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, 1999
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 Identification No.)
incorporation or organization)
1808 North Cherry Street, Knoxville, Tennessee 37917
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (865) 546-1110
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 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 March 8, 2000, 6,922,761 shares of common stock were
outstanding. The aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $6.0 million
at the close of business on March 8, 2000.
Documents incorporated by reference:
There are documents incorporated by reference
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
PART I
ITEM 1. BUSINESS
Introduction
Innovo Group Inc. ("Innovo Group"), operating through its
wholly-owned subsidiaries (which, collectively with Innovo Group are
referred to as the "Company"), designs, imports, manufactures and
domestically markets and distributes various cut and sewn canvas and
nylon consumer products, such as tote bags and insulated lunch bags
and coolers, along with aprons and vests, for sale in the premium
and advertising specialty market and to retailers including Wal-
Mart, K-Mart, Michael's, Hobby Lobby, Dollar General, Goody's and
Joanne's. The Company internationally markets and distributes sport
bags, backpacks waistpacks and other stationary bags. Many of the
Company's products include licensed NFL, NBA, NHL, Major League
Baseball, collegiate teams and NASCAR drivers, custom artwork and
other artwork designed in house. The Company's overseas products
also include bags utilizing the characters of Walt Disney Co. and
Warner Bros. Looney Tunes and the new NFL European football teams
under a new license with NFL Europe. From April 1996 through
September 1998, the Company also manufactured and domestically
marketed ladies ready-to-wear, at-home sleep and lounge wear for
sale to retailers and through mail order distribution.
The Company's operations are classified into the industry
segment, "Canvas and Nylon Consumer Products". See Note 11 of Notes
to Consolidated Financial Statements for financial information on
discontinued industry segments.
The principal executive offices of the Company are located at
1808 North Cherry Street, Knoxville, Tennessee 37917. Its telephone
number is (865) 546-1110.
Principal Operating Subsidiaries
The Company's continuing operations are currently conducted
primarily through two wholly owned subsidiaries:
Innovo, Inc. ("Innovo") designs, imports, markets and
distributes cut and sewn canvas and nylon consumer products for the
utility, craft, sports licensed and advertising specialty markets.
A portion of Innovo's products are domestically manufactured at
facilities owned or leased by the Company, although an increasing
number of products are obtained from foreign suppliers primarily
located in the Orient.
NASCO Products International, Inc. ("NP International")
markets and distributes overseas, principally in Europe, products
similar to some of those marketed domestically by Innovo, as well as
licensed sports bags and backpacks, which the Company generally
obtains from foreign suppliers.
Products
Domestic Product Lines. Innovo designs, imports,
manufactures, markets and distributes a wide variety of cut and sewn
canvas, denim and nylon consumer products in the United States.
Following are the principal products that Innovo manufactures and
distributes in the United States to the fashion, craft and licensed
product markets:
Fashion Craft Licensed
tote bags tote bags travel and tote bags
beach bags aprons and smocks waist packs
duffel bags banners duffel bags
aprons vests stadium totes/cushions
smocks Christmas stockings insulated lunch bags
and soft coolers
backpacks
aprons
Product Design. Innovo develops the designs and artwork
for all products in-house. Innovo manufactures its craft market
products without artwork to be sold (sometimes packaged with paints
or other supplies) for finishing by retail craft customers.
Innovo's licensed products are produced with the logos or other
designs licensed from the four major professional sports leagues and
colleges. Beginning in September 1998, the Company added a licensed
NASCAR driver product line and during the second quarter of 1999,
the Company added a license for Garfield. See "Licensing
Agreements" below.
International Product Lines. NP International designs and
distributes licensed sports products internationally, principally in
Europe, to distributors that in turn sell to sporting goods,
department and mass merchandise chains, hypermarkets, through mail
order and to grocery and drug store chains. Its line of products
consists of a variety of insulated soft lunch bags and coolers,
backpacks and sport, gym, equipment and duffel bags. NP
International's products are generally imprinted or embroidered with
logos licensed from the four major professional sports leagues,
colleges and the characters licensed from Walt Disney and Warner
Bros. Sales to foreign customers, principally in Europe, accounted
for 6.3%, 21.2% and 19.4% of net sales in fiscal 1999, 1998 and 1997
respectively.
Premium Sales Market. Innovo also markets each of its
products through a sales rep force to its nonretail customers.
Those products include the customer's logo, design or slogan for use
in connection with a customer or employee promotion or as a premium
sale item.
Licensing Agreements
The Company's sports-licensed, Walt Disney Co. and Warner
Bros. Studios Looney Tunes products display logos, insignia, names,
slogans or cartoon characters licensed from the 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, NFL Europe and over 130 colleges on various products. For
the year ended November 30, 1999, the sale of licensed products
represented 46.2% of the Company's net sales.
During September 1998, the Company entered into an agreement
with the Fan Fueler? division of Action Performance Companies, Inc.
("AP") providing the Company with exclusive manufacturing and non-
exclusive distribution rights with respect to seat cushions, soft
lunch bags and coolers, waist packs, tote bags and backpacks bearing
motorsports-related trademarks and copyrights under AP's control.
Among the NASCAR drivers represented by AP are Dale Earnhardt, Dale
Earnhardt, Jr., Jeff Gordon, Rusty Wallace and Dale Jarrett.
During 1999, the Company obtained a license from Paws, Inc to
produce backpacks, sportsbags and other items with the image of
Garfield.
The following sets forth certain information concerning the
license agreements currently held by the Company.
Licensor Types of Products Geographical Areas
National Basketball Tote, lunch, shoe and laundry bags; United States;
Association stadium seat cushions. European Union ("EU")
Coolers, garment bags, backpacks, United Kingdom ("UK")
sportbags and waistpacks.
Major League Baseball Tote, lunch, shoe and laundry bags, United States; UK;
stadium seat cushions. EU
Sport bags and backpacks.
National Football Tote, lunch, shoe and laundry bags United States; UK;
League stadium seat cushions. EU
Sports bags and backpacks.
National Hockey Tote, lunch, shoe and laundry bags, United States; UK;
stadium seat cushions. EU
Sports bags and backpacks.
Colleges/logos of Tote, lunch, shoe and laundry bags; United States
approximately 130 stadium seat cushions; sports
colleges bags and backpacks.
Walt Disney/Walt Tote, sport, gym and other bags; EU
Disney characters backpacks; waistpacks; wallets
and other stationary bags
Warner Bros Tote, sport, gym and other bags; EU
backpacks; waistpacks.
Fan FuelerTM Seat cushions; soft lunch bags and United States; EU
coolers waist packs; tote bags and
backpacks.
Paws, Inc (Garfield) Backpacks, sports bags, tote bags, United States
lunch bags, seat cushions and waist
packs
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 $40,000. 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 most of the current license agreements
range from 2000 to 2002. 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.
Company History
Innovo began operations in April 1987. In August 1990, Innovo
merged into Elorac Corporation, a so called "blank check" company
that changed its name to "Innovo Group Inc." pursuant to the merger.
In fiscal 1991, the Company created a subsidiary called Nasco
Products, Inc that acquired certain assets of a division of NASCO,
Inc., a manufacturer, importer and distributor of sports-licensed
sports bags, backpacks and other sporting goods that had its
headquarters approximately 30 miles north of Nashville in
Springfield, Tennessee.
Subsequent to the asset purchase, a subsidiary of Innovo Group
Inc merged with NASCO, Inc.. NASCO, Inc., which was 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
Spirco's youth and school fundraising business. Its business of
importing and distributing sports-licensed products was retained by
NASCO Products, Inc. ("NASCO Products"), a wholly-owned subsidiary.
Spirco had incurred significant trade debt and losses during
its 1992 fiscal year in its fundraising business and from
undisclosed liabilities incurred by Spirco prior to its acquisition.
On August 27, 1993, Spirco filed for reorganization under Chapter 11
of the U.S. Bankruptcy Code. Innovo Group and its other
subsidiaries 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 Spirco plan of reorganization, 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. Spirco claims were paid either by issuing common
stock of the Company ("Common Stock") to creditors or, in the case
of claims for federal, state and local taxing authorities, by
issuing shares to a trust which sold the stock and distributed the
proceeds to such claimants. Unsecured claims did not receive any
distribution and were extinguished under the plan of reorganization.
On July 31, 1995, NASCO Products sold to Accessory Network
Group, Inc. ("ANG") its business of importing into and distributing
within the United States sports bags, backpacks and equipment bags
bearing the logos of the teams of the four major professional sports
leagues. NASCO Products discontinued all of its operations
following the sale to ANG. For the licenses, ANG paid NASCO
Products $750,000 in installments through December 1997. In
addition, ANG will make ongoing annual payments for up to forty
years to NASCO Products of 2% of sales under each of the National
Football League, Major League Baseball and National Hockey League
licenses, and 1% of sales under the NBA license, up to aggregate
sales of $15 million, and 1.5% and 0.5% of sales, respectively,
thereafter. The payments will continue unless a license expires or
is terminated and is not renewed or reinstated within twelve months.
In April 1996, the Company acquired Thimble Square, Inc.
("Thimble Square"). Thimble Square manufactured and marketed
ladies' ready-to-wear at-home, sleep and lounge wear and provided
"sew-only" manufacturing for other distributors of private-label
sleep and lounge wear. It had three manufacturing facilities, one
facility it owned in Pembroke, Georgia, and two leased facilities in
Baxley, Georgia.
From 1996 through 1998, Thimble Square contributed a declining
percentage of the Company's net sales, from approximately 18.5% in
1996 to 16.5% and 13.0% in 1997 and 1998, respectively. At the same
time, the Thimble Square apparel products segment of the Company's
business generated operating losses of approximately $110,000 in
fiscal 1997 and $346,000 in fiscal 1998. See Note 11 of Notes to
Consolidated Financial Statements.
