Innovo Group Inc. on behalf of NASCO, Inc. in 10.38 (2)
favor of ICON Cash Flow Partners, L.P., Series D dated
July 30, 1992.*
10.23 Guaranty of Innovo, Inc. on behalf of NASCO, Inc. in favor 10.39 (2)
of ICON Cash Flow Partners, L.P., Series D dated July 30,
1992.*
10.24 Guaranty of NASCO Products, Inc. on behalf of NASCO, 10.40 (2)
Inc. in favor of ICON Cash Flow Partners, L.P., Series D
dated July 30, 1992.*
10.25 Guaranty of NASCO Sportswear, Inc. on behalf of NASCO, 10.41 (2)
Inc. in favor of ICON Cash Flow Partners, L.P., Series D
dated July 30, 1992.*
10.26 1993-1996 U.S. Olympic Merchandise Agreement between 10.51 (7)
United States Olympic Committee and Innovo Group Inc.
dated April 29, 1993.*
II-6
<PAGE>
Exhibit Reference
Number Description No.
10.27 Non-Competition and Non-Solicitation Agreement dated 10.45 (4)
May 10, 1993 among QSP, Inc., NASCO, Inc. and Innovo
Group Inc.*
10.28 Agreement dated May 10, 1993 among Innovo, Inc., 10.46 (4)
NASCO Products, Inc., NASCO, Inc., Innovo Group Inc.,
Patricia Anderson-Lasko, Richard E. Binet and NBD Bank,
N.A.*
10.29 1993-A Restricted Stock Award.* 10.47 (5)
10.30 1993-A Consulting Agreement.* 10.48 (6)
10.31 Employment Agreement dated September 30, 1993 10.56 (7)
between Innovo Group Inc. and Patricia Anderson-Lasko.*
10.32 Form of Common Stock Put Option.* 10.61 (7)
10.33 Amendment to Forbearance Letter Agreement among 10.62 (7)
Innovo, Inc., NASCO Products, Inc., Innovo Group Inc.,
Patricia Anderson-Lasko, Richard E. Binet and NBD Bank,
N.A. dated November 10, 1993.*
10.34 Form of Debt Conversion Agreement between Innovo 10.63 (7)
Group Inc. and certain holders of notes payable or
Subordinated Notes Payable.*
10.35 Form of Agreement between Innovo Group Inc. and 10.64 (7)
Purchasers under the June 11, 1993 Unit Purchase
Agreement.*
10.36 Agreement dated April 29, 1994 between C.I. Sports, Inc. 10.65 (8)
and NASCO Products, Inc.*
10.37 Forbearance Extension Agreement among Innovo, Inc., 10.66 (8)
NASCO Products, Inc., Innovo Group Inc., Patricia
Anderson-Lasko, Richard E. Binet and NBD Bank, N.A.
dated May 10, 1994.*
10.38 Amended Plan of Reorganization of Spirco, Inc.* 10.67 (9)
10.39 $600,000 Secured Promissory Note and Security 10.68 (9)
Agreement dated July 20, 1994 between Innovo Group
Inc., Innovo, Inc. and NASCO Products, Inc. and certain
individual lenders.*
10.40 License Agreement dated January 24, 1994 between NFL 10.66 (10)
Properties Europe B.V. and NASCO Marketing, Inc.*
10.41 License Agreement dated July 6, 1994 between National 10.68 (10)
Football League Properties, Inc. and Innovo Group Inc.*
II-7
<PAGE>
Exhibit Reference
Number Description No.
