SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____ Commission file number: 0-18926
INNOVO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2928178
(State or other jurisdiction of (IRS Employer incorporation
or organization) Identification No.)
27 North Main Street 37172
Springfield, Tennessee (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (615) 384-0100
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or (for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of February 28, 1998, 44,726,442 shares of common stock were outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
registrant approximated $21,119,000 at the close of business on February 6,
1998.
Documents incorporated by reference: NONE
<PAGE>
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 14
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 59
PART III
Item 10. Directors and Executive Officers of the
Registrant 60
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial
Owners and Management 66
Item 13. Certain Relationships and Related Transactions 68
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 69
SIGNATURES 76
<PAGE>
PART I
Item 1. Business
Introduction
Innovo Group Inc. ("Innovo Group"), operating through its wholly-owned
subsidiaries (collectively with Innovo Group are referred to as "the
Company"), designs, manufactures and domestically markets various cut and
sewn canvas and nylon consumer products, such as tote bags and aprons, for
sale to various retailers and in the premium and advertising specialty
market. It also manufactures and domestically markets ladies ready-to-wear
at-home, sleep and lounge wear for sale to retailers and through mail order
distribution. The Company also internationally markets and distributes the
Company's canvas and nylon products, as well as sport bags and backpacks.
The Company's operations are classified into two industry segments. See Note
11 of Notes to Consolidated Financial Statements for financial information on
industry segments.
Innovo, Inc. ("Innovo"), a wholly owned subsidiary, manufactures and
domestically distributes cut and sewn canvas and nylon consumer products for
the utility, craft, sports licensed and advertising specialty markets.
Innovo's products are primarily domestically manufactured at facilities owned
or leased by the Company. Limited products are obtained from foreign
suppliers. See "-Products" and "-Manufacturing."
NASCO Products International, Inc. ("NP International") markets and
distributes overseas, principally in Europe and the Middle East, certain
products similar to those marketed domestically by Innovo, as well as
licensed sports bags and backpacks, which the Company generally obtains from
foreign suppliers. See "-Products" and "-Manufacturing."
The products comprising Innovo's sports licensed line, and those
distributed by NP International, display logos, insignia, names, slogans or
characters licensed from various licensors. Innovo and NP International hold
licenses for the use of the logos and names of the teams of the National
Football League, the National Basketball Association, Major League Baseball,
the National Hockey League, and over 130 colleges. In 1996 NP International
obtained licenses for the use of the Walt Disney Co. ("Walt Disney") cartoon
characters, and the Warner Bros. Studios ("Warner Bros.") Looney Tunes
cartoon characters, on sports bags, backpacks, fanny packs and other products
it markets in Europe and the Middle East. NP International began selling the
Walt Disney and Warner Bros. products in fiscal 1997. For the year ended
November 30, 1997, 33.1% of the Company's net sales represented the sale of
products produced pursuant to such licenses. See "-Licenses."
Thimble Square, Inc. ("Thimble Square"), which Innovo Group acquired in
April, 1996, manufactures and markets ladies' ready-to-wear at-home, sleep
and lounge wear. Thimble Square also provides "sew-only" manufacturing for
other distributors of private-label sleep and lounge wear. See "-Products"
and "-Manufacturing."
The Company has also engaged in the development of a retail mall
facility in Florida (see Item 2. - "Properties" and "Recent Developments").
<PAGE>
During fiscal 1994 the Company moved manufacturing operations from
leased facilities in Sugarland, Texas to owned facilities in Springfield,
Tennessee. On July 31, 1995, NASCO Products, Inc. ("NASCO Products"), a
wholly-owned subsidiary, sold to Accessory Network Group, Inc. ("ANG") its
operations of importing to and distributing in the United States sports bags,
backpacks and equipment bags bearing the logos of the teams of the four major
professional sports leagues. The sale did not include the products
distributed by Innovo or NP International. For the licenses ANG is paying
NASCO Products $750,000 through December, 1997. In addition, ANG will make
an ongoing annual payment, for up to forty years, of certain percentages of
sales under each of the National Football League, Major League Baseball,
National Hockey League licenses, and National Basketball Association
licenses. See Note 3 of Notes to Consolidated Financial Statements.
Prior to fiscal 1995 the Company's marketing emphasis was placed on the
U.S. retail market for its sports licensed products. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets and to preparing marketing plans
for its U.S. Olympic Team products for the 1996 Summer Games. As a result of
the Company's fiscal 1995 efforts, Innovo increased its sales of craft
products in fiscal 1996. However, the Company's increase in net sales was
limited by shortages of raw materials, which were caused by a lack of working
capital, and by labor shortages, each of which prevented the Company from
accepting certain orders. The Company raised additional working capital in
the second and third quarters of fiscal 1996 which was used, in part, to
increase raw materials levels to more desirable levels, and in October, 1996
the Company obtained a three year lease of an additional sewing facility.
The additional facility was used to allow the Company to avoid the effects of
labor shortages through the second quarter of fiscal 1997. In August, 1997,
as the result of increases in the production efficiencies of the Company's
main plant in Springfield, Tennessee, the Company idled this additional
plant. However, the additional plant remains available to offset labor
shortages should they occur again.
In fiscal 1997 the Company has improved its operating results by
continuing the growth in sales while controlling any increase in fixed
selling, general and administrative expenses. The sales increases were
achieved from the continued recapture of domestic craft market share by
Innovo, increased sports licensed market sales, by both Innovo and NP
International as the result of recovering demand, and an increase in the
sell-through and reorders for Innovo's back-to-school targeted products.
In fiscal 1998 the Company will attempt to further increase sales and
improve gross margin percentages while reducing overhead expenses.
- Sales increases are anticipated to come from the products being
marketed in Europe under the Walt Disney and Warner Bros. licenses.
Additional sales increases may also be produced by the sources that
produced the 1997 sales increases.
- The Company currently believes that it will be able to increase
certain product prices in fiscal 1998, and that the changes in the
manufacturing and administrative structure of the Company being
made under the direction of its new chief executive and operating
officers will further reduce product costs and operating expenses.
The Company believes that sales increases and cost reductions in fiscal
1998 may be sufficient to return the Company to profitability for the year;
however, there can be no assurance that any of the steps can be successfully
implemented or that the Company will in fact be profitable in fiscal 1998.
See "- Growth Strategy and Product Development," "-Manufacturing," and Item
7 - "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company estimates that its products are carried in over 5,000 retail
outlets in the United States, as well as in numerous retail outlets in
Europe. The Company's marketing efforts are conducted by its own sales and
marketing staff together with its network of domestic marketing organizations
and sales representatives and foreign distributors. The Company sells to
retail accounts such as mass merchandisers, department, sporting goods,
grocery, craft and drug store chains, and mail order retailers, including K
Mart Apparel Corp., Wal-Mart Stores, Inc. (which accounted for 28.8% of the
Company's net sales in fiscal 1997), J.C. Penney Company, Inc., Sports
Authority, Inc., Michael's Stores, Inc., and advertising specialty accounts.
See "Business Marketing and Customers".
Innovo began operations in April, 1987. In August, 1990, Innovo merged
into Elorac Corporation, a so called "blank check" company, which was renamed
Innovo Group. In fiscal 1991 the Company acquired the business of NASCO,
Inc. ("NASCO"), a manufacturer, importer and distributor of sports-licensed
sports bags, backpacks, and other sporting goods, located in Springfield,
Tennessee. NASCO, subsequently renamed Spirco, was also engaged in the
marketing of fundraising programs to school and youth organizations. The
fundraising programs involved the sale of magazines, gift wraps, food items
and seasonal gift items. Effective April 30, 1993, the Company sold the
youth and school fundraising business of Spirco to QSP, Inc. ("QSP").
Spirco had incurred significant trade debt from the fiscal 1992 losses
it incurred in marketing fundraising programs and from liabilities incurred
by Spirco prior to its acquisition which were not disclosed at that time. On
August 27, 1993, Spirco filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Innovo Group, Innovo and NASCO Products were not parties to
the filing. Spirco's plan of reorganization was confirmed by the court on
August 5, 1994, and became effective on November 7, 1994. Under the plan,
administrative claims were paid in cash from funds borrowed under the
Company's bank credit facility. Leasall Management, Inc. ("Leasall"), a
newly formed subsidiary of Innovo Group, acquired Spirco's equipment and
plant and assumed the related equipment and mortgage debt, which Innovo Group
had previously guaranteed, and Spirco was merged into Innovo Group which as
a result acquired direct ownership of its other assets. Spirco claims which
had been guaranteed by Innovo Group received full payment through the
issuance of shares of Innovo Group common stock. Additionally, shares of
Innovo Group common stock were issued to a trust ("the Class 3 Trust") which,
in fiscal 1996, completed the process of selling those shares and
distributing the proceeds to the Class 3 claimants, which were federal, state
and local taxing authorities that had claims for income, sales, property and
unemployment taxes. Unsecured claims did not receive any distribution and
were extinguished under the plan of reorganization.
The principal executive offices of the Company are located at 27 North
Main Street, Springfield, Tennessee 37172. Its telephone number is (615)
384-0100. Unless the context requires otherwise, "the Company" refers to
Innovo Group Inc. and its subsidiaries, and "Innovo Group" refers to Innovo
Group Inc.
Recent Developments
Issuance of Common Stock and Changes in Management
On August 13, 1997 the Company issued 6,750,000 shares of its common
stock to the Smith Group, which is comprised of L.E. Smith, Daniel A. Page,
J. Eric Hendrickson and Herb J. Newton. The Smith Group paid $1,350,000 for
such shares of common stock. The purchase by the Smith Group was made
pursuant to a Stock Purchase Agreement dated August 13, 1997 ("the Stock
Purchase Agreement") by and between the members of the Smith Group, the
Company, and Patricia Anderson-Lasko. In connection therewith, three members
of the Smith Group became executive officers of the Company and all four
members of the Smith Group became members of the Company's board of
directors.
The net proceeds to the Company, after the payment of the costs of the
transaction, were approximately $1,300,000. The Company utilized $150,000
of the net proceeds to repurchase and cancel its outstanding Class I common
stock purchase warrants.
Products
Innovo is a domestic manufacturer that designs and markets a wide
variety of cut and sewn canvas and nylon consumer products. The following
sets forth the principal products that Innovo manufactures and distributes to
the utility, craft and sports licensed markets:
<TABLE>
<CAPTION>
Utility Craft Sports Licensed
_______ _____ _______________
</CAPTION>
<S> <S> <S>
tote bags tote bags tote bags
gift bags aprons and smocks laundry bags
laundry bags banners shoe bags
shoe bags vests insulated lunch bags
duffle bags Christmas stockings duffle bags
aprons and smocks stonewashed denim stadium totes
vests, aprons and fanny packs
totes backpacks
</TABLE>
The products Innovo manufactures for the utility market utilize designs
and artwork developed in-house. For the craft market, Innovo's products are
produced without artwork, and are sold (sometimes packaged with paints or
other supplies) as a product for craft projects (the creation and
applications of a design by the customer).
Innovo's sports licensed products are produced with the logos or other
designs licensed from the four major professional sports leagues and
colleges. See "-Licenses."
Innovo also markets each of these products to the advertising specialty
market, for which it produces the product with the customer's logo, design or
slogan for use as a customer or employee promotion or premium sale item.
NP International designs, manufactures, imports and distributes licensed
sports products internationally, principally throughout Europe and the Middle
East, to distributors that in turn sell to sporting goods, department and
mass merchandise chains, hypermarkets, mail order and grocery and drug
chains. Its line of products consists of a variety of sport, gym, equipment,
duffle bags and backpacks. NP International's products are generally
imprinted or embroidered with logos licensed from the four major professional
sports leagues, colleges, or the characters licensed from Walt Disney and
Warner Bros.
Thimble Square designs, manufactures and distributes moderately priced
ladies' nylon, polyester and cotton at-home, lounge, and sleep wear. It's
products include sleep shirts, night gowns, teddies, house coats and pajamas.
Thimble Square also provides "sew-only" services for other distributors of
similar products. For these customers, Thimble Square cuts, sews and
packages the products using fabric supplied by the customer.
Growth Strategy and Product Development
The Company believes that growth in its business can be accomplished
both by the expansion of the sales of its existing products with new and
existing customers, and through the development or acquisition of new product
designs and the acquisition of new licenses. The Company spent approximately
$182,000 on the design of new products in fiscal 1997, and management
anticipates that in fiscal 1998 such expenditures approximate $300,000.
The Company continually seeks to develop new designs in-house, and
design or acquire new products. In fiscal 1997 the Company began marketing
stone-washed denim tote bags, aprons and vests, and test marketed dyed
versions of the same products.
The Company also continually evaluates the market potential for the sale
of products bearing licensed logos, characters or artwork. Those evaluations
involve both situations where a license has been offered to the Company, and
where the Company itself identifies a logo or character that may have market
potential. Where such an evaluation indicates a sufficient likelihood of
market acceptance, the Company attempts to negotiate and obtain a license
from the owner of the logo or character. In general, a period of from four
to six months is required, once a license is obtained, to develop and obtain
the approval for the art and the products for the new license and produce
samples, and begin marketing. The Company commenced the product development
for the Walt Disney and Warner Bros. licenses in the third and fourth
quarters of fiscal 1996. Shipments under these new licenses began in fiscal
1997. However, there can be no assurance that the Company will be able to
obtain other new licenses, or to renew existing licenses, on favorable terms.
Marketing and Customers
During fiscal 1997, the Company's Innovo and Thimble Square operations
involved sales to approximately 1,100 domestic retail accounts, which
included a mix of mass merchandisers, such as K Mart and Wal-Mart,
department, sporting goods, grocery, craft and drug store chains, mail order
retailers and other retail accounts. NP International's operations involved
sales to 12 foreign distributors which in turn resell to retail accounts.
The Company estimates that its products are carried in over 5,000 retail
outlets in the United States and numerous retail outlets in Europe.
Generally the Company's domestic accounts are serviced by the Company's
sales personnel working together with marketing organizations which have
sales representatives. NP International's marketing is conducted by the
Company's sales department working together with the foreign distributors and
sales representatives having representation throughout Europe and the Middle
East. Marketing organizations are compensated on a commission basis.
In marketing its products the Company attempts to emphasize the
competitive pricing and quality of its products, its ability to assist
customers in designing marketing programs, its short lead times, and the high
sell-through its products have historically achieved. To assist customers in
achieving a higher sell-through of its sports team (professional and college)
logoed products, the Company tracks the retail sales by team logo for various
geographic areas. The Company then uses this information to assist customers
in selecting the optimum mix of team logos for their market. The Company has
an electronic data interchange system that allows certain larger customers to
place orders directly.
The Company also continues to solicit customers whose buying seasons are
contrary to the Company's existing seasonality. See "Seasonality."
For fiscal 1997 and 1996, two customers accounted for sales in excess of
10% of net sales; Wal-Mart, a customer of Innovo which accounted for 28.8%
and 12.5% of net sales, respectively, and Crown-Tex, a customer of Thimble
Square, which accounted for 11.1%, and 11.2% of net sales, respectively.
Although the loss of Wal-Mart could have a material adverse effect on the
Company, the Company believes its efforts to diversify its customer base
would offset any loss of Wal-Mart.
Backlog
Although the Company may at any given time have significant business
booked in advance of purchase orders, customers' purchase orders are
typically filled and shipped within two to six weeks, and at November 30,
1997 and 1996, there was no significant backlog.
Seasonality
The Company's business is seasonal. The majority of the marketing and
sales activities take place from late Fall to early Spring, while the
greatest volume of shipments and sales are generally made from late Spring
through the Summer, which coincides with the Company's second and third
fiscal quarters. See Item 7. - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Seasonality."
Manufacturing
Innovo's and Thimble Square's products are either manufactured
domestically in facilities operated by the Company or obtained from foreign
suppliers through manufacturing agreements. The Company manufactures its
domestic products from an inventory of unfinished fabric rolls using cutting,
sewing and finishing equipment owned or leased by the Company. Innovo
utilizes silk-screening machines to permanently imprint designs onto its
various products. Using its in-house design staff and its computer graphic
equipment, the Company has the capacity to rapidly produce new products.
The principal materials used in Innovo's and Thimble Square's products
include denim, canvas, plain and printed rolls of nylon, polyester and
cotton, mesh and webbing. The Company buys raw materials in bulk for the
products it manufactures domestically. The Company has generally
concentrated its purchases of each type of raw materials for domestic
manufacturing among a small number of suppliers, and during fiscal 1997
purchased the majority of each type of raw material it used from one or two
suppliers. Although the Company does not have any long-term agreements with
these or other suppliers, it has to date, been able to obtain suppliers to
satisfy its raw material requirements. Management believes that if its
current suppliers were unable to supply the necessary raw materials in
sufficient quantities or on acceptable price terms, alternative suppliers
would be available on comparable price terms and delivery schedules. In the
event the Company was unable to find such alternative suppliers at
competitive prices and on a timely basis, its operations could be materially
adversely affected.
During fiscal 1998 the Company intends to shift production of certain
large run and labor intensive products to production facilities owned by
independent contractors in Mexico. Management believes that the resulting
savings in labor would more than offset any increased transportation costs.
The sport and gym bags and backpacks marketed overseas by NP
International and lunch bags for Innovo for domestic distribution are
generally obtained from overseas manufacturers in order to reduce the cost of
obtaining these more labor intensive products. The independent overseas
contractors that manufacture these products are responsible for obtaining the
necessary supply of raw materials and for manufacturing the products to the
Company's specifications. The Company generally uses one independent
contractor to fulfill all of its requirements in order to maximize its
control over production quality and scheduling. Although the Company uses
this, and other methods, to reduce the risk that the independent contractor
will fail to meet the Company's requirements, the use of independent overseas
contractors does reduce the Company's control over production and delivery
and exposes the Company to the other usual risks of sourcing products abroad.
The Company does not have any long-term supply agreements with independent
overseas contractors, but believes that there are a number of contractors
that could fulfill the Company's requirements.
The Company has generally utilized overseas contractors that utilize
production facilities located in China. As a result, the products
manufactured for the Company are subject to export quotas and other
restrictions imposed by the Chinese government. To date the Company has not
been adversely affected by such restrictions; however, there can be no
assurance that future changes in such restrictions by the Chinese government
would not adversely affect the Company, even if only temporarily while the
Company shifted production to other countries or regions such as Mexico,
Korea, Taiwan, or Latin America. Substantially all of the products
manufactured overseas for the Company are shipped directly to customers
outside the United States; accordingly, the Company is generally not subject
to United States import quotas, inspection or duties.
<PAGE>
Licensing Agreements
The following sets forth certain information concerning the license
agreements currently held by the Company.
<TABLE>
<CAPTION>
Licensor/Licensed Names
logos, characters, etc. Types of Products Geographical Areas
</CAPTION>
<S> <S> <S>
National Basketball tote, lunch, shoe, and United States; United
Association/logos of NBA laundry bags, Kingdom; Europe
Teams, NBA Finals stadium seat cushions,
and NBA All-Star Game sports bags and backpacks
Major League Baseball/ tote, lunch, shoe, and United States; United
logos of MLB Teams, World laundry bags, Kingdom; Europe
Series, All-Star Game stadium seat cushions,
sports bags and backpacks
National Football League/ tote, lunch, shoe, and United States; United
logos of NFL Teams, Super laundry bags, Kingdom; Europe
Bowl Game stadium seat cushions,
sports bags and backpacks
National Hockey League/ tote, lunch, shoe, and United States; United
logos of NHL Teams laundry bags, Kingdom; Europe
stadium seat cushions,
sports bags and backpacks
Colleges/logos of tote, lunch, shoe, and United States; United
approximately 130 colleges laundry bags, Kingdom; Europe
stadium seat cushions,
sports bags and backpacks
Walt Disney/Walt tote, sport, gym and Europe; Middle East
Disney characters in other backpacks,
sports settings waistpacks, wallets
Warner Bros./Warner tote, sport, gym and Europe; Middle East
Bros. cartoon characters other bags, backpacks,
in sports settings waistpacks, wallets
Warner Bros./Space Jam tote, sport, gym and Europe; Middle East
movie cartoon characters other bags, backpacks,
waistpacks, wallets
</TABLE>
Each license agreement grants the Company either an exclusive or non-
exclusive license for use in connection with specific products and/or
specific territories. The license agreements with the major professional
sports licensing organizations are generally non-exclusive. However, the
Company's experience has been that while the licenses are non-exclusive, the
licensing entities generally limit the number of licenses they grant for any
particular line of products. Thus, direct competition is limited by the
availability of licenses.
Typically, a license agreement is effective for a one or two-year term
for the use of particular characters or designs of the licensor on some or
all of the Company's products. A royalty is paid to the licensor that is
usually a percentage of net sales, with a minimum annual guarantee for the
license period. The royalty rates range from 7% to 17% and the minimum
annual guarantees range from $5,000 to $200,000. Some license agreements
grant the licensor broad termination rights, and most of the license
agreements grant the licensor the right to terminate the license in the event
minimum sales targets are not reached, if the Company does not diligently
market the licensed products, or for the breach of any material term of the
license agreement by the Company. The Company believes that it is in
substantial compliance with the terms of all material licenses.
The expiration dates of the current license agreements range from 1998
to 2000. Generally, the renewal provisions of the license agreements provide
that the licensee may, at its option, renew the license for an additional
one- or two-year term, provided certain conditions are satisfied.
Historically, licenses have been terminated by the Company due to decreased
sales or popularity, rather than by the licensors, and to date the Company
has generally been able to obtain the renewal of licenses it wished to
continue. The Company believes that it will continue to be able to obtain
the renewal of all material licenses, however, there can be no assurance that
competition for an expiring license from another entity, or other factors,
will not result in the non-renewal of a license.
Competition
The industries in which the Company operates are fragmented and highly
competitive. The Company competes against a large number of baggage
manufacturers and importers, and other generally small companies, that
distribute products similar to Innovo's and NP International's, and a large
number of companies that produce ladies at-home, sleep and lounge wear. NP
International's sports-licensed products also compete with those of sporting
goods manufacturers, such as Reebok, Nike and Adidas, that produce or license
the manufacture of sports bags bearing their names and logos. In all areas
the Company does not hold a dominant competitive position, and its ability to
sell its products is dependent upon the anticipated popularity of its
designs, the logos or characters its products bear, the price and quality of
its products and its ability to meet its customers' delivery schedules.
The Company believes that it is competitive in each of the above-
described areas with companies producing goods of like quality and pricing,
and that new product development, product identity through marketing,
promotions and low price points will allow it to maintain its competitive
position. In addition, the Company's ability to manufacture its products
domestically and fill orders more promptly than companies whose sole or
predominant source of products are outside the United States is an important
aspect of keeping it competitive in the markets in which Innovo and Thimble
Square compete. However, some of the Company's competitors possess
substantially greater financial, technical and other resources than the
Company, including the ability to implement more extensive marketing
campaigns.
Intellectual Property
Innovo's utility line includes tote bags imprinted with the E.A.R.T.H.
("EVERY AMERICAN'S RESPONSIBILITY TO HELP") BAG trademark. E.A.R.T.H. Bags
are marketed as a reusable bag that represents an environmentally conscious
alternative to paper or plastic bags. Sales of E.A.R.T.H. Bags, while
significant in Innovo's early years, have not been significant in the last
five years. The Company still considers the trademark to be a valuable
asset, and has registered it with the United States Patent and Trademark
Office.
Employees
As of February 6, 1998, the Company employed 94 full-time personnel at
the Springfield, Tennessee facility, comprised of 6 persons in management, 10
persons in general administration and 78 persons in manufacturing and
production, and Thimble Square employed 66 full-time personnel in Baxley,
Georgia, comprised of 7 persons in management and administration and 59 in
production. Due to varying seasonal demands and redesign of the Company's
manufacturing facilities, the Company's total work force has fluctuated
within a range of approximately 160 to 350 employees through the year.
Management considers its relationship with its employees to be excellent.
None of the Company's employees is party to a collective bargaining
agreement. There has never been any material interruption of operations due
to labor disagreements.
Item 2. Properties
The Company's headquarters, manufacturing and distribution facilities
are located in Springfield, Tennessee, where Leasall owns four buildings.
The main complex is situated on seven acres of land with approximately
220,000 square feet of usable space, including 30,000 square feet of office
space and 35,000 square feet of cooled manufacturing area. The warehouse
annex contains 30,000 square feet. First Independent Bank of Gallatin,
Tennessee holds a First Deed of Trust on the real property located in
Springfield.
Innovo also leases a 5,000 square foot sewing facility in Red Boiling
Springs, Tennessee under a three year lease having an annual rental of
$24,000. The facility was used to allow the Company to avoid the effects of
labor shortages through the second quarter of fiscal 1997. In August, 1997,
as the result of increases in the production efficiencies of the Company's
main plant in Springfield, Tennessee, the Company idled this additional
plant.
Thimble Square owns a 40,000 square foot manufacturing and distribution
facility in Pembroke, Georgia, which is subject to liens held by the First
Bank of Coastal Georgia, the Bryan County Development Authority, Inc. and
the Business Development Corporation of Georgia, Inc. This plant was idled
and sewing capacity was absorbed by Baxley in August, 1997 and in December
1997 the Pembroke, GA cutting operation was moved to Baxley. The building is
held for sale.
Thimble Square also leases two facilities in Baxley, Georgia. The first
is a 21,000 square foot manufacturing facility with any annual rental of
$36,000. The lease runs through August, 2000 and provides Thimble Square
with a bargain purchase option. The second is a 7,000 square foot cutting
facility whose lease runs through October, 1998 with annual lease payments of
$10,000.
The Company believes that its existing facilities are adequate for its
current and future needs.
<PAGE>
Florida Retail Property
The company's Florida retail property, operated as Good Deal Mall, was
acquired in fiscal 1995, and through August, 1997 the Company was engaged in
readying it to operate as an indoor multivendor open space mall in which
retailers operate from permanent booths. The Good Deal Mall has
approximately 22,000 square feet of rentable space, which can accommodate up
to 135 vendor merchants. The property was initially opened in August 31,
1997 with approximately 32 spaces, representing approximately 24% of the
space available and monthly rentals of approximately $16,000, rented to
merchants, generally on a monthly basis. The property had continued to
operate at approximately that level of occupancy through November, 1997.
However, in November, 1997, the Company decided to engage new management for
the Good Deal Mall, and in connection therewith refine the long-term goals
for the property. The Company has determined that the then existing merchant
lessees were not consistent with its revised plans, and has commenced steps
to have that space vacated so that merchants consistent with the revised
plans can be attracted. The Company currently anticipates that these steps
will be completed in the second quarter of fiscal 1998.
Item 3. Legal Proceedings
The Company is a party to lawsuits in the ordinary course of its
business. While the damages sought in some of these actions are material,
the Company does not believe that it is probable that the outcome of any
individual action will have a material adverse effect, or that it is likely
that adverse outcomes of individually insignificant actions will be
sufficient enough, in number or magnitude, to have a material adverse effect
in the aggregate.
In Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc., Rick Binet,
and Patricia Anderson-Lasko, f/k/a/ Patricia M. DeAlejandro, the Company
appealed a $700,000 judgement awarded by a jury for employment benefits,
including stock compensation, it found to be due to an ex-employee who it
nonetheless found had been properly terminated for cause. In August, 1994,
the trial court granted the Company's motion for partial summary judgement
and directed verdicts with respect to certain of Tedesco's claims, including
those concerning his ownership of an interest in the "E.A.R.T.H." trademark,
or the existence of a partnership with the Company to jointly own the
trademark, and the state court jury returned findings in favor of the Company
on the remainder of the plaintiff's claims concerning the trademark as well
as his claims for wrongful termination, fraud and conspiracy. However, the
jury awarded Tedesco approximately $700,000, of which $50,000 was assessed
against Innovo Group and $650,000 was assessed against Innovo, including pre-
judgement interest and attorney's fees, on the theory that he was entitled to
have received certain employment benefits, including employee stock awards,
during, and after, the term of his employment. The Company appealed the
jury's award, and in August, 1996 (as revised in an amended October, 1996
opinion), the appeals court reversed approximately $350,000 of the initial
judgement as not supported by the evidence or improper as a matter of law.
As a result, the judgement, including post-judgement interest through August,
1996, has been reduced to $420,000. In addition, the appeals court ruled
that the trial court erred in not submitting to the jury the questions of the
Company's counterclaim of breach of fiduciary duty by Tedesco, ruling that
the trial record indicated that there was evidence of such breach and damages
therefrom. The appeals court remanded the case to the trial court (District
Court of Harris County Texas) for trial of the Company's claims of breach of
fiduciary duty by Tedesco, which trial is scheduled for March 1998. In
connection with its appeal the Company has pledged as an appeal bond of
200,000 shares of its unissued common stock.
The Company believes that its fiduciary duty claims against Tedesco are
meritorious. However, there can be no assurance that the Company's claims
against Tedesco will be successful, or that alternatively the litigation can
be settled on terms manageable to the Company. The need to immediately
satisfy the plaintiff's award in the event the Company's claims are
unsuccessful would have a material adverse impact on the Company.
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products (Pannoy Enterprises Corporation v. NASCO
Products, Inc., Case No. 12948, in the Chancery Court for Robertson County,
Tennessee). NASCO Products and the supplier had previously reached an
agreement on the balance owed (which is the balance recorded), as well as an
arrangement under which the schedule for NASCO Products' payments reducing
the balance would be based on future purchases from that supplier of products
distributed internationally by NP International. The Company has denied the
supplier's claims, and has asserted affirmative defenses, including the
supplier's late shipment of the original products, and the supplier's refusal
to accept and fill NP International orders on terms contained in the
agreement. NASCO Products sold its operations in July, 1995, and that
company currently has no operations or unencumbered assets. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General and -Liquidity and Capital Resources."
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
The Company's common stock is currently traded on the NASDAQ SmallCap
Market under the symbol "INNO". The following sets forth the high and low bid
quotations for the Company's common stock in such market for the periods
indicated. This information reflects inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily represent actual
transactions. No representation is made by the Company that the above
quotations necessarily reflect an established public trading market in the
Company's common stock.
<TABLE>
<CAPTION>
High Low
____ ___
Fiscal 1996
___________
</CAPTION>
<S> <C> <C>
First Quarter 7/8 7/32
Second Quarter 2 3/16 17/64
Third Quarter 1 3/4 9/16
Fourth Quarter 5/8 3/16
Fiscal 1997
___________
First Quarter 1/2 5/32
Second Quarter 5/16 5/32
Third Quarter 31/32 9/64
Fourth Quarter 27/32 15/32
</TABLE>
As of February 6, 1998, there were approximately 905 record holders of
the Company's common stock.
The Company has never declared or paid a dividend and does not
anticipate paying dividends on its common stock in the foreseeable future.
In deciding whether to pay dividends on the common stock in the future, the
Company's Board of Directors will consider factors it deems relevant,
including the Company's earnings and financial condition and its capital
expenditure requirements.
In July, 1997 the SEC and NASDAQ revised standards for listing on the
NASDAQ SmallCap Market removing certain exemptions for companies whose
securities trade for less than $1.00, this change became effective February,
1998. On February 27, 1998 the Company received notice from NASDAQ that it
was not in compliance with the revised standards and was given to May 28,
1998 to come into compliance. Prior to the change companies with
stockholder's equity greater than $2 million were, for the most part, exempt
from the $1.00 bid requirement. Effective February, 1998 the exemption is
removed and companies must maintain a $1.00 bid price and tangible new worth
of over $2 million.
The Company's stock has generally traded at prices below $1.00 since
November, 1995. The Company has been able to maintain its NASDAQ SmallCap
listing by complying with the alternative $2 million stockholder's equity
requirement. Under the new NASDAQ requirements the Company could face
delisting unless the bid price rises to a minimum of $1.00 through normal
markets or such other steps as deemed necessary by the Company. Although the
Company will continually use its best efforts to maintain its NASDAQ Small
Cap listing, there can be no assurance that it will be able to do so. If in
the future, the Company is unable to satisfy the NASDAQ criteria for
maintaining listing, its securities would be subject to delisting, and
trading, if any, in the Company's securities would thereafter be conducted in
the over-the-counter market, in the so-called "pink sheets" or on the
National Association of Securities Dealers, Inc. ("NASD") "Electronic
Bulletin Board". As a consequence of any such delisting, a stockholder would
likely find it more difficult to dispose of, or to obtain accurate quotations
as to the prices, of the Company's Common Stock.
During the fourth quarter of fiscal 1997 the Company issued an aggregate
of 1,840,000 shares of common stock. 1,500,000 shares were issued in a
private placement to three accredited investors for $675,000 in gross cash
proceeds. 250,000 shares were issued upon the conversion of all the
outstanding Class E Warrants and in exchange for $9,000 cash and the
extinguishment of debt totaling $66,000. 15,000 shares were issued upon the
exercise of a portion of the Class G Warrants for $4,000. 75,000 shares were
issued in exchange for debt totalling $52,000. No commissions or other
discounts were paid. The shares were issued in reliance upon the exemption
under Section 3(A)(9) of, and Rules 901 through 903 promulgated under, the
Securities Act of 1933.
Also in the fiscal fourth quarter of 1997, 1,500,000 of 4,000,000 shares
issued to an officer of the Company in exchange for a note were returned to
the Company for a prorata reduction in the note of $422,000.
<PAGE>
Item 6. Selected Consolidated Financial Data
The table below (including the notes hereto) sets forth a summary of
selected consolidated financial data. The selected consolidated financial
data should be read in conjunction with the related consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30,(1) October 31,
_______________________ ______________________________
Income Statement Data: 1997 1996(2) 1995 1994 1993
_______________________ ______________________________
(000's except per share amounts)
</CAPTION>
<S> <C> <C> <C> <C> <C>
Net Sales $ 9,458 $ 7,391 $ 5,276 $ 8,028 $12,468
Cost of Goods Sold 6,388 4,853 3,808 5,044 6,998
Gross Profit 3,070 2,538 1,468 2,984 5,470
Operating Expenses 4,590 4,478 3,134 5,389(3) 5,023
Income (loss) from operations (1,520) (1,940) (1,666) (2,405) 447
Interest expense (766) (963) (511) (821) (960)
Income (loss) before income taxes
(benefit) (1,839) (3,088) (67)(4) (4,124) (223)
Income (loss) from
continuing operations (1,839) (3,088) (67)(4) (7,905)(5) (661)(5)
Income (loss) per share
from continuing operations (.05) (.23) (.03) (3.99) (.63)
Supplemental loss per share from
continuing operations (6) - - - (3.77) (.14)
Income(loss) from discontinued
operations (7) - - (626) (685) (7,268)
Income(loss) per share from
discontinued operations (7) - - (.24) (.34) (6.92)
Extraordinary gain (loss) 524 (9) - (258) (8) 699 (8) -
Extraordinary gain (loss) per share .01 - (.09) .35 -
Net income (loss) (1,315) (3,088) (951) (7,891) (7,929)
Net income (loss) per share (.04) (.23) (.36) (3.98) (7.55)
Cash dividends declared
per common share - - - - -
Weighted Average Shares of
Common Stock and Common Stock
Equivalents Outstanding 34,382 13,613 2,616 1,982 1,050
Balance Sheet Data:
Total Assets $ 9,168 $ 9,433 $ 5,667 $11,143 $19,351
Long-Term Debt 1,854 3,303 1,565 1,514 1,759
Common Stock Issuable (10) - - - - 2,911
Redeemable Common Stock (11) - - - 1,423 1,423
Stockholders' Equity 3,791 2,275 (230) (2,372) 951
</TABLE>
_______________
(1) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year ended on October 31. The
results of operations and cash flows for the transition period of November 1,
1995 to November 30, 1995 are separately presented in the Company's consolidated
financial statements presented elsewhere herein.
(2) Includes the effects of the acquisition of Thimble Square, accounted for
under the purchase method of accounting, beginning April, 1996. See Note 2 of
Notes to Consolidated Financial Statements.
(3) Operating expenses for fiscal 1994 include plant consolidation charges of
$470,000 ($.20 per share) relating to the consolidation of the Company's
manufacturing facilities.
(4) Includes other income of $1.9 million from the settlement of litigation.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations".
(5) Includes the effect of additions to the deferred tax valuation allowance of
$3,679,000 ($1.86 per share) and $624,000 ($.59 per share) in fiscal 1994 and
1993, respectively.
(6) Represents net loss per share adjusted to treat as outstanding from the date
of the loans the 229,720 shares of common stock issued in fiscal 1994 to
extinguish certain borrowings.
(7) Reflects the operations and July 1995 sale of the import operations of NASCO
Products, the operations and May 1993 sale of the fundraising program direct
marketing operations of Spirco and the operations and loss from the disposal of
Sportswear. See Note 3 of Notes to Consolidated Financial Statements.
(8) Represents gains and losses resulting from the Chapter 11 reorganization of
Spirco. See Note 4 of Notes to Consolidated Financial Statements.
(9) Represents gains from favorable debt settlements completed in the fourth
fiscal quarter of 1997. See Note 5 of Notes to Consolidated Financial
Statements.
(10) Represents obligations extinguished subsequent to October 31, 1993 by the
issuance of common stock.
(11) Represents 189,761 shares of common stock, which were issued in September
1993 to extinguish $1,423,000 of debt and accrued interest, which the Company
could have been required to repurchase at $7.50 per share between January 1994
and April 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of 1995 to 1997
The Company has incurred losses from continuing operations in each of
the last three fiscal years, principally as the result of a lack of adequate
working capital and, to some extent, lower than expected sales. Prior to
August of 1997 the Company's capital resources have been below necessary
levels. The losses incurred by the Company's discontinued Spirco and NASCO
Products operations also absorbed significant working capital.
Fiscal 1995 sales were adversely affected by a continuing weakness in
the retail sector, and by a shortage of working capital. The Company had
projected that its sale of the NASCO Products imported product line would
provide it with both immediate working capital and the ability to obtain more
traditional accounts receivable and inventory financing, as the terms
originally negotiated with the buyer provided for an all cash payment with
which the Company could have retired certain existing borrowings. However,
shortly before the completion of the sale, the buyer, ANG, advised the
Company that it would not proceed on an all cash basis. The Company decided
to proceed with the sale to ANG, under revised terms that allowed ANG to pay
the purchase up to a three year period, because the preceding process of
obtaining league approvals, which had been proceeding since March, 1995, had
made it impractical for the Company to alter its restructuring strategy and
remain in this business.