Based on Thimble Square's deteriorating operating results, an
ongoing operating capital drain of more than $20,000 per month and
management's need to focus on the Company's core business, on
September 13, 1998 the Company entered into an agreement with
Confident Colors LLC (a company formed by a former officer of the
Company, the chief operating officer of Thimble Square and others)
("Confident Colors") to lease to Confident Colors one of Thimble
Square's Baxley, Georgia facilities and equipment and to allow it to
succeed to all of Thimble Square's business and operations. Upon
execution of the lease, Thimble Square discontinued all operations.
In October 1998, the lease on Thimble Square's second Baxley
facility expired. The Company sold Thimble Square's Pembroke
facility on December 10, 1998 for net proceeds of $122,354 and the
equipment in the Baxley facility for $30,000 on January 13, 1999.
The Company recorded losses totaling $1,400,165 (including $639,000
of goodwill) as the result of the sale of Thimble Square during the
fourth quarter of fiscal 1998.
During 1999, Confident Colors defaulted on its lease with the
Company and vacated the remaining Baxley facility. Due to the
inability to find a tenant for this facility, the Company decided to
terminate its lease for the facility. In the circumstance, the
leaseholder (lessor) agreed to terminate both the lease agreement
and sublease agreement, effective November, 1999, without penalty.
This termination necessitated the write off of the remaining net
book value of the capitalized lease (asset) and the removal of the
remaining capitalized lease obligation (liability) resulting in a
net charge to operations of $293,000. See "Item 2 Properties".
During November and December, 1998, the Company moved its
headquarters and manufacturing and distribution facilities to a
78,000 square foot facility located in Knoxville, Tennessee. The
Knoxville facility provides approximately 65,000 square feet for
manufacturing and distribution operations, as well as approximately
13,000 square feet of office spaces. See "Item 2 Properties".
Summary of Significant 1999 Developments
During the first and second quarters of 1999, the Company sold
571,000 shares of stock in a private placement for cash in the
amount of $792,000. The cash generated from these sales was used to
fund current operations during those quarters. In addition, the
Company issued 250,000 shares of stock in exchange for the
conversion of $400,000 of debt to equity.
Two directors of the Company loaned the Company money at
various times throughout the year. The total borrowings for the
year aggregated $712,000. As of November 30, 1999, $100,000 of such
borrowings remained outstanding, after repayments of $212,000 and
conversions of debt to equity of $400,000 (as described above).
In November 1999, the Company took a $293,000 charge against
operations for the write-off of the remaining net assets associated
with a terminated capital lease (discussed above).
In November 1999, the Company recorded a $145,000 expense for
a valuation adjustment on its Springfield, Tennessee facility. The
value of the facility was written-down to its appraised value using
the guidelines of Statement of Financial Accounting Standard No.
121(SFAS 121).
During 1999, the Company incurred significant expense items
relating to lawsuit settlements and insurance losses. These
expenses totaled $150,000 and negatively impacted the earnings of
the Company. See "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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 continues to develop its marketing department in
an effort to build relationships in new markets and new customers
for the Company. This continued focus on marketing is evidenced by
the addition in December 1999 of Phillip Myers and Bill Moore.
Phillip Myers was hired as National Premium Sales Manager and Bill
Moore was hired as a Vice President of Retail Sales. Mr. Myers and
Mr. Moore will be responsible for building new customer
relationships in their respective industries as well as initiating
strategic marketing plans.
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, to produce samples and to begin marketing. However,
there can be no assurance that the Company will be able to obtain
other new licenses or renew existing licenses on favorable terms in
the future.
Another critical part of the Company's growth strategy/product
development, is the addition of brand named lines to the product
offering. These lines have been designed to meet the demands of
channels of distribution and age markets that are currently a small
portion of the Company's customer base but have a great potential in
the market place. See "Intellectual Property" below.
The newest branded lines for 2000 provide the Company with the
opportunity to present more products to department stores and
specialty retailers. The designs are fashion oriented, fill nitch
markets such as female "teens", and have the potential for added
sales opportunities during the holiday season. The Company believes
the addition of these in-house-designed, branded lines will help
diversify a product base that relies heavily on licensed products.
Marketing and Customers
During fiscal 1999, the Company's Innovo operations sold
products to 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 sold to 4 foreign distributors which in turn resell to
retail accounts. The Company estimates that its products are
carried in over 8,000 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 with marketing organizations that
have sales representatives which are compensated on a commission
basis. NP International's marketing is conducted by the Company's
European Sales and Marketing Manager selling directly to foreign
distributors for resale to its retail customers which NPII assists
in presentations to European retailers.
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 1999, two customers accounted for aggregate sales
in excess of 54.1% of net sales: Wal-Mart, a customer of Innovo
which accounted for 26.9% of net sales, and National Car Rental
which accounted for 27.2% of net sales. The sales to National Car
Rental are not expected to reoccur in fiscal 2000. The loss of Wal-
Mart as a customer would have a material adverse effect on the
Company.
Backlog
Although the Company may at any given time have significant
business booked in advance of purchase orders, customers' purchase
orders are typically filled and shipped within two to six weeks. As
of November 30, 1999, there were no significant backlogs.
Seasonality
The Company's business is seasonal. The majority of the
marketing and sales activities take place from late fall to early
spring. The greatest volume of shipments and sales are generally
made from late spring through the summer, which coincides with the
Company's second and third fiscal quarters and the Company's cash
flow is strongest in its third and fourth fiscal quarters.. See
"Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Seasonality."
Manufacturing
Innovo'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 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 1999 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 supply to satisfy its
raw material requirements. Management believes that if its current
suppliers were unable to supply the necessary raw materials in
sufficient quantities or on acceptable price terms, alternative
suppliers would be available on comparable price terms and delivery
schedules. In the event the Company was unable to find such
alternative suppliers at competitive prices and on a timely basis,
its operations could be materially adversely affected.
The sport and gym bags and backpacks marketed overseas by NP
International and lunch bags, coolers and sport bags for Innovo for
domestic distribution are generally obtained from overseas
manufacturers in order to reduce the cost of these 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
employ 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. In the past, substantially all of the
products manufactured overseas for the Company were shipped directly
to customers outside the United States, but the Company is now
importing more products for domestic distribution. It is
anticipated that in fiscal 2000 more than 50% of the Company's
domestic sales will be imported products which are subject to United
States import quotas, inspection or duties.
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. 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. 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. 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 fashion line includes tote bags imprinted with the
E.A.R.T.H. ("EVERY AMERICAN'S RESPONSIBILITY TO HELP") BAG
trademark. E.A.R.T.H. Bags are marketed as a reusable bag that
represents an environmentally conscious alternative to paper or
plastic bags. Sales of E.A.R.T.H. Bags, while significant in
Innovo's early years, have not been significant in the last five
years. The Company still considers the trademark to be a valuable
asset, and has registered it with the United States Patent and
Trademark Office.
The Company has also applied for a trademark for its product
lines known as "Friendship", "Exposed", "Clear Gear" and "Test Tube".
The Company anticipates that these trademarks will be registered
during 2000.
Employees
As of December 31, 1999, the Company employed 92 full-time
personnel at the Knoxville, Tennessee facility, comprised of 3
persons in management, 19 persons in general administration and 70
persons in manufacturing and production. Due to varying seasonal
demands and redesign of the Company's manufacturing facilities, the
Company's total work force reached a high of 142 employees during
1999. These people were employed only for the "back to school"
shipping season and only remained with the Company for approximately
three months. 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 leases a 78,000 square foot facility in Knoxville,
Tennessee that is used as its headquarters, manufacturing and
distribution center. This facility provides approximately 65,000
square feet for production and distribution operations and 13,000
square feet for offices. The Company believes that the Knoxville
facilities are adequate for its current and anticipated executive,
administrative, sales and domestic manufacturing and distribution
needs. Manufacturing capacity could be increased by approximately
50% in the Knoxville facility. To the extent that additional
manufacturing capacity is required, management believes that
additional facilities and capacity are available at reasonable cost,
both domestically and overseas.
The Company's previous headquarters and manufacturing
facilities were located in Springfield, Tennessee. The Springfield
facilities are currently owned by Leasall Management, Inc.
("Leaseall"), a wholly owned subsidiary of Innovo Group, Inc. The
main Springfield complex is situated on seven acres of land with
approximately 220,000 square feet of usable space, including 30,000
square feet of office space and 35,000 square feet of cooled
manufacturing area. A warehouse annex contained 30,000 square feet.
First Independent Bank of Gallatin, Tennessee holds a First Deed of
Trust on the Springfield real property. The Springfield facilities
are currently held for lease or sale, and approximately 33% of the
facilities had been leased as of January 11, 2000.
Thimble Square leased two facilities in Baxley, Georgia. The
principal facility was a 21,000 square foot manufacturing facility
with an annual rental of $36,000. The lease ran through August 2000
and provided Thimble Square with a purchase option. This lease was
terminated by both parties during the fourth quarter of 1999, which
resulted in $293,000 in expenses due to the write-off of the assets
and liability.
Thimble Square also owned a 40,000 square foot manufacturing
and distribution facility in Pembroke, Georgia, which was 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. The Pembroke property was sold in December 1998 for
approximately $122,000 net of selling expenses.
The Company acquired a Florida retail property with
approximately 32,000 square feet of rentable space, operated as the
"Good Deal Mall," in fiscal 1995. Through August 1997 the Company
was engaged in readying the property to operate as an indoor
multiple vendor open space mall in which retailers operate from
permanent booths. The property was initially opened in August 31,
1997 with approximately 24% of its available space leased. After
several lease terminations the Company closed the facility in
November 1997. The property is currently held for lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits and other contingencies in the ordinary
course of its business. The Company does not believe that it is probable that
the outcome of any individual action will have a material adverse
effect, or that it is likely that adverse outcomes of individually
insignificant actions will be sufficient enough, in number or
magnitude, to have a material adverse effect in the aggregate.
In December 1999, the American Apparel Contractors Association
Workers' Compensation Fund filed suit against the Company's Thimble
Square subsidiary for $13,000 plus interest of 1.5% per month from
the due date (American Apparel Contractors Association Workers'
Compensation Self-Insured Fund v. Thimble Square and Innovo Group).