10.42 Third Amendment to Forbearance Letter Agreement among 10.69 (10)
NBD Bank, N.A., Innovo, Inc., Nasco Products, Inc., Innovo
Group Inc., Patricia Anderson-Lasko and Richard E. Binet
dated April 10, 1995.*
10.43 First Amendment to $600,000 Secured Promissory Note 10.70 (10)
and Security Agreement dated April 15, 1995.*
10.44 Security Agreement dated April 28, 1995 between Innovo, 10.71 (10)
Inc. and Riviera Finance.*
10.45 Form of Amendment to Common Stock Put Option.* 10.72 (10)
10.46 Agreement dated July 31, 1995 between NASCO Products, 10.1 (12)
Inc. and Accessory Network Group, Inc.*
10.47 License Agreement dated November 14, 1995 between 10.47 (13)
Innovo Group Inc., United States Olympic Committee and
Warner Bros. Studios*
10.48 Agreement dated December 11, 1995 between Innovo 10.48 (13)
Group Inc., United States Olympic Committee and Original
Appalachian Artworks, Inc.*
10.49 License Agreement dated August 9, 1995 between Innovo, 10.49 (13)
Inc. and NHL Enterprises, Inc.*
10.50 License Agreement dated August 9, 1995 between NASCO 10.50 (13)
Products International, Inc. and NHL Enterprises, B.V.*
10.51 License Agreement dated December 15, 1995 between 10.51 (13)
Major League Baseball Properties, Inc. and Innovo Group
Inc.*
10.52 License Agreement dated October 6, 1995 between Major 10.52 (13)
League Baseball Properties and NASCO Products
International, Inc.*
10.53 License Agreement dated October 13, 1995 between NBA 10.53 (13)
Properties, Inc. and Innovo, Inc.*
10.54 License Agreement dated October 13, 1995 between NBA 10.54 (13)
Properties, Inc. and NASCO Products International, Inc.*
10.55 Merger Agreement dated April 12, 1996 between Innovo 10.1 (14)
Group Inc. and TS Acquisition, Inc. and Thimble Square,
Inc. and the Stockholders of Thimble Square, Inc.*
10.56 Property Acquisition Agreement dated April 12, 1996 10.2 (14)
between Innovo Group Inc., TS Acquisition, Inc. and Philip
Schwartz and Lee Schwartz*
10.57 License Agreement between Innovo Inc. and Anheuser-Busch 10.57 (15)
Cos., Inc.*
21 Subsidiaries of the Registrant* 21 (14)
23.1 Consent of BDO Seidman
27 Financial Data Schedule (appears only in electronically filed
version of the Registration Statement)
</TABLE>
II-8
<PAGE>
- ----------
* 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 November 12, 1993.
(5) Registration Statement on Form S-8 (No. 33-71576) of Innovo Group
Inc. filed November 12, 1993.
(6) Registration Statement on Form S-8 (No. 33-74312) of Innovo Group
Inc filed January 21, 1994.
(7) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1993.
(8) Amendment No. 2 to the Registration Statement on Form S-1 (No.
33-77984) of Innovo Group Inc. filed July 25, 1994.
(9) Amendment No. 4 to the Registration Statement on Form S-1 (No.
33-77984) of Innovo Group Inc. filed August 18, 1994.
(10) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1994.
(11) Registration Statement on Form S-8 (No. 33-94880) of Innovo Group
Inc. filed July 21, 1995.
(12) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926)
dated July 31, 1995 filed September 13, 1995.
(13) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1995.
II-9
<PAGE>
(14) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926)
dated April 12, 1996 filed April 29, 1996
(15) Amendment No. 1 to the Registration Statement on Form S-1 (No.
333-03119) of Innovo Group Inc. filed June 25, 1996.
(b) Financial Statement schedules
Page Reference
--------------
Report of Independent Certified Public Accountants
on Financial Statement Schedule II - 13
Schedule II II - 14
II-10
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information in the
registration statement; and
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is assured by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the question has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-
II-11
<PAGE>
effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be deemed
to be the initial bona fide offering therein.
II-12
<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedule
Board of Directors
Innovo Group Inc.
The audits referred to in our report to Innovo Group Inc. and
subsidiaries, dated January 26, 1996, which is contained in the Prospectus
constituting part of this Registration Statement included the audit of the
schedule listed under Item 16(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.