Fiscal 1995 results also reflect effects of the Company's 1994 strategy
of emphasizing sports licensed products in its marketing. The Company
devoted fiscal 1995 to shifting its emphasis to developing new products and
marketing programs for its products in the fashion, utility and craft lines
and for the premium and advertising specialty markets and to preparing
marketing plans for its U.S. Olympic Team products for the 1996 Summer Games.
As a result of the Company's fiscal 1995 efforts, Innovo increased its
sales of craft products in fiscal 1996, which contributed to a 14.2% increase
in net sales before considering the effect of the April, 1996 acquisition of
Thimble Square, and a 40.1% increase in net sales including those of Thimble
Square. However, the Company's increase in net sales was limited by
shortages of raw materials during the first half of fiscal 1996, which were
caused by a lack of working capital, and by labor shortages experienced
during the second, third and fourth quarters of fiscal 1996. These
conditions prevented the Company from accepting orders for an estimated $1
million of products, and also adversely affected the Company's gross profit
percentage. The Company raised additional working capital in the second and
third quarters of fiscal 1996 which was used, in part, to increase raw
material levels to more desirable levels. In October, 1996 the Company
obtained a three year lease of a sewing facility in Red Boiling Springs,
Tennessee. Production at the facility, which began in November, 1996, was
used to allow the Company to avoid the effects of the labor shortages through
the second quarter of fiscal 1996. In August 1997, as a result of increased
production efficiencies at the Company's main plant in Springfield,
Tennessee, the Company idled this additional plant.
The results of operations for fiscal 1996 were also affected by
increases in selling, general and administrative expenses that resulted from
the Company's pursuit of, and subsequent product development for, new
licenses which were obtained in the second half of fiscal 1996. In the third
quarter of fiscal 1996 the Company obtained a license to use the Warner Bros.
Studios Looney Tunes cartoon characters on various bags and backpacks to be
sold in Europe and a license to use the sports drawings of sports artist Gary
Patterson on various bags and t-shirts. In the fourth quarter of fiscal 1996
the Company obtained a license to use the Walt Disney Co. cartoon characters
on various bags and totes in Europe.
In general, a period of from four to six months is required, once a
license is obtained, to develop and obtain the approval for the art and
products for the new license, and produce samples and begin marketing. The
Company commenced the product development for these new licenses in the third
and fourth quarters of fiscal 1996, and expended approximately $363,000 in
fiscal 1996 on those projects. Product development for the Walt Disney and
Warner Bros. products continued into the second quarter of fiscal 1997.
Because product development on these licenses lasted well into fiscal 1997,
the Company missed much of the back-to-school business. Initial orders on
the Disney license was shipped in the second half of fiscal 1997 and totaled
4.0% of fiscal 1997 sales. Substantial increases of sales under this license
and the Warner Bros. license is anticipated in fiscal 1998.
The Company acquired Thimble Square on April 12, 1996. Thimble Square's
operating results are included in the consolidated results of operations from
April 12, 1996. Thimble Square's sales for its fiscal year ended December
31, 1995 were approximately $3 million. Thimble Square operated profitably
for many years, but during fiscal 1994 and 1995 (years ended December 31)
incurred losses, due principally to lower levels of sales. That lower level
of sales, and resulting operating losses, continued through the Company's
1997 fiscal year, in part due to labor shortages, and the Company's use of
Thimble Square's production capacity to produce Innovo products.
On July 31, 1995 NASCO Products sold to ANG its operations of importing
to and distributing in the United States sports bags, backpacks and equipment
bags bearing the logos of the teams of the four major professional sports
leagues. The disposed of product line was imported, and therefore required
the Company to make substantial investments to order and purchase inventory
several months ahead of expected sales. Competition and soft demand for
these products caused the Company to incur operating losses in order to sell
the imported inventories, and the Company's decision to sell the product line
reflected its conclusion that these market conditions were likely to continue
for some time, as a result of which near-term profitability was unlikely. As
the result of the disposal, the Company's continuing operations became
concentrated around its domestic manufacturing capabilities and its
international license rights, which the Company views as its strategic
strengths.
In October 1996, the Company began the process of restructuring senior
management, increasing capitalization and reduction in overhead expenses.
The Company remained focused on these objectives into fiscal 1997. They were
addressed collectively in August 1997 by initiating a private placement which
brought in an investment group that would also participate in management full
time. There were net proceeds to the Company of $1,300,000 raised through
this private placement. The investment group consisted of L. E. "Butch"
Smith, Dan Page, Eric Hendrickson and Herb Newton each simultaneously
accepting positions on the Board of Directors with Smith serving as Chairman
and CEO, Page serving as Chief Operating Officer and Hendrickson serving as
V.P. and Treasurer. Patricia Anderson-Lasko relinquished her positions as
Chairman and CEO while retaining the position of President and was appointed
as the manager of sales.
Prior to the Smith Group's involvement with the Company, it continued to
struggle because of a lack of adequate working capital that adversely
effected raw material availability.
The new management group remained focused on reductions in costs
through the fourth quarter of fiscal 1997 and implemented cost reductions
that will reduce expenses by an estimated $500,000, annually. The cost
reductions included reductions in personnel, closing of the Red Boiling
Springs, Tennessee facility and closing of the Pembroke, Georgia plant,
except for cutting operations. The Pembroke, Georgia cutting operation was
moved to leased space in Baxley, Georgia in December 1997.
The manufacturing lines in Baxley, Georgia and Springfield, Tennessee
were realigned immediately following the plant closings and a significant
portion of the equity raised was directed toward making raw materials more
readily available while at the same time broadening the number of suppliers.
The fourth quarter of fiscal 1997 had sales of $2,228,000 as compared to
$1,687,000 for fiscal 1996 and in spite of the plant closings the Company was
able to raise fulfillment rates and reduce overtime from prior periods.
1998 Strategy and Outlook
In fiscal 1998 the Company will attempt to further increase sales and
improve gross margin percentages while reducing overhead expenses.
- Sales increases are anticipated to come from the products being
marketed in Europe under the Walt Disney and Warner Bros. and
American pro sports licenses. Additional sales increases may also
be produced by the sources that produced the 1997 sales increases.
- Sales from a new line of apparel to existing customers of t-shirts
and night shirts, is also anticipated to impact 1998 sales at
Thimble Square.
- NP International has hired a director of sales for European
operations. Management expects this direct hands on involvement to
favorably impact sales in Europe.
- The Company currently believes that it will be able to increase
certain product prices in fiscal 1998, and that the changes in the
manufacturing and administrative structure of the Company being
made under the direction of its new chief executive and operating
officers will further reduce product costs and operating expenses.
Although such increases could meet customer resistance, causing the
Company to either lose or decline and order, the lost sale would
generally be one that would not have contributed material gross
profits.
- The Company believes it can further reduce manufacturing costs by
using manufacturing alliances it is developing in Mexico to produce
certain large run and labor intensive products with domestic goods.
Management believes that any increase in transportation costs will
be more than offset by labor savings.
As previously discussed, the August 1997 restructuring of senior
management has allowed the Company to put cost controls under more direct
supervision, and the Company believes that both the increases in sales, and
improvements in gross profit margins, can be accomplished without significant
increases to fixed overhead costs.
The Company is also currently evaluating the efficiency of its
production facilities. While the Company believes that these facilities are
adequate for its current and projected future needs, and its investments
therein are recoverable from future operations, it is studying whether
further consolidation or relocation of certain facilities might improve
efficiency and reduce production costs. If the Company were to decide to
relocate or consolidate from any of its owned or leased facilities, such a
step could require the Company to record a non-cash charge relating to the
closed facility, which charge would adversely effect operating results for
the period in which it was recorded.
The Company believes that these steps, once fully effective, will allow
it to return to profitability. However, the timing and ultimate success of
these plans can be affected by numerous factors and risks. See "-Forward
Looking Statements."
Forward Looking Statements
Certain statements in the discussion and analysis of financial condition
and results of operations, and elsewhere in this Annual Report on Form 10-K,
represent "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve
management's estimates, projections or predictions of future developments or
events concerning the development, manufacturing and marketing of products,
operating plans and results, liquidity, significant customers, litigation,
and other plans for the Company and its business, and generally can be
identified by the use of forward looking terminology such as "may", "will",
"would", "could", "should", "expect", "estimate", "anticipate", "project", or
the negative thereof, or other variations thereon or comparable terminology.
Such statements involve matters that are subject to various risks and
uncertainties, as a result of which actual future developments, results or
events may differ materially from management's estimates, projections or
predictions. The following discusses certain of the more significant risks
and uncertainties.
The Company operates in competitive and fragmented industries, and its
ability to maintain or increase its level of sales, and its gross profit
margins, will depend on the popularity of its designs or of the logos or
characters its product bear, and upon overall consumer spending patterns.
Both are difficult to predict with certainty, as a result of which actual
future results can differ materially from projections or estimates.
Additionally, a material portion of the Company's sales are of products
produced pursuant to license agreements obtained from sports or entertainment
licensors. The loss or non-renewal of a material license, either due to the
Company's performance, or due to competition for the license, would
materially affect future results.
The Company's ability to maintain or increase its level of sales, and
its gross profit margins, is also dependent on its ability to meet customers'
delivery schedules. The Company's domestic manufacturing has, in the past
and could in the future, be affected by raw material shortages caused by a
lack of working capital, and by labor shortages. Shortages of working
capital or labor can be caused, or magnified, by the seasonality of the
Company's business. The Company could also be affected by the ability of
foreign manufacturers to meet needed delivery schedules. Such events could
limit the Company's ability to accept and fill customer orders, and would
adversely affect the profitability of the sales the Company does make.
As discussed in Note 10 of Notes to Consolidated Financial Statements,
the Company is engaged in certain litigation. As a result, the Company faces
risks concerning the ultimate outcome of these matters, which, if adverse,
could have a material adverse effect on the Company.
In accordance with the provisions of the Private Securities Litigation
Reform Act of 1995, the Company assumes no obligation to update forward
looking statements.
Results of Continuing Operations
Change in Fiscal Year
Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously, the Company's fiscal year needed on October 31.
The results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 are separately presented in the
Company's consolidated financial statements.
Fiscal 1997 Compared to Fiscal 1996
Sales for fiscal 1997 were $9,458,000 which is an increase of $2,067,000
or 28.0% over 1996 fiscal sales of $7,391,000. Higher sales by Innovo and NP
International accounted for $1,878,000 of the increase, representing an
increase of 31.2% in their sales, and the inclusion of a full 12 months of
Thimble Square's sales, which was acquired in April 1996, accounted for the
remaining $189,000 increase.
The increase in Innovo's and NP International's sales resulted
principally from increased domestic craft product shipments and domestic
sports licensed products. A small portion of the increase was from certain
initial shipments of Warner Bros. licensed products in the second quarter.
The development of the Walt Disney and Warner products was completed in the
second quarter of fiscal 1997. The Company's recent discussions with
international customers have indicated that the volume of back-to-school and
holiday business in fiscal 1997 was adversely affected by the timing of the
product introductions, competitive pricing and poor economic conditions in
certain European markets. As a result, the effects of the Warner Bros. and
Walt Disney licenses are expected to be more significant in fiscal 1998 with
new sourcing which has resulted in lower costs, and recovering economic
conditions in certain markets.
Gross profit as a percentage of sales in fiscal 1997 was 32.5% as
compared to 34.3% for the year ended November 30, 1996. The gross profit for
Innovo and NP International was 37.9%. The gross profit margins have been
less than anticipated because sales for the first half of fiscal 1997 have
been heavily weighted towards craft products which generally carry a lower
gross margin than licensed products, production inefficiencies caused by the
lack of anticipated working capital up to the third quarter and higher than
anticipated costs on some items resulting principally from packaging
requirements imposed by certain major customers. Gross profit margin was
also affected by the full nine months of Thimble Square's sales which,
traditionally carry a higher cost of goods sold than Innovo's mix. Gross
profit for Thimble Square was 4.6% for the year ended November 30, 1997.
Thimble Square's gross profit was adversely affected by its large
concentration (67.6% of its fiscal 1997 revenues) of sew only production
which carries a lower gross margin than other product lines and use by Innovo
for Innovo production.
Selling, general and administrative ("SG&A") was $4,121,000 for the year
ended November 30, 1997 or 43.6% of sales as compared to $3,890,000 or 52.6%
of sales for fiscal 1996. Although SG&A increased from fiscal 1996 and 1997
there was a decrease as a percentage of sales. Of the increase of $231,000
in SG&A, $45,000 is the result of the inclusion of a full year of operations
for Thimble Square, legal and professional fees relating to the Company's
litigation with certain former employees, debt restructurings, and the
Company's year-end reporting and annual meeting caused a $43,000 increase in
those costs, and commissions were $90,000 higher in 1997 than 1996 due to
increased sales.
The loss from operations was $1,520,000 for fiscal 1997 as compared to
$1,940,000 for the year ended November 30, 1996, an improvement of $420,000.
The improvement is primarily due to increased sales as discussed above.
Interest expense was reduced $197,000 to $766,000 in fiscal 1997 as
compared to $963,000 for fiscal 1996. This reduction resulted from
reductions in debt through cash payments and conversion into equity and a
reduction in the interest rate charged by Riviera.
Other income in fiscal 1997 was $447,000 consisting primarily of a gain
from legal settlement with former bridge lenders of $166,000 and an override
on the sale of NASCO Products, Inc. to ANG of $135,000.
In the fourth quarter of 1997 the Company recognized an extraordinary
gain from debt settlement of $524,000, see Note 5 of the Consolidated
financial statements.
Fiscal 1996 Compared to Fiscal 1995
Sales for the year ended November 30, 1996 increased by $2,115,000, or
40.1%, to $7,391,000, from $5,276,000 for fiscal 1995. The inclusion of
Thimble Square's operations for April 12, 1996 through November 30, 1996,
contributed $1,368,000 of the increase. The remaining $747,000 increase was
due to sales of the Company's new craft products, the recapture of certain
craft accounts from import suppliers, and approximately $1.1 million of sales
of the Company's U.S. Olympic Team products, offset by declines in
international and domestic pro-licensed sales. As previously discussed,
insufficient working capital caused raw material shortages during the first
half of fiscal 1996, and labor shortages experienced in the second, third and
fourth quarters of fiscal 1996, forced the Company to not accept orders for
an approximate $1 million, and therefore limited the growth in the Company's
sales.
Gross profit as a percentage of sales was 34.3% for fiscal 1996 compared
to 27.8% for the year ended October 31, 1995. The gross profit percentage
for the sales of Innovo's and NP International's was 33.9% in fiscal 1996,
and was favorably impacted by the increase in Innovo's sales of domestically
manufactured products, which lowered the per unit absorption of fixed
manufacturing costs, and other manufacturing improvements. However, the
gross profit percentage for fiscal 1996 was adversely affected by the
Company's lack of working capital for the purchase of raw materials, the
shortages of labor at its manufacturing facilities, and the presence of
specialized U.S. Olympic orders in the sales mix. These factors caused
production inefficiencies, overtime labor costs, and higher freight costs.
The overall gross profit percentage for fiscal 1996 includes the effect of
the gross profit percentage of 36.3% for Thimble Square for the period April
12, 1996 to November 30, 1996.
Selling, general and administrative ("SG&A") expenses increased from
$2,728,000 for fiscal 1995 to $3,890,000 for the year ended November 30,
1996. The $1,162,000 increase was principally due to the inclusion of
Thimble Square's operations since April 12, 1996 ($347,000), an increase in
commissions and royalties of $302,000 as the result of higher sales,
additional minimum royalties to the USOC of $88,000, and approximately
$358,000 in increases in costs for functions related to the development of
new products, and products for the Company's newly obtained licenses. As a
percentage of sales SG&A expenses were 52.6% for fiscal 1996 compared to
51.7% for the year ended October 31, 1995. Depreciation and amortization
expense increased in the fiscal 1996 periods principally due to the inclusion
of the depreciation and amortization of Thimble Square, including goodwill
amortization of $56,000.
The loss from operations was $1,940,000 for the year ended November 30,
1996, compared to $1,666,000 for fiscal 1995, a difference of $449,000. That
difference is caused principally by the increase in SG&A expenses, as
discussed above.
Interest expense increased to $963,000 for the year ended November 30,
1996 as compared to $511,000 for fiscal 1995. The $452,000 increase results
from interest on higher accounts receivable based borrowings reflecting the
increase in sales and interest expense of $82,000 relating to Thimble
Square's assumed notes payable and long-term debt.
In March, 1995 the Company recognized other income of $1.9 million for
the net proceeds it received upon the settlement of its lawsuit against the
former auditors of NASCO. The absence of such a gain from fiscal 1996 is the
principal cause in the decline in other income between the current and prior
year periods, and also for $2.1 million of the change in the results of
continuing operations.
Results of Discontinued Operations
Sales for the discontinued NASCO Products operations decreased by $3.2
million from sales in fiscal 1994 of $5,937,000 to sales in fiscal 1995 of
$2,777,000. The decline in sales in fiscal 1995 reflected the effects of the
weakness in the sporting goods sector of the retail sector, and the effects
of the baseball and hockey strikes. The negative effect of those factors was
partially offset by sales the Company made at discounted prices to reduce its
investment in imported inventory. NASCO Products' fiscal 1995 sales were
also impacted by a decline in marketing efforts which took place during, and
as a result of, the negotiations with ANG. Additionally, sales for fiscal
1995 represent only sales through July 31, 1995, or for nine months.
The gross profits from the discontinued NASCO Products operations were
8.8% and 22.0% of sales for fiscal 1995 and 1994, respectively. The fiscal
1995 and 1994 gross profit percentages were adversely affected by the sales
made at discounted prices to reduce inventory in reaction to the decline in
industry-wide sales of sports licensed products.
The SG&A relating to NASCO Products' discontinued operations equaled
37.6% and 44.1% of sales in fiscal 1995 and 1994, respectively. The
percentage decreased in fiscal 1995, as compared to fiscal 1994, due to lower
commissions, as the majority of fiscal 1995 sales were made to accounts
serviced directly by the Company.
The Company recognized a gain from the sale of NASCO Products' domestic
operations of $301,000 during the third quarter of fiscal 1995. The gain
reflects the recording of the payments to be received from ANG over the next
three years at their present value, discounted at 10% per annum.
Reorganization of Spirco
As described in Note 4 of Notes to Consolidated Financial Statements,
the plan of reorganization for Spirco under Chapter 11 of the U.S. Bankruptcy
Code was confirmed on August 5, 1994 and became effective on November 7,
1994. Generally Spirco's plan of reorganization provided for the full
payment of all claims ranking above general unsecured claims, with claims
ranking below general unsecured claims receiving no distribution. With the
exception of administrative expenses, which were paid in cash with funds
borrowed under the Company's bank credit facility, the claims were paid
through the issuance of Innovo Group common stock. Spirco's equipment and
plant were transferred to Leasall, which assumed the related debt, and Spirco
was merged into Innovo Group, which acquired direct ownership of its other
assets.
The implementation of Spirco's plan of reorganization resulted in a
fiscal 1994 extraordinary gain of $699,000 (net of taxes of $429,000) from
the extinguishment of the unsecured and other claims that did not receive any
distribution under the plan of reorganization. In fiscal 1995 the Company
recorded extraordinary charges of $258,000 for changes in the estimates of
certain allowed claims. Certain claims ("the Class 3 claims") were
contributed to a trust ("the Class 3 Trust"), to which shares of the
Company's common stock were contributed. The Class 3 Trust sold those shares
and distributed the proceeds to satisfy the Class 3 claims. For financial
reporting purposes the Class 3 claims were reported as satisfied as the Class
3 Trust sold the shares of common stock and distributed the proceeds to the
claimants (see Note 4 of Notes to Consolidated Financial Statements).
Accordingly, the full impact of the plan of reorganization was not reflected
in the consolidated balance sheet until that process was completed in fiscal
1996. On an overall basis, Spirco's plan of reorganization had the effect of
eliminating liabilities of approximately $3.4 million and increasing
stockholders' equity by approximately $2.5 million.
The majority of Spirco's creditors were related to its discontinued
fundraising program operations and are not suppliers to the Company's
continuing operations. Spirco had continued during its reorganization to
make the scheduled payments on its mortgage debt, and the implementation of
the plan of reorganization resulted in a significant reduction in the amount
and periodic payments for the equipment debt assumed by Leasall.
Additionally, the Company's creditors had, since March, 1994, been generally
aware that unsecured Spirco creditors would receive little or no
distribution. Accordingly, the implementation of the plan did not have a
material adverse effect on the Company's liquidity. Additionally, the
implementation of Spirco's plan of reorganization did not have a material
impact on the Company's results of continuing operations.
Seasonality
The Company's business is seasonal. The greatest volume of shipments
and sales are, in general, made in the summer and fall, which coincide with
the Company's third and fourth fiscal quarters. During the first half of the
calendar year, the Company incurs the expenses of maintaining corporate
offices, administrative, sales and production employees, and developing the
marketing programs and designs for and conducting the majority of its sales
campaigns. Inventory levels also increase during the first half of the year.
Consequently, during the first half of each calendar year, corresponding to
the Company's first and second fiscal quarters, the Company utilizes
substantial working capital and its cash flows are diminished, whereas the
second half of the calendar year, corresponding to the Company's third and
fourth fiscal quarters, generally provides increased cash flows and the
build-up of working capital.
The following table presents unaudited quarterly consolidated financial
data for the four quarters in each of the years ended November 30, 1997 and
1996. The Company believes all necessary adjustments have been included in
the amounts stated below to present fairly the following selected quarterly
information when read in conjunction with the consolidated financial
statements appearing elsewhere herein. The information includes all normal
recurring adjustments the Company considers necessary for a fair presentation
thereof, in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Quarter Ended
__________________________________________________________________________
1997 1996
__________________________________________________________________________
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
__________________________________________________________________________
(In thousands, except for per share amounts)
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $2,220 $2,112 $2,898 $2,228 $1,319 $2,081 $2,304 $1,687
Gross profit 762 728 1,210 370 587 810 756 385
Income (loss)
from continuing
operations (457) (639) (253) (490) (161) (436) (890) (1,601)
Earnings (loss) per
share from continuing
operations (.02) (.03) (.01) (.01) (.02) (.04) (.05) (.08)
</TABLE>
Liquidity and Capital Resources
On an overall basis the Company's liquidity was materially restricted
throughout most of fiscal 1995, 1996 and the first three quarters of fiscal
1997. The repayment of the bank borrowings that had financed a significant
portion of the losses incurred by the Company's discontinued Spirco and NASCO
Products operations absorbed significant working capital. Although the
Company has been able to obtain working capital through the private placement
of debt and equity securities, the Company's losses, and the other factors
discussed above, have had adverse effects on the per share price of the
Company's common stock which in turn has impaired the amount and terms of
capital available from such sources. The Company has financed its operations
and its debt reductions through the issuance of common stock, borrowings and
internally generated cash flow. External financing sources provided net
capital of $1,895,000 and $2,776,000 in fiscal 1997 and 1996, respectively
and required net repayments of $1,787,000 in fiscal 1995, while operations
provided (absorbed) cash flow of $(1,247,000), $(2,743,000) and $1,704,000
during those periods.
Operating cash flows were a negative $1,274,000 for the year ended
November 30, 1997. The primary reason was a net loss of $1,315,000. There
were also net non-cash gains of $104,000, and decrease in receivables and
inventories of $357,000 which was offset by a corresponding decrease in
payables and accruals of $307,000.
Primarily, sales of the Company's common stock for the exercise of
common stock purchase warrants of approximately $2.2 million financed the
fiscal 1997 loss. A majority of the capital raised came in conjunction with
the private placement of $.6 million in the fourth quarter. (See Note 9 to
the consolidated financial statements.) The two private placements were $.20
and $.45, respectively.
The remaining 8% convertible debentures, recorded at $470,000 at
November 30, 1996 were converted into 4,127,931 shares of common stock in the
first and second quarters of 1997. Additionally, in fiscal 1997, 150,000
shares of common stock were used to extinguish $82,000 in liabilities.
Operating cash flows were a negative $2.7 million for fiscal 1996
principally as the result of the $3,088,000 million net loss, non-cash
charges of $672,000, a $836,000 increase in accounts receivable and
inventories and a $40,000 decrease in accounts payable and accrued expenses.
The increase in accounts receivable results from the increase in sales; at
November 30, 1996, accounts receivable equals approximately 58 days of sales,
as compared to 108 days at October 31, 1995.
The net loss, accounts receivable and inventory increases and accounts
payable and accrued expense decreases were financed with an aggregate of $2.8
million obtained from the sale of shares of the Company's common stock, or
the exercise of outstanding common stock purchase warrants, and new notes
payable or long-term debt borrowings (net of repayments on those notes and
the final repayment of NBD, as discussed below). $1.6 million of that
capital was raised during the second quarter and used to reduce trade debt,
which improved the Company's trade credit with its suppliers and allowed it
to finance through new trade credit the increases in accounts receivables and
inventories required to support the increases in sales. The private
placements of shares of common stock, which the Company undertook to obtain
the working capital needed to support the increase in sales, were undertaken
in February, April and May, 1996, at times when the Company's common stock
was trading at prices of between $.25 and $.63 per share.
During the third quarter of fiscal 1996 the Company raised an aggregate
of $2.0 million, principally from the issuance of 8% Convertible Debentures.
The Company undertook these financings to fund the development of products,
advance royalty deposits for the new Warner Bros. license, the repayment of
the notes issued in the acquisition of Thimble Square (repaid in September,
1996), the completion of the development of the Florida retail property, and
to further reduce accounts payable to increase the availability of trade
credit.
$1,205,000 of the 8% Convertible Debentures were converted into shares
of common stock during the fourth quarter of fiscal 1996 (see Note 6 of Notes
to Consolidated Financial Statements). Additionally, other notes payable or
other liabilities aggregating $423,000 were extinguished during fiscal 1996
through the issuance of a total of 1,269,470 shares of common stock (see Note
9 of Notes to Consolidated Financial Statements).
Cash flows from operations of $1,704,000 in fiscal 1995 were generated
principally from a $4.4 million reduction in inventories. The inventory and
accounts receivable reductions both principally resulted from the Company's
exit from its import operations. The cash flows generated from those sources
allowed the Company to reduce current liabilities, including notes payable,
by $5.5 million.
The Company's issuances of common stock in fiscal 1995 were principally
to extinguish debt (including the debt extinguished through Spirco's plan of
reorganization). In fiscal 1995 the Company issued 119,813 shares of common
stock to reduce by $128,000 the balance of notes payable outstanding at
October 31, 1994, and issued 187,049 shares upon the resolution of Class 8
claims in Spirco's reorganization proceeding that were in dispute when the
plan was initially implemented (see "- Reorganization of Spirco").
Additionally, the Class 3 Trust sold 359,049 shares of common stock for
proceeds of $590,000, which were distributed to the Class 3 claimants, and
$350,000 of debt and related accrued interest was tendered as payment for
372,149 shares of common stock that were subsequently issued to the former
creditor over the period November, 1995 to May, 1996.
In April, 1995 Innovo entered into an accounts receivable factoring
agreement with Riviera Finance under which the Company obtains advances of
80% of assigned Innovo accounts receivable. Riviera Finance charges 1% of
each invoice assigned plus 2% per month of average outstanding advances.
Thimble Square was added to the factoring agreement in April, 1996 after
Innovo Group's acquisition of that company. During the course of 1997,
Riviera revised the terms of their factoring agreement to first advance 90%
of eligible receivables of Innovo, and then, in October 1997, Riviera reduced
the rates the charged Innovo to .75% of each invoice plus 1.5% per month of
average outstanding advances. NP International's sales to foreign customers
are generally secured by letters of credit provided by the customer prior to
shipment, which are paid upon or shortly after delivery to the customer. The
Company utilizes those letters of credit to secure the purchase of the
foreign manufactured products included in such orders. Additionally, the
Company is generally able to obtain these orders sufficiently in advance of
requested delivery to contract for foreign manufacturing of quantities that
closely match its sales, and as a result can generally avoid significant
investments in foreign manufactured inventories. As a result, this aspect of
NP International's business neither requires or provides material borrowings.
In October 1997 the Company obtained a line of credit for $762,000 with
First American Bank collateralized by a certificate of deposit owned by the
Company for $462,000 and a certificate of deposit owned by a director of the
Company for $300,000. $489,000 was available on the line at November 30,
1997. In December 1997, First American Bank replaced Riviera as the
Company's factor. First American advances 90% of approved invoices and
charges Innovo 1% for the first 15 days an invoice is outstanding and .05%
per day thereafter to a maximum of 6%. Thimble Square is charged 1.5% for
the first 30 days an invoice is outstanding at .033% per day thereafter to a
maximum of 6%. There are no established limits on the First America Bank
factoring facility.
In December 1997, the Company negotiated a line of credit at First
First Independent Bank for $350,000 collateralized by the equipment of Innovo
and Leasall.
In 1995 the Company paid $936,000 to NBD to eliminate the then
outstanding borrowings on Innovo's existing accounts receivable and
inventory. The payment to NBD was funded from net proceeds of $1.9 million
which the Company received in March 1995 upon the settlement of its lawsuit
against the former auditors of Spirco (then NASCO). NBD agreed to continue
to advance funds against the accounts receivable and inventories of NASCO
Products through July 31, 1995. Effective August 1, 1995, NBD began to apply
to the balance due it all of the proceeds from the collection of NASCO
Products' accounts receivable, and payments being received by NASCO Products
from ANG.
In July, 1994, the Company obtained a $600,000 working capital loan
which was used principally to reduce past due royalties and commissions. The
original term of the loan expired in January, 1995. In April, 1995 the
Company paid accrued interest through that date, and reduced the outstanding
principal to $407,000, using $258,000 from the settlement with Spirco's
former auditors. An extension of the maturity to the earlier of October 15,
1995 or the repayment of the NBD facility was obtained in exchange for the
issuance of 69,500 shares of common stock and the increase of the loan's
interest rate to 20%. In January, 1996, the Company and the lenders extended
the maturity of the working capital loan to October 31, 1996 and reduced the
interest rate to 16% retroactively to October, 1995. The lenders were
granted a security interest, subordinate to NBD's, in the payments to be
received from ANG, to be used to retire the working capital loan once NBD had
been fully repaid. To obtain the extension, the Company issued 50,000 shares
of common stock and issued an additional 6,250 shares each month the
extension remained in force. The Company completed the repayment of the
borrowings under the NBD credit facility in the third quarter of fiscal 1996
with funds from payments received from ANG. The remaining payments received
from ANG were used to reduce the outstanding borrowings on the working
capital loan to $213,000 by November 30, 1996. In February, 1997, the
holders of $124,000 of such remaining balance agreed to accept $70,000,
payable by June 30, 1997 without additional interest, in full satisfaction of
such $124,000 balance, in exchange for the release of certain claims by the
Company against them. The maturity of the remaining $89,000 due under the
loan was extended, under the existing terms, and was paid in fiscal 1997.
The Company believes that working capital provided by operations and
amounts available under the December 1997 line of credit with First
Independent Bank will be sufficient to fund operations and required debt
reductions in fiscal 1998. However, due to the seasonality of the Company's
business, operating cash flows may be negative during the first half of the
year, and the Company may therefore be required to obtain capital through
debt or equity financing. The Company believes that additional capital, to
the extent needed, could be obtained from a private placement of equity
securities, the refinancing of Thimble Square's plants and equipment or the
sale of all or a portion of the Florida property. However, there can be no
assurance that this or other financing will be available if needed. The
inability of the Company to be able to fulfill any interim working capital
requirements would force the Company to have to constrict its operations.
Innovo Group is a holding company the principal assets of which are the
common stock of the operating subsidiaries. As a result, to satisfy its
obligations Innovo Group is dependent on cash obtained from the operating
subsidiaries, either as loans, repayments of loans made by Innovo Group to
the subsidiary, or distributions, or on the proceeds from the issuance of
debt or equity securities by Innovo Group. Leasall's first mortgage loan
contains restrictions on its ability to make advances or distributions to
Innovo Group; however, Leasall's activities are limited to the ownership of
the Company's real property and the servicing of the mortgage debt thereon.
The debt agreements of the other subsidiaries do not restrict advances or
distributions to Innovo Group.
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during
the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit date codes to perform computations
or decision-making functions. The Company has not yet performed a
comprehensive review of its computer programs to identify the systems that
would be affected by the Year 2000 issue nor has it yet reviewed the
Company's Year 2000 exposure to customers, distributors, suppliers and
banking institutions. Management is presently unable to estimate the costs
associated with modification or replacement of systems affected by the Year
2000 issue, however, these costs could be significant.
Other
Inflation has not had a significant impact on the operations or
financial position of the Company.
The Company has no material commitments or plans for capital
expenditures. The Company has certain commitments for minimum royalty
payments and may, under certain circumstances, be required to repurchase
certain shares of its common stock. See Notes 9 and 10 of Notes to
Consolidated Financial Statements.
Certain of the Company's sales are to foreign customers, and a material
portion of those sales involved products sourced from foreign suppliers.
Sales to foreign customers and purchases from foreign suppliers are generally
negotiated in U.S. dollars, and are settled at shipment, so that the exchange
rate risk for these transactions is not significant. The Company does not
utilize foreign currency contracts or other derivative instruments.
New Accounting Pronouncements
SFAS No. 128, "Earnings Per Share" is effective for periods ending
after December 15, 1997. This statement revised the manner in which earnings
per share is calculated and requires the restatement, when first applied, of
prior period earnings per share data. The Company does not expect the adoption
of this pronouncement to have a material effect on the previously reported
earnings per share data.
SFAS No. 130, "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. This pronouncement is not expected to have a material impact on
the Company's financial statements when adopted.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for years beginning after December 15, 1997. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This pronouncement is not
expected to have a material impact on the Company's financial statements when
adopted.
<PAGE>
Item 8. Financial Statements
Innovo Group Inc.
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38
Financial Statement Schedules are included at Item 14.