This amount represents the allocation to Thimble Square of the
excess workers' compensation claims paid under the plan. The
Company has not accrued for the disputed funds in this case.
In November, 1999, the Company received a notice from the Internal Revenue
Service ("IRS") asserting deficiencies in federal corporate income taxes for the
Company's 1991 tax year. The total tax proposed by the IRS amounts to
approximately $5.5 million plus interest. The Company believes that it has
meritorious legal defenses to those deficiencies, and believes that the ultimate
resolution of this matter will not have a material effect on the Company's
financial statements.
In May 1996, a foreign manufacturer that had previously
supplied imported products to NASCO Products filed suit against
NASCO Products asserting that it is owed approximately $470,000,
which was $300,000 in excess of the amount presently recorded on the
books of NASCO Products (Pannoy Enterprises Corporation v. NASCO
Products, Inc., Case No. 12948, in the Chancery Court for Robertson
County, Tennessee). During 1999, the Company settled the suit for
$200,000. This settlement has been paid as of year-end. See "Item
7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - General and -Liquidity and Capital
Resources."
In December 1991, a former employee filed suit against the
Company, Patricia Anderson-Lasko and others alleging breach of an
employment agreement and conversion of his interest in certain
property rights (Michael J. Tedesco v. Innovo, Inc.., et al., Case
No. 91-64033, District Court of Harris County, Texas, 164th Judicial
Circuit). Following an appeal and a second trial, a final judgment
was rendered against Innovo for $194,045.62 on August 17, 1998.
Thereafter, 20,000 shares of Common Stock that has been held in the
registry of the court, as security during the appeal and subsequent
trial, were released to the plaintiff. If the sale of that stock
does not generate sufficient net proceeds to pay the judgment, then
Innovo will be liable for any shortfall. As of November 30, 1999,
the Company had accrued $185,215 for any potential shortfall.
In July 1992, a former employee filed suit against the Company
and Spirco for alleging breach of an employment agreement and
asserting other related claims (Wayne Copelin v. Innovo Group, Inc.,
et al., Case No. 11950, in the Chancery Court of Robertson County,
Tennessee). When Spirco went into bankruptcy in August 1993, the
case proceeded against Innovo Group and a summary judgment of
$100,000 was entered against it in March 1995. However, because the
Copelin judgment was classified as a Class 8 Claim in the Spirco
bankruptcy, the Company believed that the judgment was fully paid
when it issued 35,211 shares of Common Stock to Copelin, in
compliance with the confirmed Plan of Reorganization. When Copelin
sought to enforce the judgment, Innovo Group, as the successor by
merger to Spirco, brought a motion in the Spirco bankruptcy to
enforce the terms of the Plan of Reorganization against Copelin.
The bankruptcy judge granted the motion and permanently enjoined
Copelin from enforcing the judgment in an order entered on October
18, 1996. Copelin appealed to the United States District Court and
on April 13, 1998, the District Court reversed. The case was
appealed to the United States Third Circuit Court of Appeals. This
court upheld the lower court's decisions and the Company has
recorded the $100,000 judgment as of November 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the Company's fourth fiscal quarter.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock is currently traded on the Nasdaq SmallCap
Market maintained by The Nasdaq Stock Market, Inc ("Nasdaq") under
the symbol "INNO." The following sets forth the high and low bid
quotations for the Common Stock in such market for the periods
indicated. This information reflects inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions. No representation is made by the
Company that the following quotations necessarily reflect an
established public trading market in the Common Stock. The
following information (as all other information herein) is adjusted
to reflect a reverse stock split in which one-share of new Common
Stock with a par value of $.10 per share was exchanged for every ten
shares of old common stock having a par value of $.01 per share (the
"Reverse Split"). The Reverse Stock Split was completed effective
September 11, 1998).
Fiscal 1999 High Low
First Quarter $3.94 $1.09
Second Quarter 2.56 1.31
Third Quarter 2.75 1.09
Fourth Quarter 3.00 1.50
Fiscal 1998
First Quarter $6.875 $5.63
Second Quarter 6.250 4.06
Third Quarter 4.375 1.88
Fourth Quarter 2.813 1.16
The Company has never declared or paid a cash dividend and
does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. In deciding whether to pay dividends on the
Common Stock in the future, the Company's Board of Directors will
consider factors it deems relevant, including the Company's earnings
and financial condition and its capital expenditure requirements.
In July 1997, the SEC and Nasdaq announced revised standards
for listing on the Nasdaq SmallCap Market that required that a
company's listed securities trade for not less than $1.00 and that
the company have net tangible assets (total assets, excluding
goodwill, minus total liabilities) of at least $2,000,000. The
change became effective in February 1998. On February 27, 1998,
Nasdaq notified the Company that it was not in compliance with the
revised standards and was given to May 28, 1998 to come into
compliance.
The Common Stock generally traded at prices below $1.00
beginning in November 1995 and until the Reverse Split was completed
effective September 11, 1998. The Company had been able to maintain
its Nasdaq SmallCap listing by complying with an alternative
$2,000,000 stockholder's equity requirement that is no longer
available. Under the new Nasdaq requirements, the Company faced
delisting unless the bid price on its stock increased to a minimum
of $1.00 through normal markets or such other steps as deemed
necessary by the Company. Following the Reverse Split, the bid
price on the Company's stock has consistently exceeded $1.00.
However, as the result of the losses incurred during the fourth
quarter of fiscal 1999, the Company has net tangible assets of
approximately $1,730,000 as of November 30, 1999 and did not meet
the $2,000,000 net tangible asset requirement. During February of
2000, the Company converted $500,000 of notes owed to shareholders
into 423,729 shares of Common Stock. The Company also sold 200,000
shares of Common Stock during February and March 2000 for $1.00 per
share. The Company anticipates selling additional equity securities
during March in an effort to satisfy the net tangible asset
requirement through the second quarter.
Although the Company will continually use its best efforts to
maintain its Nasdaq SmallCap listing, there can be no assurance that
it will be able to do so. If in the future, the Company is unable
to satisfy the Nasdaq criteria for maintaining listing, its
securities would be subject to delisting, and trading, if any, the
Company's securities would thereafter be conducted in the over-the-
counter market, in the so-called "pink sheets" or on the National
Association of Securities Dealers, Inc. ("NASD") "Electronic
Bulletin Board." As a consequence of any such delisting, a
stockholder would likely find it more difficult to dispose of, or to
obtain accurate quotations as to the prices, of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The table below (includes the notes hereto) sets forth a
summary of selected consolidated financial data. The selected
consolidated financial data should be read in conjunction with the
related consolidated financial statements and notes thereto.
Years Ended (3)
11/30/99 11/30/98 11/30/97 11/30/96 10/31/95(3)
(000's except per share data)
Net Sales $10,837 $6,790 $7,901 $6,023 $5,276
Costs of Goods Sold 6,252 4,493 5,303 3,981 3,808
------- ------- ------- ------- -------
Gross Profit 4,585 2,297 2,598 2,042 1,468
Operating Expenses (5),(6) 5,688 4,203 4,007 4,008 3,134
Loss from Operations (1,103) (1,906) (1,409) (1,966) (1,666)
Interest Expense (517) (503) (657) (870) (511)
Other Income (Expense) (4) 280 142 337 (147) 2,110
------- ------- ------- ------- -------
Loss Before Income Taxes (1,340) (2,267) (1,729) (2,983) (67)
Income Taxes 0 0 0 0 0
------- ------- ------- ------- -------
Loss from Continuing
Operations (1,340) (2,267) (1,729) (2,983) (67)
Discontinued Operations (1) (1,747) (110) (105) (626)
Extraordinary Item (2) 0 0 524 0 (258)
------- ------- ------- ------- -------
Net Loss $(1,341) $(4,014) $(1,315) $(3,088) $(951)
Loss per share from
Continuing Operations
(basic and diluted) $(0.22) $(0.49) $(0.50) $(2.19) $(0.26)
Weighted Average Shares
Outstanding 5,984 4,618 3,438 1,361 261
Balance Sheet Data:
Total Assets $6,222 $7,232 $9,168 $9,433 $5,667
Long-Term Debt 1,979 2,234 1,854 3,303 1,565
Stockholders' Equity 1,730 1,722 3,791 2,275 (230)
(1) The amounts for 1998, 1997 and 1996 represent the operations
of Thimble Square. Thimble Square's operations were
discontinued during the fourth fiscal quarter of 1998 and most
of its assets have since been leased or sold. The 1995 amount
reflects the operations and July 1995 sale of the import
operations of NASCO Products.
(2) Represents gains (losses) from extinguishment of debt.
(3) Effective November 1, 1995 the Company changed its fiscal year
to end on November 30. Previously the Company's fiscal year
ended October 31.
(4) Amounts include $1.9 million of income from the settlement of
litigation in 1995.
(5) Amount includes a $300,000 write down of long-term assets in
1998.
(6) Amount includes a $145,000 write down of long-term assets in
1999 as well as $293,000 for the termination of a capital
lease and $100,000 for the settlement of a lawsuit in 1999.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Historically, the Company's operating losses have resulted from disappointing
sales, high internal production costs and inadequate working captial.
Management has been addressing these issues in an attempt to make the Company
profitable, as discussed below. During 1999, the Company's operating
results showed improvement as sales and margins increased and the operating loss
was reduced.
During 1998, the Company shed itself of the assets of Thimble
Square, Inc., effectively taking the Company out of the apparel
segment of the industry. Thimble Square had not achieved
profitability since it was acquired in 1996 and no longer fit into
the long-term operating plan of the Company. The Company also
decided to move its operations to Knoxville, Tennessee into a more
efficient and advanced production facility. The move to Knoxville
was completed on December 15, 1998.
In addition to the steps to minimize continued operating
losses and cut costs, the Company has created a sales and marketing
department around Patricia Anderson-Lasko. During January 2000, the
Company hired Phillip Myers as National Premium Sales Manager. Mr.