/s/BDO Seidman, LLP
---------------------
BDO SEIDMAN, LLP
Atlanta, Georgia
January 26, 1996
II-13
<PAGE>
<TABLE>
<CAPTION>
INNOVO GROUP INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Additions
-------------------------------------
(1) (2)
Balance at Charged Charged to Balance
Beginning to Costs Other Accounts- Deductions- at End
Description of Period and Expenses Describe Describe of Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from asset to which it applies:
Allowance for
doubtful accounts:
Year ended October 31,
1995 $ 117,000 $ 102,000 $ - $ 99,000(A) $ 120,000
Year ended October 31,
1994 170,000 383,000 - 436,000(A) $ 117,000
Year ended October 31,
1993 170,000 150,000 125,000(C) 275,000(A) 170,000
Allowance for inventories:
Year ended October 31,
1995 $ 759,000 $ - $ - $ 741,000(B) $ 18,000
Year ended October 31,
1994 689,000 759,000 - 689,000(B) 759,000
Year ended October 31,
1993 - 689,000 - - 689,000
<FN>
Note A - Uncollected receivables written off, net of recoveries.
Note B - Recovery of valuation reserve.
Note C - Charged to accounts payable for allowances to customers reimbursed
by a supplier.
</FN>
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Springfield, Tennessee
on June 27, 1996.
INNOVO GROUP INC.
By: /s/Patricia Anderson-Lasko
--------------------------------
Patricia Anderson-Lasko
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title DATE
--------- ----- ----
<S> <C> <C>
/s/Patricia Anderson-Lasko
- ---------------------------- Chairman of the Board, June 27, 1996
Patricia Anderson-Lasko President, Chief Executive Officer
and Director (Principal Executive and
Financial Officer)
/s/Reino C. Lanto, Jr.* Director June 27, 1996
- ----------------------------
Reino C. Lanto, Jr.
/s/Felix Lee* Director June 27, 1996
- ----------------------------
Felix Lee
/s/Alexander K. Miller* Director June 27, 1996
- ----------------------------
Alexander K. Miller
/s/Eleanor V. Schwartz* Director June 27, 1996
- ----------------------------
Eleanor V. Schwartz
/s/Marvin M. Williamson* Director June 27, 1996
- ----------------------------
Marvin M. Williamson
/s/Terrance J. Bond* Controller (Principal Accounting June 27, 1996
- ---------------------------- Officer)
Terrance J. Bond
*By /s/Patricia Anderson-Lasko
--------------------------
Patricia Anderson-Lasko
Attorney-in-Fact
</TABLE>
II-15
<PAGE>
Exhibit 23.1
------------
Consent of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We hereby consent to the use in the Prospectus constituting a part of
this Amendment No.2 to the Registration Statement of our report dated January
26, 1996, except for Note 4, which is as of April 26, 1996, relating to the
consolidated financial statements of Innovo Group Inc. and subsidiaries, which
is contained in that Prospectus, and of our report dated January 26, 1996,
relating to the schedule, which is contained in Part II of the Registration
Statement.
We also consent to the references to us under the captions "Selected
Consolidated Financial Data" and "Experts" in the Prospectus.
/s/BDO Seidman, LLP
---------------------
BDO SEIDMAN, LLP
Atlanta, Georgia
June 26, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED OCTOBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-1-1994
<PERIOD-END> OCT-31-1995
<EXCHANGE-RATE> 1
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 1,349
<ALLOWANCES> 120
<INVENTORY> 1,229
<CURRENT-ASSETS> 3,165
<PP&E> 3,660
<DEPRECIATION> 1,534
<TOTAL-ASSETS> 5,667
<CURRENT-LIABILITIES> 4,048
<BONDS> 0
<COMMON> 30
0
0
<OTHER-SE> (260)
<TOTAL-LIABILITY-AND-EQUITY> 5,667
<SALES> 5,276
<TOTAL-REVENUES> 5,276
<CGS> 3,808
<TOTAL-COSTS> 3,134
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 511
<INCOME-PRETAX> (67)
<INCOME-TAX> 0
<INCOME-CONTINUING> (67)
<DISCONTINUED> (626)
<EXTRAORDINARY> (258)
<CHANGES> 0
<NET-INCOME> (951)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> 0
<PAGE>
</TABLE>