<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 November 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years ended November 30, 1997, 1996 and October 31,
1995 and for the period November 1, 1995 to November 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Innovo Group Inc. and subsidiaries as of November 30, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the years ended November 30, 1997, 1996 and October 31, 1995 and
for the period November 1, 1995 to November 30, 1995, in conformity with
generally accepted accounting principles.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
February 6, 1998
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's, except for share data)
<TABLE>
<CAPTION>
November 30, November 30,
1997 1996
____________ ___________
ASSETS
CURRENT:
Cash and cash equivalents (including
</CAPTION>
<S> <C> <C>
$462 pledged in 1997, Note 6) $ 469 $ 31
Accounts receivable (Note 6) 895 1,238
Inventories (Note 6) 1,582 1,749
Prepaid expenses 398 332
_______ _______
TOTAL CURRENT ASSETS 3,344 3,350
PROPERTY AND EQUIPMENT, net (Notes 6 and 7) 5,071 5,188
OTHER ASSETS 753 895
_______ _______
$ 9,168 $ 9,433
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 6) $ 1,131 $ 921
Current maturities of long-term
debt (Note 7) 211 224
Accounts payable 1,412 1,861
Accrued expenses 769 954
_______ _______
TOTAL CURRENT LIABILITIES 3,523 3,960
LONG-TERM DEBT, less current
maturities (Note 7) 1,854 3,079
OTHER - 119
_______ _______
TOTAL LIABILITIES 5,377 7,158
_______ _______
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 4 and 9):
Common stock, $.01 par - shares
authorized 70,000,000 in 1997 and
30,000,000 in 1996; issued 44,596,133
in 1997 and 26,530,577 in 1996 446 265
Additional paid-in capital 28,429 25,076
Promissory Note - Officer (703) -
Deficit (21,955) (20,640)
Treasury stock, 119,691 shares (2,426) (2,426)
_______ _______
TOTAL STOCKHOLDERS' EQUITY 3,791 2,275
_______ _______
$ 9,168 $ 9,433
_______ _______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except earnings per share information)
<TABLE>
<CAPTION>
Transition Year Ended
Year Ended Period October 31,
November 30, November 1-30, __________
1997 1996 1995 1995
________ _________ __________ ____
</CAPTION>
<S> <C> <C> <C> <C>
NET SALES $ 9,458 $ 7,391 $ 281 $ 5,276
COST OF GOODS SOLD 6,388 4,853 166 3,808
_______ _______ _______ ______
Gross profit 3,070 2,538 115 1,468
OPERATING EXPENSES
Selling, general and administrative 4,121 3,890 233 2,728
Depreciation and amortization 469 588 31 406
______ _______ _______ _______
Income (loss) from operations (1,520) (1,940) (149) (1,666)
INTEREST EXPENSE (766) (963) (33) (511)
OTHER INCOME (EXPENSE), net (Note 1(m)) 447 (185) (12) 2,110
______ _______ _______ _______
Income (loss) before income taxes
(benefit) (1,839) (3,088) (194) (67)
INCOME TAXES (BENEFIT) (Note 8) - - - -
_______ _______ _______ _______
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,839) (3,088) (194) (67)
_______ _______ _______ _______
DISCONTINUED OPERATIONS, NET OF TAXES (Note 3)
Results of discontinued NASCO Products
operations - - - (927)
Gain on sale of NASCO Products operations - - - 301
_______ _______ ______ ______
- - - (626)
_______ _______ _______ _______
EXTRAORDINARY ITEM (Notes 4 and 5) 524 - - (258)
_______ _______ _______ _______
NET INCOME (LOSS) $ (1,315) $ (3,088) $ (194) $ (951)
_______ _______ _______ _______
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.05) $ (.23) $ (.05) $ (.03)
Discontinued operations (Note 3) - - - (.24)
Extraordinary item (Notes 4 and 5) .01 - - (.09)
_______ _______ _______ _______
Net income (loss) $ (.04) $ (.23) $ (.05) $ (.36)
_______ _______ _______ _______
WEIGHTED AVERAGE SHARES OUTSTANDING 34,382 13,613 3,846 2,616
_______ _______ _______ _______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's except for shares)
<TABLE>
<CAPTION>
Additional Retained Promissory
Common Stock Stock paid-in earnings Note Treasury
Shares Amount Subscription capital (deficit) Officer stock Total
______ ______ ____________ _______ ________ ________ ________ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 1, 1994 2,146,372 $ 21 $ - $17,485 $(16,407) - $(3,471) $(2,372)
Issuance of common stock
Spirco reorganization (Note 4) 546,103 5 - 1,116 - - - 1,121
Extinguishment of debt 119,873 1 350 127 - - - 478
Loan extension 69,500 1 - 121 - - - 122
Other 2,500 - - 9 - - - 9
Costs of issuances - - - (60) - - - (60)
Expiration of put options 189,761 2 - 1,421 - - - 1,423
Cancellation of treasury shares (24,047) - - (1,082) - - 1,082 -
Net loss - - - - (951) - - (951)
_________ _____ _____ ______ ________ ______ _______ ______
BALANCE, October 31, 1995 3,050,062 30 350 19,137 (17,358) - (2,389) (230)
Issuances of common stock
Exercise of warrants 750,000 8 - 232 - - - 240
Subscription agreement 60,793 1 (58) 57 - - - -
Spirco reorganization (Note 4) 18,000 - - 12 - - - 12
Issuance of stock option (Note 7) - - - 700 - - - 700
Net loss - - - - (194) - - (194)
_________ _____ _____ ______ ________ ______ _______ ______
BALANCE, November 30, 1995 3,878,855 39 292 20,138 (17,552) - (2,389) 528
Issuances of common stock
Cash 7,316,282 73 - 1,737 - - - 1,810
Subscription agreements 311,356 3 (292) 289 - - - -
Spirco reorganization (Note 4) 312,994 3 - 295 - - - 298
Manufacturing agreement 1,200,000 12 - 388 - - - 400
Thimble Square acquisition (Note 4)1,241,176 12 - 621 - - - 633
Extinguishment of debt 1,269,470 13 - 410 - - - 423
Conversion of debentures (Note 7) 7,521,912 75 - 915 - - - 990
Exercise of warrants and options 3,372,730 34 - 412 - - - 446
Loan fees (Note 7) 105,802 1 - 31 - - - 32
Debt settlement - - - - - - (37) (37)
Issuance of warrants (Note 8) - - - 40 - - - 40
Issuance costs - - - (200) - - - (200)
Net loss - - - - (3,088) - - (3,088)
_________ _____ _____ ______ _______ ______ ______ _____
BALANCE, November 30, 1996 26,530,577 265 - 25,076 (20,640) - (2,426) 2,275
Issuances of common stock
Smith group purchase 6,750,000 68 - 1,282 - - - 1,350
Cash 1,500,000 15 _ 660 - - - 675
Conversion of debenture 4,127,931 41 - 359 - - - 400
Exercise of stock purchase right 4,000,000 40 - 1,085 - (1,125) - -
Conversion of convertible notes 2,100,000 21 - 383 - - - 383
Exercise of warrants 765,000 8 - 135 - - - 143
Debt settlement 75,000 1 - 50 - - - 51
Other 247,625 2 - 41 - - - 43
Cost of issuances - - _ (85) - - - (85)
Retire shares subject to stock
purchase right (1,500,000) (15) - (407) - 422 - -
Warrant repurchase - - - (150) - - - (150)
Net Loss - - - - (1,315) - - (1,315)
__________ ____ _____ _______ _______ ______ ________ ______
BALANCE, November 30, 1997 44,596,133 $446 $ 0 $28,429 $(21,955) $ (703) $(2,426) $3,791
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
<TABLE>
<CAPTION>
Year Ended Transition Year Ended
November 30, Period October 31,
_______________________ November 1-30, __________
1997 1996 1995 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
</CAPTION>
<S> <C> <C> <C> <C>
Net (loss) $(1,315) $(3,088) $ (194) $ (951)
Adjustments to reconcile net
(loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 469 588 26 412
Provision for uncollectible accounts 153 78 - 102
(Gain) on disposal of discontinued
operations - - - (395)
Extraordinary (gain) or loss (524) - - 258
Other - 6 (2) -
Changes in assets and liabilities:
Accounts receivable 190 (430) 821 279
Inventories 167 (406) (14) 4,430
Prepaid expenses (66) 560 (672) (25)
Accounts payable (173) 558 (688) (867)
Accrued expenses (134) (598) 556 (1,032)
Other (14) (11) (2) (507)
______ ______ _______ ______
Cash provided by (used in) operating activities (1,247) (2,743) (169) 1,704
______ ______ _______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (469) (379) - (19)
Increase in other assets 43 - - 4
Proceeds from sale of discontinued operations - 257 - 100
Disposal of fixed assets 216 - - -
______ ______ _______ ______
Cash provided by (used in) investing activities (210) (122) - 85
______ ______ _______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition of notes payable 869 - 300 356
Repayments of notes payable (221) (444) (245) (1,970)
Additions to long-term debt - 1,675 - -
Debt issue costs - (285) - -
Repayments of long-term debt (729) (226) (12) (113)
Proceeds from issuance of common stock 2,168 2,256 240 -
Stock issuance costs (85) (200) - (60)
Warrant repurchase (150) - - -
Other 43 - - -
______ ______ _______ ______
Cash provided by (used in) financing activities 1,895 2,776 283 (1,787)
______ ______ _______ ______
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 438 (89) 114 2
CASH AND CASH EQUIVALENTS, at beginning of period 31 120 6 4
______ ______ _______ ______
CASH AND CASH EQUIVALENTS, at end of year $ 469 $ 31 $ 120 $ 6
______ ______ _______ ______
</TABLE>
See accompanying notes to consolidated financial statements.
<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 International, Inc. ("NP International") and
Thimble Square, Inc. ("Thimble Square"), which Innovo Group acquired in
April, 1996 (see Note 2). Innovo Group and its wholly-owned subsidiaries are
referred to as "the Company".
Innovo is a domestic manufacturer and distributor of cut and sewn canvas
and nylon consumer products, such as tote and other bags and aprons, which
are sold to the utility, craft, sports licensed and advertising specialty
markets. Innovo's sports licensed products are produced with logos or other
designs licensed from various sports and entertainment related licensors.
Innovo grants credit to customers, substantially all of which are retail
merchandisers or are in the premium incentive industry.
NP International distributes in foreign, principally European markets,
nylon sports bags and backpacks, imprinted or embroidered with logos or other
designs licensed from various sports and entertainment related licensors. NP
International generally receives payment at the time of shipment.
Thimble Square manufactures and markets ladies' ready-to-wear at home,
sleep and lounge wear. Its products are sold to mail order companies,
retailers and through mail order distribution. Thimble Square also provides
"sew-only" manufacturing for other distributors of private-label sleep and
lounge wear; in those instances, the customer provides the raw materials and
Thimble Square manufactures the products to the customer's specifications.
Thimble Square grants credit to apparel retailers, mail order distributors,
and to other apparel distributors.
NASCO Products, Inc., also a wholly owned subsidiary, imported a line of
canvas and nylon sport bags, backpacks, equipment bags, and other sporting
goods products imprinted or embroidered with emblems and logos licensed from
various sports related licensors, principally the major professional sports
teams. NASCO Products, Inc. granted credit to customers, substantially all
of which were major retailers and mail order catalog businesses. Effective
July 31, 1995 the Company disposed of and discontinued the import operations
of NASCO Products, Inc. (see Note 3).
The Company operated in a single business segment, the manufacture and
sale of Innovo's and NP International's canvas and nylon consumer products,
throughout fiscal 1995. Thimble Square's operations are classified as a
separate business segment ("apparel products"). See Note 11. Sales to two
customers (one a customer of Innovo, and one a customer of Thimble Square)
accounted for 28.8%, and 11.1% of net sales for the year ended November 30,
1997. Sales to foreign customers, principally in Europe, accounted for
16.4%, 12,1% and 27.5% of net sales in fiscal 1997, 1996 and 1995,
respectively.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Changes in fiscal year end
Effective November 1, 1995, the Company changed its fiscal year to end
on November 30. Previously, the Company's fiscal year ended on October 31.
The results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 are separately presented in the
accompanying consolidated financial statements.
(c) Principles of consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
(d) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates most significantly affect the amortization of
goodwill (see Note 1(g)), the evaluation of contingencies (see Note 10), and
the determination of allowances for accounts receivable (see Note 1(i)) and
inventories (see Note 1(e)).
(e) Inventories
Inventories are stated at the lower of cost, as determined by the first-
in, first-out method, or market.
Inventories consisted of the following:
<TABLE>
<CAPTION>
November 30,
1997 1996
(000's) (000's)
</CAPTION>
<S> <C> <C>
Finished goods $ 680 $ 440
Work-in-process 246 719
Raw materials 692 663
______ ______
1,618 1,822
Less inventory reserve (36) (73)
______ ______
$ 1,582 $ 1,749
______ ______
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Property, plant, equipment, depreciation and amortization
Property, plant and equipment, including assets utilized under capital
leases, are stated at cost. Depreciation and amortization are provided in
amounts sufficient to allocate the cost of depreciable assets to operations
over their estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the lives of the respective leases or the
estimated service lives of the improvements, whichever is shorter. On sale
or retirement, the asset cost and related accumulated depreciation or
amortization are removed from the accounts, and any related gain or loss is
included in the determination of income.
Fixed assets and fixed assets to be disposed of are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 121. Under the
standard, where there is a significant change in use or value of a long-lived
asset, the asset is written down to recoverable value if it is determined
that recoverable value is less than the Company's cost basis. SFAS No. 121
was adopted in fiscal 1997 and has not had a material effect on the Company's
consolidated financial statements.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Useful
Lives November 30,
(Years) 1997 1996
_______ _________ _________
(000's) (000's)
Buildings, land and
</CAPTION>
<S> <C> <C> <C>
improvements 88-20 $ 4,575 $ 4,351
Machinery and equipment 5-8 1,526 1,766
Furniture and fixtures 3-8 674 412
Transportation equipment 5 65 65
Leasehold improvements 5-8 3 11
______ ______
6,843 6,605
Less accumulated depreciation
and amortization (1,772) (1,417)
______ ______
Net property and equipment $ 5,071 $ 5,188
______ ______
</TABLE>
The cost and accumulated depreciation for assets utilized under capital
leases were $475,000 and $36,000, respectively, at November 30, 1997.
Due to the incorporation of the Pembroke, Georgia operation into Baxley,
Georgia, the above also includes the Pembroke real estate, that is held for
sale, recorded at a net book value of $500,000 at November 30, 1997. The
Pembroke real estate is recorded in the apparel products business segment and
no gain or loss was recognized in relation to the classification of the asset
as held for sale.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Other assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
November 30,
1997 1996
(000's) (000's)
Goodwill, net of accumulated
</CAPTION>
<S> <C> <C>
amortization $ 702 $ 786
Debt issue costs, net 8 80
Other 43 29
_____ ______
$ 753 $ 895
_____ ______
</TABLE>
Goodwill, which arose in the Company's acquisition of Thimble Square, is
being amortized over a period of ten years. The Company assesses the
recoverability of goodwill by comparison to the projected undiscounted cash
flows from the acquired operations. If such a comparison indicates
impairment, unamortized goodwill will be reduced to equal the present value
of such projected cash flows. The amortization of goodwill for the years
ended November 30, 1997 and 1996 were $84,000 and $56,000, respectively.
Accumulated amortization at November 30, 1997 and 1996, were $140,000 and
$56,000, respectively.
Cost incurred in the issuance of debt securities or to obtain bank
financing are capitalized and are amortized as a component of interest
expense using the level yield method.
The Company charges to expense in the year incurred costs to develop new
products and programs. Amounts charged to expense approximated $182,000,
$363,000 and $39,000 in fiscal 1997, 1996 and 1995, respectively.
(h) Income taxes
The Company files a consolidated income tax return and provides for
income taxes under Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under that standard, deferred income
taxes are provided for temporary differences arising from differences between
financial statement and federal income tax bases of assets and liabilities.
(i) Revenue recognition
Revenues are recorded on the accrual basis of accounting when the Company
ships products to its customers. The Company provides an allowance ($106,000
and $66,000 at year ended November 30, 1997 and 1996, respectively) for
estimated losses to be incurred in the collection of accounts receivable.
(j) Earnings per share
Earnings (loss) per share are computed using weighted average common
shares and dilutive common equivalent shares outstanding. Common stock
equivalents consist of outstanding options and warrants. Common stock
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
equivalents were not considered in the computation of weighted average common
shares as their effect would have been antidilutive.
On June 8, 1995 the Company declared a one-for-ten reverse stock split,
effective June 19, 1995. All share and per share amounts have been restated
to reflect the effects of the reverse stock split.
(k) Stock Options
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recorded in conjunction with
options issued to employees. Had compensation cost been determined based on
the fair value of the options at the grant date, consistent with the method
prescribed by SFAS No. 123, the Company's net earnings would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(000's except per share information)
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Net income (loss) - as reported $(1,315) $(3,088)
Net income (loss) - pro forma (1,496) (3,088)
Net income (loss) per common share - pro forma (.04) (.23)
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1997; expected volatility of 40%; risk-free interest rate
of 5.8%; and expected lives from one to five years.
(l) Statement of cash flows
Cash and cash equivalents are generally comprised of highly liquid
instruments with original maturities of six months or less, such as treasury
bills, certificates of deposit, commercial paper and call and time deposits.
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, October 31,
1997 1996 1995
(000's) (000's) (000's)
</CAPTION>
<S> <C> <C> <C>
Cash paid for interest $ 767 $ 618 $ 576
Cash paid for income taxes $ - $ - $ -
</TABLE>
During fiscal 1997 the Company issued stock to extinguish an aggregate
of $855,000 of liabilities.
During fiscal 1996 the Company issued common stock in connection with the
acquisition of Thimble Square (see Note 2), to extinguish an aggregate of
$423,000 in liabilities, as a loan fee extension, to acquire manufacturing
services (see Notes 4, 6 and 9) and upon the conversion of $1,205,000 of 8%
Convertible Debentures (see Note 7). The Company also issued stock warrants
and a mortgage note to acquire property for $1.5 million (see Note 7).
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
During fiscal 1995 the Company issued common stock and common stock
subscriptions to extinguish an aggregate of $1,599,000 in liabilities, as a
loan extension fee, and for stock awards. See Notes 4, 6 and 9.
(m) Other Income (Expense)
Other income in fiscal 1995 includes a $1.9 million gain from the
settlement from litigation.
(n) Financial Instruments
The fair values of the Company's financial instruments (consisting of
cash, accounts receivable, accounts payable, notes payable, long-term debt
and notes payable officer) do not differ materially from their recorded
amounts.
The Company neither holds, or is obligated under, financial instruments
that possess off-balance sheet credit or market risk.
(o) New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income" is effective for years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. This pronouncement is not expected to have a material impact on
the Company's financial statements when adopted.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for years beginning after December 15, 1997. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This pronouncement is not
expected to have a material impact on the Company's financial statements when
adopted.
SFAS No. 128, "Earnings Per Share" is effective for periods ending after
December 15, 1997. This statement revised the manner in which earnings per
share is calculated and requires the restatement, when first applied, of
prior period earnings per share data. The Company does not expect the
adoption of this pronouncement to have a material effect on the previously
reported earnings per share data.
NOTE 2 - ACQUISITIONS
On April 12, 1996, the Company acquired 100% of the outstanding common
stock of Thimble Square, Inc. ("Thimble Square") for an aggregate of $1.1
million, paid by the issuance of shares of the restricted common stock of the
Company. In a concurrent transaction, Thimble Square acquired from its
stockholders a plant it had previously leased from them in exchange for (a)
$300,000 paid by the issuance of shares of the restricted common stock of
Innovo Group, and (b) the issuance by Thimble Square of $200,000 of unsecured
notes payable, which were paid in September, 1996. The Company also issued
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (continued)
95,686 shares in payment of a finder's fee related to the acquisition.
A total of 2,840,784 shares of the Company's common stock were initially
issued to effect the acquisition. However, in August, 1996, upon completion
of the audit of Thimble Square's financial statements and the appraisal of
its plants and equipment, the number of shares was, pursuant to the terms of
the merger agreement, reduced by 519,608 shares. Additionally, at the time
of the acquisition Thimble Square owned 1,080,000 shares of the Company's
common stock as a result of the January, 1996 manufacturing agreement between
the companies (see Note 7). As a result of the acquisition, Innovo Group
reacquired, and retired, those shares, and the net increase in the number of
shares of Innovo Group common stock outstanding was 1,241,176 shares.
The aggregate purchase price, as adjusted, of $1,584,000 (which includes
the finder's fee of $49,000 and acquisition costs of $200,000) was allocated
to Thimble Square's assets and liabilities, based on their fair values, as
follows:
<TABLE>
<CAPTION>
(000's)
</CAPTION>
<S> <C>
Current assets $ 220
Property and equipment 1,525
Investment in Innovo Group
common stock 551
Goodwill 842
Current liabilities (924)
Long-term debt (546)
Other liabilities (84)
_______
$ 1,584
_______
</TABLE>
The acquisition was accounted for as a purchase, and Thimble Square's
operating results are included in the consolidated results of operations from
April 12, 1996. The following unaudited pro forma information indicates what
net sales, income from continuing operations, and income from continuing
operations per share, would have been had the acquisition of Thimble Square
been completed on December 1, 1995 and November 1, 1994, respectively. This
unaudited pro forma information has been prepared for illustrative purposes
only and is not necessarily indicative of the Company's future financial
position or results of operations.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (concluded)
<TABLE>
<CAPTION>
Year Ended
________________________
November 30, October 31,
1996 1995
___________ __________
(000's except per share amounts)
</CAPTION>
<S> <C> <C>
Sales $ 7,824 $8,905
Income (loss) from
continuing operations (3,300) (165)
Income (loss) from continuing
operations per share $ (.24) $ (.04)
</TABLE>
NOTE 3 - DISCONTINUED OPERATIONS
The components of income (loss) from discontinued operations are as
follows:
<TABLE>
<CAPTION>
Year ended
October 31,
________
1995
(000's)
Results of discontinued NASCO
</CAPTION>
<S> <C>
Products operations $ (927)
Gain on sale of NASCO Products
operations 301
_______
$ (626)
_______
</TABLE>
On July 31, 1995 the Company executed an agreement with Accessory Network
Group ("ANG") under which ANG succeeded to all of the rights held by NASCO
Products to market and distribute in the United States the National Football
League, NBA, Major League Baseball and National Hockey League logoed sports
bags, back packs and equipment bags NASCO Products previously imported and
distributed.
For each license ANG paid NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining
$650,000 was payable, without interest, in monthly installments equal to 5%
of ANG's aggregate sales of the licensed products. The final payment was
made in December, 1997. NASCO Products transferred to ANG its existing
inventory of these products, for which ANG paid approximately 67% of NASCO
Products' cost over a six month period. The gain of $301,000 recognized in
fiscal 1995 from the sale of the NASCO Products' domestic operations reflects
the recording of the payments to be received from ANG over the next three
years at their present value, discounted at 10% per annum. Payments from ANG
were pledged and paid to certain secured debts of Leasall, Innovo and Innovo
Group of which NASCO Products was a guarantor.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - DISCONTINUED OPERATIONS (concluded
In addition, through December 1997, ANG was making ongoing annual
payments to NASCO Products of 2% of sales under each of the National Football
League, Major League Baseball and National Hockey League licenses, and 1% of
sales under the NBA license. ANG will pay 1.5% and .5% of sales hereafter.
The payments will continue for forty years unless a license expires or is
terminated and is not renewed or reinstated within twelve months.
The revenues and expenses relating to the disposed NASCO Products
imported product line were as follows:
<TABLE>
<CAPTION>
Year ended
October 31,
___________
1995
____
(000's)
</CAPTION>
<S> <C>
Net sales $ 2,777
Cost of goods sold (2,532)
Selling, general and
administrative expenses (1,043)
Interest expense (79)
Other (50)
Income tax benefit -
________
Income (loss) from operations $ (927)
________
</TABLE>
Interest expense was allocated to the discontinued operations in
accordance with EITF 87-24, which provides for allocating interest to a
discontinued operation based on the relationship of the net assets employed
in the discontinued operation to the Company's consolidated net assets.
NOTE 4 - REORGANIZATION OF SPIRCO
On August 5, 1994 the U.S. Bankruptcy Court for the Western District of
Pennsylvania issued an order confirming the plan of reorganization of Spirco,
and the confirmed plan was implemented and made effective on November 7,
1994. Spirco had filed for reorganization under Chapter 11 of the Bankruptcy
Code on August 27, 1993. Innovo Group, Innovo, NP International and NASCO
Products were not parties to the filing.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - REORGANIZATION OF SPIRCO (concluded)
Spirco's creditors were divided into six categories. Administrative
expenses were paid in cash. Spirco's equipment and mortgage debt, which had
been guaranteed by Innovo Group, were assumed by Leasall Management, Inc.
("Leasall"), a newly formed subsidiary. Other Spirco liabilities that were
secured or that had been guaranteed by Innovo Group were paid in full through
the issuance of 222,000 shares of Innovo Group common stock on the basis of
$2.84 per share. The claim of the Internal Revenue Service was satisfied
through the issuance to the IRS of 25,000 shares of common stock.
Additionally, the IRS foreclosed on 30,000 shares of common stock that had
been personally pledged to it by the Company's president.
Priority claims for sales, property and unemployment taxes held by state
and local taxing authorities, estimated to total $826,000 after the
resolution of disputes, were contributed to a trust ("the Class 3 Trust") to
which Innovo Group issued 584,000 shares of common stock. The plan of
reorganization provided that the Class 3 Trust would sell the shares of
common stock and distribute the net proceeds therefrom to the Class 3
claimants. During fiscal 1995 and the period November 1, 1995 to November
30, 1995, the Class 3 Trust received, and distributed to the Class 3
claimants, $590,000 and $12,000, respectively, from the sale of 359,054 and
18,000 shares of common stock. During fiscal 1996 the Class 3 Trust sold an
additional 286,678 shares, and, with the distribution of the proceeds of
$271,000 therefrom, completed the payment of the Class 3 claims.
Additionally, an aggregate of 187,049 shares were issued to settle certain
disputed claims.
For financial reporting purposes the shares of common stock issued
pursuant to Spirco's plan of reorganization to satisfy the secured, Innovo
Group guaranteed and IRS claims were recorded as issued on October 31, 1994
at a value of $2.84 per share, which represents the per share value
determined pursuant to the plan of reorganization. The claims contributed to
the Class 3 Trust were reflected as a separate item on the Company's
consolidated balance sheet. As shares of common stock were sold by the Class
3 Trust, the satisfaction of those claims and the issuance of those shares
was reflected based on the net proceeds received and distributed by the Class
3 Trust. The implementation of Spirco's plan of reorganization resulted in
the discharge of all of its remaining indebtedness, including the claims of
Spirco's general unsecured creditors and of Innovo Group, Innovo and NASCO
Products, for intercompany advances to Spirco. During fiscal 1995 the
Company recorded extraordinary charges of $285,000 for changes in the
estimates of allowed claims.
NOTE 5 - DEBT SETTLEMENTS
In the fourth quarter of 1997 the Company settled debts with 44 creditors
recorded at $930,000. The Company made cash payments totaling $406,000,
thereby recognizing an extraordinary gain in the amount of $524,000.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
November 30,
1997 1996
____________ ________
(000's) (000's)
</CAPTION>
<S> <C> <C>
Accounts receivable factoring facility $ 504 $ 468
Bank credit facility 273 -
Working capital loan - 213
NP International loan 251 100
Other 103 140
______ ______
$ 1,131 $ 921
______ ______
</TABLE>
Innovo and Thimble Square previously borrowed under an accounts
receivable factoring facility with Riviera Finance ("Riviera") under which
Riviera advanced 90% and 80% of assigned accounts receivable, respectively.
The factoring facility provides for advances up to $1,500,000. Riviera
charged .75% of each invoice assigned plus 1.5% per month of outstanding
advances. Borrowings under the facility are collateralized by assigned
accounts receivable, which aggregated $603,000 and $652,000 at November 30,
1997 and 1996, respectively.
In December 1997 the Company replaced its accounts receivable factoring
facility with Riviera with a facility with First American Bank ("First
American"). Under the facility, First American advances 90% of approved
invoices. There is no established limit on the total facility. First
American charges Innovo 1% for the first 15 days an invoice is outstanding
and .05% per day thereafter until paid, up to a maximum of 6%. Thimble
Square is charged 1.5% for the first 30 days an invoice is outstanding and
.033% per day thereafter, also to a maximum of 6%. The facility is secured
by first position on accounts receivable and inventory and personal
guarantees of management members of the Smith Group (see Note 9(a)).
In December, 1995, the Company obtained a $300,000 short-term loan,
collateralized by the common stock of NP International, which bears interest
at 12%. At November 30, 1997 and 1996, $251,000 and 100,000, respectively,
was outstanding on this loan. The lender is a company owned and controlled
by a relative of the Company's President. The Company is in default on the
payment terms of this note but has not received notice or demand from DWL.
In October 1997 Innovo Group obtained a secured bank line of credit of
$762,000. $273,000 was outstanding on the line at November 30, 1997. The
line is collateralized by a $462,000 certificate of deposit owned by the
Company and a $300,000 certificate of deposit owned by a director of the
Company. The line expires along with the pledge of certificates of deposit
in May 1998. The line of credit is at the bank's prime which was 8.5% at
November 30, 1997.
Also in December 1997 the Company entered into a revolving line of credit
with a bank for $365,000 at a fixed rate of 9.5%. The line is secured by
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - NOTES PAYABLE (concluded)
equipment owned by Innovo and Leasall and the personal guarantees of
management members of the Smith Group. The line of credit expires in
December 1998.
The weighted average interest rate on outstanding short-term borrowings
was 17.7% and 18.7% at November 30, 1997 and 1996, respectively.
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
November 30, November 30,
1997 1996
(000's) (000's)
Notes payable to ICON Cash Flow Partners,
</CAPTION>
<S> <C> <C>
L.P., Series D ("ICON") $ - $ 268
Leasall first mortgage loan 783 876
Non-recourse first mortgage on
Florida property 759 787
Thimble Square SBA loan 194 214
Thimble Square first mortgage loan 112 140
Capital plant lease obligation 211 221
Capitalized equipment lease obligation - 151
8% Convertible Debentures - 470
Other 6 176
______ ______
Total long-term debt 2,065 3,303
Less current maturities (211) (224)
______ ______
$ 1,854 $ 3,079
______ ______
</TABLE>
The ICON loan bore interest at 11% and was collateralized by all the
equipment and personal property located at the Company's main office in
Springfield, Tennessee. The loan was originally obtained by Spirco, and was
assumed by Leasall in connection with the implementation of Spirco's plan of
reorganization (see Note 4). Innovo and NASCO Products had each guaranteed
the obligations of Leasall under this loan.
Leasall's first mortgage loan is collateralized by a first deed of trust
on the real property in Springfield, Tennessee and by an assignment of key-
man life insurance on the president of the Company in the amount of $950,000.
The loan bears interest at 2.75% over the lender's prime rate (which was
8.50% at November 30, 1997) and requires monthly payments of $9,900. In
order for the loan to be guaranteed by the Small Business Administration
("SBA"), Innovo Group, Innovo, NASCO Products, and the president of the
Company agreed to act as guarantors for Spirco's obligations under the loan
agreement.
In November, 1995 the Company acquired a facility which it developed as
an indoor retail outlet featuring antique and flea market shops. The $1.5
million purchase price was paid by the issuance to the seller of (i) warrants
to purchase 1 million shares of the Company's common stock, exercisable at
$.01 per share through March, 1998, and (ii) an $800,000 first lien non-
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - LONG-TERM DEBT (continued)
recourse mortgage secured by the property. The mortgage is payable $25,500
quarterly; all unpaid principal, and interest (which accrues at the rate of
9.5% per annum) is due January, 2006. Construction period interest of
$79,000 was capitalized during fiscal 1996. The stock option was exercised
in March, 1996. The Company also issued a warrant, exercisable for the
purchase of 100,000 shares at $.01 per share, as a finder's fee on the
property acquisition. The warrant was exercised in April, 1996.
Thimble Square's SBA and first mortgage loans are collateralized by liens
on that company's Pembroke, Georgia plant and certain machinery and
equipment. The loans bear interest at 2.75% and 2%, respectively, over the
prime rate. The capital plant lease obligation represents the lease on
Thimble Square's Baxley, Georgia plant. Interest on the capital plant lease
is imputed at the rate of 10% per annum.
In fiscal 1996 the Company privately placed $1,625,000 of 8% Convertible
Debentures due September 30, 1998. As of November 30, 1996 $1,205,000 of the
8% Convertible Debentures had been converted into 7,521,912 shares of common
stock. During fiscal 1997 the remaining $470,000 of convertible debentures
was converted into 4,127,932 shares of common stock.
Principal maturities of long-term debt as of November 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Year ending November 30, Amount
(000's)
</CAPTION>
<C> <C>
1998 $ 211
1999 117
2000 284
2001 120
2002 134
Thereafter 1,199
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - INCOME TAXES
No Provision for income tax for any of the last three fiscal years
has been provided for, as income tax benefits arising from net operating losses
are offset by corresponding increases in the deferred tax asset valuation.
Net deferred tax assets result from the following temporary
differences between the book and tax bases of assets and liabilities:
<TABLE>
<CAPTION>
November 30,
1997 1996
(000's) (000's)
Deferred tax assets:
</CAPTION>
<S> <C> <C>
Allowance for doubtful accounts $ 36 $ 22
Inventory reserves 18 57
Property and equipment 111 91
Other 31 62
Benefit of net operating loss
carryforwards 3,664 3,183
______ ______
Gross deferred tax assets 3,860 3,415
Deferred tax assets valuation allowance (3,860) (3,415)
______ ______
Net deferred tax assets $ - $ -
______ ______
</TABLE>
The valuation allowance for deferred taxes decreased in fiscal 1996
as the result of the reduction in the net operating loss carryforward
resulting from the limitations of Internal Revenue Code Section 382, as
discussed below.
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
Year ended
November 30, October 31,
1997 1996 1995
_______ _____ __________
(000's)
Computed tax (benefit)
</CAPTION>
<S> <C> <C> <C>
at the statutory rate (34%) (34%) (34%)
State income tax - - -
Change in valuation allowance 34% 34% 34%
______ ____ ____
- - -
______ ____ ____
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - INCOME TAXES (concluded)
The Company has consolidated net operating loss carryforwards of
approximately $27.9 million expiring through the year 2012. However, as the
result of "changes in control" as defined in Section 382 of the Internal
Revenue Code, approximately $25 million of such carryforwards may be subject
to an annual limitation, which is currently estimated to be a minimum of
$432,000, subject to adjustment. Such limitation would have the effect of
limiting to approximately $9 million the future taxable income which the
Company may offset through the year 2012 through the application of its net
operating loss carryforwards. A subsidiary of the Company has state tax net
operating loss carryforwards of approximately $12.1 million to offset state
taxable income. These carryforwards expire in varying amounts between the
years 1999 and 2006.
NOTE 9 - STOCKHOLDERS' EQUITY
(a) Common Stock
During fiscal 1995 the Company issued an aggregate of 119,873 shares
of common stock to extinguish an aggregate of $128,000 of unsecured notes
payable, which were past due. Additionally, in October 1995 the holder of
unsecured notes aggregating $319,000 tendered the notes, and accrued interest
of $31,000, as a subscription for shares of the Company's common stock.
Under the subscription agreement the Company issued 372,149 shares over the
six month period ending May, 1996, on the basis of 75 percent of the market
prices at the times the shares are issued.
In January, 1996, the Company entered into an agreement to obtain
contract manufacturing services, and issued to the contractor (Thimble
Square) 1,200,000 shares of its common stock as prepayment for $400,000
(approximately 57,000 hours) of manufacturing operations which the Company
may use on an as needed basis through July 31, 1997. Thimble Square owned
1,080,000 of such shares at the time of its acquisition by the Company (see
Note 2), as the result of which the agreement was canceled and the Company
reacquired, and retired, such 1,080,000 shares.
During the first quarter of fiscal 1996 the Company settled an
outstanding obligation held by a creditor who had previously received 66,619
shares of common stock as a partial payment. As a part of the settlement the
creditor returned the shares to the Company. The returned shares were
recorded as treasury stock at their market value.
In connection with the private placement of shares of its common stock
for cash during the first quarter of fiscal 1996, the Company issued warrants
for the issuance of 2,272,730 shares of its common stock, exercisable through
January, 1998 at a per share price equal to 50% of the exercise date market
price of the Company's common stock. The warrants were exercised in April
and May, 1996.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
During the third quarter of fiscal 1996 the Company completed the
private placement of aggregate of 1,751,516 shares of its common stock for
net cash proceeds of $560,000. The placements included the issuance of
warrants for the purchase of 775,758 shares of the Company's common stock
exercisable for five years at an exercise price of $.52 per share. In
connection with the third quarter fiscal 1996 placements of common stock and
the 8% Convertible Debentures, the Company issued to the placement agent
warrants (Class I warrants) for the purchase of an aggregate of 1,220,588
shares of its common stock, subject to adjustment, exercisable for a period
of five years at an exercise price of $.17 per share. In the third quarter
of fiscal 1997 all the outstanding Class I warrants were repurchased by the
Company for $150,000.
An aggregate of 1,269,470 shares of common stock, and 250,000 Class E
and 50,000 Class G common stock purchase warrants, were issued during fiscal
1996 to extinguish an aggregate of $423,000 of indebtedness. The
extinguished indebtedness included the remaining $300,000 of Subordinated
Collateralized Notes.
During the first quarter of fiscal 1997 the Company issued $271,000 in
10% unsecured convertible promissory notes due January 1998. The notes were
convertible into 2,100,000 shares of common stock. Also, in connection
therewith, the Company issued 500,000 Class J warrants. the warrants expired
in January 1998 and held an option price of $.125 per share. In the second
quarter of fiscal 1997 the notes were converted and the warrants were
exercised for net cash proceeds of $63,000.
On April 4, 1997 the Company's stockholders approved the increase in
the number of authorized shares of common stock to 70 million.
On August 4, 1997, the Company's president exercised a stock purchase
right (the "Purchase Right") awarded her by the board of directors on
February 12, 1997. The Purchase Right entitled her to purchase up to 4
million shares of the Company's common stock during the period April 30, 1997
to April 30, 2002 at a price of $.28125 per share. The officer paid for the
shares by the delivery of a non-recourse promissory note, bearing no
interest, due April 30, 2002. The note is collateralized by the shares
purchased therewith, which shares would be forfeited to the extent the note
is not paid on or before maturity, and would be payable (including
prepayable), in whole or in part, by the delivery to the Company of (i) cash,
or (ii) other shares of the Company's common stock that the officer has owned
for a period of at least six months, which shares would be credited against
the note on the basis of the closing bid price for the Company's common stock
on the date of delivery. Any dividends or distributions made with respect to
shares collateralizing any unpaid note will be held in the escrow to be
established for such shares and note until such time, if any, as the related
note is paid. In November 1997, 1,500,000 shares subject to this Purchase
Right were returned to the Company for a pro-rata reduction in the note.
Concurrently, Ms. Anderson-Lasko relinquished any further rights to such
1,500,000 shares of common stock. At November 30, 1997, $703,000 remains
outstanding under this Promissory Note.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
On August 13, 1997, the Company issued 6,750,000 shares of common
stock to a group of investors ("the Smith Group") for $1,350,000 pursuant to
a stock purchase agreement also dated August 13, 1997 between members of the
Smith group, the Company and Patricia Anderson-Lasko. Concurrent with the
execution of the stock agreement and in conjunction with employment
agreements with key executives, the Company granted 2,925,000 in non-
qualified stock options to those executives. Subject to vesting provisions,
the options remain exercisable until August, 2002 at a price of $.3315 per
share. At November 30, 1997 487,500 options were vested.
During the fourth quarter of fiscal 1997 15,000 Class G warrants and
all 250,000 Class E warrants were exercised. In connection therewith, the
Company extinguished $66,000 in indebtedness and received $14,000 in cash.
Additionally, in the fourth quarter of fiscal 1997 the Company received net
proceeds of $645,000 in a private placement for 1,500,000 shares of common
stock.
In fiscal 1997, an aggregate of 4,277,931 shares of common stock were
issued to extinguish a total of $482,000 in indebtedness, including the
remaining amounts outstanding of the 8% convertible debentures.
As of November 30, 1997 the Company has outstanding common stock
purchase warrants as follows:
<TABLE>
<CAPTION>
Class Exercise Price Shares Expiration
_____ ______________ ______ __________
</CAPTION>
<S> <C> <C> <C>
G $.28 35,000 May 1998
H $.52 775,758 August 2001
</TABLE>
The Company also has outstanding at November 30, 1997, 2,925,000 in non-
qualified stock options of which 487,500 were exercisable at $.33125.
The Company has reserved 3,685,758 shares for issuance upon the exercise
of the outstanding common stock purchase warrants and options.
In September 1993 the Company issued 189,761 shares of restricted common
stock to extinguish notes payable and accrued interest of $1,423,000. The
holders of such shares hold options ("put options") that allowed them, until
April, 1995, to require that the Company repurchase any or all of the shares
at a price of $7.50 per share. The put options continue to be exercisable at
$30 per share, in the event of certain "changes in control" not approved by
the board of directors. The put options grant the Company a right of first
refusal to purchase any of the related shares upon the payment of the same
price offered to the holders by another party. Also, the Company can cancel
the put options by paying nominal consideration.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
(b) Stock Compensation
The Company adopted a Stock Option Plan (the "1991 Plan") in December
1991 (amended in April 1992) under which 100,000 shares of the Company's
common stock have been reserved for issuance to officers, directors,
consultants and employees of the Company under the terms of the 1991 Plan.
The 1991 Plan will expire on December 10, 2001.
The 1991 Plan provides for the issuance of "incentive stock options" (as
defined in the Internal Revenue Code) and non-qualified options to officers,
directors, consultants and employees of the Company. The exercise price of
incentive stock options must be equal to the fair market value of the
underlying common stock on the date of grant. The exercise price of non-
qualified stock options must be at least 50% of the fair market value of the
common stock on the date of issuance.
The following table summarizes the activity in the 1991 Plan for the
periods indicated:
<TABLE>
<CAPTION>
Exercise
Options Price Options
Outstanding Per Share Exercisable
___________ _________ ___________
Outstanding at
</CAPTION>
<C> <C> <C> <C>
October 31, 1994 4,500 $10 - $3.80 4,500
Canceled (1,500) $10
Granted -
______
Outstanding at
October 31, 1995 3,000 $3.80 3,000
Canceled -
Granted -
______
Outstanding at
November 30, 1996 3,000 $3.80 3,000
Canceled -
Granted -
______
Outstanding at
November 30, 1997 3,000 $3.80 3,000
______
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain property, buildings and equipment. Rental
expense for the years ended November 30, 1997, 1996 and October 31, 1995 was
approximately $63,000, $54,000, and $50,000, respectively. The minimum
rental commitments under noncancellable operating leases as of November 30,
1997 are as follows: 1998, $40,000; 1999, $33,000; 2000, $12,055.