Myers fills a new position at the Company. Mr. Myers will focus on
building a premium sales representative force that will promote the
Company's products across the United States. The Company feels that
it has been under represented in the premium sales market in
previous years and that this market holds a considerable amount of
potential. In addition to Phillip Myers, the Company hired William
Moore as Vice President of Retail Sales. Mr. Moore will be
responsible for initiating strategic marketing plans including
merchandising, consumer rebates and price promotions and national
advertising.
Results of Operations
The following table sets forth the certain statement of
operations data for the years indicated:
Years Ended
11/30/99 11/30/98 11/30/97
-------- -------- --------
(in 000's)
Net Sales $10,837 $6,790 $7,901
Costs of Goods Sold 6,252 4,493 5,303
------- ------- -------
Gross Profit 4,585 2,297 2,598
Selling, General & Administrative 4,963 3,638 3,740
Write down of long-term assets 145 300 --
Termination of a Capital Lease 293 -- --
Depreciation & Amortization 287 265 267
------- ------- -------
Loss from Operations (1,103) (1,906) (1,409)
Interest Expense (517) (503) (657)
Other Income 280 142 337
------- ------- -------
Loss Before Income Taxes (1,340) (2,267) (1,729)
Income Taxes 0 0 0
------- ------- -------
Loss from Continuing Operations (1,340) (2,267) (1,729)
Discontinued Operations (1) (1,747) (110)
Extraordinary Item 0 0 524
------- ------- -------
Net Loss $(1,341) $(4,014) $(1,315)
======= ======= =======
Comparison of Fiscal Year Ended November 30, 1999 to Fiscal Year
Ended November 30, 1998
Net Sales for the year ended November 30 increased $4 million
or 59.6% from $6.8 million in 1998 to $10.8 million in 1999. This
increase in sales was primarily the result of a $2,500,000
promotional order from a national car rental company and the
increased demand of the company's clear backpacks and sports bags.
The Company does not expect the promotional order to reoccur in
fiscal 2000.
The company's clear line of backpacks and sports bags added
approximately $1,700,000 in revenue during the third quarter of
1999.
The gross margin percentage increased 8.5 basis points from
33.8% in 1998 to 42.3% in 1999 due to improved material pricing (obtained from
competitive bidding on import contracts) and a reduction in production costs.
The Company anticipates a further improvement in gross margin in it's import
business in 2000 due to further reductions in material costs from favorable
pricing on imported items.
Selling, General and Administrative costs increased $1,325,000
or 36.4% from 1998 to 1999 due primarily to increased royalties($384,000
increase) and commissions ($223,000 increase) from the increased sales and due
to temporary labor ($286,000 increase) hired during the Company's back to school
shipping season. In addition, rent expensed increased by approximately $190,000
due to the relocation of the Company's operations to the Knoxville facility.
Under the guidelines of SFAS 121 the Company recorded a
$145,000 impairment loss representing a valuation adjustment on a
facility that the Company owns. The Company is currently offering
parcels of this facility out for lease. The Company will continue
to market this building for lease or for sale.
The Company terminated the lease on a facility in Baxley
Georgia. This facility was utilized by the Thimble Square
subsidiary until that line of business was discontinued during 1998.
This facility was subleased for a portion of 1999, but this
facility was left vacant after the sublessee was forced to move out
due to a loss of business. The lessor agreed to terminate both the
lease agreement and sublease agreement without penalty. This
termination necessitated the write off of the remaining net book
value of the capitalized lease (asset) and the removal of the
remaining capitalized lease obligation (liability) resulting in a
net charge to operations of $293,000.
Depreciation and Amortization expenses were not significantly
different from 1998 to 1999 due to the lack of significant purchases
of fixed assets and intangible assets during 1998 and 1999.
Interest expense for the year ended November 30 was largely
unchanged from 1998 to 1999 due to a lack of significant changes to
the debt structure of the Company and relatively constant interest
rates.
Other Income increased $138,000 from the year ended November
30, 1998 to 1999. This increase is primarily the result of income realized
under a warehouseing agreement between the Company and Z. Metro, Inc., an
unrelated company.
Comparison of Fiscal Year Ended November 30, 1998 to Fiscal Year
Ended November 30, 1997
Net Sales for the year ended November 30 decreased $1.1
million or 14% from $7.9 million in 1997 to $6.8 million in 1998.
This decrease is primarily the result of the loss of programs with
two significant customers.
The gross margin percentage increased one point from 32.9% in
1997 to 33.8% in 1998 due to improved material pricing and a
reduction in production costs.
Selling, General and Administrative costs decreased $100,000
or 2.7% from 1997 to 1998 due to decreased royalties from the
reduced sales. The reductions in royalties were offset by an
increase in legal and professional fees that resulted from the work
performed on two potential acquisitions during 1998 and from a one
time charge of $187,000 for the settlement of a lawsuit.
Under the guidelines of SFAS 121 the Company recorded a
$300,000 impairment loss representing a valuation adjustment on
the Good Deal Mall facility as of November 30, 1998.
Depreciation and Amortization expenses were not significantly
different from 1997 to 1998 due to the lack of significant purchases
of fixed assets and intangible assets during 1998.
Interest expense for the year ended November 30 decreased
$154,000 or 23% from 1997 to 1998 due to the payoff of debt in
1997 from the proceeds of the private placement to the "Smith
Group" as well as a reduction in interest rates for new debt
instruments placed during 1998.
Seasonality
The Company's business is seasonal. The majority of the
marketing and sales activities take place from late fall to early
spring. The greatest volume of shipments and sales are generally
made from late spring through the summer, which coincides with the
Company's second and third fiscal quarters and the Company's cash
flow is strongest in its 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.
Liquidity and Capital Resources
Innovo Group is a holding company and its principal assets 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.
Cash flows from continuing operations were a negative
$2,124,000 for the year ended November 30, 1999 as compared to a
negative $1,238,000 for the year ended November 30, 1998. The
negative cash flows reflect the net loss from continuing operations
of $1,340,000, partially offset by $725,000 of non-cash charges for
depreciation and amortization, loss on termination of capital lease
and an asset impairment charge. There were also increases in
receivables and inventories totaling $1,406,000 primarily reflecting
increased revenue.
Cash flows from investing activities provided $85,000 in
cash for the year ended November 30, 1999 as compared to cash
flows used in investing activities of $18,000 for the year ended
November 30, 1998. The Company has had relatively limited
investing activity during fiscal 1999 and 1998.
Cash flows from financing activities provided $972,000 in
cash for the year ended November 30, 1999 as compared to $2,067
provided from financing activities for the year ended November 30,
1998. During fiscal 1999, the Company generated cash of $0.8
million from the issuance of stock as compared to $1.8 million
generated from the issuance of stock in fiscal 1998.
The Company's primary cash commitments for the fiscal year
ending November 30, 2000 are for property, building and equipment
leases ($218,000) and for current maturities of long-term debt
($75,000). At November 30, 1999, the Company had working capital
of $619,000 as compared with a working capital deficiency of
$75,000 at November 30, 1998.
The Company has continued to generate losses throughout the
first quarter of 2000. However, these losses are in line with
expectations due to the seasonal nature of the Company's business
(see discussion above). The Company anticipates continuing
improvement in financial performance for fiscal year 2000 due to
additional product lines and an improved marketing effort.
The Company relied on four primary sources to fund
operations in 1999:
1. An accounts receivable factoring agreement with
First American National Bank ("First American")
2. Trade credit with its domestic and international
suppliers
3. Borrowings from management and shareholders
4. Equity financing through private placements
The Company anticipates continued reliance on the accounts
receivable factoring agreement to generate the majority of its
working capital needs. Under this facility, First American advances
between 70% and 90% of approved invoices. First American charges
Innovo 1% for the first 15 days an invoice is outstanding and .05%
per day thereafter until paid, up to a maximum of 6%. The facility
is secured by a first position on accounts receivable and inventory
and personal guarantees of certain members of the Board of Directors
and management. The facility
can be terminated upon thirty day written notice by either party.
During 1999, the Company was successful in negotiating
extended trade credit with its largest vendors. In 1998, the
Company entered into an agreement with Sunwaki Industrial Company,
Ltd. of Hong Kong to produce the Company's licensed products for
both domestic and international distribution. Sunwaki has the
capability to meet a substantial portion of the Company's need for
such products. In 1999, Sunwaki extended trade credit to Innovo in
excess of $1 million. The Company anticipates that it will be able
to negotiate a similar credit limit with Sunwaki in 2000.
During 1999, the Company utilized commitments from certain
members of management to provide working capital funding. The
Company believes that management and certain shareholders will again
provide short-term loans to fill the working capital needs during
2000. These loans are interest bearing and typically mature within
nine months from issuance.
The Company has traditionally been able to secure equity
financing through the sale of Common Stock in private placement
offerings. During the second quarter of 1999, the Company sold
$792,000 in Common Stock to multiple investors. Management
anticipates being able to find investors for the Company's stock in
2000.
Subsequent to November 30, 1999, the Company has received
$715,000 in financing from an officer, of which $500,000 was
converted in February 2000 from debt to equity. In addition, in
February and March 2000 the Company has received $200,000 in equity
financing from the proceeds of a private placement.
Effective March 1, 2000, the Company's Chairman and CEO has
committed to provide additional cash funding, as may be required
from time to time, of up to $500,000. These funds will be available
to the Company through November 30, 2000 to satisfy any short-tem
working capital needs.
As of March 14, 2000, the Company is in negotiation with a California company to
produce and distribute substantially all of the Company's products. In
conjunction with the production and distribution agreement, an outside investor
is scheduled to make an equity investment into the Company of approximately
$500,000 once the letter of intent is signed. The effects of this transaction
on the Company's financial statements have not been quantified at this time.
Based on the foregoing, the Company believes that working
capital will be sufficient to fund operations and required debt
reductions during fiscal 2000. The Company believes that any
additional capital, to the extent needed, could be obtained from the
sale of equity securities or short-term working capital loans.
However, there can be no assurance that this or other financing will
be available if needed. The inability of the Company to be able to
satisfy its interim working capital requirements would require the
Company to constrict its operations and would have a materially
unfavorable effect on the Company's financial statements.