The Company displays characters, names and logos on its products under
license agreements that require royalties ranging from 7% to 17% of sales.
The agreements expire through 1998 and require annual advance payments
(included in prepaid expenses) and certain annual minimums. Royalties were
$363,000, $441,000 and $402,000 for fiscal 1997, 1996 and 1995, respectively.
Four executive officers of the Company have entered into employment
agreements that expire in August 1999. The Company or the employee may
terminate the agreement at any time for cause, or without cause with 60 days
notice and 12 months severance. Annual salaries under the employment
agreements are $157,500, $70,000, $30,000 and $30,000.
In Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc., Rick Binet, and
Patricia Anderson-Lasko, f/k/a/ Patricia M. DeAlejandro, the Company appealed
a $700,000 judgement awarded by a jury for employment benefits, including
stock compensation, it found to be due to an ex-employee who it nonetheless
found had been properly terminated for cause. In August, 1994, the trial
court granted the Company's motion for partial summary judgement and directed
verdicts with respect to certain of Tedesco's claims, including those
concerning his ownership of an interest in the "E.A.R.T.H." trademark, or the
existence of a partnership with the Company to jointly own the trademark, and
the state court jury returned findings in favor of the Company on the
remainder of the plaintiff's claims concerning the trademark as well as his
claims for wrongful termination, fraud and conspiracy. However, the jury
awarded Tedesco approximately $700,000, of which $50,000 was assessed against
Innovo Group and $650,000 was assessed against Innovo, including pre-
judgement interest and attorney's fees, on the theory that he was entitled to
have received certain employment benefits, including employee stock awards,
during, and after, the term of his employment. The Company appealed the
jury's award, and in August, 1996 (as revised in an amended October, 1996
opinion), the appeals court reversed approximately $350,000 of the initial
judgement as not supported by the evidence or improper as a matter of law.
As a result, the judgement, including post-judgement interest through August,
1996, has been reduced to $420,000. In addition, the appeals court ruled
that the trial court erred in not submitting to the jury the questions of the
Company's counterclaim of breach of fiduciary duty by Tedesco, ruling that
the trial record indicated that there was evidence of such breach and damages
therefrom. The appeals court remanded the case to the trial court for trial
of the Company's claims of breach of fiduciary duty by Tedesco, which trial
is scheduled for March 1998. In connection with its appeal the Company has
pledged as an appeal bond of 200,000 shares of its unissued common stock.
The Company continues to believe that the ultimate resolution of the case is
unlikely to result in a material loss. An adverse outcome of the Company's
appeal to the Texas Supreme Court, which is scheduled for March 1998, and of
the Company's claims against Tedesco, could result in a loss of up to
$400,000.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products. NASCO Products and the supplier had
previously reached an agreement on the balance owed (which is the balance
recorded), as well as an arrangement under which the schedule for NASCO
Products' payments reducing the balance would be based on future purchases
from that supplier of products distributed internationally by NP
International. The Company has denied the supplier's claims, and has
asserted affirmative defenses, including the supplier's late shipment of the
original products, and the supplier's refusal to accept and fill NP
International orders on terms contained in the agreement. NASCO Products
sold its operations in July, 1995, and that company currently has no
operations or unencumbered assets. No provisions for the additional amount
sought has been recorded in the consolidated financial statements.
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during
the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit date codes to perform computations
or decision-making functions. The Company has not yet performed a
comprehensive review of its computer programs to identify the systems that
would be affected by the Year 2000 issue nor has it yet reviewed the
Company's Year 2000 exposure to customers, distributors, suppliers and
banking institutions. Management is presently unable to estimate the costs
associated with modification or replacement of systems affected by the Year
2000 issue, however, these costs could be significant.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
NOTE 11 - SEGMENT INFORMATION
Information concerning the two segments in which the Company operated in
fiscal 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Year ended
November 30,
1997 1996
____ ____
(000's)
Net Sales
Canvas and Nylon
</CAPTION>
<S> <C> <C>
Consumer Products $7,901 $6,023
Apparel Products 1,557 1,368
General Corporate - -
_____ _____
Consolidated 9,458 7,391
_____ _____
Income (loss) from operations
Canvas and Nylon
Consumer Products 125 (965)
Apparel Products (520) (12)
General Corporate (1,125) (963)
_____ _____
Consolidated (1,520) (1,940)
_____ _____
Indentifiable assets
Canvas and Nylon
Consumer Products 2,768 3,657
Apparel Products 2,376 2,830
General Corporate 4,204 2,946
_____ _____
Consolidated 9,168 9,433
_____ _____
Capital expenditures
Canvas and Nylon
Consumer Products 35 48
Apparel Products - 1,525
General Corporate 434 331
_____ _____
Consolidated 469 1,904
_____ _____
Depreciation and amortization
Canvas and Nylon
Consumer Products 185 397
Apparel Products 202 134
General Corporate 82 57
_____ _____
Consolidated 469 588
_____ _____
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company as of February 28, 1998.
<TABLE>
<CAPTION>
Name Age Position
____ ___ ________
</CAPTION>
<S> <C> <S>
L. E. Smith 50 Chairman of the
Board, Chief
Executive Officer,
Director
Dan Page 49 Chief Operating
Officer, Director
Patricia Anderson-Lasko (2) 38 President, Director
J. Eric Hendrickson 45 Vice President,
Treasurer, Director
Herb Newton (1)(2)(3) 47 Director
Marvin M. Williamson (1)(2)(3) 58 Director
</TABLE>
____________________
(1) Member of the audit committee of the board of directors.
(2) Member of the executive compensation committee of the board of directors.
(3) Member of the stock option committee of the board of directors.
L. E. Smith became the chairman and chief executive officer of the
Company in August, 1997. For more than five years prior thereto Mr. Smith
has served as the president of Smith & Smith, Inc., a privately held company
engaged in real estate investing in Tennessee. Mr. Smith is also the
managing partner of Forbus Capital, LLC, Capital Management, LLC and Crawford
Properties, LLC, each of which is a privately held real estate investment
company.
Patricia Anderson-Lasko has been President and a director of the Company
since August 1990, and President of Innovo since her founding of that company
in 1987. From August, 1990 until August, 1997 Ms. Anderson-Lasko was also
the Chairman and Chief Executive Officer of the Company.
Daniel A. Page became the chief operating officer and a director of the
Company in August, 1997. From June, 1993 until August, 1997, Mr. Page was
the principal operating and executive officer of Southeast Mat Company, a
privately held manufacturer of automobile mats. Prior thereto Mr. Page was
the president of Tennessee Properties Company, a privately held real estate
development company.
J. Eric Hendrickson became vice president, treasurer and a director of
the Company in August, 1997. From February, 1997 until August, 1997, Mr.
Hendrickson was engaged as a consultant for Smith & Smith, Inc. From
December 1995 until February, 1997 Mr. Hendrickson held an executive officer
and director position with a state chartered bank, and from February, 1994
until May, 1995 held a similar position with a regional banking subsidiary of
a federally chartered bank holding company. From November, 1984 until
February, 1994 Mr. Hendrickson held various executive positions with banking
subsidiaries of NationsBank, N.A.
Herb J. Newton became a director of the Company in August, 1997. Mr.
Newton's principal occupation for in excess of the last five years has been
the ownership of retail automobile dealer franchises.
Marvin Williamson has been a director of the Company since August 1990.
From April 1982 to June 1987, he was a Vice President and Mortgage Sales
Manager for First Boston Corp. in New York City. From June 1987 through
August 1990 he was Vice President of Mortgage Sales for Greenwich Capital,
Greenwich, Connecticut. From August 1990 to April 1991 Mr. Williamson was a
Senior Vice President with Alliance Funding Co. in Montvale, New Jersey. In
April 1991 he left Alliance Funding Co. to establish his own business, Marvin
Williamson Associates, a mortgage investment brokerage and consulting firm in
New Canaan, Connecticut. Mr. Williamson is currently a registered
representative of First Sentinel Securities Ltd., a member firm of the
National Association of Securities Dealers, Inc.
Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting or until his successor
has been elected and qualified. Vacancies in the board of directors are
filled by a majority vote of the remaining members of the board of directors.
Pursuant to the Stock Purchase Agreement, the Company has agreed that the
current six members of the board of directors will be the Company's director
nominees at the next annual meeting of stockholders.
Executive officers of the Company are elected on an annual basis and
serve at the discretion of the board of directors.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who own more than 10% of the
registered class of the Company's equity securities to file reports of
ownership with the Securities and Exchange Commission. Officers, directors
and greater than 10% stockholders are required by the regulations of the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the Forms 3, 4 and 5 and amendments thereto
and certain written representations furnished to the Company, the Company
believes that during the fiscal year ended November 30, 1997, all filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
Form 5 is not required to be filed if there are not previously unreported
transactions or holdings to report. Nevertheless, the Company is required to
disclose the name of directors, executives officers and 10% shareholders who
did not file a Form 5, unless the Company has obtained a written statement
that no filing is due. The Company has been advised by those required to
file Form 5 that no filings were due.
<PAGE>
Item 11. Executive Compensation
Executive Compensation
The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of the Company's chief executive
officer, and the one other executive officer who is compensated at an annual
rate of $100,000 or higher.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
______________________
Annual Compensation Awards Payouts
___________________ ______ _______
Other
Annual Restricted LTIP All Other
Compen- Stock Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) (1) (#) ($) ($)
________ ____ _________ ________ _______ _______ ________ _______ ________
</CAPTION>
<S> <C> <C> <S> <C> <C> <C> <C> <S>
L. E. Smith, Chief 1997 $ 8,981(2) - 0 0 1,600,000(2) 0 -
Executive Officer,
and Chairman of the
Board
Patricia Anderson- 1997 $157,500 - 4,070(4) 0 0 0 -
Lasko, President 1996 171,354(3) - 1,346(4) 0 0 0 -
1995 175,000(3) - 2,791(4) 0 0 0 -
</TABLE>
(1) No executive officer received or held restricted stock awards during
or at the end of fiscal 1997, 1996, or 1995.
(2) Mr. Smith Became employed in August, 1997 and is compensated at an
annual rate of $30,000. In connection with his employment, Mr. Smith was
granted 1,600,000 in non-qualifying stock options. The options vest over a
24 month period. At November 30,1997, 266,667 of the options were vested.
(3) At the request of the Company Ms. Anderson-Lasko deferred the payment
of $51,000 of her fiscal 1995 salary until fiscal 1996.
(4) During fiscal 1997, 1996 and 1995 Ms. Anderson-Lasko received life
insurance benefits in the aggregate amount of $4,070, $1,346 and $2,019,
respectively.
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential
Realized Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
________________________________________________________________________________________________________________
(a) (b) (c) (d) (e) (f) (g)
% of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
Name (/) Year (S/Sh) Date 5% ($) 10% ($)
________________________________________________________________________________________________________________
L. E. Smith,
Chief Executive
Officer and
Chairman of
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
the Board 1,600,000 55% $.33 8/31/02 $54,080 $110,880
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (/) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (/) Value Realized ($) Unexercisable Unexercisable
________________________________________________________________________________________________________________
L. E. Smith,
Chief Executive
Officer and
Chairman of
</CAPTION>
<S> <S> <S> <C> <C>
the Board - - 233,333/ $153,125/
1,366,667 $896,875
</TABLE>
<PAGE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Ms. Anderson-Lasko and Messrs. Newton and Williamson served on the
executive compensation committee of the board of directors during the past
fiscal year. Although Ms. Anderson-Lasko, the Company's President served on
the Company's executive compensation committee, she did not participate in
any decisions regarding her own compensation as an executive officer.
Messrs. Newton and Williamson are not officers of the Company.
Employment Agreements
In August 1997 the Company entered into employment agreements with L.
E. Smith, Dan Page, Eric Hendrickson and Patricia Anderson-Lasko. The
agreements expire in August 1999, but provide that the terms may be extended
for additional one-year periods, starting in August 1999, at the election of
the parties. The employment agreements provide that L. E. Smith, Dan Page,
Eric Hendrickson and Patricia Anderson-Lasko shall be employed as the chief
executive officer, chief operating officer, treasurer and president,
respectively, of the Company at annual base salaries of $30,000, $30,000,
$70,000 and $157,000 and shall be eligible for such increases in salary,
other bonuses and payments as the Board of Directors shall direct.
The employment agreements contain provisions requiring certain
severance payments in the event the Company terminates employment other than
for cause, death or disability. In such event, after 60 days notice, the
officers are entitled to a severance payment equal to the annual salary
provided for in their agreements. Such severance is to be paid in 12 equal
monthly installments.
Stock Option Plan
The Company has adopted a stock option plan (the "1991 Plan") pursuant
to which an aggregate of 100,000 shares of common stock had been reserved for
issuance to officers, directors, consultants and employees of the Company and
its subsidiaries upon exercise of non-qualified options and exercise of
"incentive stock options" (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended) issuable under the 1991 Plan. The primary
purpose of the 1991 Plan is to attract and retain capable executives,
consultants and employees by offering them stock ownership in the Company.
The 1991 Plan was originally adopted by the board of directors on December
11, 1991, and amended and ratified by the board of directors on April 10,
1992. The 1991 Plan was approved by the Company's shareholders at the annual
meeting of shareholders on May 28, 1992.
The 1991 Plan is administered by the stock option committee appointed
by the Company's board of directors. The current members of the stock option
committee are Messrs. Newton and Williamson. No member of the stock option
committee will be eligible to participate in a grant of options pursuant to
the 1991 Plan.
The stock option committee will determine, among other things, the
persons to be granted options, the number of shares subject to each option
and the option price. The exercise price of any incentive stock option
granted under the 1991 Plan to an eligible employee must be equal to the fair
market value of the shares on the date of grant and, with respect to persons
owning more than 10% of the outstanding common stock, the exercise price may
not be less than 110% of the fair market value of the shares underlying such
option on the date of grant. The exercise price for non-qualified options
must be at least 50% of the fair market value of the shares on the date of
issue. The stock option committee will determine the terms of each option
and the manner in which it may be exercised. No option may be exercisable
more than ten years after the date of grant, except for those held by
optionee who own more than 10% of the Company's common stock, which may not
be exercisable more than five years after the date of grant. Options are not
transferable except upon the death of the optionee.
The board of directors may amend the 1991 Plan from time to time;
however, without stockholder approval, the 1991 Plan may not be amended to:
(i) increase the aggregate number of shares subject to the 1991 Plan; (ii)
materially increase the benefits accruing to participants under the 1991
Plan; (iii) change the class of individuals eligible to receive options under
the 1991 Plan; or (iv) extend the term of the 1991 Plan.
As of February 6, 1998, the Company had outstanding options to acquire
a total of 3,000 shares of the Company's common stock held by officers and
other employees of the Company under the 1991 Plan. No options granted under
the 1991 Plan have been exercised.
Stock Bonus Plan
The board of directors has authorized and may in the future authorize
the issuance of restricted stock to certain employees of the Company.
<PAGE>
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the
beneficial ownership of the Company's common stock on February 28, 1998 by
(i) each of the Company's executive officers or directors, (ii) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding shares of the common stock, and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned (1)
_____________________________
Name Number Percent
__________________________________________________________________________________________
</CAPTION>
<S> <C> <C>
L.E. Smith (2) 3,455,336 (3) (4) 7.6%
27 North Main Street
Springfield, Tennessee 37172
Patricia Anderson-Lasko 2,861,439 (5) (6) (7) (8) 6.3%
27 North Main Street
Springfield, TN 37172
Daniel A. Page (2) 2,838,330 (9) 6.2%
27 North Main Street
Springfield, Tennessee 37172
J. Eric Hendrickson (2) 500,000 1.1%
27 North Main Street
Springfield, Tennessee 37172
Marvin M. Williamson 22,000 *
53 Fitch Lane
New Canaan, CT 06840
Herb J. Newton (2) 2,308,335 5.1%
2865 Camp Branch Road
Buford, Georgia 30519
All Executive Officers 11,985,440(2) (3) (4) (5) 26.3%
and Directors as a Group (8) (9)
(6 persons)
</TABLE>
_________________
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission,
certain shares of the Company's common stock that a beneficial owner set
forth in this table has a right to acquire within 60 days of the date hereof
pursuant to the exercise of options or warrants for the purchase of shares of
common stock are deemed to be outstanding for the purpose of computing the
percentage ownership of that owner but are not deemed outstanding for the
purpose of computing percentage ownership of any other beneficial owner shown
in the table. Shares outstanding and eligible to vote exclude 200,000 shares
held as an appeal bond for the Company's appeal of the Tedesco litigation
(see Note 10 of Notes to Consolidated Financial Statements). Under the terms
of the bond, such shares are not eligible to vote.
(2) Messrs. Smith, Page, Hendrickson and Newton are deemed to be a
"group" (the Smith Group) for purposes of Section 13(d) of the Exchange Act.
In certain circumstances the Smith Group may be entitled to direct the manner
in which shares owned by Patricia Anderson-Lasko are voted, and the Smith
Group holds rights of first refusal with respect to certain shares of common
stock.
(3) Includes 2,458,335 shares owned by Forbus Investments, L.P., a
limited partnership comprised of members of the family of Mr. Smith. The
management of Forbus Investments, L.P. resides in two general partner limited
liability companies controlled by Mr. Smith. Mr. Smith disclaims beneficial
ownership of the shares owned by Forbus Investments, L.P.
(4) Includes 600,000 shares subject to options exercisable, or which
become exercisable within 60 days of the date hereof, by Mr. Smith.
(5) Includes 79,432 shares owned by DWL International, a corporation in
which Ms. Anderson-Lasko's spouse, Donald W. Lasko, holds a controlling
interest.
(6) Includes 2.5 million shares purchased by Ms. Anderson-Lasko
pursuant to the 1997 Stock Purchase Right Award, awarded to her in February,
1997. Under the terms of the 1997 Stock Purchase Right Award, Ms. Anderson-
Lasko was permitted to, and elected to, pay for the purchase of the 2.5
million shares ("the 1997 Award Shares") by the execution of a non-recourse
note ("the Note") to the Company for the exercise price of $.28125 per share
($703,125) in the aggregate). The Note is due, without interest, on April
30, 2002, and is collateralized by the 1997 Award Shares purchased therewith.
Ms. Anderson-Lasko may pay, or prepay (without penalty) all or any part of
the Note by (i) the payment of cash, or (ii) the delivery to the Company of
other shares of the Company's common stock (other than the 1997 Award Shares)
that Ms. Anderson-Lasko has owned for a period of at least six months, which
shares would be credited against the Note on the basis of the closing bid
price for the Company's common stock on the date of delivery. The 1997 Award
Shares will be forfeited and returned (at the rate of one shares per $.28125)
to the Company to the extent the Note is not paid on or before its maturity;
accordingly, the number of shares owned by Ms. Anderson-Lasko could decrease
in the future.
(7) In certain circumstances the Smith Group may be entitled to direct
the manner in which shares owned by Ms. Anderson-Lasko are voted. See "-
Voting Agreements."
(8) Includes 2.5 million shares (the 1997 Award Shares) as to which the
Smith Group holds rights of first refusal. See "-Rights of First Refusal."
(9) Includes 450,000 shares subject to options exercisable, or which
become exercisable within 60 days of the date hereof, by Mr. Page.
<PAGE>
Item 13. Certain Relationships and Related Transactions
In December, 1995, the Company obtained a $300,000 12% short term
loan collateralized by the common stock of NP International from DWL
International. Donald W. Lasko, the husband of Patricia Anderson-Lasko, is
an officer and stockholder of DWL International. $200,000 of the loan was
repaid in fiscal 1996, together with interest of $22,000. In fiscal 1997 the
Company borrowed an additional $155,000 on this note and repaid $4,000.
Interest paid on the note in fiscal 1997 was $9,000.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements. See Item 8.
(2) Financial Statement Schedules
Schedule Page Reference
Report of Independent Certified Public
Accountants on Financial Statement Schedules 76
Schedule II - Valuation and Qualifying Accounts 77
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit Reference
Number Description No.
</CAPTION>
<C> <S> <C>
3.1 Form of Amended and Restated Certificate
of Incorporation of Registrant. 3.1 (12)
3.2 Amended and Restated Bylaws of Registrant.* 4.2 (5)
4.1 Article Four of the Registrant's Amended
and Restated Certificate of Incorporation
(included in Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.2 NASCO, Inc. Amended Stock Bonus Plan dated
as of December 31, 1991.* 10.6 (2)
10.3 Note executed by NASCO, Inc. and payable to
First Independent Bank, Gallatin, Tennessee
in the principal amount of $950,000 dated
August 6, 1992.* 10.21 (2)
10.4 Deed of Trust between NASCO, Inc. and First
Independent Bank, Gallatin, Tennessee dated
August 6, 1992.* 10.22 (2)
10.5 Authorization and Loan Agreement from the
U.S. Small Business Administration, Nashville,
Tennessee dated July 21, 1992.* 10.23 (2)
10.6 Indemnity Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee.* 10.24 (2)
10.7 Compliance Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee
dated August 6, 1992.* 10.25 (2)
<PAGE>
10.8 Assignment of Life Insurance Policy issued
by Hawkeye National Life Insurance Company
upon the life of Patricia Anderson-Lasko to
First Independent Bank, Gallatin, Tennessee
dated July 31, 1992.* 10.26 (2)
10.9 Guaranty of Patricia Anderson-Lasko on behalf
of NASCO, Inc. in favor of First Independent
Bank, Gallatin, Tennessee dated August 6, 1992.* 10.27 (2)
10.10 Guaranty of Innovo Group Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.28 (2)
10.11 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.29 (2)
10.12 Guaranty of NASCO Products, Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.30 (2)
10.13 Note executed by NASCO, Inc. and payable to
ICON Cash Flow Partners, L.P., Series D, in
the principal amount of $750,000 dated
August 7, 1992.* 10.36 (2)
10.14 Security Agreement between NASCO, Inc.
and ICON Cash Flow Partners, L.P., Series
D dated August 7, 1992.* 10.37 (2)
10.15 Guaranty of Innovo Group Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.38 (2)
10.16 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of ICON Cash Flow Partners,
L.P., Series D dated July 30, 1992.* 10.39 (2)
10.17 Guaranty of NASCO Products, Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.40 (2)
10.18 Guaranty of NASCO Sportswear, Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.41 (2)
10.19 1993-1996 U.S. Olympic Merchandise Agreement
between United States Olympic Committee and
Innovo Group Inc. dated April 29, 1993.* 10.51 (6)
10.20 Non-Competition and Non-Solicitation Agreement
dated May 10, 1993 among QSP, Inc., NASCO,
Inc. and Innovo Group Inc.* 10.45 (4)
<PAGE>
10.21 Employment Agreement dated September 30, 1993
between Innovo Group Inc. and Patricia
Anderson-Lasko.* 10.56 (6)
10.22 Form of Common Stock Put Option.* 10.61 (6)
10.23 Form of Debt Conversion Agreement between
Innovo Group Inc. and certain holders of
notes payable or Subordinated Notes Payable.* 10.63 (6)
10.24 Form of Agreement between Innovo Group Inc.
and Purchasers under the June 11, 1993 Unit
Purchase Agreement.* 10.64 (6)
10.25 Agreement dated April 29, 1994 between C.I.
Sports, Inc. and NASCO Products, Inc.* 10.65 (7)
10.26 Amended Plan of Reorganization of Spirco, Inc.* 10.67 (8)
10.27 $600,000 Secured Promissory Note and Security
Agreement dated July 20, 1994 between Innovo
Group Inc., Innovo, Inc. and NASCO Products,
Inc. and certain individual lenders.* 10.68 (8)
10.28 License Agreement dated January 24, 1994
between NFL Properties Europe B.V. and NASCO
Marketing, Inc.* 10.66 (9)
10.29 License Agreement dated July 7, 1997 between
National Football League Properties, Inc. and
Innovo Group Inc.
10.30 First Amendment to $600,000 Secured Promissory
Note and Security Agreement dated April 15, 1995.* 10.70 (9)
10.31 Security Agreement dated April 28, 1995 between
Innovo, Inc. and Riviera Finance.* 10.71 (9)
10.32 Form of Amendment to Common Stock Put Option.* 10.72 (9)
10.33 Agreement dated July 31, 1995 between NASCO
Products, Inc. and Accessory Network Group, Inc.* 10.1 (11)
10.34 License Agreement dated November 14, 1995 between
Innovo Group Inc., United States Olympic Committee
and Warner Bros. Studios* 10.47 (12)
10.35 Agreement dated December 11, 1995 between Innovo
Group Inc., United States Olympic Committee and
Original Appalachian Artworks, Inc.* 10.48 (12)
10.36 License Agreement dated August 9, 1995 between
Innovo, Inc. and NHL Enterprises, Inc.* 10.49 (12)
10.37 License Agreement dated August 9, 1995 between
NASCO Products International, Inc. and NHL
Enterprises, B.V.* 10.50 (12)
10.38 License Agreement dated December 15, 1995
between Major League Baseball Properties, Inc.
and Innovo Group Inc.* 10.51 (12)
10.39 License Agreement dated October 6, 1995
between Major League Baseball Properties
and NASCO Products International, Inc.* 10.52 (12)
10.40 License Agreement dated August 1, 1997
between NBA Properties, Inc. and Innovo, Inc.
10.41 License Agreement dated August 1, 1997
between NBA Properties, Inc. and NASCO
Products International, Inc.
10.42 Merger Agreement dated April 12, 1996 between
Innovo Group Inc. and TS Acquisition, Inc.
and Thimble Square, Inc. and the Stockholders
of Thimble Square, Inc.* 10.1 (13)
10.43 Property Acquisition Agreement dated
April 12, 1996 between Innovo Group Inc.,
TS Acquisition, Inc. and Philip Schwartz
and Lee Schwartz.* 10.2 (13)
10.44 License Agreement between Innovo, Inc. and
Anheuser-Busch Cos., Inc.* 10.57(14)
10.45 License Agreement between Innovo Group Inc.
and Warner Bros. dated June 25, 1996.* 10.45(15)
10.46 License Agreement between Innovo Group Inc.
and Walt Disney dated September 12, 1996.* 10.46(15)
10.47 Indenture of Lease dated October 12, 1993
between Thimble Square, Inc. and Development
Authority of Appling County, Georgia* 10.47(15)
10.48 Lease dated October 1, 1996 between Innovo,
Inc. and John F. Wilson, Terry Hale, and
William Dulworth* 10.48(15)
21 Subsidiaries of the Registrant 21 (13)
23.1 Consent of BDO Seidman, LLP (incorporated by
reference as Exhibit 23.2 to Registration
Statements No. 33-71576 and No. 333-12527).
27 Financial Data Schedule (appears only in
electronically filed version of this report).
</TABLE>
_________________________
* Certain of the exhibits to this Report, indicated by an asterisk, are
incorporated by reference to other documents on file with the Securities and
Exchange Commission with which they were physically filed, to be part hereof
as of their respective dates. Documents to which reference is made are as
follows:
(1) Amendment No. 4 Registration Statement on Form S-18 (No. 33-
25912-NY) of ELORAC Corporation filed October 4, 1990.
(2) Amendment No. 2 to the Registration Statement on Form S-1
(No. 33-51724) of Innovo Group Inc. filed November 12, 1992.
(3) Annual Report on Form 10-K of Innovo Group Inc. (file no. 0-
18926) for the year ended October 31, 1993.
(4) Current Report on Form 8-K of Innovo Group Inc. (file no. 0-
18926) dated May 10, 1993 filed May 25, 1993.
(5) Registration Statement on Form S-8 (No. 33-71576) of Innovo
Group Inc. filed November 12, 1993.
(6) Annual Report on Form 10-K of Innovo Group Inc. (file
0-18926) for the year ended October 31, 1993.
(7) Amendment No. 2 to the Registration Statement on Form S-1
(No. 33-77984) of Innovo Group Inc. filed July 25, 1994.
(8) Amendment No. 4 to the Registration Statement on Form S-1
(No. 33-77984) of Innovo Group Inc. filed August 18, 1994.
(9) Annual Report on Form 10-K of Innovo Group Inc. (file
0-18926) for the year ended October 31, 1994.
(10) Registration Statement on Form S-8 (No. 33-94880) of Innovo
Group Inc. filed July 21, 1995.
(11) Current Report on Form 8-K of Innovo Group Inc. (file
0-18926) dated July 31, 1995 filed September 13, 1995.
(12) Annual Report on Form 10-K of Innovo Group Inc. (file
0-18926) for the year ended October 31, 1995.
(13) Current Report on Form 8-K of Innovo Group Inc. (file
0-18926) dated April 12, 1996, filed April 29, 1996.
(14) Registration Statement on Form S-1 (No. 333-03119) of Innovo
Group Inc., as amended June 28, 1996.
(15) Annual Report on Form 10-K of Innovo Group Inc. (file
0-18926) for the year ended November 30, 1996.
(b) Reports on Form 8-K
On September 13, 1996, the Company filed a Current Report on Form 8-K
that included certain updated historical and pro forma financial information
relating to the acquisition of Thimble Square.
<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedules
Board of Directors
Innovo Group Inc.
The audits referred to in our report to Innovo Group Inc. and
subsidiaries, dated February 6, 1998 which is contained in Item 8,
included the audits of the schedule listed under Item 14(a)(2).
This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits.
In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
March 18, 1998
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
________________________________
(1) (2)
Balance at Charged Charged to Balance
Beginning to Costs Other Accounts- Deductions- at End
Description of Period and Expenses Describe Describe of Period
___________ _________ ____________ ________ ________ _________
Allowance deducted
from asset to
which it applies:
Allowance for
doubtful accounts:
Year ended November 30,
</CAPTION>
<C> <C> <C> <C> <C>
1997 $ 66,000 $153,000 $ - $113,000(A) $106,000
Year ended November 30,
1996 99,000 78,000 - 111,000(A) 66,000
Year ended October 31,
1995 117,000 102,000 - 120,000(A) 99,000
Allowance for inventories:
Year ended November 30,
1997 $ 73,000 $ - $ - $ 37,000(B) $ 36,000
Year ended November 30,
1996 18,000 55,000 - - 73,000
Year ended October 31,
1995 759,000 - - 741,000(B) 18,000
</TABLE>
Note A - Uncollected receivables written off, net of recoveries.
Note B - Recovery of valuation reserve.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INNOVO GROUP INC.
By:/s/ L. E. Smith
L. E. Smith
Chairman of the Board, and
Chief Executive Officer
March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature and Title Date
___________________ ____
/s/ L. E. Smith
L. E. Smith
Chairman of the Board,
Chief Executive Officer
</CAPTION>
<S> <C>
and Director March 18, 1998
/s/ Dan Page
Dan Page
Chief Operating Officer March 18, 1998
/s/ Patricia Anderson-Lasko
Patricia Anderson-Lasko
President and Director March 18, 1998
/s/ J. Eric Hendrickson
J. Eric Hendrickson
Vice President, Treasurer
and Director March 18, 1998
/s/ Herb Newton
Herb Newton
Director March 18, 1998
/s/ Marvin N. Williamson
Marvin N. Williamson
Director March 18, 1998
</TABLE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We hereby consent to the incorporation by reference of our
reports dated February 6, 1998 relating to the consolidated
financial statements and schedule of Innovo Group Inc. and
subsidiaries, appearing in the Company's Annual Report on Form 10-K
for the year ended November 30, 1997 and the Registration Statement
on Form S-3 (No. 333-35981) and the Prospectus constituting a part
of that Registration Statement.
We also consent to the reference to us under the caption
"Experts" in the Prospectus.
/s/BDO SEIDMAN, LLP
BDO Seidman, LLP
Atlanta, Georgia
March 18, 1998
LICENSING AGREEMENT TERM SHEET
Licensee: INNOVO, INC. Date: July 7, 1997
Address: 27 North Main Street No.: 300 - 440105 - 505
Springfield, TN 37172
The following terms are made part of and are subject to all definitions,
terms and conditions set forth in License No. 1453 :
MARKETING PROGRAM: NFL Game Day
TERM: April 1, 1997 - March 31, 1999
TERRITORY: The United States, its territories and possessions.
LICENSED PRODUCTS: UTILITY/LAUNDRY BAGS; LUNCH BAGS; SEAT CUSHION TOTE;
SHOE ORGANIZER/GARMENT BAG/TOTE BAGS
FISCAL YEAR LICENSED PRODUCT ROYALTY%
YEAR I 4/1/97 - 3/31/98 3146 UTILITY/LAUNDRY BAGS 10.00
7446 LUNCH BAGS 10.00
7447 SEAT CUSHION TOTE 10.00
30349 SHOE ORGANIZER/GARMENT BAG/ 10.00
TOTE BAGS
YEAR II 4/1/98 - 3/31/99 3146 UTILITY/LAUNDRY BAGS 11.00
7446 LUNCH BAGS 11.00
7447 SEAT CUSHION TOTE 11.00
30349 SHOE ORGANIZER/GARMENT BAG/ 11.00
TOTE BAGS
FISCAL YEAR MINIMUM GUARANTEE ADVANCE
YEAR I 4/1/97 - 3/31/98 $25,000 $25,000
YEAR II 4/1/98 - 3/31/99 $30,000 $25,000
AUTHORIZED BRANDS FOR
LICENSED PRODUCT(S): INNOVO
LICENSED MARK(S) FOR
LICENSED PRODUCT(S): Marketing Program logo, Club Marks and the
following League Marks:"National Football
League", "NFL", "National Football Conference",
"American Football Conference", "NFC", "AFC".
DISTRIBUTION CHANNELS FOR
LICENSED PRODUCT(S): All Retailers in the Territory
RENEWAL REQUEST DATE: August 31, 1998
<PAGE>
PROMOTIONAL PRODUCTS:
FISCAL YEAR LICENSED PRODUCTS
YEAR I As reasonably requested by NFLP.
YEAR II As reasonably requested by NFLP.
COOPERATIVE FUND: N/A
ADVERTISEMENTS: N/A
SPONSORSHIPS:
<PAGE>
Retail Licensing Agreement
Licensee: INNOVO, INC. Date: July 7, 1997
Address: 27 North Main Street No.: 300 - 440105 - 505
Springfield, TN 37172 Lic. No.: 1453
National Football League Properties, Inc. ("NFLP") has the exclusive
right to license for commercial purposes the trademarks of the National
Football League ("NFL") and the thirty-one professional football teams
that comprise the NFL ("Member Clubs"). Licensee, whose name and address
are set forth above, desires to use certain of these trademarks in
accordance with the terms and conditions of this agreement ("License").
In consideration of the mutual premises, covenants and undertakings
contained in this License, the parties to this License agree as follows:
1. Definitions
As used in this License, the terms listed on the attached Term Sheet
and elsewhere in this License have the following meanings:
a. "Advance Royalty Payment": The amount to be credited to Royalty
payments due for the corresponding Fiscal Year payable to NFLP upon
the execution of this License for Fiscal Year I and on or before
April 15 for each successive Fiscal Year.
b. "Advertisements": Advertising space in designated NFLP publications
to be purchased by Licensee in accordance with this License.
c. "Affiliate": Any person or entity in which Licensee or any owner,
majority shareholder, officer or director of Licensee has any direct
or indirect beneficial or ownership interest or is a joint venture
partner.
d. "Authorized Brands": The only brand names Licensee may use in
association with the Licensed Products.
e. "Club Marks": The full team names, nicknames, helmet designs,
uniform designs, logos, slogans, geographic designations, and other
identifying symbols and indicia adopted for commercial purposes by
the Member Clubs.
f. "Cooperative Fund": The amount payable to NFLP during each Fiscal
Year for use by NFLP in connection with the designated Cooperative
Program.
g. "Distribution Channels": The channels of trade in the Territory in
which Licensee may distribute for sale or sell each Licensed Product
as defined in Exhibit I attached to this License and/or the attached
Term Sheet.
h. "Fiscal Year": The period beginning on April 1 of any year and
ending on March 31 of the following year except for Fiscal Year I,
which will begin on the date this License is fully-executed and will
end on March 31 of the following year.
i. "League Marks": "National Football League", "NFL", "National
Football Conference", "American Football Conference", "NFC", "AFC",
"Super Bowl", "Pro Bowl", the NFL Shield design, and other
identifying symbols, slogans and indicia adopted for commercial
purposes by the NFL.
j. "Licensed Marks": The trademarks for which Licensee is granted
certain limited, non-exclusive rights under this License.
k. "Licensed Products": All products for which Licensee may use the
Licensed Marks in association with the Authorized Brands. This
license will refer to each distinct type of product as a "Licensed
Product" since more than one product may be licensed (e.g. T-shirts
and jackets would each be a Licensed Product).
l. "Marketing Program": The program established by NFLP in connection
with which Licensee may use the Licensed Marks as authorized under
this License. Licensee shall abide by all rules, guidelines and
policies established by NFLP for such Marketing Program, which are
deemed part of this License.
m. "Minimum Royalty Guarantee": The minimum amount of Royalty payments
payable to NFLP on or before the 15th day following the end of each
Fiscal Year.
n. "Net Sales": Gross sales of all Licensed Products sold or
distributed for sale at the greater of Licensee's invoiced selling
price or Licensee's normal domestic wholesale warehouse price less
sales derived from returns received and credited and less reasonable
quantity discounts as actually calculated on the invoice provided
that the total returns in any Fiscal Year in which Licensee desires
to deduct quantity discounts from Net Sales may not exceed ten
percent (10%) of Net Sales for the corresponding Fiscal Year without
NFLP's prior written consent only. Licensee shall not credit any
return at a rate greater than the original invoiced selling price
for such Licensed Products. There shall be no other deductions
allowed including, without limitation, deductions for manufacturing
costs, selling costs, distribution costs, advertising and
promotional costs, freight, non-collected or uncollectible accounts,
commissions, taxes, cash discounts, close out sales, distress sales,
sales to employees, or any other costs. For purposes of this
Agreement, Net Sales and all other referenced sales occur when
Licensee invoices or ships any Licensed Product, whichever is
earlier. If Net Sales are made to an Affiliate, the dollar amount
of gross sales will be the greater of Licensee's regular price to
unaffiliated accounts or the Affiliate's gross sales price to an
unaffiliated account.
o. "NFL Marks": All League Marks and Club Marks, collectively.
p. "Premiums": Any products, including the Licensed Products, bearing
the NFL Marks or other indicia of the NFL or its Member Clubs that
Licensee sells or gives away for the purposes of promoting,
publicizing or increasing the sale of its own products or services
other than the Licensed Products, or that Licensee sells or gives
away to any other party whom Licensee knows or should reasonably
know intends to use such products for the purposes of promoting,
publicizing or increasing the sale of any other party's products or
services. Promotions include, without limitation, combination
sales, incentives for sales force, and trade or consumer promotions.
q. "Promotional Products": The quantity of each Licensed Product that
Licensee shall provide to NFLP at no cost during each Fiscal Year
for use in connection with NFLP's Promotional Programs, as defined
in Paragraph 5 of this License.
r. "Renewal Request Date": The date by which NFLP must receive
notification from Licensee of Licensee's desire to renew the
License.
s. "Royalty": The amount of Net Sales Licensee shall pay to NFLP for
all sales of the Licensed Products. NFLP reserves the right to
increase the rate of the Royalty during the Term, provided that it
gives Licensee at least six (6) months written notice before such
increase takes effect.
t. "Sponsorship": The designated events for which Licensee will
participate as a sponsor during each Fiscal Year of the Term subject
to the execution of an NFLP Sponsorship Agreement.
u. "Style": A distinct prototype of a Licensed Product that differs
from any other prototype of that same Licensed Product in any form
or manner with respect to design, material, pattern, size, shape,
Licensed Marks, or any other distinguishing characteristic involving
the specifications for the production of all or any portion of that
Licensed Product (e.g. T-shirts bearing the San Francisco 49ers logo
and T-shirts bearing the San Diego Chargers logo would each be a
Style of Licensed Product).
v. "Term": The time period for which this License shall be effective.
w. "Territory": The geographic area in which Licensee shall have the
right to sell the Licensed Products. Licensee is prohibited from
selling Licensed Products F.O.B. outside the Territory without the
prior written approval of NFLP.
x. "Unit": A single Licensed Product (e.g. one T-shirt and one jacket
would each be a Unit).