Year 2000
During 1999, the Company spent approximately $60,000 to replace
its existing computer hardware and software to be year 2000
compliant.
New Accounting Pronouncements
SOP 98-1, "Accounting for the Costs of Computer Software
Developed of Obtained for Internal Use" provides guidance on
accounting for the costs of computer software developed of
obtained for internal use and determining whether computer
software is for internal use. This statement is effective for
fiscal years beginning after December 15, 1998. Adoption of this
statement had no impact on the Company's financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities"
requires that the costs of start-up activities, including
organization costs, be expensed as incurred. This statement is
effective for financial statements issued for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-5 had
no material effect on the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" , as amended, is effective for all fiscal years beginning
after June 15, 2000. This statement requires recognition of all
derivative contracts as either assets or liabilities in the balance
sheet and the measurement of them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of any gains
or losses on the hedge with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in
the period of change. Historically, the Company has not entered
into derivative contracts either to hedge existing risks or for
speculative purposes. The adoption of the new standard on January
1, 2000 will not affect the Company's financial statements.
SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities" Deferral of the Effective Date of FASB
Statement No. 133 was issued and effective in June 1999. SFAS No.
137 extends the effective date of SFAS No. 133 to fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 137 also
amends the manner in which entities recognize embedded derivative
instruments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk is relatively low. The
Company has no investments in derivative instruments. Transactions with foreign
customers and suppliers are made in U.S. currency. The Company's primary
exposure to market risk relates to outstanding borrowings with variable interest
rate terms. At November 30, total borrowings with variable interest rates
amount to $650,000.
ITEM 8. FINANCIAL STATEMENTS
Innovo Group Inc.
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules are included at Item 14.
Report of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We have audited the accompanying consolidated balance sheets of
Innovo Group Inc. and subsidiaries as of November 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years ended November 30,
1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the years ended November
30, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
January 13, 2000, except for Note 13,
as to which the date is March 8, 2000
INNOVO GROUP INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's except for share data)
11/30/99 11/30/98
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 1,078
Accounts receivable net of allowance
($153,000 for 1999 and $67,000 for 1998) (Note 5) 1,161 708
Inventories (Note 5) 1,968 1,101
Prepaid expenses 3 267
------- -------
TOTAL CURRENT ASSETS 3,132 3,154
PROPERTY, PLANT and EQUIPMENT, net 3,042 4,037
OTHER ASSETS 48 41
------- -------
TOTAL ASSETS $ 6,222 $ 7,232
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 5) $ 959 $ 914
Current maturities of long-term debt (Note 6) 75 270
Accounts payable 623 1,139
Accrued expenses 856 906
------- -------
TOTAL CURRENT LIABILITIES 2,513 3,229
LONG-TERM DEBT, less current maturities (Note 6) 1,979 2,234
OTHER -- 47
------- -------
TOTAL LIABILITIES 4,492 5,510
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 9)
Common stock, $0.10 par - shares
authorized 15,000,000 in 1999 and
7,000,000 in 1998;
issued 6,299,032in 1999 and 5,387,113
in 1998 629 538
Additional paid-in capital 31,540 30,282
Promissory note - officer (Note 6) (703) (703)
Accumulated Deficit (27,310) (25,969)
Treasury stock (2,426) (2,426)
------- -------
TOTAL STOCKHOLDERS' EQUITY 1,730 1,722
------- -------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 6,222 $ 7,232
======= =======
See accompanying notes to consolidated financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except per share data)
Year Ended November 30,
1999 1998 1997
------- ------ ------
NET SALES $10,837 $6,790 $7,901
COST OF GOODS SOLD 6,252 4,493 5,303
------ ------ ------
Gross profit 4,585 2,297 2,598
OPERATING EXPENSES
Selling, general and administrative 4,963 3,638 3,740
Write down of long-term assets 145 300 --
Termination of Capital Lease 293 -- --
Depreciation and amortization 287 265 267
------ ------ ------
5,688 4,203 4,007
LOSS FROM OPERATIONS (1,103) (1,906) (1,409)
INTEREST EXPENSE (517) (503) (657)
OTHER INCOME (EXPENSE), net 280 142 337
------ ------ ------
LOSS BEFORE INCOME TAXES (1,340) (2,267) (1,729)
INCOME TAXES (BENEFIT) -- -- --
------ ------ ------
LOSS FROM CONTINUING OPERATIONS (1,340) (2,267) (1,729)
DISCONTINUED OPERATIONS
Results from Thimble Square operations (1) (346) (110)
Loss on disposal of Thimble Square -- (1,401) --
------ ------ ------
(1) (1,747) (110)
LOSS BEFORE EXTRAORDINARY ITEM (1,341) (4,014) (1,839)
EXTRAORDINARY ITEM (Note 7) -- -- 524
------ ------ ------
NET LOSS $(1,341) $(4,014) $(1,315)
====== ====== ======
LOSS PER SHARE - BASIC AND DILUTED:
Continuing operations $(0.22) $(0.49) $(0.50)
Discontinued operations $(0.00) $(0.38) $(0.03)
Net loss $(0.22) $(0.87) $(0.38)
WEIGHTED AVERAGE SHARES OUTSTANDING 5,984 4,618 3,438
See accompanying notes to consolidated financial statements
<TABLE>
INNOVO GROUP INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's except for share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Promissory
Stock Paid-in Note Treasury
Shares Amount Subscription Capital Deficit Officer Stock Total
--------- ------ ------------ ---------- ------- --------- -------- -----
Balance, November 30, 1996 2,653,058 $265 $ -- 25,076 $(20,640) $ -- $(2,426) $2,275
Issuance of common stock
Smith group purchase 675,000 68 1,282 1,350
Cash 150,000 15 660 675
Conversion of debentures 412,793 41 359 400
Exercise of stock purchase right 400,000 40 1,085 (1,125) --
Conversion of convertible notes 210,000 21 383 404
Exercise of warrants 76,500 8 135 143
Debt settlement 7,500 1 50 51
Other 24,762 2 41 43
Costs of issuance (85) (85)
Retire shares subject to stock
purchase right (150,000) (15) (407) 422 --
Warrant repurchase (150) (150)
Net loss (1,315) (1,315)
Balance, November 30, 1997 4,459,613 446 -- 28,429 (21,955) (703) (2,426) 3,791
Issuance of common stock
Furrow-Holrob Development
purchase 899,000 89 1,709 1,798
Issuance for compensation 16,450 2 98 100
Issuance for debt service 8,550 1 53 54
Exercise of warrants and options 3,500 9 9
Costs of issuance (16) (16)
Net loss (4,014) (4,014)
Balance, November 30, 1998 5,387,113 538 -- 30,282 (25,969) (703) (2,426) 1,722
Issuance of common stock
Issuance for compensation 45,919 5 59 64
Issuance for debt service 45,000 4 89 93
Issuance for debt conversion 250,000 25 375 400
Issuance for cash 571,000 57 735 792
Net Loss (1,341) (1,341)
Balance, November 30, 1999 6,299,032 $629 $ -- $31,540 $(27,310) $(703) $(2,426) $1,730
</TABLE>
See accompanying notes to consolidated financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
Year Ended November 30,
1999 1998 1997
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,341) $(4,014) $(1,315)
Adjustment to reconcile net loss to cash
Used in operating activities from
continuing operations:
Loss on disposal of discontinued
operations -- 1,401 --
Loss from discontinued operations 1 346 110
Stock issuances for services and
compensation 64 100 --
Depreciation and amortization 287 265 267
Asset impairment charge 145 300 --
Provision for uncollectable accounts 86 39 49
Extraordinary gain -- -- (524)
Termination of Capital Lease 293 -- --
Changes in current assets and
liabilities:
Accounts receivable (539) 148 294
Inventories (867) 137 167
Prepaid expenses and other 264 176 (66)
Accounts payable (423) (273) (173)
Accrued expenses (50) 137 (134)
Other (44) -- (14)
------ ------ ------
Cash used in operating activities of
continuing operations (2,124) (1,238) (1,339)
Cash used in operating activities of
discontinued operations (11) (202) 92
------ ------ ------
Cash used in operating activities (2,135) (1,440) (1,247)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (161) (18) (469)
Increase in other assets -- -- 43
Disposal of fixed assets 246 -- 216
------ ------ ------
Cash provided by (used in) investing
activities 85 (18) (210)
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition of notes payable 710 7,865 869
Repayments of notes payable (265) (8,027) (221)
Additions to long-term debt -- 650 --
Repayments of long-term debt (265) (212) (729)
Proceeds from issuance of common stock 792 1,807 2,168
Stock issuance costs -- (16) (85)
Warrant repurchase -- -- (150)
Other -- -- 43
------ ------ ------
Cash provided by financing activities 972 2,067 1,895
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,078) 609 438
CASH AND CASH EQUIVALENTS, at beginning of
period 1,078 469 31
------ ------ ------
CASH AND CASH EQUIVALENTS, at end of period -- $1,078 $ 469
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for interest $ 493 $555 $767
Cash paid for income taxes -- -- --
See accompanying 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 are three wholly-owned operating subsidiaries,
Innovo, Inc. ("Innovo"), NASCO Products International, Inc. ("NP International")
and Thimble Square, Inc. ("Thimble Square"). Certain assets of Thimble Square
were disposed of and its operations ceased on September 13, 1998 (see Note 12).
The Innovo Group and its wholly owned subsidiaries are referred to
as "the Company".
Innovo is a domestic manufacturer 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 is also an importer of sports
licensed products produced with logos or other designs licensed from
various sports licensors. These items such as coolers, seat
cushions and back packs are sold to the sports licensed and
advertising specialty markets. 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.
Thimble Square manufactured and marketed ladies' ready-to-wear
at home, sleep and lounge wear. Its products were sold to mail
order companies, retailers and through mail order distribution.
Thimble Square also provided "sew-only" manufacturing for other
distributors of private-label sleep and lounge wear; in those
instances, the customer provided the raw materials and Thimble
Square manufactured the products to the customer's specifications.
The Company operated in two business segments throughout the
majority of fiscal 1998 and fiscal 1997. See Note 11. Sales to two
customers accounted for 27.2% and 26.9%, respectively, of the
Company's net sales in fiscal 1999. Sales to one customer accounted
for 37.4% of the Company's net sales in fiscal 1998. Sales to
foreign customers of Nasco Products International, principally in
Europe, accounted for 6.3%, 18.4% and 16.4% of net sales in fiscal
1999, 1998 and 1997 respectively.
(b) 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.
(c) 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 evaluation of contingencies, and the
determination of allowances for accounts receivable and inventories.
Actual results could differ from these estimates.
(d) Revenue recognition
Revenues are recorded on the accrual basis of accounting
when the Company ships products to its customers. Sales returns
must be approved by the Company and are typically only allowed
for damaged goods. Such returns are typically not material. The
Company provides an allowance for estimated losses to be incurred
in the collection of accounts receivable.
(e) Loss per share
Loss per share is computed using weighted average common
shares and dilutive common equivalent shares outstanding.
Potentially dilutive securities consist of outstanding options and
warrants. Potentially dilutive securities were not considered in the
computation of weighted average common shares as their effect would
have been antidilutive.
On September 13, 1998 the Company declared a reverse stock
split of which one share of new Common Stock was exchanged for ten
shares of old Common Stock. All share and per share amounts have
been restated to reflect the effects of the reverse stock split.
(f) Capitalization policy
Cost incurred in the issuance of debt securities or to obtain
bank financing are capitalized and are amortized as a component of
interest expense using the level yield method.
The Company charges to expense in the year incurred costs to
develop new products and programs. Amounts charged to expense
approximated $24,000, $2,000 and $182,000 in fiscal 1999, 1998 and
1997 respectively.
(g) Financial Instruments
The fair values of the Company's financial instruments
(consisting of cash, accounts receivable, accounts payable, notes
payable, long-term debt and notes payable officer) do not differ
materially from their recorded amounts.
The Company neither holds, nor is obligated under, financial
instruments that possess off-balance sheet credit or market risk.
(h) Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(i) New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, is effective for all fiscal years beginning
after June 15, 2000. This statement requires recognition of all
derivative contracts as either assets or liabilities in the balance
sheet and the measurement of them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of any gains
or losses on the hedge with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in
the period of change. Historically, the Company has not entered
into derivative contracts either to hedge existing risks or for
speculative purposes. The adoption of the new standard on January
1, 2000 will not affect the Company's financial statements.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost, as determined by
the first-in, first-out method, or market.
Inventories consisted of the following:
November 30,
1999 1998
------- --------
(000's) (000's)
Finished goods $1,510 $ 766
Work-in-process 28 18
Raw materials 534 353
------ -------
2,072 1,137
Less inventory reserve (104) (36)
------ -------
$1,968 $ 1,101
NOTE 3 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment, are stated at cost.
Depreciation and amortization are provided in amounts sufficient to
allocate the cost of depreciable assets to operations over their
estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the lives of the respective leases
or the estimated service lives of the improvements, whichever is
shorter. On sale or retirement, the asset cost and related
accumulated depreciation or amortization are removed from the
accounts, and any related gain or loss is included in the
determination of income.
Property and equipment consisted of the following:
Useful
Lives November 30,
(Years) 1999 1998
--------- --------
(000's) (000's)
Buildings, land and
improvements 8-38 $ 3,105 $ 3,250
Machinery and equipment 5-10 1,628 1,153
Furniture and fixtures 3-8 463 637
Transportation equipment 5 64 56
Leasehold improvements 5-8 62 3
------- -------
5,322 5,099
Less accumulated depreciation
and amortization (2,280) (1,841)
------- -------
3,042 3,258
Net property, plant and equipment of
discontinued operations -- 779
------- -------
Net property and equipment $3,042 $ 4,037
As of November 30, 1999 the Company had terminated a capital
lease relating to a building in Baxley Georgia. The Company wrote
off the remaining net book value of the capitalized lease (asset)
and removed the remaining capitalized lease obligation (liability)
resulting in a net charge to operations of $293,000.
In 1999, management determined that, based on current market
conditions and an analysis of projected undiscounted future cash
flows calculated in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, the carrying
amount of certain long-lived assets may not be recoverable. The
resultant impairment of long-lived assets necessitated a write-
down of the Springfield Tennessee property in the amount of
$145,000. The estimated fair value of this property was
determined by calculating the present value of estimated expected
future cash flows using a discount rate commensurate with the
risks involved.
The Thimble Square facility in Pembroke, Georgia was sold on
December 10, 1998 for approximately $122,000 net of selling
expenses. This sale resulted in a $278,000 loss on disposal. Under
the provision of SFAS No. 121, the value of the Pembroke property
was adjusted to its net realizable value as of November 30, 1998.
In 1998, management determined that, based on current market
conditions and an analysis of projected undiscounted future cash
flows calculated in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, the carrying
amount of certain long-lived assets may not be recoverable. The
resultant impairment of long-lived assets necessitated a write-
down of the Florida property in the amount of $300,000. The
estimated fair value of this property was determined by
calculating the present value of estimated expected future cash
flows using a discount rate commensurate with the risks involved.
NOTE 4 - OTHER ASSETS
Other assets consisted of the following:
November 30,
1999 1998
------- -------
(000's) (000's)
Debt issue costs, net -- 23
Other 48 18
------- -------
$ 48 $ 41
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
November 30,
1999 1998
------- -------
(000's) (000's)
Accounts receivable factoring facility $ 510 $ 439
Bank credit facility 349 349
Other -- 126
Borrowings from Director 100 --
------ ------
$ 959 $914
As of November 30, 1999, the Company had outstanding
borrowings from a director totaling $100,000. This money was
borrowed under two promissory notes bearing interest at 10%.
These notes are due on June 30, 2000.
Under a factoring facility with First American National Bank
("First American"), First American advances 70% to 90% of approved
invoices. There is no established limit on the total facility.
First American charges Innovo 1% for the first 15 days an invoice is
outstanding and .05% per day thereafter until paid, up to a maximum
of 6%. The facility is secured by first position on accounts
receivable and inventory. The agreement with First American
terminates upon thirty day written notice from either party.
In July of 1999, the Company entered into an additional
factoring arrangement with Riviera Finance ("Riviera") for the
factoring of a specific customer's receivables. Under the
agreement, Riviera advances the company 75% for each approved
invoice with 24% placed in a reserve account and 1% retained by
Riviera as a fee. In addition to the 1% factoring fee, the Company
pays a monthly fee of 0.5% of the maximum account or $5,000. This
agreement has a limit on borrowing of $1 million and expires on July
20, 2000.
As of November 30, 1998, Thimble Square had a note payable to
a local bank that used the Pembroke, Georgia facility as collateral.
This interest rate was 2.75 basis points over the prime rate per
annum. The loan balance of approximately $126,000 was repaid when
the Pembroke facility was sold in December 1998.
In December 1997 the Company entered into a revolving line of
credit with a bank for $350,000 at a fixed rate of 9.5%. The line
is secured by equipment and the personal guarantees of certain
members of management. In December 1998, the Company renewed the
line of credit through February 27, 2000 at an interest rate of
10.75%. The Company is currently in negotiation with the lender to
renew the line of credit.
The weighted average interest rate on outstanding short-term
borrowings was 11.4% and 11.1% at November 30, 1999 and 1998,
respectively.
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following:
November 30,
1999 1998
------- -------
(000's) (000's)
First mortgage loan $ 714 $ 754
Non-recourse first mortgage on
Florida property 690 727
Thimble Square SBA loan --- 179
Capital lease obligation --- 194
Bank promissory note secured by receivable
from an officer of the Company 650 650
------ ------
Total long-term debt 2,054 2,504
Less current maturities (75) (270)
------ ------
$1,979 $2,234
====== ======
The first mortgage loan is collateralized by a first deed of
trust on real property in Springfield, Tennessee and by an
assignment of key-man life insurance on the president of the Company
in the amount of $950,000. The loan bears interest at 2.75% over
the lender's prime rate per annum (which was 8.50% at November 30,
1999) and requires monthly principal and interest 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 the 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- 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 warrant 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 loan was collateralized by a lien on that
company's Pembroke, Georgia plant. This loan was repaid in
conjunction with the December 1998 sale of the Pembroke facility.
The loan bore interest at 2.75%, over the prime rate and was paid
in full in conjunction with the December 1998 sale of the Pembroke
plant. The capital lease obligation represented the lease on
Thimble Square's Baxley, Georgia plant. Interest on the capital
lease was imputed at the rate of 10% per annum. This lease was
terminated in November 1999.
In April 1998, Innovo Group entered into a secured note with
a bank for $650,000 at a rate of 13.5% per annum. A $703,000 note
receivable that the Company holds from an officer and 250,000 shares
owned by Pat Anderson-Lasko serve as collateral for the note. The
secured note is also guaranteed by certain members of management.
The secured note requires monthly payments of interest only. The
principal amount of the secured note is due on April 1, 2003.
Principal maturities of long-term debt for continuing
operations as of November 30, 1999 are as follows:
Year ending November 30, Amount
-------
2000 $ 75,000
2001 83,000
2002 92,000
2003 751,000
2004 112,000
Thereafter 941,000
----------
Total $2,054,000
NOTE 7 - DEBT SETTLEMENTS
In the fourth quarter of 1997 the Company settled debts with
forty-four creditors recorded at $930,000. The Company made cash
payments totaling $406,000 and recognized an extraordinary gain in
the amount of $524,000.
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 allowance.