2. Grant of License
Subject to all of the terms and conditions of this License, NFLP
grants Licensee the non-exclusive right to use the Licensed Marks in
connection with the manufacture, distribution, sale, and advertising
of the Licensed Products under the Authorized Brand in the
Distribution Channels in the Territory in accordance with all
policies, rules and regulations of the Marketing Program and NFLP,
which are deemed part of this License. Unless otherwise indicated
on the Term Sheet, Licensee shall have no right to distribute the
Licensed Products directly to consumers as a Direct Retailer or
otherwise. Licensee shall have no right to sell or distribute any
Premiums unless Licensee receives a separate Premium License from
NFLP and pays NFLP the applicable Royalty under such Premium
License. Licensee shall not use the Licensed Products as Premiums
or permit the use of the Licensed Products as Premiums by any party
whom Licensee knows or should reasonably know intends to use the
Licensed Products as Premiums.
3. Terms of Payment
a. Licensee shall pay NFLP the Royalty on all sales of the Licensed
Products. Regardless of whether any sales occur during any Fiscal
Year, Licensee shall also pay NFLP the applicable Advance Royalty
Payment and Minimum Royalty Guarantee for each Fiscal Year during
the Term. Advance Royalty Payments and any payments made to satisfy
the Minimum Royalty Guarantee are not refundable. Licensee may
credit the Advance Royalty Payment and Royalty payments made to NFLP
during each Fiscal Year to the Minimum Royalty Guarantee for the
corresponding Fiscal Year only. Licensee may not credit such
amounts to the Advance Royalty Payment, Minimum Royalty Guarantee or
any other payment required under this License for any other Fiscal
Year. If the Term Sheet assigns a per-product Advance Royalty
Payment and Minimum Royalty Guarantee, then Licensee may only credit
the Advance Royalty Payment for such product and Royalty payments
from the sales of such product toward the corresponding Minimum
Royalty Guarantee for such product in the corresponding Fiscal Year.
If NFLP terminates this License, for the Fiscal Year in which
termination occurs ("Termination Fiscal Year") Licensee shall pay
NFLP the Royalty on all sales of the Licensed Products made during
the Termination Fiscal Year or a pro rated portion of the Minimum
Royalty Guarantee owed in excess of the Advance Royalty Payment
("Termination Guarantee"), whichever is greater. For purposes of
this paragraph the pro rated Minimum Royalty Guarantee will be
calculated as follows:
Termination Guarantee x No. of Days Completed in Termination
Fiscal Year
1 365
b. On or before the 15th day of each month, Licensee shall make all
Royalty payments to NFLP due on sales of the Licensed Products
during the preceding calendar month. Simultaneously with the Royalty
payment, Licensee shall furnish full and accurate statements of the
Net Sales of each Licensed Product sold and distributed during such
calendar month on forms provided by NFLP. The statements will
include the quantity and description of each Licensed Product
itemized by Member Club if applicable, the gross sales price,
itemized deductions from the gross sales price, any returns made
during the preceding month, and the resulting Net Sales on which
Licensee calculated the Royalty amount. Licensee shall furnish such
statements for each Licensed Product regardless of whether it sold
any such Licensed Product during the preceding month. NFLP's receipt
or acceptance of any statement or Royalty payment or the cashing of
a Royalty check will not preclude NFLP from questioning the
correctness of such statements or payments at any time. Upon
discovery of any verifiable inconsistency or mistake in such
statements or payments, Licensee shall immediately rectify such
inconsistency or mistake.
c. Licensee shall pay NFLP all other amounts listed on the Term Sheet
attached to this License, if applicable, in accordance with the
dates provided in such Term Sheet.
d. Licensee shall pay NFLP an additional charge of one and one-half
percent (1.5%) per month on any payment due under this License that
remains unpaid fifteen (15) days after such payment becomes due.
4. Quality Control
a. Prior to making any use of any Style of any Licensed Product,
Licensee shall submit to NFLP for its approval at Licensee's sole
cost and expense at the following applicable stages: (i) finished
artwork or final proofs; (ii) pre-production samples or strike-offs
for such proposed Style; and (iii) a sample Unit of the finished
version of such Style together with all packaging, cartons,
containers, hangtags and wrapping materials related to such Unit
("Related Materials"). For Styles that differ solely with respect
to the Licensed Marks, Licensee may submit a sample Unit of one
Style along with artwork of the Styles bearing the other Licensed
Marks for approval purposes unless NFLP requests a sample Unit of
each such Style. NFLP shall use its best efforts to promptly
evaluate all such submissions and provide Licensee, if applicable,
with quality standards and specifications for the finished Units of
each Style. Upon approval of the finished version of a sample Unit
of a Style, NFLP shall execute a Product Approval Form that will
contain any applicable quality standards and specifications.
License shall not manufacture, sell, distribute or advertise any
Style of a Licensed Product unless NFLP has executed a Product
Approval Form for such Style.
b. All Product Approval Forms are effective for one Fiscal Year only
and Licensee must resubmit to NFLP each Style of each Licensed
Product previously approved by NFLP for quality control approval
each Fiscal Year. From time to time, NFLP may request additional
sample Units of any Style of any Licensed Product to confirm
continued compliance with NFLP's quality control guidelines and any
applicable quality standards and specifications. NFLP shall have
the right to withdraw its approval of any Style of any Licensed
Product if, in NFLP's sole judgment, such sample Units cease to
conform to such guidelines, standards or specifications or otherwise
deviate in quality from the previously approved sample Units. Upon
notice by NFLP to Licensee that the Product Approval Form for a
Style of a Licensed Product has been withdrawn, Licensee shall
immediately cease to manufacture, distribute, sell or advertise any
further Units of such Style until such time as a new Product
Approval Form has been executed and delivered by NFLP.
c. Licensee shall not make any modification to any Style for which NFLP
has issued a Product Approval Form or depart from any applicable
quality standards and specifications for any Style unless NFLP has
approved such modification for such Style and issues a new Product
Approval Form. Licensee acknowledges that the manufacture, use,
sale, distribution, or advertising of any Style that deviates from
the Style approved by NFLP will constitute a material breach of this
License. Upon such breach, NFLP may terminate this License
immediately.
d. No distribution or sale of irregulars or seconds is permitted except
when Licensee receives prior written approval from NFLP.
5. Advertising and Promotional Materials
a. Licensee will not use the Licensed Marks or any reproduction of
them, including without limitation, Photographs or Computer Art, as
defined in Paragraph 10a, in any advertising, promotion, publicity
or display materials (collectively "Promotional Materials") without
receiving NFLP's prior written approval executed on a Promotional
Approval Form supplied to Licensee by NFLP. Licensee may use such
approved Promotional Materials only in conjunction with the Styles
of Licensed Products that NFLP has approved. Licensee shall submit
to NFLP all Promotional Materials at the following applicable stages
appropriate to the medium used: (i) conceptual stage, pre-production
art or rough cuts; (ii) layout, storyboard and script; (iii)
finished materials; and (iv) at any other time as reasonably
requested by NFLP. Licensee shall ensure that it submits all
proposed Promotional Materials and any modifications to previously
approved Promotional Materials to NFLP in a timely fashion that will
ensure NFLP has adequate time to review such materials prior to the
date of their proposed use by Licensee. NFLP shall use best efforts
to evaluate all such Promotional Materials' submissions within ten
(10) business days of their receipt by NFLP. NFLP shall execute a
Promotional Approval Form for all Promotional Materials that it
approves. Licensee shall notify its retailers and/or Third Party
Distributors that NFLP must approve all Promotional Materials
involving or using in any form or manner the Licensed Marks.
Licensee shall use best efforts to ensure that its retailers and/or
Third Party Distributors do not publish, display or otherwise
distribute such Promotional Materials without NFLP's prior written
approval.
b. NFLP has the exclusive right, in its sole discretion, to approve or
disapprove any Promotional Materials' submissions. Licensee
acknowledges that NFLP may disapprove Promotional Materials that, in
NFLP's opinion, reflect unfavorably upon NFLP, the NFL or its Member
Clubs including, without limitation, materials involving gambling,
lotteries or other games inconsistent with the image of the NFL, the
Member Clubs, or the Licensed Products.
c. NFLP may withdraw its approval of any Promotional Materials if: (i)
the Promotional Materials have been altered without the prior
written approval of NFLP; (ii) the Style and/or the Licensed Product
promoted in the Promotional Materials ceases to be approved under
this License; or (iii) an event occurs that, in NFLP's opinion,
causes NFLP's relationship with Licensee or any Licensed Product to
adversely reflect upon the professional or business reputation of
the NFL, its Member Clubs or NFLP.
d. Licensee represents that NFLP has the right to conduct promotions
and special events in its sole discretion and to print catalogs,
sales sheets and brochures involving representative merchandise from
NFLP's licensees ("Promotional Programs"). Licensee shall supply
within ten (10) business days of any request by NFLP, at no charge
to NFLP, all or any portion of the quantity of Promotional Products
specified on the Term Sheet required by NFLP for use, in NFLP's sole
discretion, in such Promotional Programs.
e. Licensee shall pay NFLP the designated amounts for the
Advertisements, Sponsorship, and Cooperative Fund, if applicable, on
or before the corresponding dates listed on the Term Sheet attached
to this License. NFLP shall use such payments in a manner
determined by NFLP in its sole discretion.
f. During each Fiscal Year of the Term in which NFLP publishes the NFL
Merchandise Catalogue, Licensee shall purchase a full-page
advertisement in such catalogue at the rate established in NFLP's
then-existing rate card. Licensee shall make such payment within
fifteen (15) days from receiving an invoice from NFLP.
6. Distribution Requirements
Licensee shall distribute for sale and sell each Licensed Product
only in the authorized Distribution Channels. Prior to distribution
of any Licensed Product, Licensee shall submit to NFLP a list of its
retail accounts for the Licensed Products for the purpose of
determining which accounts fall within the Distribution Channels.
NFLP shall determine, in its sole discretion, whether such retail
accounts fall within the Distribution Channels and shall provide
Licensee with a list of the approved retail accounts. Licensee
shall manufacture, distribute, sell and maintain inventory of
sufficient quantities of each Style of each Licensed Product to meet
the reasonable market demand in the Distribution Channels. Licensee
shall not sell Licensed Products to any third party that Licensee
knows or should reasonably know intends to sell the Licensed
Products outside of the authorized Distribution Channels. If
Licensee sells or distributes for sale other merchandise that does
not bear the Licensed Marks but is of the same grade and quality as
the Licensed Products, Licensee shall not discriminate in the
granting of commissions and discounts to salespersons, dealers and
distributors for the sale of the Licensed Products. If the Licensed
Marks are Club Marks, Licensee acknowledges that it shall
manufacture, distribute and sell a commercially significant quantity
of Units bearing the trademarks of each Member Club individually in
each Style. Licensee shall have no right to distribute the Licensed
Products via computer on-line services unless expressly indicated on
the Term Sheet.
7. Authorized Brands
Licensee shall only use the Authorized Brands, if applicable, in
connection with the manufacture, distribution, sale, and advertising
of each Licensed Product. NFLP shall have the right, in its sole
discretion, to remove or change any of the Authorized Brands, if
applicable, during the Term. Licensee must receive the prior
written approval of NFLP to use any other trademarks on the Licensed
Products.
8. NFLP's Purchase of Licensed Products
In addition to the Promotional Products provided at no cost by
Licensee, NFLP, the NFL and its Member Clubs shall have the right to
purchase any of the Licensed Products in any quantity at the minimum
wholesale price, excluding Royalty payments, that Licensee charges
to its best customer, provided that NFLP will not require Licensee
to pay a Royalty on such sales.
9. Third Party Relationships
a. Licensee shall not assign, sublicense, transfer or otherwise
encumber any of its rights under this License to any Affiliate or
other third party without NFLP's prior written consent. If Licensee
assigns, sublicenses, transfers or encumbers any portion of this
License without such consent, NFLP shall have the right to terminate
this License immediately. Among other things, NFLP will consider
the License assigned and subject to the requirements of this
subparagraph if: (i) the beneficial ownership or control of fifty
percent (50%) or more of Licensee's capital stock is transferred or
otherwise conveyed; (ii) Licensee becomes part of any merger or
consolidation; or (iii) the sale or transfer of all or substantially
all of Licensee's assets occurs.
b. Licensee shall have no right to use any screen printer in connection
with the manufacture of any Licensed Products, including, without
limitation, "hot market" and Super Bowl products, without NFLP's
prior written consent. In the event of such consent, Licensee shall
have no right to sell the Licensed Products to such approved screen
printer without the separate written consent of NFLP. In the event
of such separate consent, Licensee shall calculate Royalty payments
for Licensed Products sold to screen printers based on Net Sales of
the Licensed Products calculated on the sales made by the screen
printer to parties in the Distribution Channels.
c. Licensee must receive NFLP's prior written consent to use any
domestic or foreign third party distributor of any Licensed Product.
If the Licensed Products consist of headwear or apparel, Licensee
may only use those third party distributors that NFLP has approved
for all NFL apparel and headwear licensees. For purposes of this
License, a third party distributor shall mean any third party who
purchases Licensed Products from Licensee, ships such products to
retailers and invoices retailers directly ("Third Party
Distributor"). Licensee shall ensure that any of its sales
representatives for the Licensed Products shall not produce,
inventory, warehouse or distribute any of the Licensed Products.
NFLP shall have the right to approve or disapprove any Third Party
Distributor in its sole discretion.
d. Licensee must receive NFLP's prior written consent to use a domestic
or foreign third party manufacturer of any Licensed Product or any
portion of any Licensed Product, including patches, labels and
emblems made by any party that is not already a licensee of NFLP
("Third Party Manufacturer"). NFLP shall have the right to approve
or disapprove any Third Party Manufacturer in its sole discretion.
NFLP's approval of any Third Party Manufacturer, if granted, will be
contingent on the execution of an agreement between NFLP and the
approved Third Party Manufacturer. Notwithstanding such agreement,
Licensee shall at all times remain primarily obligated to NFLP under
this License and shall take all necessary efforts to ensure that
such Third Party Manufacturer uses the Licensed Marks only to
manufacture the designated Licensed Product and for no other purpose
including, without limitation, promoting or selling the Licensed
Products. If such Third Party Manufacturer has made an unauthorized
use of the Licensed Marks, Licensee shall fully cooperate with NFLP
to ensure that such unauthorized use ceases promptly. Licensee
shall be primarily obligated to ensure that each Licensed Product
produced by such Third Party Manufacturer complies with the
requirements of Paragraph 4 of this License.
e. Licensee represents and warrants that it shall manufacture and cause
all Third Party Manufacturers to manufacture the Licensed Products
in accordance with all applicable laws, rules and regulations of the
United States Department of Labor and state Departments of Labor,
including, without limitation, the federal Fair Labor Standards Act.
Licensee shall ensure that it will not distribute or cause the
distribution of Licensed Products that Licensee knows or should
reasonably know were manufactured in violation of any federal or
state labor law, rule or regulation. Upon a determination by the
United States Department of Labor or any state Department of Labor
that the Licensed Products have been manufactured in violation of
any federal or state labor law, rule or regulation, Licensee shall
take all necessary steps to correct such violation including,
without limitation, paying all applicable back wages found due to
workers who manufactured the Licensed Products or any portion of
them.
f. Licensee shall not make any payments to any Member Club or to any
shareholder, officer, director, employee, agent or representative of
any Member Club, or to any employee, agent or representative of the
NFL or its affiliates in such person's individual capacity, in
connection with the use of any Licensed Marks under this License or
otherwise as a direct result of sales of any Licensed Product.
Licensee shall disclose to NFLP all existing agreements or
agreements being negotiated by Licensee or its agent between
Licensee and any Member Club or any shareholder, officer, director,
employee, agent or representative of any Member Club, or any
employee, agent or representative of the NFL or any of its
affiliates in such person's individual capacity.
g. In the event that NFLP consents to any third party relationship
under this Paragraph 9 or otherwise under this License, Licensee
acknowledges that such approval will be contingent on the execution
of an appropriate form or agreement supplied by NFLP.
10. Computer Artwork and Photographs
a. Subject to the requirements of Paragraph 4, if Licensee wishes to
use computer artwork incorporating graphic depictions of the
Licensed Marks ("Computer Art") or photographs incorporating graphic
depictions of the Licensed Marks ("Photographs") owned and/or
controlled by NFLP, Licensee shall request such Computer Art or
Photographs in a Use Application provided to Licensee by NFLP. If
NFLP, in its sole discretion, approves such application, NFLP shall
provide Licensee with Computer Art or Photographs at a rate
established by NFLP in its sole discretion provided that, in the
case of Photographs, Licensee must first sign NFLP's standard Photo
Use Agreement. Licensee shall make any payment for the Computer Art
or Photographs within thirty (30) days of receiving an invoice from
NFLP. Licensee shall only use the Computer Art or Photographs in
accordance with the terms and conditions of this License including,
without limitation, Paragraph 11, and, in the case of Photographs,
the Photo Use Agreement. The terms of the executed Photo Use
Agreement will govern in the event of any conflict between the terms
of this License and the terms of the Photo Use Agreement.
b. Licensee shall not make copies of the Computer Art or Photographs
without the express written approval of NFLP and shall not use the
Computer Art or Photographs for any purpose other than the purpose
set forth in Licensee's Use Application. Licensee shall not provide
the Computer Art or Photographs to any other party including a
manufacturer, unless NFLP approves such party in accordance with
Paragraph 9 of this License. Licensee shall take all steps
necessary to prevent the unauthorized copying or use of the Computer
Art or Photographs by third parties.
c. Upon the expiration or termination of this License, Licensee shall
immediately deliver to NFLP all Computer Art and Photographs
provided by NFLP and all copies and duplications of such Computer
Art or Photographs and all related materials.
d. Licensee acknowledges that it has no right, title or interest in or
to any of the Photographs, including, without limitation, copyrights
in the Photographs. Licensee represents that it will not assert any
rights in or to the Photographs during the Term or thereafter.
11. Protection of Rights
a. Licensee acknowledges that, as between NFLP and Licensee, NFLP
exclusively owns the NFL Marks and all copyrights, trademarks and
other proprietary rights in and to them. Licensee further
acknowledges that NFLP shall own worldwide in perpetuity: (i) all
artwork produced under this License bearing the NFL Marks
("Artwork") and all copyrights and other proprietary rights in such
Artwork; (ii) all secondary marks and/or promotional concepts
("Secondary Marks") developed for use and used in connection with
any Licensed Product and all copyrights and other proprietary rights
in such Secondary Marks; (iii) all derivative works based on any of
the NFL Marks, Secondary Marks, Computer Art, or Artwork
("Derivative Works") and all copyrights and other proprietary rights
in such Derivative Works; and (iv) all Computer Art and all
copyrights and other proprietary rights in such Computer Art as well
as duplicates and copies of it. Licensee's use of the Licensed
Marks, Computer Art, Artwork, Secondary Marks and Derivative Works
is for NFLP's benefit and Licensee will not acquire any rights in
any of them by such use. Licensee acknowledges that NFLP will have
the right to terminate this License if Licensee asserts any rights
in or to any of the NFL Marks, Computer Art, Artwork, Secondary
Marks and Derivative Works other than those granted under this
License. Licensee shall not attack the trademarks, copyrights or
other proprietary rights of NFLP, the NFL, or its Member Clubs
during the Term or thereafter.
b. Any Artwork, Secondary Marks, Derivative Works, computer artwork or
other materials created by Licensee or its agents in connection with
this Agreement shall be performed as a "work made for hire" for
NFLP. Licensee irrevocably assigns and transfers to NFLP all right,
title and interest, including all copyrights and extensions and
renewals thereof, in and to the Artwork, the Secondary Marks, the
Derivative Works, any computer artwork created by Licensee or its
agents and all related proprietary rights (collectively the
"Proprietary Materials"). At the request of NFLP, Licensee shall
execute all documents confirming NFLP's rights in and to the NFL
Marks and Proprietary Materials including an assignment of copyright
in form and substance satisfactory to NFLP. Licensee shall cause
each third party who makes or contributes to the creation of the
Proprietary Materials to agree that all rights, including the
copyrights, in his or her work shall be owned by NFLP whether as a
"work made for hire" or by assignment, as appropriate.
c. Licensee shall only display or use the Licensed Marks in the form
and manner that NFLP has specifically approved in writing. At
NFLP's direction, Licensee shall cause to be irremovably and legibly
printed or affixed in a clearly visible location approved by NFLP on
every Unit of each Licensed Product, and all Related Materials,
Proprietary Materials, and Promotional Materials the following:
(i) Trademark Notices as directed and specified by NFLP;
(ii) Copyright Notices as directed and specified by NFLP;
(iii) The Marketing Program symbol as directed by NFLP;
(iv) Hangtags, inserts, the Officially Licensed Product hologram
label or hangtag, which must be used on all Licensed Products, and
other identifying material required by NFLP;
(v) A permanent label displaying Licensee's name and the Authorized
Brand as directed by NFLP;
(vi) Licensee's name and trade name as directed by NFLP; and
(vii) All other notices required by NFLP to protect the
interests of NFLP, the NFL, and its Member Clubs.
d. Licensee will not use any Trademark or Copyright Notices on the
Licensed Products, Related Materials, Proprietary Materials, and
Promotional Materials that conflict with, negate or cause confusion
with any notices required under this Paragraph 11. Licensee
represents that, except for the Authorized Brands, if applicable, or
as otherwise authorized in writing by NFLP, it will not associate
other licensed properties, names, symbols, or designs with the
Licensed Marks on any of the Licensed Products, Related Materials,
Promotional Materials, and Proprietary Materials. Licensee will not
use the Licensed Marks or NFL Marks on any business sign, business
card, invoice, sales sheet, brochure, catalog, or other form, or as
part of the name of Licensee's business except as authorized by NFLP
in writing prior to such usage.
e. NFLP shall have the right to secure trademark and/or copyright
registrations for the NFL Marks. Upon request by NFLP, in addition
to any other quantity of Licensed Products that Licensee must submit
to NFLP under this License, Licensee shall deliver to NFLP, free of
cost, twelve (12) Units of each Licensed Product with their Related
Materials for such registration purposes provided that Licensee
shall not owe any Royalty for such Units. Licensee shall provide
NFLP with the date of first use of each Licensed Product in
interstate and intrastate commerce. NFLP shall have the right to
secure trademark and/or copyright registrations in NFLP's name for
any Proprietary Materials created by Licensee or its agents for use
in connection with any Licensed Product. By execution of this
License, Licensee appoints NFLP as Licensee's attorney-in-fact
coupled with an irrevocable interest to execute, acknowledge,
deliver and record all registrations and all documents referred to
in this Paragraph 11.
f. Licensee shall assist NFLP, at NFLP's expense, in the procurement,
protection, and maintenance of NFLP's rights in and to the NFL Marks
and the Proprietary Materials. NFLP may, in its sole discretion,
commence or prosecute and control the disposition of any claims or
suits relative to the imitation, infringement and/or unauthorized
use of the NFL Marks or the Proprietary Materials either in its own
name, or in the name of Licensee, or join Licensee as a party in the
prosecution of such claims or suits. Licensee shall cooperate fully
with and provide full assistance to NFLP in connection with any such
claims or suits. Licensee shall promptly notify NFLP in writing of
any infringement, imitations, or unauthorized use of the NFL Marks
or Proprietary Materials by others. NFLP shall, in its sole
discretion, determine whether to take action and the type of action,
if any, to take against such infringement. Licensee shall not
institute any suit or take any action on account of such
infringements, imitations or unauthorized uses unless it receives
NFLP's prior written consent. NFLP will receive the full amount of
any settlement made or damages awarded in connection with any action
taken against such infringement.
12. Indemnification and Insurance
a. During the Term and thereafter, Licensee shall be solely responsible
for, defend, indemnify and hold harmless NFLP, the NFL, its Member
Clubs, and each of their respective affiliates, shareholders,
officers, directors, agents and employees for, from and against any
claims, demands, causes of action, damages, costs and expenses,
including reasonable attorneys' fees, judgments, and settlements
arising out of or in connection with: (i) Licensee's breach of any
of its representations, warranties, covenants or obligations
contained in this License; (ii) Licensee's use of the Licensed Marks
except as provided in subparagraph (c) below; (iii) Licensee's
noncompliance with any applicable federal, state, or local laws or
regulations; or (iv) the manufacture, distribution, sale,
advertising or use of any Licensed Product. Licensee acknowledges
that NFLP's approval of any Licensed Product pursuant to Paragraph
4 of this License or Promotional Materials or promotional concepts
pursuant to Paragraph 5 of this License shall not relieve Licensee
of its indemnification obligations under this Paragraph.
b. Licensee shall obtain and maintain at its own expense from a
licensed and admitted insurance carrier with a rating not less than
A from Best, a product liability insurance policy that will provide
coverage of three million dollars ($3,000,000) for personal injuries
arising out of each occurrence and one million dollars ($1,000,000)
for property damage arising out of each occurrence and an
advertising liability insurance policy that will provide coverage of
three million dollars ($3,000,000) for each occurrence. Licensee
shall ensure that such policies: (i) will list the NFL, its Member
Clubs, NFLP, and each of their respective affiliates, shareholders,
officers, directors, agents, and employees as additional insureds;
and (ii) will each provide that they can not be canceled without at
least thirty (30) days written notice to NFLP. Simultaneously with
the execution of this License, Licensee shall submit to NFLP the
fully paid policies or certificates of insurance. Compliance with
this subparagraph (b) will not relieve Licensee of its other
obligations under this Paragraph 12. The insurance coverage
required under this License is not cumulative and will not extend to
any other License or Agreement between Licensee and NFLP unless
otherwise authorized by NFLP in writing.
c. During the Term and thereafter, NFLP shall indemnify and hold
harmless Licensee, its officers, directors, agents and employees
for, from and against any claims, demands, causes of action,
damages, and reasonable attorneys' fees for trademark infringement
arising out of the use of the Licensed Marks as strictly authorized
under this License, provided that NFLP is given immediate notice of
and shall have the option to undertake and conduct the defense of
any such claim, demand or cause of action and further provided that
Licensee shall cooperate in the defense of such claim as reasonably
required by NFLP.
13. Financial Information
a. Upon NFLP's request, Licensee shall provide NFLP with a statement
from an independent certified public accountant attesting to
Licensee's solvency. For the purposes of this License, "solvency"
shall mean that Licensee is able to pay its obligations as they
become due in the regular course of business.
b. On or before the 15th day of each month, Licensee shall provide NFLP
with Licensee's Fiscal Year projections for sales and income for the
Licensed Products. Upon request by NFLP, Licensee shall provide
NFLP with a list ranking its Licensed Products sales by retailer
and/or Third Party Distributors for its top twenty-five (25) retail
accounts or by retail accounts comprising seventy-five percent (75%)
of its Net Sales, whichever is greater, and itemizing for each such
retailer and/or Third Party Distributors a description and the
number of Units of each Licensed Product sold.
c. Licensee shall notify NFLP in writing of any adverse material change
in Licensee's financial condition that will likely affect its
performance under this License at the time such material change
occurs.
14. Audits and Inspections
a. During the Term and for at least three (3) full Fiscal Years after
the expiration or termination of the License, Licensee shall keep,
maintain and preserve complete and accurate books of account and
records covering all transactions relating to this License,
including, without limitation, invoices, correspondence, inventory
accounting, banking and financial records ("Records"). Licensee
shall designate a symbol or number that will be used exclusively on
Records relating to the Licensed Products and with no other articles
that Licensee manufactures, distributes or sells. Licensee shall
ensure that all invoices for the sale of Licensed Products to its
retailers and/or Third Party Distributors will include the quantity
and description of each Licensed Product itemized by Marketing
Program, Style and Member Club, if applicable.
b. During the Term and for at least three (3) full Fiscal Years after
the expiration or termination of the License, NFLP and its duly
authorized representatives will have the right during reasonable
business hours to inspect and audit all Records and conduct a
physical examination of Licensee's premises including its warehouses
and manufacturing facilities and those of Third Party Distributors
and Third Party Manufacturers. NFLP shall provide Licensee with no
less than five (5) business days' written notice prior to such
inspection, audit or examination; provided however, if compelling
circumstances exist, as determined by NFLP in the exercise of its
reasonable business judgment, NFLP may conduct an immediate
inspection, audit or examination with no prior notice to Licensee.
Licensee represents that it will fully cooperate with the
inspection, audit or examination and will not cause or permit any
interference with NFLP or its representatives during any inspection,
audit or examination. During an inspection, audit or examination,
NFLP shall have the right to make copies or extracts of Licensee's
Records.
c. Licensee shall pay NFLP for the cost of any audit that discloses a
payment deficiency of more than two percent (2%) between the amount
due to NFLP pursuant to the audit and the amount Licensee actually
paid or reported to NFLP. Licensee shall pay NFLP any deficiency
amount together with interest on the deficiency amount pursuant to
the provisions in Paragraph 3d of this License. Licensee shall pay
NFLP the amount of any additional costs beyond the cost of the audit
incurred by NFLP due to a change in an audit date scheduled by NFLP
made at Licensee's request. Licensee shall pay such amounts within
ten (10) days of invoicing by NFLP.
15. Termination
Without prejudice to any other rights it may have in law, equity or
otherwise, NFLP shall have the right to immediately terminate this
License upon written notice to Licensee at any time if:
a. Licensee fails to generate Net Sales during any Fiscal Year
satisfying the corresponding Minimum Royalty Guarantee or fails to
generate Net Sales on any Licensed Product with a separate Minimum
Royalty Guarantee satisfying the corresponding per-product Minimum
Royalty Guarantee;
b. Licensee fails to deliver to NFLP or to maintain in full force and
effect the insurance coverage referred to in Paragraph 12b of this
License;
c. Licensee fails to make available its premises, Records or other
business information to NFLP or its representatives or fails to
provide full and complete information as required in Paragraphs 13
and 14 of this License;
d. Licensee manufactures, sells, distributes, advertises or uses any
Style of any Licensed Product, or any Promotional Materials, or
Proprietary Materials without the prior written approval of NFLP as
required in this License, or after such written approval has been
withdrawn by NFLP or has expired;
e. Licensee distributes or sells any Licensed Product outside the
Territory or sells any Licensed Product to a third party that
Licensee knows or should reasonably know intends to sell such
Licensed Product outside the Territory;
f. Licensee distributes any Licensed Product outside the corresponding
Distribution Channels, or sells any Licensed Product to any third
party that Licensee knows or should reasonably know intends to sell
such Licensed Product outside the corresponding Distribution
Channels;
g. Licensee fails to obtain NFLP's written approval prior to assigning,
sublicensing, transferring, or otherwise encumbering the License or
prior to using a Third Party Manufacturer, Third Party Distributor,
or screen printer or any approved Third Party Manufacturer, Third
Party Distributor, or screen printer engages in conduct that would
entitle NFLP to terminate the License if Licensee had engaged in
such conduct;
h. Any sales representative of Licensee produces, inventories,
warehouses or distributes any of the Licensed Products;
i. Licensee fails to satisfy the distribution requirements in Paragraph
6 of this License or otherwise fails to make timely and complete
delivery of orders it has taken for any Licensed Product to seventy
percent (70%) or more of its retail accounts and/or Third Party
Distributors that collectively account for eighty percent (80%) of
its Net Sales on one or more occasion during any Fiscal Year;
j. Licensee makes a material misrepresentation or omission in its
license application form;
k. Licensee fails to make any payment or deliver any statement required
under this License and fails to correct such default within ten (10)
days of written notice of such default;
l. Licensee breaches any other agreement in effect between Licensee and
NFLP;
m. Licensee makes or agrees to make a payment to any Member Club or any
shareholder, officer, director, employee, agent, or representative
of a Member Club, or to any agent, representative or employee of the
NFL or its affiliates in such person's individual capacity, in
connection with the use of any Licensed Marks under this License or
otherwise as a direct result of the sales of any Licensed Product,
or Licensee fails to disclose to NFLP any existing agreement or
agreement being negotiated by Licensee or Licensee's agent between
Licensee and a Member Club or any shareholder, officer, director,
employee, agent, or representative of a Member Club, or any agent,
representative or employee of the NFL or its affiliates in such
person's individual capacity;
n. Licensee disparages NFLP, the NFL, any of its Member Clubs, or any
of their respective shareholders, officers, directors and employees
as determined by NFLP in its sole discretion, or otherwise engages
in conduct that NFLP deems detrimental to the NFL or any of its
Member Clubs or any shareholder, officer, director, employee, agent,
or representative of a Member Club;
o. Licensee fails to comply with any applicable federal, state or local
law or regulation in connection with this License;
p. Licensee fails, in any way, to comply with the requirements of
Paragraph 19; or
q. Licensee fails to comply with any other material term or condition
of this License.
16. Goodwill and Reputation
Licensee recognizes the great value of the goodwill associated with
the NFL Marks and acknowledges that such goodwill belongs to the
Member Clubs and the NFL, and that such NFL Marks have secondary
meaning in the minds of the public. The nature of the business of
NFLP, the NFL, and its Member Clubs, requires public respect for and
trust in the reputation and integrity of the NFL and its Member
Clubs. NFLP may, at its sole option, terminate this License or
withdraw some or all Product Approval Forms or Promotional Approval
Forms by written notice to Licensee if any unanticipated factor,
development or event causes NFLP's continued association with any
one or more Licensed Product or Licensee to adversely reflect upon
NFLP, the NFL or its Member Clubs as determined by NFLP in its sole
discretion. In the event of such termination, Licensee shall pay to
NFLP the Royalty on all sales of the Licensed Products made during
the Termination Fiscal Year or the Termination Guarantee as defined
in Paragraph 3a, whichever is greater, and all other amounts due to
NFLP. Upon receipt of such payment, NFLP will reimburse Licensee
for its salvage expenses or, in the case of unsalvageable Licensed
Products, Licensee's manufacturing costs if NFLP does not permit
Licensee to distribute the remaining inventory of Licensed Products.
17. Renewal Request
NFLP must receive a written request from Licensee by no later than
the Renewal Request Date if Licensee desires to renew the License.
If Licensee has complied with all terms and conditions of this
License during the Term and NFLP desires, in its sole discretion, to
negotiate a renewal License, NFLP shall negotiate with Licensee for
the terms and conditions of a renewal License for a period of no
more than sixty (60) days following NFLP's receipt of Licensee's
renewal request notice. This License automatically expires at the
end of the Term if NFLP does not receive Licensee's written request
by the Renewal Request Date, Licensee has failed to comply with all
terms and conditions of this License, NFLP elects not to negotiate
a renewal License, or the parties are unable to reach an agreement
within said sixty-day negotiation period. Licensee acknowledges
that NFLP has no express or implied obligation to renew the License.
NFLP will have no liability to Licensee for any expenses incurred by
Licensee in anticipation of any renewal or extension of this
License.
18. Effect of Expiration or Termination of the License
a. Sixty (60) days before the expiration of this License, Licensee will
furnish to NFLP a statement showing the number of Units and
description of such Units for each Style of each Licensed Product,
Promotional Materials, and Proprietary Materials on hand or in
process in Licensee's inventory. If this License is terminated by
NFLP, Licensee shall furnish such statement within ten (10) days
after notice of termination is given by NFLP.
b. After expiration or termination of this License for whatever reason,
all rights granted under this Licensee will revert to NFLP and
Licensee shall refrain from further use of, simulation of or
reference to any and all of the NFL Marks except as provided in this
paragraph. Except for termination of this License by NFLP, Licensee
will have ninety (90) days to dispose of the Licensed Products
("Sell-Off Period") that are on hand or in process at the time of
such expiration, provided all statements and payments then due to
NFLP are first made, Licensee is otherwise in compliance with all
terms and conditions of the License, and such Sell-Off occurs at
Licensee's regular selling price and within the Distribution
Channels. During the Sell-Off Period, Licensee shall submit all
payments and statements required under this License in accordance
with the terms and conditions of the License.
c. If Licensee has remaining inventory of the Licensed Products upon
the termination of this License or after the Sell-Off Period, if
applicable, NFLP may, at its option: (i) purchase such inventory at
Licensee's cost; (ii) require Licensee to deliver such inventory to
NFLP for destruction at Licensee's expense; or (iii) require
Licensee to destroy such inventory at Licensee's expense and furnish
NFLP with an affidavit signed by an officer of Licensee attesting to
such destruction. NFLP will have the right at any time before
expiration or termination of this License and during the Sell-Off
Period to conduct a physical inventory to, among other things,
verify the quantity and Style of the Licensed Products in Licensee's
inventory. If Licensee refuses to permit such physical examination
of the inventory or fails to provide NFLP with the statement
required in subparagraph a above, Licensee will forfeit its right to
any Sell-Off Period.
d. Upon the termination of this License or immediately after the Sell-
Off Period, Licensee shall deliver to NFLP all Proprietary Materials
and all related materials, including software, created or used by
Licensee in connection with this License and shall, at NFLP's
option, destroy or sell to NFLP at Licensee's cost, any molds,
plates and other items used to reproduce the Licensed Marks.
19. On-Field Product Exposure
Licensee acknowledges that in furtherance of the NFL's policy of
control of game operations, NFLP shall approve any and all visible
items worn or used on-field, including the sidelines, during all
pre-season, regular season and post-season NFL games. Except as
otherwise authorized in writing by NFLP or as otherwise provided in
this License, Licensee shall not during the Term or thereafter
agree, contractually or otherwise, with any Member Club, NFL player,
coach, or other Member Club employee, for any individual to wear,
use or promote any commercially identified product on-field,
including the sidelines, during any NFL game.
20. Players and Coaches
Licensee acknowledges that this License does not grant Licensee any
rights with respect to the name, likeness, signature, or other
attributes of any player, coach, or other employee of the NFL.
Licensee shall be responsible for securing whatever rights may be
required for the use of such names, likeness, signatures, or other
attributes. Licensee represents that it will not exercise the
rights granted in this License in any manner that will imply that
Licensee has obtained any such rights without separate written
authorization from the appropriate player, coach, or employee.
21. NFL Films
Licensee understands and acknowledges that this License does not
grant Licensee any rights with respect to film or videotape footage
of NFL game action and that Licensee must obtain such footage
directly from NFL Films, Inc. ("NFL Films") on terms and conditions
to be mutually agreed upon by Licensee and NFL Films. If Licensee
desires to use such footage in connection with this License, NFLP
must approve the proposed usage and subject matter of such footage
in writing prior to its usage.
22. Information Transmission
If NFLP obtains the capacity to receive computer transmissions of
any or all information required from Licensee under this License
during the Term, Licensee shall begin to provide such information by
such computer transmission as soon as practicably possible.
23. Notices
The parties to this License shall send all notices and statements
required under this License to the respective addresses of the
parties set forth above unless notification of a change of address
is given in writing. Licensee shall direct all notices to NFLP to
the Senior Vice President of Consumer Products with a copy to the
General Counsel of NFLP. All notices required under this License
must be in writing, must be sent by registered or certified mail,
facsimile, or an overnight delivery service generally accepted in
the industry that provides evidence of delivery, and shall be deemed
to have been given at the time they are sent.
24. Relationship of Parties
The parties to this License are not partners, joint venturers, or
agents and nothing in this License shall be construed to place them
in any such relationship. Neither party will have the power to
obligate or bind the other in any manner whatsoever. NFLP, the NFL,
and its Member Clubs in no way endorse, certify or guarantee the
quality of the Licensed Products.
25. Governing Law and Disputes
This License and any dispute arising under it shall be governed by
and construed in accordance with the laws of the State of New York
without regard to conflict of law principles. All disputes
pertaining to this License shall be decided by a state or federal
court located in the City of New York and Licensee consents to
personal jurisdiction in such courts.
26. Waiver
Neither party to this License can waive or modify any provision of
this License unless such waiver or modification is in a writing
signed by both parties. Licensee acknowledges that NFLP's prior
forbearance of any requirement of this License will not prevent NFLP
from subsequently requiring full and complete compliance with such
requirement or from exercising its rights under this License.
27. Confidentiality
The parties to this License acknowledge that the terms of this
License are confidential and each warrant that neither shall
disclose such terms to any third party other than the disclosing
party's accountants, agents or attorneys or as required by law,
without the other party's prior written consent.
28. Severability
If any paragraph or clause of this License is illegal or invalid or
void for any reason, the remaining paragraphs and clauses of the
License will remain in full force and effect.
29. Release
In consideration of the rights granted under this License, Licensee
releases NFLP, the NFL, its Member Clubs and each of their
respective affiliates, shareholders, officers, directors, agents and
employees from any claims, demands, losses, expenses or damages,
whether known or unknown, arising out of or in connection with or in
any manner related to the manufacture, distribution or sale of
products bearing the Licensed Marks.
30. Entire Agreement
This License constitutes the entire agreement and understanding
between the parties to this License with respect to the subject
matter of this License and cancels, terminates, and supersedes any
prior or contemporaneous agreement or understanding, whether oral or
written, on this subject between Licensee and the NFL, its
affiliates or Member Clubs, or NFLP. The headings in this License
are for reference purposes only and have no legal effect.
31. Execution
Licensee will make an offer to enter into this License by having a
duly authorized officer or representative sign below and return the
License with a check payable to NFLP for the Advance Royalty Payment
required for Fiscal Year I. An acceptance of the offer will occur
and a binding agreement will exist only after an authorized officer
or duly authorized representative of NFLP signs this License and
delivers a fully-executed copy to Licensee. Licensee acknowledges
that this License will be deemed to have been executed in New York
City.
Licensee: INNOVO, INC.
BY: /s/Patricia Anderson DATE: October 9, 1997
Patricia Anderson
(Signature of officer, partner or individual duly authorized to sign)
TITLE: President
NATIONAL FOOTBALL LEAGUE PROPERTIES, INC.
BY: /s/Jim Conwell DATE: October 5, 1997
Jim Conwell
(Signature of officer, partner or individual duly authorized to sign)
TITLE: Jr. Vice President
<PAGE>
EXHIBIT I
DISTRIBUTION CHANNELS
The following definitions shall apply to this License:
1. Airport/Hotel Shop: A separate retail store located in an airport
or hotel.
2. Amusement/Convenience Venues: Restaurants, convenience stores, gas
stations, car and truck stops, amusement venues, recreation centers
and any other business venue in which the sale of the Licensed
Products would constitute a subsidiary business excluding Stadium
Shops/Stadium Concessionaires as defined below.
3. Automotive Store: A retail store that carries as its primary retail
items automotive supplies.
4. Book Store: A retail store that carries as its primary items books
and periodicals. Examples include, without limitation, Walden
Books, and Barnes and Noble.
5. Card/Party Shop: A retail store that carries as its primary retail
items cards or party products. Examples include, without
limitation, Hallmark Stores.
6. Computer/Electronic Store: A retail store that carries as its
primary retail items computers, software, and computer accessories
or electronic equipment and appliances. Examples include, without
limitation, CompUSA and Computer City.
7. Computer On-Line: Licensee, and no other organization, making the
Licensed Product available for sale to consumers on the Internet or
through a computer on-line service provided that the Licensed
Products are physically shipped to consumers by traditional methods
and not distributed electronically on-line or via the Internet.
8. Craft Store: A retail store that carries as its primary retail
items arts and crafts supplies.
9. Department Store: A retail store that operates several departments
carrying higher-priced brands of apparel and non-apparel. Examples
include, without limitation, Macy's, Dillards, Nordstrom, and
Lothrop, JC Penney, Boscov's, Sears, May Co., Federated Group,
Carson Pirie Scott, Dayton Hudson, Bon Ton, Belks, Strawbridge &
Clothier, Jacobson and Bloomingdales.
10. Direct Retailer: An organization that markets products directly to
consumers without using retail space through the mediums of
television or catalog but excluding the Internet or other computer
on-line services.
11. Discount Store: A retail store that operates several departments
carrying lower-priced brands of apparel and non-apparel with limited
service. Examples include, without limitation, Wal-Mart, Kmart,
Bradlees, Roses, Hills, Caldor, Venture, Target, Shopko, and Ames.
12. Distributor: Defined as Third Party Distributor in Paragraph 9c of
the License.
13. Drug Store: A retail store that carries as its primary retail
items pharmaceuticals, health and beauty aids, and convenience
items. Examples include, without limitation, OSCO, Walgreen, and
Eckert.
14. Fan Shop: A retail store that carries as its primary retail item
licensed products of the NFL, National Basketball Association,
National Hockey League, Major League Baseball, and the National
Collegiate Athletic Association. Examples include, without
limitation, Pro Image, Team Spirit and Stadium Stuff.
15. Footwear Specialty Store: A retail store that carries as its
primary retail item athletic footwear and also carries, in limited
quantities, licensed apparel and headwear. Examples include,
without limitation, Foot Locker, FootAction, and Athletes Foot.
16. Fund Raising: An organization, including Licensee, that markets
products through various channels such as schools for the purpose of
raising money for educational or charitable causes. NFLP must
approve each educational or charitable cause.
17. Gallery: A retail store that carries as its primary retail item
artwork.
18. Gift/Flower Shop: A retail store that carries as its primary retail
items gifts, novelties or flowers.
19. Grocery Store: A retail store that carries as its primary retail
items food and household products. Examples include, without
limitation, A & P, Shop Rite, Vons, Jewel, and Food Town.
20. Hardware Store: A retail store that carries as its primary retail
items hardware products. Examples include, without limitation, True
Value, Ace and Home Depot.
21. Hobby Store: A retail store that carries as its primary retail item
collectible products.
22. Home Specialty Store: A retail store that carries as its primary
retail items furniture and home products. Examples include, without
limitation, Home Place, Linens 'N Things, and Bed Bath and Beyond.
23. Jewelry Store: A retail store that carries as its primary retail
item jewelry. Examples include, without limitation, Adler Jewelers.
24. Membership Club/Warehouse Store: A retail store that markets
products to members only. Examples include, without limitation,
BJ's Wholesale Club.
25. Military Base: The domestic military bases of the United States.
26. Office Supply: A retail store that carries as its primary retail
items office supplies. Examples include, without limitation, Office
Max and Staples.
27. Sporting Goods Store: A retail store that carries as its primary
retail items licensed apparel, athletic footwear and sporting goods
equipment. Examples include, without limitation, Champ's, Herman's,
Koenig's, The Sports Authority, Sportmart, Gart Brothers, and
Modells.
28. Stadium Shop/Stadium Concessionaire: A store or vendor that carries
as its primary retail item Licensed Products of the NFL and is
located at the training facilities or stadium of a Member Club.
29. Toy/Children's Store: A retail store that carries as its primary
retail items toys and/or children's apparel. Examples include,
without limitation, Toys 'R Us, Kids 'R Us, and Babies 'R Us.
FORM: NBPA
U.S./NON-APPAREL
LICENSEE: INNOVO, INC. RETAIL PRODUCT LICENSE AGREEMENT
ADDRESS: 27 North Main Street
Springfield, TN 37172
THIS RETAIL PRODUCT LICENSE AGREEMENT is entered into by NBA Properties,
Inc. ("NBAP"), with its principal office at 645 Fifth Avenue, New York,
New York 10022, and the licensee listed above ("LICENSEE") with regard
to the commercial use of certain names, logos, symbols, emblems, designs
and uniforms and all identifications, labels, insignia or indicia thereof
(the "Marks") of the national Basketball Association (the "NBA") and its
Member Teams (collectively, the "NBA Marks"). On the terms of this
Agreement and subject to the attached NBAP Standard Terms and Conditions,
NBAP hereby accepts, the non-exclusive (except as otherwise expressly
provided in this Agreement) right and license to use the marks of the
member Teams, the silhouetted dribbler logo (the "NBA Logo") and the
Marks of the NBA, NBA All-Star Weekend and NBA Playoffs and Finals
(collectively, the "Licensed Marks") solely in connection with the
manufacture, distribution, advertisement, promotion and sale of the
products described in Paragraph A below including one or more of the
Licensed Marks ("Licensed Products"). No license or right is granted for
the use of the Licensed Marks for any purpose other than on the Licensed
Products and in the distribution, advertisement, promotion and sale of
the Licensed Products in accordance with this Agreement.
A. LICENSED PRODUCTS:
* insulated and non-insulated vinyl lunch bags and soft-
sided coolers
* cotton canvas tote bags
* nylon, vinyl and/or cotton laundry bags
* shoe bags
* garment bags
* "Cush-N-Carry" seat cushions
B. TERM: As of August 1, 1997 to July 31, 1998 (the "Term").
C. TERRITORY: Licensed Products may only be distributed in the 50
United States and the District of Columbia, except that product may
be shipped to the in-arena concessionaires of the Toronto Raptors
and Vancouver Grizzlies (the "Territory").
D. ROYALTY RATES: During the Term, LICENSEE shall pay monthly to NBAP
a royalty and advertising and promotion payment (hereinafter
referred to as "royalty") equal to twelve percent (12%) of "Net
Sales" (as defined in Paragraph 1 of the attached NBAP Standard
Terms and Conditions).
E. MINIMUM GUARANTEES: LICENSEE guarantees that its aggregate royalty
payments to NBAP for the Term under this Agreement shall not be
less than forty-six thousand dollars ($46,000).
F. ADVANCES: Upon execution of this Agreement, LICENSEE shall pay to
NBAP the sum of eleven thousand five hundred dollars ($11,500) as an
advance to be credited against LICENSEE's Minimum Guarantee as set
forth above.
G. ADVERTISING AND PROMOTION:
(i) Consistent with NBAP's past practice of creating, undertaking
or supporting advertising and promotion activities with respect
to NBAP-licensed products sold at retail, NBAP shall devote up
to two percent (2%) of Net Sales (from the royalties received
from LICENSEE pursuant to this Agreement) to cover the expenses
incurred by NBAP in connection with such advertising and
promotion activities.
(ii) LICENSEE shall exhibit, at its sole cost and expense, a fair
and representative selection of Licensed Products at the Super
Show and every other trade show where LICENSEE exhibits
licensed products.
H. SELLING PRACTICES: LICENSEE acknowledges NBAP's legitimate and
reasonable interest in protecting the value of the NBA Marks and
maximizing the effectiveness of its advertising, promotion and
distribution efforts by segmenting the classes of trade into which
its licensees sell NBAP-licensed products. Therefore, LICENSEE
shall only sell Licensed Products to a buyer that, to its best
knowledge (i) purchases Licensed Products from LICENSEE solely for
sale directly to the consumer and operates a retail establishment
that supports the high quality and image of NBA officially licensed
products with appropriate merchandising displays, promotion and/or
customer service. LICENSEE acknowledges that a failure to comply
with the selling practices set forth in this Paragraph shall cause
significant harm to NBAP's efforts to effectively and efficiently
distribute NBAP-licensed products.
AGREED TO AND ACCEPTED, subject AGREED TO AND ACCEPTED:
to and incorporating the attached NBAP NBA PROPERTIES, INC.
Standard Terms and Conditions which
the undersigned has read:
INNOVO, INC. By:_____________________
Harvey E. Benjamin
Senior Vice President,
Business Affairs
By:________________________
Title:_____________________ Dated:__________________
<PAGE>
NBAP STANDARD TERMS AND CONDITIONS
1. ADDITIONAL DEFINITIONS
For the purposes of this Agreement
(a) "Contract Year" shall mean a twelve (12) month accounting
period commencing August 1 and concluding July 31.
(b) "Counterfeit Goods: shall mean and include: (i) goods that
bear any NBA mark that has been reproduced and/or affixed
without authorization from NBAP; (ii) goods that bear any NBA
Mark produced by any source in excess of an amount ordered by
an NBAP licensee; and (iii) goods that bear any NBA Mark that
have been rejected by NBAP or an NBAP licensee and nevertheless
enter the stream of commerce.
(c) "Diverted Goods" shall mean and include any goods produced by
someone acting on behalf of an NBAP licensee, which goods are
not delivered by the producer to such licensee or to a person
designated by such licensee to receive such goods.
(d) "Net Sales" shall mean the total amount of the gross sales of
a Licensed Product by LICENSEE. After deducting any bona-fide
credit or adjustment for returns actually made and volume
discounts actually and customarily given to the trade (such
discounts may not exceed two percent (2%) of the gross sales
for the applicable accounting period). In computing Net Sales,
no direct or indirect expenses or costs incurred in connection
with paying royalties due under this Agreement (including
transferring funds for royalties or converting currency into
U.S. dollars) or manufacturing, selling, distributing,
importing or advertising including cooperative and other
advertising and promotion allowances( the Licensed Products
shall be deducted, nor shall any deduction be made for
uncollectible accounts, cash discounts, early payment
discounts, discounts relating to advertising, mark-down
allowances or other allowances. Net sales resulting from sales
to any party directly or indirectly related to or affiliated
with LICENSEE (a "Related Transaction") shall be the higher of
the sales price to the related or affiliated party or the sales
price charged to the trade by such related or affiliated party.
If a purchaser from LICENSEE purchases FOB the manufacturing
source or participates in other arrangements which result in
such purchaser paying less for the Licensed Products than
LICENSEE's regular selling prices to the trade, Net Sales with
respect to any such transaction shall be computed based on the
regular selling prices to the trade.
(e) "Parallel Goods" shall mean and include Licensed Products
transferred outside of the Territory or brought into the
Territory in violation of this Agreement.
(f) "Premium" shall mean anything given free or sold at
substantially less than its usual selling price (but does not
include sales made pursuant to periodic price reductions
resulting from"specials," "sales," or volume pricing discounts)
for the purpose of increasing the sale of, or publicizing, any
product or service, or other giveaway or promotional purpose.
Other giveaway or promotional purposes include, but are not
limited to, self-liquidating offers, uses of Licensed Products
as sales force or trade incentives and sales of Licensed
Products through distribution schemes involving earned
discounts or "bonus" points based on the consumer's use of the
offeror's product or service.
2. TEAM REPRESENTATION; LIMITATIONS ON LICENSE
(a) Unless otherwise approved in writing by NBAP, each Licensed
Product must be manufactured and offered for sale on LICENSEE's
standard terms in a version for each Member Team. LICENSEE
acknowledges that, unless the NBA Logo is specifically
contained in the definition of Licensed Marks above, no license
is granted for the use of the NBA Logo except insofar as the
NBA Logo is embodied in the NBA "Official Licensed Product"
logo. Unless otherwise approved in writing by NBAP, the NBA
Logo may only be used in combination with the Marks of one (1)
or more Member Teams (i.e., the NBA Logo may not be used by
itself), which must be shown with equal or greater prominence
that the NBA Logo.
(b) All designs of the Licensed Products, including any packages,
containers or tags, shall be subject to NBAP's prior written
approval and shall be used solely in furtherance of this
Agreement, and such designs will not be used in any other
respect by LICENSEE nor will LICENSEE authorize any third party
to use such designs acknowledges that LICENSEE may hold other
licenses pursuant to which LICENSEE manufactures, distributes
or sells products similar in design to the Licensed Products
and nothing in this Agreement is intended to prohibit
LICENSEE's manufacture, distribution or sale of such products
not bearing or relating to the Licensed Marks.
3. STATEMENTS AND PAYMENTS; REPORTING
(a) Statement and Payments: By the fifteenth (15th) day following
the end of each month, LICENSEE shall furnish (on forms
provided by or approved by NBAP) full and accurate statements
(on a county-by-country and unit basis, if more than one
country is contained within the definition of the Territory),
certified by an officer of LICENSEE, showing all information
relating to the calculation of Net Sales for the preceding
month. Simultaneously with the submission of such statement,
LICENSEE shall make all monthly royalty payments required under
this Agreement for the preceding month. The minimum amount of
royalties to be paid by LICENSEE by the end of each quarter
with respect to each Licensed Product category shall be the
amount which, when added to payments of royalties previously
made for the Contract Year with respect to such Licensed
Product category, shall be equal to one-fourth (25%) of the
Minimum Guarantee for such Licensed Product category for such
Contract Year required under Paragraph E above multiplied by
the number of quarters then elapsed. Aggregate royalties paid
each Contract Year may exceed the Minimum Guarantee for such
Contract Year. Such monthly statements shall be furnished and
the required payments made by LICENSEE whether or not there are
any Net Sales for that month. LICENSEE shall not deduct or
withhold any amounts by reason of any tax (including any taxes
imposed on NBAP); any applicable tax on the distribution and
sale of the Licensed Products shall be borne, and paid
directly, by LICENSEE. All payments shall be in U.S. dollars,
from a U.S. source approved by NBAP. All computations and
payments shall be in U.S. dollars, at the spot rate for the
local currency as published in the Wall Street Journal for the
last business day of the preceding month. If LICENSEE shall
fail to timely pay any amount due under this Paragraph,
LICENSEE shall pay interest on such amount at a rate equal to
the lesser of (i) three percent (3%) per annum over the highest
percent rate (announced by Chemical Bank, New York branch)
prevailing during the period between the date the payment first
became due and the date such payment is actually paid or (ii)
the highest rate permitted by law during the period between the
date the payment first became due and the date such payment is
actually paid. The receipt or acceptance by NBAP of any of the
statements furnished or royalties paid by LICENSEE (including
the cashing of any royalty checks) shall not preclude NBAP from
questioning their accuracy at any time, auditing LICENSEE's
books and records pursuant to Paragraph 12 or claiming any
shortfall in royalty payments. In order to assist with NBAp's
annual budget process, by April 15 of each Contract Year,
LICENSEE shall deliver a statement detailing LICENSEE's
projections for sales of each Licensed Product for the
following Contract Year, broken down on a quarterly basis. If
LICENSEE fails to comply with reporting requirements contained
in this Paragraph, NBAP may charge LICENSEE, and LICENSEE shall
pay, two thousand U.S. dollars (USD 2,000) for each instance of
non-compliance with this Paragraph.
(b) No Cross Collateralization: Any royalty payment for unit of
Licensed Product sold shall only be applied against the Minimum
Guarantee for such Licensed Product for the Contract Year in
which the unit of such Licensed Product was sold (i.e., any
shortfall in, or payment in excess of, the Minimum Guarantee
for a Contract Year may not be offset or credited against the
Minimum Guarantees for any other Contract Year, against any
other Licensed Product or against any other NBA license
(including premium license agreements entered into pursuant to
Paragraph 5 hereof) held by LICENSEE). If Minimum Guarantees
are stated separately for different categories of Licensed
Products or for different territories, royalty payments
resulting from Net Sales of a category of Licensed Product or
in a particular territory shall be applied only against the
Minimum Guarantee for such category of Licensed Product or
territory.
4. NON-RESTRICTIVE GRANT; RIGHTS RESERVED
Nothing in this Agreement shall prevent NBAP from granting any other
licenses and rights. All rights not specifically granted in this
Agreement are expressly reserved by NBAP. No right of renewal or
option to extend is granted or implied and LICENSEE shall have no
right to continue manufacturing or selling Licensed Products or to
continue holding itself out as a licensee of NBAP after the
expiration or termination of this Agreement except as provided in
Paragraph 14.
5. PREMIUMS
LICENSEE shall not use, nor allow any third party to use, any
Licensed Product as a Premium without the prior written
authorization of NBAP pursuant to a separate agreement with
NBAP. In addition, no Premium shall be offered with the
Licensed Products without the prior written approval of NBAP.
Nothing in this Agreement shall prohibit LICENSEE from
marketing Licensed Products using creative techniques
consistent with industry practice, including, but not limited
to, periodic "specials," "sales," or volume discount prices, so
long as all receipts are accounted for in Net Sales and in
accordance with this Agreement.
6. GOODWILL
LICENSEE recognizes that (i) a portion of the value of the NBA
Marks is attributable to goodwill, (ii) the goodwill attached
to the NBA Marks belongs exclusively to NBAP, the NBA and its
Member Teams and (iii) that such NBA Marks have secondary
meanings in the minds of the public. LICENSEE shall not,
during the Term or thereafter, challenge (y) the property
rights of the Member Teams, whether severally owned or held in
association as the NBA, or NBAP's property rights in and to NBA
Marks, or (z) the validity, legality or enforceability of this
Agreement.
7. PROTECTION OF RIGHTS
(a) Unauthorized Activities: LICENSEE shall promptly notify
NBAP in writing of any infringements of the Licensed Marks
or the Licensed Products or the sale of any Licensed
Products outside the Territory (e.g., unauthorized
importation/exportation of goods) which may come to
LICENSEE's attention. NBAP shall have the sole right to
determine whether or not any action shall be taken on
account of any such infringement or unauthorized
importation/exportation. LICENSEE agrees not to contact
any third party, not to make any demands for claims and
not to institute any suit or action on account of such
infringement or unauthorized importation/exportation
without obtaining the express prior written permission of
NBAP in each instance.
(b) Assistance in Protecting Marks: LICENSEE shall
cooperate to the fullest extent necessary to assist NBAP
in the protection of the rights of NBAP, the NBA and the
Member Teams in and to the Licensed Marks. NBAP shall
reimburse LICENSEE for any reasonable out-of-pocket costs
actually incurred by LICENSEE in providing such
cooperation and assistance. LICENSEE shall cooperate with
NBAP in its enforcement efforts, including being named by
NBAP as a complainant in any action against an infringer.
LICENSEE shall pay to NBAP, and waives all claims to, all
damages or other monetary relief recovered in any such
NBAP-initiated action by reason of a judgment or
settlement (other than for reasonable attorneys' fees and
expenses incurred at NBAP's request) whether or not such
damages or any part of such damages represent or are
intended to represent injury sustained by LICENSEE.
(c) Ownership of Marks: LICENSEE acknowledges that NBAP and/or
the Member Teams are the exclusive owners
of the Licensed Marks. Any intellectual
property rights in the Licensed Marks that
may accrue to LICENSEE shall inure to the
benefit of NBAP and shall be assigned to
NBAP upon its request. Any copyright,
trademark, service mark or other right
used, created or procured by LICENSEE with
respect to or involving the Licensed
Marks, derivations or adaptations of the
Licensed Marks, or any word, symbol or
design which users or is similar to the
Licensed Marks so as to suggest
association with or sponsorship by the
NBA, one of its Member Teams or any of
their affiliates, shall be procured for
the benefit of and in NBAP's name, but at
LICENSEE's expense, notwithstanding their
creation by LICENSEE. LICENSEE shall take
all necessary steps to secure an
assignment to NBAP to the copyright from a
creator of work that is not work-for-hire.
Any copyright, trademark or service mark
affecting or relating to the Licensed
Marks already procured or applied shall be
assigned to NBAP. LICENSEE shall supply
NBAP with any necessary supporting
materials required to obtain copyright or
trademark registrations of any copyrights
or trademarks required to be assigned to
NBAP under this Agreement.
(d) Notices, Labeling, and Records: NBAP may from time-to-
time designate such copyright, trademark or service mark
notices (including the form, location and content of such
notices) that LICENSEE shall cause to appear on or within
each Licensed Product sold, by means of a tag, label,
imprint or other appropriate device, in every instance in
which any Licensed Mark is used. The following general
notice (in the English language and the language of the
country where the Licensed Products will be sold) must be
included on a label, the packaging material or on a
separate slip of paper packed with or attached to the
Licensed Product:
"The NBA and individual NBA member team
identifications reproduced on this product are
trademarks and copyrighted designs, and/or other
forms of intellectual property, that are the
exclusive property of NBA Properties, Inc. and the
respective NBA member teams and may not be used, in
whole or in part, without the written consent of NBA
Properties, Inc."
LICENSEE shall (i) cause all Licensed Products to bear the
NBA "official Licensed Product" logo on either the article
or its packaging in such place, and in such prominence, as
NBAP may designate from time-to-time, (ii) faithfully
comply with and adhere to NBAP's mandatory hologram
"Official Licensed Product" identification system or such
other shipment tracking identification and anti-
counterfeiting systems, tags and labels that NBAP may
establish from time-to-time, (iii) unless approved in
writing by NBAP, not cross-license or otherwise use other
licensed properties or other Marks with the Licensed
Products or Licensed Marks and (iv) keep appropriate
records, and advise NBAP, of the date when each of the
Licensed Products is first placed on sale or sold in each
country of the Territory and the date of first use in each
country of each different Licensed Mark in the Licensed
Products and any promotional or packaging materials.
(e) Recordation and Registered User Applications: With
respect to those countries in which LICENSEE may
distribute and which require applications to register
LICENSEE as a permitted or registered user of the Licensed
Marks, or which require the recordation of this Agreement,
LICENSEE shall execute and deliver to NBAP such
applications, agreements or other documents as may be
necessary. In such event, this Agreement rather than such
agreements will govern any disputes between LICENSEE and
NBAP, and when this Agreement expires or is terminated,
any such other agreement shall also be deemed expired or
terminated.
(f) LICENSEE Trade Names and Trademarks: LICENSEE shall
permanently affix labeling on each Licensed Product or its
packaging, indicating its name, trade name and address so
that the public can identify the supplier of the Licensed
Product. Prior to any distribution or sale of any
Licensed Products, LICENSEE shall advise NBAP in writing
of LICENSEE's trade name or trademarks used on Licensed
Products and the proposed placement of such trade names
and trademarks on the Licensed Products. LICENSEE shall
only sell Licensed Products under mutually agreed upon
trade names or trademarks and with approved copyrighted
designs, shall not incorporate the Licensed Marks into
LICENSEE's corporate or business name or trademark in any
manner whatsoever and shall place its trade names and
trademarks on Licensed Products only as approved by NBAP.
As requested by NBAP, LICENSEE shall supply NBAP, in
advance of shipping any Licensed Products, with at least
twelve (12) copies of each type of its hang tags, labels
and other markings of origin for use in identifying and
authentication Licensed Products in the marketplace.
LICENSEE shall not use, whether during or after the Term,
any Marks: (i) in connection with the Licensed Marks
without NBAP's authorization, (ii) confusingly similar to
the Licensed Marks, or (iii) intended to relate or refer
to the Licensed Marks, the Member Teams or events
involving the NBA or the Member Teams.
8. INDEMNIFICATIONS; INSURANCE
LICENSEE shall be solely responsible for, and shall
defend, hold harmless and indemnify NBAP, NBA
Entertainment, Inc. ("NBPE"), the NBA, its Member Teams
and the National Basketball Players Association ("NBPA")
and their respective affiliates, owners, directors,
governors, officers, employees and agents (collectively
"NBA Parties")against, any claims, demands, causes of
action or damages,including attorneys' fees (collectively,
"Claims"), arising out of: (i) any act or omission of
LICENSEE, (ii) any breach of this Agreement by LICENSEE,
(iii) the manufacture, distribution, advertisement,
promotion, sale, possession or use of any Licensed Product
(including, but not limited to, claims relating to any
defect (whether obvious or hidden and whether or not
present in any sample approved by NBAP) in a Licensed
Product or in any packaging or other materials (including
advertising materials), or to injuries to persons or
property, or to any infringement of any rights of any
other person or entity or to LICENSEE's failure to comply
with applicable laws, regulations and standards) or (iv)
any claim that the use of any design or other graphic
component of any Licensed Product (other than the Licensed
Marks) violates or infringes upon the trademark, copyright
or other intellectual property rights (including trade
dress) of a third party, provided LICENSEE is given prompt
written notice of and shall have the option to undertake
and conduct the defense of any such Claim. In any
instance to which the foregoing indemnities pertain, NBAP
shall cooperate fully with and assist LICENSEE in all
respects in connection with any such defense. LICENSEE
shall reimburse NBAP for all reasonable out-of-pocket
costs actually incurred by NBAP in connection with such
cooperation and assistance. In any instance to which such
indemnities pertain, LICENSEE shall keep NBAP fully
advised of all developments pertaining to such Claim and
shall not enter into a settlement of such Claim or admit
liability or fault without NBAP's prior written approval.
LICENSEE shall obtain and maintain product liability
insurance providing protection for the NBA Parties against
any Claims arising out of any alleged defects in the
Licensed Products or any use of the Licensed Products, in
an amount and providing coverage satisfactory to NBAP
(including the amount of the deductible). Such insurance
shall be carried by an insurer with a rating by A.M. Best
& Co. of A-7 or other rating satisfactory to NBAP. Such
insurance policy shall also provide that NBAP receive
written notice within thirty (30) days prior to the
effective date of the cancellation, non-renewal or any
material change in coverage. In the event LICENSEE has
failed to deliver to NBAP a certificate of such insurance
evidencing satisfactory coverage prior to NBAP's execution
of this Agreement (or fails to maintain such insurance in
accordance with this Paragraph), NBAP shall have the right
to withdraw its consent to use any or all of the Licensed
Marks and/or terminate this Agreement at any time. Such
insurance obligations shall not limit LICENSEE's indemnity
obligations, except to the extent that LICENSEE's
insurance company actually pays NBAP amounts which
LICENSEE would otherwise be obligated to pay NBAP.
(b) NBAP shall be solely responsible for, and shall defend,
hold harmless and indemnify LICENSEE, it directors,
officers, employees and agents against any Claims arising
out of: (i) a claim that the use of the Licensed Marks
as authorized by this Agreement violates or infringes upon
the trademark, copyright or other intellectual property
rights (including trade dress) of a third party in or to
the Licensed Marks or (ii) any breach of this Agreement by
NBAP, provided NBAP is given prompt written notice of and
shall have the option to undertake and conduct the defense
of any such Claim. In any instance to which the foregoing
indemnities pertain, NBAP shall not enter into a
settlement of such Claim or admit liability or fault
without LICENSEE's prior written approval.
9. QUALITY; APPROVALS; SAMPLES
LICENSEE shall cause the Licensed Products to meet and conform
to high standards of style, quality and appearance. In order
to assure NBAP that it is meeting such standards and other
provisions of this Agreement, LICENSEE shall comply with the
following:
(a) Pre-Production: Before commercial production and
distribution of any product bearing a Licensed Mark,
LICENSEE shall submit to NBAP all preliminary and proposed
final artwork, three dimensional models (if any),
prototypes, mock-ups, and pre-production samples of each
product, including all styles, colors and variations,
together with its labels, tags, cartons and containers
(including packaging and wrapping materials). All
LICENSEE submissions under this Paragraph shall be
accompanied by forms supplied by NBAP, using one (1) form
for each submission and filling in all necessary
information. NBAP shall approve or disapprove in writing
all submissions, in its sole discretion, before LICENSEE
shall be entitled to distribute, advertise, use, produce
commercial quantities of or sell any item relating to any
such submission. Any article actually submitted and not
disapproved within sixty (60) days after receipt by NBAP
shall be deemed approved. Approval of an article which
uses a particular artwork does not imply approval of such
artwork with a different article or of such article with
different artwork. LICENSEE acknowledges that NBAP's
approval of an article does not imply approval of, or
license to use, any non-NBA controlled elements contained
in any article. After a sample of an article has been
approved, LICENSEE shall not make any changes without
resubmitting the modified article for NBAP's written
approval.
(b) Production Samples: Before selling or distributing any
product bearing a Licensed Mark, LICENSEE shall furnish
NBAP with, at no charge, for its permanent use, two (2)
samples of the product from the first production run of
each manufacturer of the Licensed Products, including all
styles, colors and variations, together with its labels,
tags, cartons and containers (including packaging and
wrapping materials). If such samples do not conform to
all aspects of the Licensed Product as approved or if the
quality of any such sample does not meet the requirements
of this Paragraph 9, NBAP shall notify LICENSEE and such
article shall be deemed disapproved and all such articles
shall be promptly destroyed. LICENSEE shall also furnish
NBAP, free of charge, with any additional pieces of
Licensed Product as may reasonable be requested by NBAP to
promote the sale of Official Licensed Products (e.g., for
NBAP's display room, advertisements, catalogs, mailers,
product placement and trade shows) or for comparison with
earlier samples. In addition, LICENSEE shall provide NBAP
with any additional pieces of Licensed Product as may be
required for the permanent use of the Member Teams, not to
exceed one (1) piece per Member Team. If NBAP wishes to
purchase Licensed Products for give-away purposes and not
for resale, LICENSEE shall sell the Licensed Products to
NBAP at LICENSEE's direct manufacturing cost for such
Licensed Products and LICENSEE shall not be required to
pay royalties on such sales to NBAP.
(c) Rejections and Non-Compliance: The rights granted
under this Agreement do not permit the sale of "seconds"
or "irregulars." All submissions or samples not approved
by NBAP shall promptly be destroyed by LICENSEE. LICENSEE
shall advise NBAP regarding the time and place of such
destruction (in sufficient time to arrange for an NBAP
representative to witness such destruction, if NBAP so
desires) and such destruction shall be attested to in a
certificate signed by one of LICENSEE's officers and
submitted to NBAP within fifteen (15) days of the date on
which the sample was not approved. In the event of
LICENSEE's unapproved or unauthorized manufacture,
distribution, use or sale of any products or materials
bearing the Licensed Marks, including promotional and
advertising materials, or the failure of LICENSEE to
comply with Paragraphs 7 (d), 9, 11 (c) or 11 (e), NBAP
shall have the right to: (i) immediately revoke LICENSEE's
rights with respect to any Licensed Product licensed under
this Agreement, (ii) charge LICENSEE two thousand U.S.
dollars (USD 2,000) for each instance (e.g., per unit) of
non-compliance with this Paragraph with respect to any
article, product or material and/or (iii) at LICENSEE's
expense, confiscate or order the destruction of such
unapproved, unauthorized or non-complying products. Such
right(s) shall be without prejudice to any other rights
NBAP may have under this Agreement or otherwise.
(d) Testing: Both before and after Licensed Products are put
on the market, LICENSEE shall follow reasonable and proper
procedures for testing the Licensed Products for
compliance with laws, regulations, standards and
procedures, and shall permit NBAP (upon reasonable notice)
to inspect its and its authorized manufacturer's testing,
manufacturing and quality control records, procedures and
facilities and to test or sample Licensed Products for
compliance with this Paragraph and the other terms and
conditions of this Agreement. Licensed Products found by
NBAP at any time not to comply with applicable laws,
regulations, standards and procedures shall be deemed
disapproved, even if previously approved by NBAP, and
shall not be shipped unless and until LICENSEE can
demonstrate to NBAP's satisfaction that such Licensed
Products have been brought into full compliance.
(e) Revocation of Approval: In the event that: (i) the
quality, appearance or style of any Licensed Product
ceases to be acceptable to NBAP, (ii) LICENSEE uses the
Licensed Marks improperly or violates any term of this
Paragraph 9 or, (iii) NBAP becomes aware of something
relating to any such Licensed Product or LICENSEE which,
in the opinion of NBAP, reflects unfavorably upon the
professional, business or personal reputation of NBAP, the
NBA or any of its Member Teams, then, in any such event,
NBAP shall have the right, in its sole discretion, to
withdraw its approval of such Licensed Product. In the
event of such withdrawal, NBAP shall provide immediate
written notice to LICENSEE and LICENSEE shall cease the
use of the Licensed Marks in connection with the
manufacture, sale, distribution, advertisement or use of
such Licensed Product and such Licensed Product shall
immediately be withdrawn from the market and destroyed;
provided, however, that in the event of a revocation of
approval pursuant to (i) above, NBAP and LICENSEE shall
negotiate in good faith to provide for a reasonable sell-
off period for such Licensed Product and an adjustment to
the Minimum Guarantee for such Licensed Product. Within
ten (10) days after LICENSEE's receipt of such notice,
LICENSEE shall pay all royalties and Minimum Guarantees
due NBAP with respect to the Licensed Product for which
approval has been revoked. If there are other Licensed
Products for which approval has not been withdrawn under
this subparagraph, then this Agreement shall remain in
full force and effect as to such other Licensed Products
deleted from its product lines.