Net deferred tax assets result from the following temporary
differences between the book and tax bases of assets and
liabilities:
November 30,
1999 1998
-------- --------
(000's) (000's)
Deferred tax assets:
Allowance for doubtful accounts $ 52 $ 23
Inventory reserves 35 12
Benefit of net operating loss
carryforwards 4,180 3,773
------- -------
Gross deferred tax assets 4,267 3,808
Deferred tax assets valuation allowance (4,267) (3,808)
------- -------
Net deferred tax assets $ -- $ --
The reconciliation of the effective income tax rate to the
federal statutory rate is as follows:
Year ended
November 30,
1999 1998 1997
------- ------- -------
Computed tax (benefit)
at the statutory rate (34%) (34%) (34%)
State income tax -- -- --
Change in valuation allowance 34% 34% 34%
------- ------- -------
-- -- --
The Company has consolidated net operating loss carryforwards
of approximately $31.6 million expiring through the year 2013.
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 $12.7 million the future taxable income which the
Company may offset through the year 2013 through the application of
its net operating loss carryforwards. Any "changes in control"
subsequent to the aforementioned one may have the effect of further
limiting the utilization of the 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 2000 and 2006.
NOTE 9 - STOCKHOLDERS' EQUITY
(a) Common Stock
On September 13, 1998, the Company's Board of Directors
approved a reverse one for ten stock split. All references to the
number of shares and price per share have been adjusted to reflect
the reverse split.
In September 1993 the Company issued 18,976 shares of
restricted common stock to extinguish notes payable and accrued
interest of $1,423,000. The holders of such shares hold options
("put options") that allowed them, until April, 1995, to require
that the Company repurchase any or all of the shares at a price of
$75 per share. The put options continue to be exercisable at $300
per share, in the event of certain "changes in control" not approved
by the board of directors. The put options grant the Company a
right of first refusal to purchase any of the related shares upon
the payment of the same price offered to the holders by another
party. Also, the Company can cancel the put options by paying
nominal consideration.
On August 4, 1997, the Company's president exercised a stock
purchase right (the "Purchase Right") awarded her by the board of
directors on February 12, 1997. The Purchase Right entitled her
to purchase up to 400,000 shares of the Company's common stock
during the period April 30, 1997, to April 30, 2002 at a price of
$2.81 per share. The president paid for the shares by the delivery
of a non-recourse promissory note, bearing no interest, due April
30, 2002. The promissory note is collateralized by the shares
purchased therewith, which shares would be forfeited to the extent
the note is not paid on or before maturity, and would be payable
(including prepayable), in whole or in part, by the delivery to
the Company of (i) cash or (ii) other shares of the Company's
common stock that the president has owned for a period of at least
six months, which shares would be credited against the note on the
basis of the closing bid price for the Company's common stock on
the date of delivery. Any dividends or distributions made with
respect to shares collateralizing any unpaid note will be held in
an escrow to be established for such shares and note until such
time, if any, as the related promissory note is paid. In November
1997, 150,000 shares subject to this Purchase Right were returned
to the Company for a pro-rata reduction in the note.
Concurrently, the President relinquished any further rights to
such 150,000 shares of common stock. At November 30, 1999,
$703,000 remains outstanding under this promissory note. The
promissory note, and the shares securing it, have been pledged by
the Company to secure a $650,000 loan. See Note 6.
On August 13, 1997, the Company issued 675,000 shares of
common stock to a group of investors ("the Smith Group") for
$1,350,000 pursuant to a stock purchase agreement also dated August
13, 1997 between members of the Smith group, the Company and
Patricia Anderson-Lasko. Concurrent with the execution of the stock
agreement and in conjunction with employment agreements with key
executives, the Company granted 292,500 in non-qualified stock
options to those executives. Subject to vesting provisions, the
options remain exercisable until August, 2002 at a price of $3.315
per share.
As of November 30, 1999 the Company has outstanding common
stock purchase warrants as follows:
Class Exercise Price Shares Expiration
_____ ______________ ______ __________
H $5.20 77,576 August 2001
$1.80 7,407 March 2002
On October 8, 1998, the Company sold 899,000 shares of common
stock in a private placement to Furrow-Holrob Development II, L.L.C.
for $1,798,000.
During 1998, the Company issued options to acquire 200,000
shares of common stock to two members of the Board of Directors.
These shares are exercisable at $4.75 per share and vest at the rate
of 2,083 per month for 48 months. As of November, 30, 1999, total
number of shares vested under these option agreements was 79,167.
These options were accounted for as employee grants. The options
were issued at prices equal to fair market value at the time of the
grant.
During December 1998, the Company issued 45,000 shares to
certain vendors as payment for payables in the amount of $91,564
which approximated the fair value of the shares.
In February 1999, the Company issued an aggregate of 150,000
shares to two directors of the Company to convert $300,000 of debt.
The $300,000 approximated the fair value of the shares.
During the second quarter of 1999, the Company issued 571,000
shares to several individual investors in a private placement for
consideration of $792,000.
In 1999, the Company's shareholders approved the authorization
of an additional 8,000,000 shares of Common Stock to increase the
total authorized shares to 15,000,000 and the authorization of
6,000,000 shares of Preferred Stock.
(b) Stock based compensation
The Company adopted a Stock Option Plan (the "1991
Plan") in December 1991 (amended in April 1992) under which 10,000
shares of the Company's common stock have been reserved for issuance
to officers, directors, consultants and employees of the Company
under the terms of the 1991 Plan. The 1991 Plan will expire on
December 10, 2001.
During 1998, the Company also issued options to acquire 25,000
shares of common stock to a member of management. These shares are
exercisable at $3.33 per share and vest at the rate of 2,083 per
month for 12 months. As of November 30, 1999, the total number of
shares vested under this option agreement was 25,000.
During April 1998, an option to purchase 25,000 shares of
Common Stock was granted to an employee of Commerce Capital as
additional collateral for the $650,000 loan to the Company. This
option expires in 2003.
The Company has reserved 685,417 shares for issuance upon the
exercise of the outstanding common stock purchase warrants and
options. As of November 30, 1999, 462,917 shares under option were
vested.
The Company follows the guidance set forth in APB No. 25 as it
pertains to the recording of expenses from the issuance of incentive
stock options. The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation expense has
been recorded in conjunction with options issued to employees. Had
compensation cost been determined based on the fair value of the
options at the grant date, consistent with the method prescribed by
SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below:
(000's except per share information)
1999 1998 1997
------- ------- ------
Net income (loss) - as reported $(1,341) $(4,014) $(1,315)
Net income (loss) - pro forma (1,687) (4,325) (1,496)
Net income (loss) per common share - as reported (0.22) (0.87) (0.38)
Net income (loss) per common share - pro forma (0.28) (0.94) (0.44)
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1998 and 1999; expected
volatility of 35%; risk-free interest rate of 6.17%; and expected
lives from one to four years.
Stock option activity during the periods indicated is as follows:
Number Weighted-average
of shares exercise price
------------ ----------------
Balance at November 30, 1997 292,500 $3.32
Granted 250,000 $4.14
Forfeited --- ---
------- -----
Balance at November 30, 1998 542,500 $3.68
Granted 207,500 $4.64
Forfeited (64,583) ($4.75)
------- -----
Balance at November 30, 1999 685,417 $3.89
Options exercisable at November 30, 1997 36,562
Options exercisable at November 30, 1998 255,722
Options exercisable at November 30, 1999 462,917
The weighted average fair value of options granted for the year
ended November 30, 1997, 1998 and 1999 were $3.315, $1.54 and
$1.70, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) leases
The Company leases certain property, buildings and
equipment. Rental expense for the years ended November 30, 1999,
1998 and 1997 was approximately $182,000, $40,000 and $63,000
respectively. The minimum rental commitments under noncancellable
operating leases as of November 30, 1999 are as follows: 2000,
$218,180; 2001, $217,085; 2002, $211,811 and 2003, $176,509.
During October of 1998, the Company entered into a lease agreement
with a related party (Furrow-Holrob Development II, L.L.C.) to
lease a production facility. The five year term began December
15, 1998 at a lease rate of $2 per square foot.
(b) license agreements
The Company displays characters, names and logos on its
products under license agreements that require royalties ranging
from 7% to 17% of sales. The agreements expire through 1999 and
require annual advance payments (included in prepaid expenses) and
certain annual minimums. Royalties were $742,000, $346,000, and
$363,000 for fiscal 1999, 1998 and 1997, respectively.
(c) contingencies
The Company is a party to lawsuits and other contingencies in the ordinary
course of its business. While the damages sought in some of these actions are
material, the Company does not believe that it is probable that the
outcome of any individual action will have a material adverse
effect, or that it is likely that adverse outcomes of individually
insignificant actions will be sufficient enough, in number or
magnitude, to have a material adverse effect in the aggregate.
In December 1999, the American Apparel Contractors Association
Workers' Compensation Fund filed suit against the Company's Thimble
Square subsidiary for $13,000 plus interest of 1.5% per month from
the due date (American Apparel Contractors Association Workers'
Compensation Self-Insured Fund v. Thimble Square and Innovo Group).
This amount represents the allocation to Thimble Square of the
excess workers' compensation claims paid under the plan. The
Company has not accrued for the disputed funds in this case.
In November, 1999, the Company received a notice from the Internal Revenue
Service ("IRS") asserting deficiencies in federal corporate income taxes for
the Company's 1991 tax year. The total tax proposed by the IRS amounts to
approximately $5.5 million plus interest. The Company believes that it has
meritorious legal defenses to those deficiencies, as well as available
net operating losses to offest any such deficiencies, and believes that the
ultimate resolution of this matter will not have a material effect on the
Company's financial statements.
In May, 1996, a foreign manufacturer that had previously
supplied imported products to a nonoperating subsidiary, NASCO
Products, filed suit against NASCO Products asserting that it is
owed approximately $470,000, which was approximately $300,000 in
excess of the amount previously recorded on the books of NASCO
Products. NASCO Products and the supplier had previously reached an
agreement on the balance owed (which was the balance recorded), as
well as an arrangement under which the schedule for NASCO Products'
payments reducing the balance would be based on future purchases
from that supplier of products distributed internationally by NP
International. The Company denied the supplier's claims, and
asserted affirmative defenses, including the supplier's late
shipment of the original products, and the supplier's refusal to
accept and fill NP International orders on terms contained in the
agreement. This suit was settled and paid by the Company in 1999
for $200,000. The Company had previously recorded a liability of
$170,000 for this suit and recorded the remaining settled amount in
the third quarter of 1999.