10. PROMOTIONAL MATERIAL
LICENSEE shall not use the Licensed Marks or any
reproduction of the Licensed Marks in any advertising,
promotion or display material in connection with any
product or in any other manner whatsoever without prior
written approval from NBAP. Under no circumstance will
"lotteries," "games of chance" or any other type of
promotion which NBAP believes reflects unfavorably upon
the NBA or its Member Teams be approved. All advertising
or promotional copy and material depicting or using the
Licensed Marks (including display material, catalogs and
press releases) shall be submitted for approval well in
advance of production (but in no event less than ten (10)
business days prior to the start of commercial production)
to allow adequate time for NBAP, in its sole discretion,
to approve, disapprove or comment upon such materials and
for any required changes to be made. By way of example,
no television or cinema advertising containing any
Licensed mark may be used unless it has been approved in
all stages (i.e., storyboard, production "rough-cut" and
final version). Unless otherwise approved by NBAP, any
NBA game action photographs or footage that LICENSEE uses
in connection with the Licensed Products must be obtained
from NBAE and shall be subject to NBAE's search and edit
charges and any applicable use fee. Any promotional
material submitted that is not approved or disapproved by
NBAP within thirty (30) days of its receipt by NBAP shall
be deemed approved by NBAP.
11. DISTRIBUTION; COMPLIANCE
(a) LICENSEE shall use its best efforts to distribute
and sell, within and throughout the Territory, the
Licensed Products in such manner as may be required
to meet competition by reputable manufacturers of
similar articles. In any ninety (90) day period in
which LICENSEE fails to sell or distribute Licensed
Products in reasonable commercial quantities,
LICENSEE shall be deemed not to have used it best
efforts. LICENSEE shall make and maintain adequate
arrangements for the distribution and timely
delivery of Licensed Products to retailers within
and throughout the Territory. In the event NBAP
advises LICENSEE that a special promotional effort
is to take place in an individual store or chain,
LICENSEE shall use its best efforts to sell the
Licensed Products to said store or chain. In
addition, LICENSEE shall give the Licensed Products
wide distribution and shall not, subject to the
provisions set forth in this Agreement, refrain for
any reason from selling Licensed Products to any
retail outlet within the Territory that may desire
to purchase Licensed Products and whose credit
rating and marketing image warrants such sale.
(b) If LICENSEE desires to have a third party
manufacture or distribute (if permitted under this
Agreement) any Licensed Product, LICENSEE must first
notify NBAP of the name and address of such third
party and of the Licensed Product LICENSEE desires
such a third party to manufacture or distribute.
Attached as Schedule A is a true and complete list
of third party manufacturers and distributors (if
permitted under this Agreement) currently authorized
by NBAP. NBAP shall have the right, in its sole
discretion, to withhold approval for such third
party manufacture or distribution. If NBAP grants
approval for such third party manufacture or
distribution, it may grant such approval pursuant to
an agreement (on a form supplied by NBAP) to be
entered into prior to such manufacture or
distribution among NBAP, LICENSEE and such
manufacturer or distributor which will, among other
things, require that the third party manufacturer or
distributor be subject to all of the terms and
conditions of this Agreement. If NBAP does not
require the third party to enter into a separate
agreement, LICENSEE must provide NBAP with a copy of
its agreement with the third party, which agreement
must provide that it is subject to this Agreement.
If any of LICENSEE's authorized manufacturers or
distributors uses the Licensed Marks for any
unauthorized purpose, LICENSEE shall be responsible
for, and shall cooperate fully and use its best
efforts in stopping, such unauthorized use. Any
change by LICENSEE from a third party manufacturer
or distributor previously approved by NBAP shall
require approval in accordance with this Paragraph.
(c) LICENSEE understand and acknowledges the meanings of
"Counterfeit Goods," "Diverted Goods" and "Parallel
Goods" as set forth in Paragraph 1 above and
LICENSEE shall use all commercially reasonable means
to prevent the creation of any such goods by it
employees, agents, representatives or any others
operating under its direction, supervision or
control and involving the NBA Marks. LICENSEE shall
stamp on all invoices, and shall require any third
party distributors (to whom LICENSEE is authorized
to sell under this Agreement) and any authorized
sublicensees and distributors to stamp on their
invoices, a prominent legend that states that the
Licensed Products are allowed to be sold only within
the Territory and only to an end user. LICENSEE
shall periodically, and at the request of NBAP,
inquire of its authorized distributors, agents and
customers as to whether they are observing
territorial limits and shall periodically report in
writing to NBAP the results of such inquiries.
LICENSEE shall notify NBAP of all orders from, or on
behalf of a customer who LICENSEE knows (or has
reason to know after having made reasonable inquiry)
is located outside the Territory or intends to
resell the Licensed Products outside the Territory.
If LICENSEE knows or has reason to know that any
Licensed Product sold by LICENSEE is resold outside
the Territory, LICENSEE shall compensate NBAP for
the injury to its licensing and distribution program
and shall pay all costs and expenses, including
attorney's fees, required to remove such goods from
the marketplace. Any such monetary damages shall be
in addition to, and not in lieu of, such other
rights and relief (including injunctive relief) as
may be available to NBAP. LICENSEE shall
incorporate within its contracts of sale or sales
orders a provision similar in substance to this
subparagraph and which provides that the obligations
set forth in this subparagraph shall be a continuing
obligation on the resale of the Licensed Products to
subsequent authorized wholesale purchasers and which
makes NBAP a third party beneficiary of such
provision.
(d) In the event LICENSEE sells or distributes other
licensed merchandise of a similar grade or quality
as the Licensed Products, but which do not bear any
of the Licensed Marks, LICENSEE will not
discriminate, in a manner which adversely impacts
the Licensed Products, in the granting of
commissions or discounts to salespeople, dealers and
distributors between the Licensed Products and the
licensed products of any third party. LICENSEE may
not package the Licensed Products in combination
with other products, whether similar or different,
without the prior written approval of NBAP. In the
event that NBAP believes in good faith that LICENSEE
has employed selling or reporting methods which
circumvent or reduce the royalty or other payment or
reporting obligations contained in this Agreement,
NBAP may, in addition to any other rights and
remedies it may have, at its option and upon fifteen
(15) days' prior written notice, adjust the minimum
royalty per unit.
(e) LICENSEE shall at all times conduct all aspects of
its business in a fair and reasonable manner and in
compliance with all shipment tracking,
identification and anti-counterfeiting systems and
labels that NBAP may establish from time-to-time and
all applicable laws, government rules and
regulations, court and administrative decrees and
the highest standard of business ethics then
prevailing in the industry. LICENSEE shall
faithfully comply with and adhere to NBAP's shipping
and distribution policies established from time-to-
time. LICENSEE shall use its commercially
reasonable efforts to ensure that all retailers and
authorized distributors purchasing Licensed Products
comply with NBAP's anti-counterfeiting systems,
labels and shipping and distribution policies
established from time to time.
(f) It shall be LICENSEE's sole responsibility, at its
sole expense, to obtain all approvals (including,
but not limited to, approvals of advertising
materials) of all governmental authorities which may
be necessary in connection with LICENSEE's
performance under this Agreement.
(g) LICENSEE acknowledges that NBAP intends to offer
various NBA and/or Member Team-identified products
for sale in an NBAP-owned "showcase" retail store
("NBA Store"). LICENSEE further acknowledges that
it will receive a variety of tangible and intangible
benefits as a result of having merchandise
manufactured by LICENSEE displayed, sold and
promoted at the NBA Store. Therefore, LICENSEE
shall, in addition to and in consideration for the
license granted under this Agreement and in
consideration of the benefits it will receive from
having merchandise displayed, sold and promoted at
the NBA Store, (i) upon the request of NBAP, perform
contract manufacturing services for NBAP in
connection with the manufacture of products for sale
in the NBA Store on terms mutually agreed upon by
NBAP and LICENSEE and (ii) offer Licensed Products
to the NBA Store on terms at least as favorable as
those offered to LICENSEE's most preferred high-
volume customers, including price, priority of
delivery, discounts, cooperative or other
advertising and promotional allowances and other
benefits (regardless of volume).
12. RECORDS;AUDITS
LICENSEE shall keep accurate books of account and records
covering all transactions relating to the license granted
in this Agreement (including, but not limited to, sales of
Licensed Products, purchases and uses of NBA hologram hang
tags and compliance with shipment tracking, identification
and anti-counterfeiting systems and labels that NBAP may
establish from time to time). NBAP and its authorized
representatives shall have the right, at all reasonable
hours of the day and upon reasonable prior notice, to
examine and audit such books of account and records and
all other documents and materials in LICENSEE's possession
or under its control (including records of LICENSEE's
parents, subsidiaries, affiliates and third parties, if
they are involved in activities which relate to this
Agreement) relating to this Agreement. NBAP shall have
free and full access for such purposes and for the purpose
of making extracts and copies. Should an audit by NBAP
establish a deficiency between the amount found to be due
NBAP and the amount LICENSEE actually paid or reported,
the LICENSEE shall pay the amount of such deficiency, plus
interest at the then current prime rate (as announced by
Chemical Bank, New York branch) from the date such amount
should have been paid until the date of payment. Should
such audit establish a deficiency of more than five
percent (5%), LICENSEE shall also pay for the cost of the
audit. LICENSEE shall pay such amount within thirty (30)
days. All such books of accounts and records shall be
kept available for at least two (2) years after the
expiration or termination of this Agreement, or three (3)
years after the end of the Contract Year to which they
relate, whichever is earlier. In order to facilitate
inspection of its books and records, LICENSEE shall
designate a symbol or number which will be used
exclusively in connection with the Licensed Products on
which royalty payments are payable and shall maintain for
inspection as provided in this Agreement duplicates of all
billings to customers with respect to Licensed Products.
LICENSEE shall, within ten (10) business days of NBAP's
request (which shall not be made more than four (4) times
per Contract Year), furnish NBAP with a list of LICENSEE's
top twenty-five (25) retail accounts for Licensed Products
(on a country by country basis) and their monthly
purchases of Licensed Products (broken down by unit sales
and in dollar volume by retailer). LICENSEE shall supply
NBAP with true and complete copies of any agreement it has
entered into, or in the future enters into, with any
Member Team or any NBA player. In addition, LICENSEE
shall, on a quarterly basis during the Term, provide NBAP
with copies of either (i) financial information furnished
to the United State Securities and Exchange Commission or
(ii) with all financial statements and other financial
information prepared by LICENSEE for distribution to its
banks or other financial lending institutions to whom it
reports regularly. LICENSEE shall cooperate with NBAP in
developing an electronic data interchange through which
NBAP may access LICENSEE's electronic database relating to
the manufacture, distribution and sale of Licensed
Products (such as work-in-progress, finished goods on
hand, orders received, deliveries made and any other on-
line information relating to the Licensed Products) or
developing such other system as will enable NBAP to obtain
such information or facilitate NBAP's review of LICENSEE's
graphic designs for Licensed Products.
13. EARLY TERMINATION
Without prejudice to any other rights NBAP may have
pursuant to this Agreement or otherwise, NBAP shall have
the right to terminate this Agreement at any time if:
(a) Within three (3) months from the date that this
Agreement is executed on behalf of NBAP, LICENSEE
shall not have begun the bona-fide distribution and
sale of each Licensed Product within and throughout
the Territory in accordance with this Agreement.
(b) LICENSEE shall fail to timely remit any payment of
any nature due to NBAP or any of its affiliates when
due and shall fail to cure such non-payment within
thirty (30) days (ten (10) days for a payment
default other than a royalty payment default) of its
receipt of written notice from NBAP; provided,
however, that the LICENSEE shall not have the right
to cure any subsequent payment default.
(c) LICENSEE or any guarantor under this Agreement shall
be unable to pay its liabilities when due, or shall
make any assignment for the benefit of creditors,
or under any applicable law admits in writing its
inability to meet its obligations when due or commit
any other act of bankruptcy, institute voluntary
proceedings in bankruptcy or insolvency or permit
institution of such proceedings against it.
(d) LICENSEE shall exhibit a pattern of frequent failure
to make timely delivery of sufficient quantities of
the Licensed Product to its retail accounts.
(e) LICENSEE (or any entity that controls LICENSEE or is
controlled by LICENSEE) now or in the future holds a
license from NBAP and such license is terminated by
NBAP during the Term.
(f) LICENSEE (i) delivers Licensed Products outside the
Territory; (ii) sells Licensed Products to a third
party who LICENSEE knows, or has reason to know,
intends to deliver the Licensed Products outside the
Territory; or (iii) LICENSEE is in breach of
Paragraph 11 (c).
(g) LICENSEE sells to any third party that LICENSEE
knows, or has reason to know, is altering or
modifying the Licensed Products prior to sale to the
ultimate consumer.
(h) LICENSEE shall fail to perform or shall be in breach
of any other term or condition of this Agreement
(other than a payment default). A termination
pursuant to this subparagraph (h) shall take effect
(i) thirty (30) days after written notice of such
failure to perform or breach is sent by NBAP if such
failure to perform or breach can be Completely Cured
(as defined below) and such failure to perform or
breach has not been Completely Cured during such
thirty (30) day period, or (ii) immediately after
written notice of such failure to perform or breach
is sent by NBAP if such failure to perform or breach
cannot be Completely Cured. For purposes of this
subparagraph, "Completely Cured" means that such
failure to perform or breach is cured so that, in
the reasonable judgment of NBAP, such failure to
perform or breach will have had no effect on, or
caused damage to, NBAP.
In addition to NBAP's other rights and remedies, upon
termination of this Agreement under this Paragraph,
LICENSEE shall pay NBAP (within thirty (30) days of such
termination) the Minimum Guarantees for each Licensed
Product through the end of the Agreement, less the
royalties paid to NBAP through the date of termination.
14. DISPOSAL OF STOCK; EFFECT OF TERMINATION
Sixty (60) days before the expiration of this Agreement
and ten (10) days after any termination under Paragraphs
9 or 13, LICENSEE will furnish to NBAP a certificate
showing the number and description of Licensed Products on
hand or in process of manufacture. After expiration or
termination of this Agreement, LICENSEE shall have no
right to, nor allow any third party to, manufacture,
advertise, distribute, sell, promote or otherwise deal in
any Licensed Products or use the Licensed Marks (and
LICENSEE shall not engage in any such activity) except as
provided below. For a period of ninety (90) days
following the expiration (but not after the termination)
of this Agreement, LICENSEE may sell-off and deliver
Licensed Products which are on hand or in process at the
time of such expiration (the "Sell-Off Period"); provided,
however that (i) the total number of units of each
Licensed Product sold during the Sell-Off Period may not
be greater than one hundred ten percent (110 %) of the
total number of units of such Licensed Product on hand the
same date the preceding Contract Year, (ii) such Licensed
Products may only be sold in accordance with this
Agreement and in the course of business and at regular
selling prices, (iii) all payments then due are first made
to NBAP and (iv) statements and payments are made in
accordance this Agreement. NBAP shall have the option to
conduct physical inventories before the expiration of this
Agreement until the end of the Sell-Off Period in order to
verify such inventory and/or statements. If LICENSEE
refuses to permit such physical inventory, LICENSEE shall
forfeit its right to dispose of Licensed Products under
this Paragraph. After such Sell-Off Period, all inventory
on hand or in process (including all promotional and
packaging materials) will be destroyed. LICENSEE shall
have no sell-off rights in the process (including all
promotional and packing materials) will be destroyed.
Any destruction of Licensed Product required pursuant to
this Agreement shall be attested to in a certificate
signed by one of LICENSEE's officers.
15. EQUITABLE RELIEF
LICENSEE acknowledges that NBAP is entering into this
Agreement not only in consideration of the royalties or
other financial consideration to be paid, but also for the
promotional value and intrinsic benefit resulting from the
manufacture, advertisement, distribution, sale and
promotion of the Licensed Products by LICENSEE in the
Territory. LICENSEE acknowledges that the Licensed marks
possess a special, unique and extraordinary character
which makes difficult the assessment of the monetary
damage which NBAP would sustain as a result of the
unauthorized use of the Licensed Marks. LICENSEE further
acknowledges that: (i) its failure to manufacture,
advertise, distribute, sell and promote the Licensed
Marks, will, in either case, cause immediate and
irreparable damage to NBAP for which NBAP would not have
an adequate remedy at law. Therefore, LICENSEE agrees
that, in the event of a breach of this Agreement by
LICENSEE, in addition to such other legal and equitable
rights and remedies as shall be available to NBAP, NBAP
shall be entitled to injunctive and other equitable
relief, without the necessity of proving damages or
furnishing a bond or other security.
16. NOTICES
All notices and statements to be given and all payments to
be made under this Agreement shall be given or made at the
respective address of the parties as set forth above,
unless notification of a change of address is given in
writing. Any notice of breach or default must be in
writing and sent by facsimile, overnight express delivery,
or registered or certified mail, return receipt requested,
properly addressed and stamped. Any written notice shall
be deemed to have been given at the time it was sent.
17. NO JOINT VENTURE
Nothing in this Agreement shall be construed to place the
parties in the relationship of partners or joint
venturers. Neither party shall have the power to obligate
or bind the other to a third party in any manner
whatsoever.
18. ARBITRATION OF CERTAIN MATTERS
Any dispute or disagreement between the parties relating
solely to the amount of royalty payments owing under this
Agreement shall be settled by arbitration in New York City
under the rules then in effect of the American Arbitration
Association. Judgment upon the award may be entered in
any court having jurisdiction. No other dispute or
disagreement between the parties (including any claim by
NBAP that LICENSEE is using the Licensed Marks in a manner
not authorized by this Agreement or is otherwise in breach
of this Agreement) shall be settled by arbitration. All
decisions by NBAP relating to disapproval of any Licensed
Product or advertising, promotion or display material
shall be final and binding on LICENSEE and shall not be
subject not review in any proceeding.
19. NO USE OF PLAYERS
LICENSEE acknowledges that this Agreement does not grant
to LICENSEE any licenses or rights with respect to the use
of the names, likenesses or other attributes of any NBA
player (collectively "Player Attributes"). The license
granted under this Agreement does not include, and shall
not be used to imply, a testimonial or endorsement of any
Licensed Products by any NBA player. LICENSEE shall not
use Player Attributes in any manner without first
obtaining written authorization from the subject
player(s). LICENSEE shall not enter into any agreement
with any NBA player or any other person which would
require that player or other person to wear or use any
Licensed Product or other product at any NBA game (either
courtside or in any locker room) or at practice.
20. WARRANTIES
Each party represents and warrants that it has the right
and authority to enter into and perform this Agreement and
NBAP represents and warrants that it has the right to
grant the rights to sue the Licensed Marks in accordance
with the terms and conditions of this Agreement. LICENSEE
represents and warrants that the Licensed Products and all
advertising and promotional materials shall comply with
all applicable laws, regulations and standards. NBAP's
approval of such materials will not imply a representation
or belief that NBAP believes such materials are sufficient
to meet applicable laws, regulations and standards, nor
shall it imply that NBAP agrees with or supports any
claims made by LICENSEE in any advertising materials
relating to the Licensed Products. LICENSEE further
represents and warrants that all advertising and
promotional materials and all graphics used on Licensed
Products will not violate the intellectual property rights
of any third party.
21. SEVERABILITY
In the event any provision of this Agreement is found to
be void, invalid or unenforceable as a result of any
judicial or administrative proceeding or decree, this
Agreement shall be construed and enforced as if such
provision were not contained in this Agreement.
22. MISCELLANEOUS
(a) Assignment: This Agreement and any rights granted
under this Agreement are personal to LICENSEE and
shall not be assigned, sublicensed, subcontracted or
encumbered, directly or indirectly, by law or by
contract, without NBAP's prior written consent,
which consent may, in NBAP's sole discretion, (i) be
contingent upon a fee payable by LICENSEE or the
transferee, the amount of which shall be determined
by NBAP in its sole discretion, and/or (ii) impose
other terms and conditions upon the assignment,
sublicense or transfer. Any transfer of a
controlling interest in LICENSEE or in any party
which currently controls LICENSEE, directly or
indirectly, shall be deemed an assignment prohibited
by the preceding sentence. Any nonconsensual
assignment, sublicense, subcontract or encumbrance
or this Agreement by LICENSEE shall be invalid and
of no force or effect. Upon any such nonconsensual
assignment, sublicense, subcontract or encumbrance,
this Agreement shall terminate, all payment
obligations of LICENSEE hereunder shall be
accelerated and immediately due and payable, and all
rights granted under this Agreement shall
immediately revert to NBAP.
(b) Waiver: None of the provisions of this Agreement
can be waived or modified except expressly by
writing signed by both parties. There are no
representations, promises, agreements, warranties,
covenants or undertakings by either party other than
those contained in this Agreement. No failure on
the part of NBAP to exercise any right under this
Agreement shall operate as a waiver of such right;
nor shall any single or partial exercise of any
right preclude any other or further exercise or the
exercise of any other rights.
(c) Survival: No expiration or termination of this
Agreement shall relieve LICENSEE of its obligation
to pay NBAP any amounts due to NBAP at the time of
termination, regardless of whether these amounts are
then or thereafter payable. The provisions of
Paragraphs 12 and 22(f) shall survive the expiration
or termination of this Agreement.
(d) Adjustments: NBAP shall have the option to
increase the Royalty Rates in the event that, at any
time during the Term, LICENSEE agrees to pay or in
fact pays royalty rates and/or advertising and
promotion contributions with respect to any other
licensed sports or entertainment property in excess
of the Royalty Rate for any Licensed Product
required under this Agreement. From time to time at
NBAP's request, LICENSEE shall deliver a certificate
to NBAP which sets forth the royalty rates and any
advertising and promotion contributions LICENSEE
pays to any other professional sports league or
entertainment property.
(e) Governing Law and Jurisdiction: This Agreement
shall be construed in accordance with the laws of
the State of New York, USA, without regard to its
principles of conflicts of laws. Any claim arising
under this Agreement (except as provided under
Paragraph 18) shall be prosecuted in a federal or
state court of competent jurisdiction located within
the City of New York, USA and LICENSEE consents to
the jurisdiction of such court and to the service of
process by mail.
(f) Confidentiality: Neither party shall (nor shall
they permit or cause their employees or agents to)
divulge, disseminate or publicize information
relating to this Agreement or the financial or other
terms of this Agreement (including any information
on the specifications or methods of reproduction of
the Licensed Marks) to any third party (other than
their respective attorneys or accountants or in the
case of NBAP, the NBA Board of Governors and the
NBPA), except as may be required by law or to
fulfill the terms of this Agreement.
(g) Research: LICENSEE shall cooperate with NBAP's
reasonable requests for information in connection
with conducting marketing tests, surveys and other
research ("Research"), provided that any proprietary
information so furnished shall be kept strictly
confidential by NBAP. If LICENSEE performs or
causes to be performed any Research primarily
dedicated to evaluating or otherwise assessing a
Licensed Product (or any LICENSEE (non-NBA) product
offering similar to a Licensed Product), then copies
of such Research results shall be promptly provided
to NBAP. As may be reasonable requested by NBAP,
LICENSEE shall provide NBAP (or NBAP's designated
third-party researcher) with any Research and
information that LICENSEE has or obtains regarding
its retail accounts.
(h) Construction: This Agreement has been executed in a
text using the English language, which text shall be
controlling. This Agreement together with any
exhibits or attachments, when fully-executed, shall
constitute the entire agreement and understanding
relating to the subject matter of this Agreement
between LICENSEE and the NBA, any Member Team, NBAP
or NBAE. The headings in this Agreement are for
reference purposes only and shall not affect the
interpretation of this Agreement. This Agreement
shall not be binding on NBAP until signed on its
behalf by its President or Senior Vice President,
Business Affairs or such other executive designated
by the President to sign.
<PAGE>
Schedule A
Third Party Manufacturers:
Hi-Performance Co. Ltd.
3/F, Kaiser Estate Phase 3, Flat 0
11 Hok Yuen Street
Hunghom, Kowloon, Hong Kong
FORM: NBPA
U.S./NON-APPAREL
LICENSEE: INNOVO, INC. RETAIL PRODUCT LICENSE AGREEMENT
ADDRESS: 27 North Main Street
Springfield, TN 37172
THIS RETAIL PRODUCT LICENSE AGREEMENT is entered into by NBA Properties,
Inc. ("NBAP"), with its principal office at 645 Fifth Avenue, New York,
New York 10022, and the licensee listed above ("LICENSEE") with regard
to the commercial use of certain names, logos, symbols, emblems, designs
and uniforms and all identifications, labels, insignia or indicia thereof
( the "Marks") of the national Basketball Association (the "NBA") and its
Member Teams (collectively, the "NBA Marks"). On the terms of this
Agreement and subject to the attached NBAP Standard Terms and Conditions,
NBAP hereby accepts, the non-exclusive (except as otherwise expressly
provided in this Agreement) right and license to use the marks of the
member Teams, the silhouetted dribbler logo (the "NBA Logo") and the
Marks of the NBA, NBA All-Star Weekend and NBA Playoffs and Finals
(collectively, the "Licensed Marks") solely in connection with the
manufacture, distribution, advertisement, promotion and sale of the
products described in Paragraph A below including one or more of the
Licensed Marks ("Licensed Products"). No license or right is granted for
the use of the Licensed Marks for any purpose other than on the Licensed
Products and in the distribution, advertisement, promotion and sale of
the Licensed Products in accordance with this Agreement.
A. LICENSED PRODUCTS:
* insulated and non-insulated vinyl lunch bags and soft-
sided coolers
* cotton canvas tote bags
* nylon, vinyl and/or cotton laundry bags
* shoe bags
* garment bags
* "Cush-N-Carry" seat cushions
B. TERM: As of August 1, 1997 to July 31, 1998 (the "Term").
C. TERRITORY: Licensed Products may only be distributed in the 50
United States and the District of Columbia, except that product may
be shipped to the in-arena concessionaires of the Toronto Raptors
and Vancouver Grizzlies (the "Territory").
D. ROYALTY RATES: During the Term, LICENSEE shall pay monthly to NBAP
a royalty and advertising and promotion payment (hereinafter
referred to as "royalty") equal to twelve percent (12%) of "Net
Sales" (as defined in Paragraph 1 of the attached NBAP Standard
Terms and Conditions).
E. MINIMUM GUARANTEES: LICENSEE guarantees that its aggregate royalty
payments to NBAP for the Term under this Agreement shall not be
less than forty-six thousand dollars ($46,000).
F. ADVANCES: Upon execution of this Agreement, LICENSEE shall pay to
NBAP the sum of eleven thousand five hundred dollars ($11,500) as an
advance to be credited against LICENSEE's Minimum Guarantee as set
forth above.
G. ADVERTISING AND PROMOTION:
(i) Consistent with NBAP's past practice of creating, undertaking
or supporting advertising and promotion activities with respect
to NBAP-licensed products sold at retail, NBAP shall devote up
to two percent (2%) of Net Sales (from the royalties received
from LICENSEE pursuant to this Agreement) to cover the expenses
incurred by NBAP in connection with such advertising and
promotion activities.
(ii) LICENSEE shall exhibit, at its sole cost and expense, a fair
and representative selection of Licensed Products at the Super
Show and every other trade show where LICENSEE exhibits
licensed products.
H. SELLING PRACTICES: LICENSEE acknowledges NBAP's legitimate and
reasonable interest in protecting the value of the NBA Marks and
maximizing the effectiveness of its advertising, promotion and
distribution efforts by segmenting the classes of trade into which
its licensees sell NBAP-licensed products. Therefore, LICENSEE
shall only sell Licensed Products to a buyer that, to its best
knowledge (i) purchases Licensed Products from LICENSEE solely for
sale directly to the consumer and operates a retail establishment
that supports the high quality and image of NBA officially licensed
products with appropriate merchandising displays, promotion and/or
customer service. LICENSEE acknowledges that a failure to comply
with the selling practices set forth in this Paragraph shall cause
significant harm to NBAP's efforts to effectively and efficiently
distribute NBAP-licensed products.
AGREED TO AND ACCEPTED, subject AGREED TO AND ACCEPTED:
to and incorporating the attached NBAP NBA PROPERTIES, INC.
Standard Terms and Conditions which
the undersigned has read:
INNOVO, INC. By:_____________________
Harvey E. Benjamin
Senior Vice President,
Business Affairs
By:________________________
Title:_____________________ Dated:__________________
<PAGE>
NBAP STANDARD TERMS AND CONDITIONS
1. ADDITIONAL DEFINITIONS
For the purposes of this Agreement
(a) "Contract Year" shall mean a twelve (12)month accounting period
commencing August 1 and concluding July 31.
(b) "Counterfeit Goods: shall mean and include: (i) goods that
bear any NBA mark that has been reproduced and/or affixed
without authorization from NBAp; (ii) goods that bear any NBA
Mark produced by any source in excess of an amount ordered by
an NBAP licensee; and (iii) goods that bear any NBA Mark that
have been rejected by NBAP or an NBAp licensee and nevertheless
enter the stream of commerce.
(c) "Diverted Goods" shall mean and include any goods produced by
someone acting on behalf of an NBAP licensee, which goods are
not delivered by the producer to such licensee or to a person
designated by such licensee to receive such goods.
(d) "Net Sales" shall mean the total amount of the gross sales of
a Licensed Product by LICENSEE. After deducting any bona-fide
credit or adjustment for returns actually made and volume
discounts actually and customarily given to the trade (such
discounts may not exceed two percent (2%) of the gross sales
for the applicable accounting period). In computing Net Sales,
no direct or indirect expenses or costs incurred in connection
with paying royalties due under this Agreement (including
transferring funds or royalties or converting currency into
U.S. dollars) or manufacturing, selling, distributing,
importing or advertising including cooperative and other
advertising and promotion allowances (the Licensed Products
shall be deducted, nor shall any deduction be made for
uncollectible accounts, cash discounts, early payment
discounts, discounts relating to advertising, mark-down
allowances or other allowances. Net sales resulting from sales
to any party directly or indirectly related to or affiliated
with LICENSEE (a "Related Transaction") computed based on
regular selling prices to the trade. If such related party or
affiliate is a reseller to the trade of the Licensed Products,
the sales price for purposes of determining Net Sales of a
Related Transaction shall be the higher of the sales price to
the related or affiliated party or the sales price charged to
the trade by such related or affiliated party. If a purchaser
from LICENSEE purchases FOB the manufacturing source or
participates in other arrangements which result in such
purchaser paying less for the Licensed Products than LICENSEE's
regular selling prices to the trade, Net Sales with respect to
any such transaction shall be computed based on the regular
selling prices to the trade.
(e) "Premium" shall mean anything given free or sold at
substantially less than its usual selling price (but does not
include sales made pursuant to periodic price reductions
resulting from"specials," "sales," or volume pricing discounts)
for the purpose of increasing the sale of, or publicizing, any
product or service, or other giveaway or promotional purpose.
Other giveaway or promotional purposes include, but are not
limited to, self-liquidating offers, uses of Licensed Products
as sales force or trade incentives and sales of Licensed
Products through distribution schemes involving earned
discounts or "bonus" points based on the consumer's use of the
offeror's product or service.
2. TEAM REPRESENTATION; LIMITATIONS ON LICENSE
(a) Unless otherwise approved in writing by NBAP, each Licensed
Product must be manufactured and offered for sale on LICENSEE's
standard terms in a version for each Member Team. Unless
otherwise approved in writing by NBAP, the NBA Logo must (i)
only be used in combination with the Marks of one (1) or more
Member Teams (i.e., must be on all Licensed Products), which
must be shown with equal or greater prominence that the NBA
Logo or (ii) may be used by itself.
(b) All designs of the Licensed Products, including any packages,
containers or tags, shall be subject to NBAP's prior written
approval and shall be used solely in furtherance of this
Agreement, and such designs will not be used in any other
respect by LICENSEE nor will LICENSEE authorize any third party
to use such designs except as may be required by NBAP.
Notwithstanding the foregoing, NBAP acknowledges that LICENSEE
may hold other licenses pursuant to which LICENSEE
manufactures, distributes or sells products similar in design
to the Licensed Products and nothing in this Agreement is
intended to prohibit LICENSEE's manufacture, distribution or
sale of such products not bearing or relating to the Licensed
Marks.
3. STATEMENTS AND PAYMENTS; REPORTING
(a) Statement and Payments: By the fifteenth (15th) day following
the end of each month, LICENSEE shall furnish (on forms
provided by or approved by NBAP) full and accurate statements
(on a county-by-country and unit basis, if more than one
country is contained within the definition of the Territory),
certified by an officer of LICENSEE, showing all information
relating to the calculation of Net Sales for the preceding
month. Simultaneously with the submission of such statement,
LICENSEE shall make all monthly royalty payments required under
this Agreement for the preceding month. The minimum amount of
each monthly royalty payment with respect to each Licensed
Product category shall be the amount which, when added to
payments of royalties previously made for the Contract Year
with respect to such Licensed Product category, shall be equal
to one-twelfth (8.34%) of the Minimum Guarantee for such
Licensed Product category for such Contract Year required under
Paragraph E above, multiplied by the number of months then
elapsed. Aggregate royalties paid each Contract Year may
exceed the Minimum Guarantee for such Contract Year. Such
monthly statements shall be furnished and the required payments
made by LICENSEE whether or not there are any Net Sales for
that month. All computations and payments shall be in U.S.
dollars, at the spot rate for the local currency as published
in the Wall Street Journal for the last business day of the
preceding month. If LICENSEE shall fail to timely pay any
amount due under this Paragraph, LICENSEE shall pay interest on
such amount at a rate equal to the lesser of (i) three percent
(3%) per annum over the highest prime rate (announced by
Chemical Bank, New York branch) prevailing during the period
between the date the payment first became due and the date such
payment is actually paid or (ii) the highest rate permitted by
law during the period between the date the payment first became
due and the date such payment is actually paid. The receipt or
acceptance by NBAP of any of the statements furnished or
royalties paid by LICENSEE (including the cashing of any
royalty checks) shall not preclude NBAP from questioning their
accuracy at any time, auditing LICENSEE's books and records
pursuant to Paragraph 12 or claiming any shortfall in royalty
payments or advertising and promotion payments. In order to
assist with NBAP's annual budget process, by April 15 of each
Contract Year, LICENSEE shall deliver a statement detailing
LICENSEE's projections for sales of each Licensed Product for
the following Contract Year, broken down on a quarterly basis.
If LICENSEE fails to comply with reporting requirements
contained in this Paragraph, NBAP may charge LICENSEE, two
thousand U.S. dollars (US $2,000) for each instance of non-
compliance with this Paragraph.
(b) No Cross Collateralization: Any royalty payment for unit of
Licensed Product sold shall only be applied against the Minimum
Guarantee for such Licensed Product for the Contract Year in
which the unit of such Licensed Product was sold (i.e., any
shortfall in, or payment in excess of, the Minimum Guarantee
for a Contract Year may not be offset or credited against the
Minimum Guarantees for any other Contract Year, against any
other Licensed Product or against any other NBA license
(including premium license agreements entered into pursuant to
Paragraph 5 hereof) held by LICENSEE). If Minimum Guarantees
are stated separately for different categories of Licensed
Products royalty payments resulting from Net Sales of a
category of Licensed Product shall be applied only against the
Minimum Guarantee for such category of Licensed Product.
(c) No Withholdings: All payments made by LICENSEE under this
Agreement shall be made free and clear of, and without
deduction or withholding for or on account of, any income,
stamp or other taxes, charges, fees deductions or withholdings.
If any such axes, charges, fees, deduction or withholdings are
required to be withheld from any amounts payable to NBAP
hereunder, the amounts so payable shall be increased to the
extent necessary to yield to NBAP the amounts specified in this
Agreement.
4. NON-RESTRICTIVE GRANT; RIGHTS RESERVED
Nothing in this Agreement shall prevent NBAP from granting any other
licenses and rights. All rights not specifically granted in this
Agreement are expressly reserved by NBAP. No right of renewal or
option to extend is granted or implied and LICENSEE shall have no
right to continue manufacturing or selling Licensed Products or to
continue holding itself out as a licensee of NBAP after the
expiration or termination of this Agreement except as provided in
Paragraph 14.
5. PREMIUMS
LICENSEE shall not use, nor allow any third party to use, any
Licensed Product as a Premium without NBAP's prior written
authorization pursuant to a separate agreement with NBAP. In
addition, LICENSEE shall not offer any Premium with the
Licensed Products without the prior written consent of NBAP.
Nothing in this Agreement shall prohibit LICENSEE from
marketing Licensed Products using creative techniques
consistent with industry practice, including, but not limited
to, periodic "specials," "sales," or volume discount prices, so
long as all receipts are accounted for in Net Sales and in
accordance with this Agreement.
6. GOODWILL
LICENSEE recognizes that (i) a portion of the value of the NBA
Marks is attributable to goodwill, (ii) the goodwill attached
to the NBA Marks belongs exclusively to NBAP, the NBA and its
Member Teams and (iii) that such NBA Marks have secondary
meanings in the minds of the public. LICENSEE shall not,
during the Term or thereafter, challenge the property rights of
the Member Teams, whether severally owned or held in
association as the NBA, or NBAP's property rights in and to NBA
Marks.
7. PROTECTION OF RIGHTS
(a) Unauthorized Activities: LICENSEE shall promptly notify
NBAP in writing of any infringements of the Licensed Marks
or the Licensed Products or the sale of any Licensed
Products outside the Territory which may come to
LICENSEE's attention. NBAP shall have the sole right to
determine whether or not any action shall be taken on
account of any such infringement. LICENSEE agrees not to
contact any third party, not to make any demands for
claims and not to institute any suit or action on account
of such infringement or unauthorized
importation/exportation without obtaining the express
prior written permission of NBAP in each instance.
(b) Assistance in Protecting Marks: LICENSEE shall
cooperate to the fullest extent necessary to assist NBAP
in the protection of the rights of NBAP, the NBA and the
Member Teams in and to the Licensed Marks. NBAP shall
reimburse LICENSEE for any reasonable out-of-pocket costs
actually incurred by LICENSEE in providing such
cooperation and assistance. LICENSEE shall cooperate with
NBAP in its enforcement efforts, including being named by
NBAP as a complainant in any action against an infringer.
LICENSEE shall pay to NBAP, and waives all claims to, all
damages or other monetary relief recovered in any such
NBAP-initiated action by reason of a judgment or
settlement (other than for reasonable attorneys' fees and
expenses incurred at NBAP's request) whether or not such
damages or any part of such damages represent or are
intended to represent injury sustained by LICENSEE.
(c) Ownership of Marks: LICENSEE acknowledges that NBAP and/or
the Member Teams are the exclusive owners
of the Licensed Marks. Any intellectual
property rights in the Licensed Marks that
may accrue to LICENSEE shall inure to the
benefit of NBAP and shall be assigned to
NBAP, any upon its request. Any
copyright, trademark, service mark
procured by LICENSEE with respect to or
involving the licensed Marks, derivations
or adaptations of the Licensed Marks, or
any word, symbol or design which is
similar to the Licensed Marks so as to
suggest association with or sponsorship by
the NBA, one of its Member Teams or any of
their affiliates, shall be procured for
the benefit of and in NBAP's name, but at
LICENSEE's expense, notwithstanding their
creation by LICENSEE. LICENSEE shall take
all necessary steps to secure an
assignment to NBAP to the copyright from a
creator of work that is not work-for-hire.
LICENSEE shall assign, and hereby does
assigned, to NBAP any copyright, trademark
or service mark affecting or relating to
the Licensed Marks already procured or
applied for. LICENSEE shall supply NBAP
with any necessary supporting materials
required to obtain copyright or trademark
registrations of any copyrights or
trademarks required to be assigned to NBAP
under this Agreement. Notwithstanding the
above, LICENSEE shall also remain
proprietor in conjunction with NBAP,
during and after the termination of this
Agreement, of any intellectual property
right that LICENSEE acquired in relation
to the licensed trademark.
(d) Notices, Labeling, and Records: NBAP may from time-to-
time designate such copyright, trademark or service mark
notices (including the form, location and content of such
notices) that LICENSEE shall cause to appear on or within
each Licensed Product sold, by means of a tag, label,
imprint or other appropriate device, in every instance in
which any Licensed Mark is used. The following general
notice (in the English language and the language of the
country where the Licensed Products will be sold) must be
included on a label, the packaging material or on a
separate slip of paper packed with or attached to the
Licensed Product:
"The NBA and individual NBA member team
identifications reproduced on this product are
trademarks and copyrighted designs, and/or other
forms of intellectual property, that are the
exclusive property of NBA Properties, Inc. and the
respective NBA member teams and may not be used, in
whole or in part, without the written consent of NBA
Properties, Inc."
LICENSEE shall (i) cause all Licensed Products to bear the
NBA "official Licensed Product" logo on either the article
or its packaging in such place, and in such prominence, as
NBAP may designate from time-to-time, (iii) faithfully
comply with and adhere to NBAP's mandatory hologram
"Official Licensed Product" identification system, or such
other shipment tracking, identification and anti-
counterfeiting systems, tags and labels that NBAP may
establish from time-to-time, (iii) unless approved in
writing by NBAP, not cross-license or otherwise use other
licensed properties or other Marks with the Licensed
Products or Licensed Marks and (iv) keep appropriate
records, and advise NBAP, of the date when each of the
Licensed Products is first placed on sale or sold in each
country of the Territory and the date of first use in each
country of each different Licensed Mark in the Licensed
Products and any promotional or packaging materials.
(e) Recordation and Registered User Applications: With
respect to those countries in which LICENSEE may
distribute and which require applications to register
LICENSEE as a permitted or registered user of the Licensed
Marks, or which require the recordation of this Agreement,
LICENSEE shall execute and deliver to NBAP such
applications, agreements or other documents as may be
necessary. In such event, this Agreement rather than such
agreements will govern any disputes between LICENSEE and
NBAP, and when this Agreement expires or is terminated,
any such other agreement shall also be deemed expired or
terminated.
(f) LICENSEE Trade Names and Trademarks: LICENSEE shall
permanently affix labeling on each Licensed Product or its
packaging, indicating its name, trade name and address so
that the public can identify the supplier of the Licensed
Product. Prior to any distribution or sale of any
Licensed Products, LICENSEE shall advise NBAP in writing
of LICENSEE's trade name or trademarks used on Licensed
Products and the proposed placement of such trade names
and trademarks on the Licensed Products. LICENSEE shall
only sell Licensed Products under mutually agreed upon
trade names or trademarks and with approved copyrighted
designs, shall not incorporate the Licensed Marks into
LICENSEE's corporate or business name or trademark in any
manner whatsoever and shall place its trade names and
trademarks on Licensed Products only as approved in
writing by NBAP prior to such use. As requested by NBAP,
LICENSEE shall supply NBAP, in advance of shipping any
Licensed Products, with at least twelve (12) copies of
each type of its hang tags, labels and other markings of
origin for use in identifying and authenticating Licensed
Products in the marketplace. LICENSEE shall not use,
whether during or after the Term, any Marks: (i) in
connection with the Licensed Marks without NBAP's
authorization, (ii) confusingly-similar to the Licensed
Marks, or (iii) intended to relate or refer to the
Licensed Marks, the Member Teams or events involving the
NBA or the Member Teams.
8. INDEMNIFICATIONS
LICENSEE shall be solely responsible for, and shall
defend, hold harmless and indemnify NBAP, the NBA, its
Member Teams and the National Basketball Players
Association ("NBPA") and their respective affiliates,
owners, directors, governors, officers, employees and
agents (collectively "NBA Parties")against, any claims,
demands, causes of action or damages,including attorneys'
fees (collectively, "Claims"), arising out of: (i) any
act or omission of LICENSEE, (ii) any breach of this
Agreement by LICENSEE, (iii) the manufacture,
distribution, advertisement, promotion, sale, possession
or use of any Licensed Product (including, but not limited
to, claims relating to any defect (whether obvious or
hidden and whether or not present in any sample approved
by NBAP) in a Licensed Product or in any packaging or
other materials (including advertising materials), or to
injuries to persons or property, or to any infringement of
any rights of any other person or entity or to LICENSEE's
failure to comply with applicable laws, regulations and
standards) or (iv) any claim that the use of any design or
other graphic component of any Licensed Product (other
than the Licensed Marks) violates or infringes upon the
trademark, copyright or other intellectual property rights
(including trade dress) of a third party, provided
LICENSEE is given prompt written notice of and shall have
the option to undertake and conduct the defense of any
such Claim. In any instance to which the foregoing
indemnities pertain, NBAP shall cooperate fully with and
assist LICENSEE in all respects in connection with any
such defense. LICENSEE shall reimburse NBAP for all
reasonable out-of-pocket costs actually incurred by NBAP
in connection with such cooperation and assistance. In
any instance to which such indemnities pertain, LICENSEE
shall keep NBAP fully advised of all developments
pertaining to such Claim and shall not enter into a
settlement of such Claim or admit liability or fault
without NBAP's prior written approval. LICENSEE shall
obtain and maintain product liability insurance providing
protection for the NBA Parties against any Claims arising
out of any alleged defects in the Licensed Products or any
use of the Licensed Products, in an amount and providing
coverage satisfactory to NBAP (including the amount of the
deductible). Such insurance shall be carried by an
insurer with a rating by A.M. Best & Co. of A-7 or other
rating satisfactory to NBAP. Such insurance policy shall
also provide that NBAP receive written notice within
thirty (30) days prior to the effective date of the
cancellation, non-renewal or any material change in
coverage. In the event LICENSEE has failed to deliver to
NBAP a certificate of such insurance evidencing
satisfactory coverage prior to NBAP's execution of this
Agreement (or fails to maintain such insurance in
accordance with this Paragraph), NBAP shall have the right
to withdraw its consent to use any or all of the Licensed
Marks and/or terminate this Agreement at any time. Such
insurance obligations shall not limit LICENSEE's indemnity
obligations, except to the extent that LICENSEE's
insurance company actually pays NBAP amounts which
LICENSEE would otherwise be obligated to pay NBAP.
(b) NBAP shall be solely responsible for, and shall defend,
hold harmless and indemnify LICENSEE, it directors,
officers, employees and agents against any Claims arising
out of: (i) a claim that the use of the Licensed Marks
as authorized by this Agreement violates or infringes upon
the trademark, copyright or other intellectual property
rights (including trade dress) of a third party in or to
the Licensed Marks or (ii) any breach of this Agreement by
NBAP, provided NBAP is given prompt written notice of and
shall have the option to undertake and conduct the defense
of any such Claim. In any instance to which the foregoing
indemnities pertain, LICENSEE shall cooperate fully with
and assist NBAP in all respects in connection with any
such defense. NBAP shall reimburse LICENSEE for all
reasonable out-of-pocket expenses actually incurred by
LICENSEE in connection with such cooperation and
assistance. In any instance to which such indemnities
pertain, NBAP shall not enter into a settlement of such
Claim or admit liability or fault without LICENSEE's prior
written approval. NBAP shall have the right within
seventy (70) days of LICENSEE's commencement of production
of Licensed Products bearing such Marks, to advise
LICENSEE that one or more Marks of a Member Team (other
than the team's name or primary logo) are not covered by
this Paragraph 8(b), whereupon any continued use of such
Mark by LICENSEE shall be at LICENSEE's sole risk.
9. QUALITY; APPROVALS; SAMPLES
LICENSEE shall cause the Licensed Products to meet and conform
to high standards of style, quality and appearance. In order
to assure NBAP that it is meeting such standards and other
provisions of this Agreement, LICENSEE shall comply with the
following:
(a) Pre-Production: Before commercial production and
distribution of any product bearing a Licensed Mark,
LICENSEE shall submit to NBAP all preliminary and proposed
final artwork, three dimensional models (if any),
prototypes, mock-ups, and pre-production samples of each
product, including all styles, colors and variations,
together with its labels, tags, cartons and containers
(including packaging and wrapping materials). All
LICENSEE submissions under this Paragraph shall be
accompanied by forms supplied by NBAP, using one (1) form
for each submission and filling in all necessary
information. NBAP shall approve or disapprove in writing
all submissions, in its sole discretion, before LICENSEE
shall be entitled to distribute, advertise, use, produce
commercial quantities of or sell any item relating to any
such submission. Any article actually submitted and not
disapproved within sixty (60) days after receipt by NBAP
shall be deemed approved. Approval of an article which
uses a particular artwork does not imply approval of such
artwork with a different article or of such article with
different artwork. LICENSEE acknowledges that NBAP's
approval of an article does not imply approval of, or
license to use, any non-NBA controlled elements contained
in any article. After a sample of an article has been
approved, LICENSEE shall not make any changes without
resubmitting the modified article for NBAP's written
approval.
(b) Production Samples: Before selling or distributing any
product bearing a Licensed Mark, LICENSEE shall furnish
NBAP with, at no charge, for its permanent use, two (2)
samples of the product from the first production run of
each manufacturer of the Licensed Products, including all
styles, colors and variations, together with its labels,
tags, cartons and containers (including packaging and
wrapping materials). If such samples do not conform to
all aspects of the Licensed Product as approved or if the
quality of any such sample does not meet the requirements
of this Paragraph 9, NBAP shall notify LICENSEE and such
article shall be deemed disapproved and all such articles
shall be promptly destroyed. LICENSEE shall also furnish
NBAP, free of charge, with any additional pieces of
Licensed Product as may reasonable be requested by NBAP to
promote the sale of Official Licensed Products (e.g., for
NBAP's display room, advertisements, catalogs, mailers,
product placement and trade shows) or for comparison with
earlier samples. In addition, LICENSEE shall provide NBAP
with any additional pieces of Licensed Product as may be
required for the permanent use of the Member Teams, not to
exceed one (1) piece per Member Team. If NBAP wishes to
purchase Licensed Products for give-away purposes and not
for resale, LICENSEE shall sell the Licensed Products to
NBAP at LICENSEE's direct manufacturing cost for such
Licensed Products and LICENSEE shall not be required to
pay royalties on such sales to NBAP.
(c) Rejections and Non-Compliance: The rights granted
under this Agreement do not permit the sale of "seconds"
or "irregulars." All submissions or samples not approved
by NBAP shall promptly be destroyed by LICENSEE. LICENSEE
shall advise NBAP regarding the time and place of such
destruction (in sufficient time to arrange for an NBAP
representative to witness such destruction, if NBAP so
desires) and such destruction shall be attested to in a
certificate signed by one of LICENSEE's officers and
submitted to NBAP within fifteen (15) days of the date on
which the sample was not approved. In the event of
LICENSEE's unapproved or unauthorized manufacture,
distribution, use or sale of any products or materials
bearing the Licensed Marks, including promotional
materials, or the failure of LICENSEE to comply with
Paragraphs 7(d), 7(f), 9, 11(c) or 11(e), NBAP shall have
the right to: (i) immediately revoke LICENSEE's rights
with respect to any Licensed Product licensed under this
Agreement, (ii) charge LICENSEE two thousand U.S. dollars
(US $2,000) for each instance (e.g., per unit) of non-
compliance with this Paragraph with respect to any
article, product or material and/or (iii) at LICENSEE's
expense, confiscate or order the destruction of such
unapproved, unauthorized or non-complying products. Such
right(s) shall be without prejudice to any other rights
NBAP may have under this Agreement or otherwise.
(d) Testing: Both before and after Licensed Products are put
on the market, LICENSEE shall follow reasonable and proper
procedures for testing the Licensed Products for
compliance with laws, regulations, standards and
procedures, and shall permit NBAP (upon reasonable notice)
to inspect its and its authorized manufacturer's testing,
manufacturing and quality control records, procedures and
facilities and to test or sample Licensed Products for
compliance with this Paragraph and the other terms and
conditions of this Agreement. Licensed Products found by
NBAP at any time not to comply with applicable laws,
regulations, standards and procedures shall be deemed
disapproved, even if previously approved by NBAP, and
shall not be shipped unless and until LICENSEE can
demonstrate to NBAP's satisfaction that such Licensed
Products have been brought into full compliance.
(e) Revocation of Approval: In the event that: (i) the
quality, appearance or style of any Licensed Product
ceases to be acceptable to NBAP, (ii) LICENSEE uses the
Licensed Marks improperly or violates any term of this
Paragraph 9 or, (iii) NBAP becomes aware of something
relating to any such Licensed Product or LICENSEE which,
in the opinion of NBAP, reflects unfavorably upon the
professional, business or personal reputation of NBAP, the
NBA or any of its Member Teams, then, in any such event,
NBAP shall have the right, in its sole discretion, to
withdraw its approval of such Licensed Product. In the
event of such withdrawal, NBAP shall provide immediate
written notice to LICENSEE and LICENSEE shall cease the
use of the Licensed Marks in connection with the
manufacture, sale, distribution, advertisement or use of
such Licensed Product and such Licensed Product shall
immediately be withdrawn from the market and destroyed;
provided, however, that in the event of a revocation of
approval pursuant to (i) above, NBAP and LICENSEE shall
negotiate in good faith to provide for a reasonable sell-
off period for such Licensed Product and advertising and
promotion amounts. Within ten (10) day after LICENSEE's
receipt of such notice, LICENSEE shall pay all royalties
and Minimum Guarantees due NBAP with respect to the
Licensed Product for which approval has been revoked. If
there are other Licensed Products for which approval has
not been withdrawn under this subparagraph, then this
Agreement shall remain in full force and effect as to such
other Licensed Products. LICENSEE shall notify NBAP in
writing of any Licensed Products deleted from its product
lines.
10. PROMOTIONAL MATERIAL
LICENSEE shall not use the Licensed Marks or any
reproduction of the Licensed Marks in any advertising,
promotion or display material in connection with any
product or in any other manner whatsoever without prior
written approval from NBAP. Under no circumstance will
"lotteries," "games of chance" or any other type of
promotion which NBAP believes reflects unfavorably upon
the NBA or its Member Teams be approved. All advertising
or promotional copy and material depicting or using the
Licensed Marks (including display material, catalogs and
press releases) shall be submitted for approval well in
advance of production (but in no event less than ten (10)
business days prior to the start of commercial production)
to allow adequate time for NBAP, in its sole discretion,
to approve, disapprove or comment upon such materials and
for any required changes to be made. By way of example,
no television or cinema advertising containing any
Licensed mark may be used unless it has been approved in
all stages (i.e., storyboard, production "rough-cut" and
final version). Unless otherwise approved by NBAP, any
NBA game action photographs or footage that LICENSEE uses
in connection with the Licensed Products must be obtained
from NBA Entertainment, Inc. ("NBAE") and shall be subject
to NBAE's search and edit charges and any additional NBAE
licensing fees. Any promotional material submitted that
is not approved or disapproved by NBAP within thirty (30)
days of its receipt by NBAp shall be deemed approved by
NBAP. LICENSEE shall be solely responsible and liable for
any advertising and promotional activities conducted and
shall ensure that all such activities comply with all
applicable laws, regulations and standards in the
Territory.
11. DISTRIBUTION; COMPLIANCE
(a) LICENSEE shall use its best efforts to distribute
and sell, within and throughout the Territory, the
Licensed Products in such manner as may be required
to meet competition by reputable manufacturers of
similar articles. In any ninety (90) day period in
which LICENSEE fails to sell or distribute Licensed
Products in reasonable commercial quantities,
LICENSEE shall be deemed not to have used it best
efforts. LICENSEE shall make and maintain adequate
arrangements for the distribution and timely
delivery of Licensed Products to retailers within
and throughout the Territory. In the event NBAP
advises LICENSEE that a special promotional effort
is to take place in an individual store or chain,
LICENSEE shall use its best efforts to sell the
Licensed Products to said store or chain. In
addition, LICENSEE shall give the Licensed Products
wide distribution in the Territory and shall not,
subject to the provisions set forth in this
Agreement, refrain for any reason from selling
Licensed Products to any retail outlet within the
Territory that may desire to purchase Licensed
Products and whose credit rating and marketing image
warrants such sale.
(b) If LICENSEE desires to have a third party
manufacture or distribute (if permitted under this
Agreement) any Licensed Product, LICENSEE must first
notify NBAP of the name and address of such third
party and of the Licensed Product LICENSEE desires
such a third party to manufacture or distribute.
Attached as Schedule A is a true and complete list
of all third party manufacturers and distributors
(if permitted under this Agreement) currently
authorized by NBAP. NBAP shall have the right, in
its sole discretion, to withhold approval for such
third party manufacture or distribution. If NBAP
grants approval for such third party manufacture or
distribution, it may grant such approval pursuant to
an agreement (on a form supplied by NBAP) to be
entered into prior to such manufacture or
distribution among NBAP, LICENSEE and such
manufacturer or distributor which will, among other
things, require that the third party manufacturer or
distributor be subject to all of the terms and
conditions of this Agreement. If NBAP does not
require the third party to enter into a separate
agreement, LICENSEE must provide NBAP with a copy of
its agreement with the third party, which agreement
must provide that it is subject to this Agreement.
If any of LICENSEE's authorized manufacturers or
distributors uses the Licensed Marks for any
unauthorized purpose, LICENSEE shall be responsible
for, and shall cooperate fully and use its best
efforts in stopping, such unauthorized use. Any
change by LICENSEE from a third party manufacturer
or distributor previously approved by NBAP shall
require approval in accordance with this Paragraph.
(c) LICENSEE understand and acknowledges the meanings of
"Counterfeit Goods" and "Diverted Goods" as set
forth in Paragraph 1 above and LICENSEE shall use
all commercially reasonable means to prevent the
creation of any such goods by it employees, agents,
representatives or any others operating under its
direction, supervision or control and involving the
NBA Marks. Nothing in this Agreement, however,
shall be deemed to restrict LICENSEE with respect to
its obligation to fulfill orders from customers in
accordance with applicable laws.
(d) In the event LICENSEE sells or distributes other
licensed merchandise of a similar grade or quality
as the Licensed Products, but which do not bear any
of the Licensed Marks, LICENSEE will not
discriminate, in a manner which adversely impacts
the Licensed Products, in the granting of
commissions or discounts to salesmen, dealers and
distributors between the Licensed Products and the
licensed products of any third party. LICENSEE may
not package the Licensed Products in combination
with other products, whether similar or different,
without the prior written approval of NBAP. In the
event that NBAP believes in good faith that LICENSEE
has employed selling or reporting methods which
circumvent or reduce the royalty or other payment or
reporting obligations contained in this Agreement,
NBAP may, in addition to any other rights and
remedies it may have, at its option and upon fifteen
(15) days' prior written notice, adjust or establish
the minimum royalty per unit.
(e) LICENSEE shall at all times conduct all aspects of
its business in a fair and reasonable manner and in
compliance with all shipment tracking,
identification and anti-counterfeiting systems and
labels that NBAP may establish from time to time and
all applicable laws, government rules and
regulations, court and administrative decrees and
the highest standard of business ethics then
prevailing in the industry. LICENSEE shall
faithfully comply with and adhere to NBAP's shipping
and distribution policies established from time-to-
time. LICENSEE shall use its commercially
reasonable efforts to ensure that all retailers and
authorized distributors purchasing Licensed Products
comply with NBAP's anti-counterfeiting systems,
labels and shipping and distribution policies
established from time to time.
(f) It shall be LICENSEE's sole responsibility, at its
sole expense, to obtain all approvals (including,
but not limited to, approvals of advertising
materials) of all governmental authorities which may
be necessary in connection with LICENSEE's
performance under this Agreement.
(g) LICENSEE acknowledges that NBAP intends to offer
various NBA and/or Member Team-identified products
for sale in an NBAP-owned "showcase" retail store
("NBA Store"). LICENSEE further acknowledges that
it will receive a variety of tangible and intangible
benefits as a result of having merchandise
manufactured by LICENSEE displayed, sold and
promoted at the NBA Store. Therefore, LICENSEE
shall, in addition to and in consideration for the
license granted under this Agreement and in
consideration of the benefits it will receive from
having merchandise displayed, sold and promoted at
the NBA Store, (i) upon the request of NBAP, perform
contract manufacturing services for NBAP in
connection with the manufacture of products for sale
in the NBA Store on terms as mutually agreed upon by
NBAP and LICENSEE and (ii) offer Licensed Products
to the NBA Store on terms at least as favorable as
those offered to LICENSEE's most preferred high-
volume customers, including price, priority of
delivery, discounts, cooperative or other
advertising and promotional allowances and other
benefits (regardless of volume).
12. RECORDS;AUDITS
LICENSEE shall keep accurate books of account and records
covering all transactions relating to the license granted
in this Agreement (including, but not limited to, sales of
Licensed Products, purchases and uses of NBA hologram hang
tags and compliance with shipment tracking, identification
and anti-counterfeiting systems and labels that NBAP may
establish from time to time). NBAP and its authorized
representatives shall have the right, at all reasonable
hours of the day and upon reasonable prior notice, to
examine and audit such books of account and records and
all other documents and materials in LICENSEE's possession
or under its control (including records of LICENSEE's
parents, subsidiaries, affiliates and third parties, if
they are involved in activities which relate to this
Agreement) relating to this Agreement. NBAP shall have
free and full access for such purposes and for the purpose
of making extracts and copies. Should an audit by NBAP
establish a deficiency between the amount found to be due
NBAP and the amount LICENSEE actually paid or reported,
the LICENSEE shall pay the amount of such deficiency, plus
interest at the then current prime rate (as announced by
Chemical Bank, New York branch) from the date such amount
should have been paid until the date of payment. Should
such audit establish a deficiency of more than five
percent (5%), LICENSEE shall also pay for the cost of the
audit. LICENSEE shall pay such amount within thirty (30)
days. All such books of accounts and records shall be
kept available for at least two (2) years after the
expiration or termination of this Agreement, or three (3)
years after the end of the Contract Year to which they
relate, whichever is earlier. In order to facilitate
inspection of its books and records, LICENSEE shall
designate a symbol or number which will be used
exclusively in connection with the Licensed Products on
which royalty payments are payable and shall maintain for
inspection as provided in this Agreement duplicates of all
billings to customers with respect to Licensed Products.
LICENSEE shall, within ten (10) business days of NBAP's
request (which shall not be made more than four (4) times
per Contract Year), furnish NBAP with a list of LICENSEE's
top twenty-five (25) retail accounts for Licensed Products
(on a country by country basis) and their monthly
purchases of Licensed Products (broken down by unit sales
and in dollar volume by retailer). LICENSEE shall supply
NBAP with true and complete copies of any agreement it has
entered into, or in the future enters into, with any
Member Team or any NBA player. In addition, LICENSEE
shall, on a quarterly basis during the Term, provide NBAP
with copies of either (i) financial information furnished
to the United State Securities and Exchange Commission or
(ii) with all financial statements and other financial
information prepared by LICENSEE for distribution to its
banks or other financial lending institutions to whom it
reports regularly. LICENSEE shall cooperate with NBAP in
developing an electronic data interchange through which
NBAP may access LICENSEE's electronic database relating to
the manufacture, distribution and sale of Licensed
Products (such as work-in-progress, finished goods on
hand, orders received, deliveries made and any other on-
line information relating to the Licensed Products) or
developing such other system as will enable NBAP to obtain
such information or facilitate NBAP's review of LICENSEE's
graphic designs for Licensed Products.
13. EARLY TERMINATION
Without prejudice to any other rights NBAP may have
pursuant to this Agreement or otherwise, NBAP shall have
the right to terminate this Agreement at any time if:
(a) Within three (3) months from the date that this
Agreement is executed on behalf of NBAP, LICENSEE
shall not have begun the bona-fide distribution and
sale of each Licensed Product within and throughout
the Territory in accordance with this Agreement.
(b) LICENSEE shall fail to timely remit a payment when
due and shall fail to cure such non-payment within
thirty (30) days (ten (10) days for a payment
default other than a royalty payment default) of its
receipt of written notice from NBAP; provided,
however, that the LICENSEE shall not have the right
to cure any subsequent payment default.
(c) LICENSEE or any guarantor under this Agreement shall
be unable to pay its liabilities when due, or shall
make any assignment for the benefit of creditors,
or under any applicable law admits in writing its
inability to meet its obligations when due or commit
any other act of bankruptcy, institute voluntary
proceedings in bankruptcy or insolvency or permit
institution of such proceedings against it.
(d) LICENSEE shall exhibit a pattern of frequent failure
to make timely delivery of sufficient quantities of
the Licensed Products to its retail accounts.
(e) LICENSEE (or any entity that controls LICENSEE or is
controlled by LICENSEE) now or in the future holds a
license from NBAP and such license is terminated by
NBAP during the Term.
(f) LICENSEE is in breach of Paragraph 11 (c).
(g) LICENSEE sells to any third party that LICENSEE
knows, or has reason to know, is altering or
modifying the Licensed Products prior to sale to the
ultimate consumer.
(h) LICENSEE shall fail to perform or shall be in breach
of any other term or condition of this Agreement
(other than a payment default). A termination
pursuant to this subparagraph (h) shall take effect
(i) thirty (30) days after written notice of such
failure to perform or breach is sent by NBAP if such
failure to perform or breach can be Completely Cured
(as defined below) and such failure to perform or
breach has not been Completely Cured during such
thirty (30) day period, or (ii) immediately after
written notice of such failure to perform or breach
is sent by NBAP if such failure to perform or breach
cannot be Completely Cured. For purposes of this
subparagraph, "Completely Cured" means that such
failure to perform or breach is cured so that, in
the reasonable judgment of NBAP, such failure to
perform or breach will have had no effect on, or
caused damage to, NBAP.
In addition to NBAP's other rights and remedies, upon
termination of this Agreement under this Paragraph,
LICENSEE shall pay NBAP (within thirty (30) days of such
termination) the Minimum Guarantees for each Licensed
Product through the end of the Agreement, less the
royalties paid to NBAP through the date of termination.
14. DISPOSAL OF STOCK
Sixty (60) days before the expiration of this Agreement
and ten (10) days after any termination under Paragraphs
9 or 13, LICENSEE will furnish to NBAP a certificate
showing the number and description of Licensed Products on
hand or in process of manufacture. After expiration or
termination of this Agreement, LICENSEE shall have no
right to, nor allow any third party to, manufacture,
advertise, distribute, sell, promote or otherwise deal in
any Licensed Products or use the Licensed Marks (and
LICENSEE shall not engage in any such activity) except as
provided below. For a period of ninety (90) days
following the expiration (but not after the termination)
of this Agreement, LICENSEE may sell-off and deliver
Licensed Products which are on hand or in process at the
time of such expiration (the "Sell-Off Period"); provided,
however that (i) the total number of units of each
Licensed Product sold during the Sell-Off Period may not
be greater than one hundred ten percent (110 %) of the
total number of units of such Licensed Product on hand the
same date the preceding Contract Year, (ii) such Licensed
Products may only be sold in accordance with this
Agreement and in the course of business and at regular
selling prices, (iii) all payments then due are first made
to NBAP and (iv) statements and payments with respect to
the Sell-Off Period are made in accordance with this
Agreement. NBAP shall have the option to conduct physical
inventories before the expiration of this Agreement until
the end of the Sell-Off Period in order to verify such
inventory and/or statements. If LICENSEE refuses to
permit such physical inventory, LICENSEE shall forfeit its
right to dispose of Licensed Products under this
Paragraph. After such Sell-Off Period, all inventory on
hand or in process (including all promotional and
packaging materials) will be destroyed. LICENSEE shall
have no sell-off rights in event this Agreement is
terminated the process (including all promotional and
packing materials) will be destroyed.
Any destruction of Licensed Product required pursuant to
this Agreement shall be attested to in a certificate
signed by one of LICENSEE's officers.
15. EQUITABLE RELIEF
LICENSEE acknowledges that NBAP is entering into this
Agreement not only in consideration of the royalties or
other financial consideration to be paid, but also for the
promotional value and intrinsic benefit resulting from the
manufacture, advertisement, distribution, sale and
promotion of the Licensed Products by LICENSEE in the
Territory. LICENSEE acknowledges that the Licensed marks
possess a special, unique and extraordinary character
which makes difficult the assessment of the monetary
damage which NBAP would sustain as a result of the
unauthorized use of the Licensed Marks. LICENSEE further
acknowledges that: (i) its failure to manufacture,
advertise, distribute, sell and promote the Licensed
Products in accordance with this Agreement and (ii) the
unauthorized or unapproved use of Licensed Marks will, in
either case, cause immediate and irreparable damage to
NBAP for which NBAP would not have an adequate remedy at
law. Therefore, LICENSEE agrees that, in the event of a
breach of this Agreement by LICENSEE, in addition to such
other legal and equitable rights and remedies as shall be
available to NBAP, NBAP shall be entitled to injunctive
and other equitable relief, without the necessity of
proving damages or furnishing a bond or other security.
16. NOTICES
All notices and statements to be given and all payments to
be made under this Agreement shall be given or made at the
respective address of the parties as set forth above,
unless notification of a change of address is given in
writing. Any notice of breach or default must be in
writing and sent by facsimile, overnight express delivery,
or registered or certified mail, return receipt requested,
properly addressed and stamped. Any written notice shall
be deemed to have been given at the time it is sent.
17. NO JOINT VENTURE
Nothing in this Agreement shall be construed to place the
parties in the relationship of partners or joint
venturers. Neither party shall have the power to obligate
or bind the other to a third party in any manner
whatsoever.
18. ARBITRATION OF CERTAIN MATTERS
Any dispute or disagreement between the parties relating
solely to the amount of royalty payments owing under this
Agreement shall be settled by arbitration in New York City
under the rules then in effect of the American Arbitration
Association. Judgment upon the award may be entered in
any court having jurisdiction. No other dispute or
disagreement between the parties (including any claim by
NBAP that LICENSEE is using the Licensed Marks in a manner
not authorized by this Agreement or is otherwise in breach
of this Agreement) shall be settled by arbitration. All
decisions by NBAP relating to disapproval of any Licensed
Product or advertising, promotion or display material
shall be final and binding on LICENSEE and shall not be
subject not review in any proceeding.
19. NO USE OF PLAYERS
LICENSEE acknowledges that this Agreement does not grant
to LICENSEE any licenses or rights with respect to the use
of the names, likenesses or other attributes of any NBA
player (collectively "Player Attributes"). The license
granted under this Agreement does not include, and shall
not be used to imply, a testimonial or endorsement of any
Licensed Products by any NBA player. LICENSEE shall not
use Player Attributes without first obtaining written
authorization from the subject player(s). LICENSEE shall
not enter into any agreement with any NBA player or any
other person which would require that player or other
person to wear or use any Licensed Product at any NBA game
(either courtside or in any locker room) or at practice.
20. WARRANTIES
Each party represents and warrants that it has the right
and authority to enter into and perform this Agreement and
NBAP represents and warrants that it has the right to
grant the rights to use the Licensed Marks in accordance
with the terms and conditions of this Agreement. LICENSEE
represents and warrants that the Licensed Products and all
advertising and promotional materials shall comply with
all applicable laws, regulations and standards. NBAP's
approval of such materials will not imply a representation
or belief that NBAP believes such materials are sufficient
to meet applicable laws, regulations and standards, nor
shall it imply that NBAP agrees with or supports any
claims made by LICENSEE in any advertising materials
relating to the Licensed Products. LICENSEE further
represents and warrants that all advertising and
promotional materials and all graphics used on Licensed
Products will not violate the intellectual property rights
of any third party.
21. SEVERABILITY
In the event any provision of this Agreement is found to
be void, invalid or unenforceable as a result of any
judicial or administrative proceeding or decree, this
Agreement shall be construed and enforced as if such
provision were not contained in this Agreement.
22. GOVERNING LAW AND JURISDICTION
This Agreement shall be construed in accordance with the
laws of the State of New York, USA, without regard to its
principles of conflicts of laws. Any claim arising under
this Agreement (except as provided under Paragraph 18)
shall be prosecuted in a federal or state court of
competent jurisdiction located within the City of New
York, USA, and LICENSEE consents to the jurisdiction of
such court and to the service of process by mail.
23. MISCELLANEOUS
(a) Assignment: This Agreement and any rights granted
under this Agreement are personal to LICENSEE and
shall not be assigned, sublicensed, subcontracted or
encumbered, directly or indirectly, by law or by
contract, without NBAP's prior written consent,
which consent may, in NBAP's sole discretion, (i) be
contingent upon a fee payable by LICENSEE or the
transferee, the amount of which shall be determined
by NBAP in its sole discretion, and/or (ii) impose
other terms and conditions upon the assignment,
sublicense or transfer. Any transfer of a
controlling interest in LICENSEE or in any party
which currently controls LICENSEE, directly or
indirectly, shall be deemed an assignment prohibited
by the preceding sentence. Any nonconsensual
assignment, sublicense, subcontract or encumbrance
or this Agreement by LICENSEE shall be invalid and
of no force or effect. Upon any such nonconsensual
assignment, sublicense, subcontract or encumbrance,
this Agreement shall terminate, all payment
obligations of LICENSEE hereunder shall be
accelerated and immediately due and payable, and all
rights granted under this Agreement shall
immediately revert to NBAP.
(b) Waiver: None of the provisions of this Agreement
can be waived or modified except expressly by
writing signed by both parties. There are no
representations, promises, agreements, warranties,
covenants or undertakings by either party other than
those contained in this Agreement. No failure on
the part of NBAP to exercise any right under this
Agreement shall operate as a waiver of such right;
nor shall any single or partial exercise of any
right preclude any other or further exercise or the
exercise of any other rights.
(c) Survival: No expiration or termination of this
Agreement shall relieve LICENSEE of its obligation
to pay NBAP any amounts due to NBAP at the time of
termination, regardless of whether these amounts are
then or thereafter payable. The provisions of
Paragraphs 12 and 23(f) shall survive the expiration
or termination of this Agreement.
(d) Adjustments: NBAP shall have the option to
increase the Royalty Rates and promotion commitment
in the event that, at any time during the Term,
LICENSEE agrees to pay or in fact pays royalty rates
and/or advertising and promotion contributions with
respect to any other licensed sports or
entertainment property in excess of the Royalty Rate
for any Licensed Product. From time to time at
NBAP's request, LICENSEE shall deliver a certificate
to NBAP which sets forth the royalty rates and
advertising and promotion contributions LICENSEE
pays to any other professional sports league or
entertainment property.
(e) Confidentiality: Neither party shall (nor shall
they permit or cause their employees or agents to)
divulge, disseminate or publicize information
relating to this Agreement or the financial or other
terms of this Agreement (including any information
on the specifications or methods of reproduction of
the Licensed Marks) to any third party (other than
their respective attorneys or accountants or in the
case of NBAP, the NBA Board of Governors and the
NBPA), except as may be required by law or to
fulfill the terms of this Agreement.
(f) Research: LICENSEE shall cooperate with NBAP's
reasonable requests for information in connection
with conducting marketing tests, surveys and other
research ("Research"), provided that any proprietary
information so furnished shall be kept strictly
confidential by NBAP. If LICENSEE performs or
causes to be performed any Research primarily
dedicated to evaluating or otherwise assessing a
Licensed Product (or any LICENSEE (non-NBA) product
offering similar to a Licensed Product), then copies
of such Research results shall be promptly provided
to NBAP. As may be reasonable requested by NBAP,
LICENSEE shall provide NBAP (or NBAP's designated
third-party researcher) with any Research and
information that LICENSEE has or obtains regarding
its retail accounts.
(g) Construction: This Agreement has been executed in a
text using the English language, which text shall be
controlling. This Agreement together with any
exhibits or attachments, when fully executed, shall
constitute the entire agreement and understanding
relating to the subject matter of this Agreement
between parties and cancels, terminates, and
supersedes any prior agreement or understanding
relating to the subject matter of this Agreement
between LICENSEE and the NBA, any Member Team or
NBAP. The headings in this Agreement are for
reference purposes only and shall not affect the
interpretation of this Agreement. This Agreement
shall not be binding on NBAP until signed on its
behalf by its President or Senior Vice President,
Business Affairs or such other executive designated
by the President to sign.
<PAGE>
Schedule A
Third Party Manufacturers:
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED NOVEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000844143
<NAME> INNOVO GROUP INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30
<PERIOD-START> DEC-1-1996
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 469
<SECURITIES> 0
<RECEIVABLES> 1,001
<ALLOWANCES> 106
<INVENTORY> 1,582
<CURRENT-ASSETS> 3,344
<PP&E> 6,843
<DEPRECIATION> 1,772
<TOTAL-ASSETS> 9,168
<CURRENT-LIABILITIES> 3,523
<BONDS> 0
0
0
<COMMON> 446
<OTHER-SE> 3,345
<TOTAL-LIABILITY-AND-EQUITY> 9,168
<SALES> 9,458
<TOTAL-REVENUES> 9,458
<CGS> 6,388
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 766
<INCOME-PRETAX> (1,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 524
<CHANGES> 0
<NET-INCOME> (1,315)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