In December 1991, a former employee filed suit against the
Company, Patricia Anderson-Lasko and others alleging breach of an
employment agreement and conversion of his interest in certain
property rights (Michael J. Tedesco v. Innovo, Inc.., et al., Case
No. 91-64033, District Court of Harris County, Texas, 164th Judicial
Circuit). Following an appeal and a second trial, a final judgment
was rendered against Innovo for $194,045.62 on August 17, 1998.
Thereafter, 20,000 shares of Common Stock which has been held in the
registry of the court, as security during the appeal and subsequent
trial, were released to the plaintiff. If the sale of that stock
does not generate sufficient net proceeds to pay the judgment, then
Innovo will be liable for any shortfall. The Company monitors
the price of its stock in the market and make adjustments to the
amount recorded in the financial statements as necessary.
In July 1992, a former employee filed suit against the Company
and Spirco for alleging breach of an employment agreement and
asserting other related claims (Wayne Copelin v. Innovo Group, Inc.,
et al., Case No. 11950, in the Chancery Court of Robertson County,
Tennessee). When Spirco filed for bankruptcy in August 1993, the
case proceeded against Innovo Group and a summary judgment of
$100,000 was entered against it in March 1995. However, because the
Copelin judgment was classified as a Class 8 Claim in the Spirco
bankruptcy, the Company believed that the judgment was fully paid
when it issued 35,211 shares of Common Stock to Copelin, in
compliance with the confirmed Plan of Reorganization. When Copelin
sought to enforce the judgment, Innovo Group, as the successor by
merger to Spirco, brought a motion in the Spirco bankruptcy to
enforce the terms of the Plan of Reorganization against Copelin.
The bankruptcy judge granted the motion and permanently enjoined
Copelin from enforcing the judgment in an order entered on October
18, 1996. Copelin appealed to the United States District Court and
on April 13, 1998, the District Court reversed. The case was
appealed to the United States Third Circuit Court of Appeals. This
court upheld the previous courts ruling. The Company recorded the
$100,000 liability as of November 30, 1999.
(d) liquidity
The Company has experienced recurring operating losses and negative cash flows
from operations. Managment is currently taking steps to improve profitability
by increasing the number of marketing personnel, introducing new products lines
and by endeavoring to control and minimize fixed costs. The Company has taken
several steps to improve liquidity during fiscal year 2000, as discussed in
Note 13 Subsequent Events.
Based on the foregoing, the Company believes that working capital will be
sufficient to fund operations and required debt reductions during fiscal 2000.
The Company believes that any additional capital, to the extent needed, could
be obtained from the sale of equity securities or short-term working capital
loans. However, there can be no assurance that this or other financing will be
available if needed. The inability of the Company to be able to satisfy its
interim working capital requirements would require the Company to constrict its
operations and would have a materially unfavorable effect on the Company's
financial statements.
NOTE 11 - SEGMENT DISCLOSURES
(a) current operating segments
During 1999, the Company operated under the following operating segments (in
'000's)
1999
Domestic International Corporate Total
-------- ------------- --------- -----
Revenues (net) $10,138 $ 699 $ - - $10,837
Gross Profits 4,438 147 - - 4,585
Depreciation 114 - - 173 287
Interest Expense 104 - - 413 517
Segment Assets 3,210 157 2,855 6,222
Expenditures for segment assets 92 - - 34 126
1998
Domestic International Corporate Total
-------- ------------- --------- -----
Revenues (net) $ 5,353 $ 1,437 $ - - $6,790
Gross Profits 1,742 555 - - 2,297
Depreciation 72 - - 193 265
Interest Expense 170 - - 333 503
Segment Assets 1,941 - - 5,291 7,232
Expenditures for segment assets 81 - - - - 81
1997
Domestic International Corporate Total
-------- ------------- --------- -----
Revenues (net) $6,351 $ 1,550 - - $7,901
Gross Profits 1,946 652 - - 2,598
Depreciation 107 - - 160 267
Interest Expense - - - - 657 657
Segment Assets 2,312 211 6,645 9,168
Expenditures for segment assets 35 - - 434 469
Corporate includes for 1998 and 1997 the remaining assets of a discontinued
segment (see Note 11(b))
(b) SALE OF THIMBLE SQUARE (DISCONTINUED OPERATIONS)
On September 13, 1998 Thimble Square entered into a sale
agreement with Confident Colors, LLC. ("Confident Colors"). Under
the terms of the agreement, Confident Colors leased the Baxley,
Georgia, facility and equipment for $3,000 monthly and succeeded to
the business of Thimble Square. Thimble Square ceased all
operations following the lease to Confident Colors. The Pembroke,
Georgia, facility was sold on December 10, 1998 to H.N. Properties
L.L.C. for $122,354 net of selling expenses. As a result of the
cessation of the Thimble Square business and the sale of the
Pembroke, Georgia, building to H.N. Properties, L.L.C., the Company
recorded a loss totaling $1,401,000 including write off of
unamortized goodwill and adjustment of property and equipment and
assets under capital lease to their estimated net realizable values.
Thimble Square's operations for the years ending November 30, 1998
and 1997 have been reclassified as discontinued operations on the
statement of operations for those years. In conjunction with the
disposition of assets of Thimble Square, the Company paid off, in
December 1998, an aggregate of approximately $306,000 of debt
collateralized by Thimble Square assets. The net assets of Thimble
Square as of 1998 and 1997 are as follows:
1998 1997
------- ------
Accounts Receivable $ 0 $ 65,000
Inventory 12,000 207,000
Other Current Liabilities 0 61,000
Property, Plant and Equipment 1,020,000 1,526,000
Accumulated Depreciation (241,000) (196,000)
Goodwill 0 702,000
Other Long-Term Assets 0 12,000
Current debt (327,000) (287,000)
Accounts Payable (19,000) (45,000)
Accrued Expenses (55,000) (76,000)
Long-term Debt (173,000) (365,000)
--------- ---------
$ 217,000 $1,604,000
NOTE 12 - RELATED PARTY TRANSACTIONS
Certain officers and directors loaned the Company cash
throughout 1999. The outstanding amount on these loans totaled
$100,000 as of the end of the year.
During the first quarter of 1999, the Company borrowed in
aggregate of $300,000 from two officers. This debt was converted to
150,000 shares of common stock on February 26, 1999 at $2 per share,
which approximated fair value.
During the second quarter of 1999, officers loaned the Company
$100,000. These loans were sold to other investors and converted to
common stock valued at $1 per share which approximated fair value.
During the third quarter of 1999, an officer loaned the
Company $212,000 in two fundings of $20,000 and $192,000. The
$20,000 was repaid within three days without interest. The $192,000
was repaid during the third quarter with 8.5% annualized interest.
During the fourth quarter of 1999, an officer loaned the
Company $100,000 in two separate loans of $50,000. These loans bear
interest at 10% and mature on June 30, 2000.
NOTE 13 - SUBSEQUENT EVENTS
In December 1999, the Company borrowed an aggregate of
$435,000 from an officer under two promissory notes in the amounts
of $160,000 and $275,000, respectively. These notes mature on June
30, 2000 and bear interest at the rate of 9% and 10% per annum
respectively.
During January 2000, the Company borrowed $200,000 from an
officer. This loan bears interest at 10% and matures on June 30,
2000.
During February 2000, the Company borrowed $80,000 from an
officer. This loan bears interest at 10% and matures on June 30,
2000.
On February 28, 2000, the Company converted $500,000 of the
borrowings from an officer (described above) into equity by issuing
423,729 shares of Common Stock.
On February 29, 2000, the Company sold 100,000 shares of
Common Stock in a private placement for $100,000.
Effective March 1, 2000, the Company's Chairman and CEO has
committed to provide additional cash funding, as may be required
from time to time, of up to $500,000. These funds will be available
to the Company through November 30, 2000 to satisfy any short-term
working capital needs.
On March 8, 2000, the Company sold 100,000 shares of Common
Stock in a private placement for $100,000.
ITEM 9. CHANGES IS AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Directors and
Executive Officers of the Company as of November 30, 1999.
Name Age Position with the Company
- ---- --- -------------------------
Samuel J. (Sam) Furrow(2) 58 Chairman of the Board,
Chief Executive Officer,
Director
Patricia Anderson-Lasko 41 President, Director
Bradley T. White 29 Treasurer
Daniel A. (Dan) Page 50 Director
Samuel J. (Jay) Furrow, Jr. 26 Chief Operating Officer,
Director
Marc B. Crossman 28 Director
Dr. John Looney 58 Director
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer of the Company during 1999 and to the other executive officers of the
Company who received annual compensation in excess of $100,000 during 1999 (the
"Named Executive Officers") during fiscal years 1999, 1998 and 1997.
<TABLE>
Annual Compensation(1) Long-term Compensation
Securities
Underlying
Name and Other Annual Options/
Principal Position Year Salary Bonus Compensation(3) SARs (#)
<C> <C> <C> <C> <C> <C>
Samuel J. Furrow, 1999 $ -- $ -- $ -- --
Chariman and CEO(2) 1998 -- -- -- 100,000
Patricia Anderson-Lasko 1999 157,500 15,750 509 --
President 1998 188,493 -- -- --
1997 157,500 -- 4,070 --
</TABLE>
(1) No executive officers received or held restricted stock awards during
fiscal 1999, 1998 or 1997.
(2) Mr. Furrow's employemnt by the Company began in October 1996 with no
salary. Mr. Furrow a grant of nonqualified stock options to purchase 100,000
shares of Common Stock at an exercise price of $4.75 per share upon becoming a
Director in March 1998. The options vest and become exercisable at the rate of
2,083 per month through 2002.
(3) During fiscal 1999, 1998 and 1997 Ms. Anderson-Lasko received life
insurance benefits in the aggregate amounts of $509, $0 and $4,070,
respectively.
There were no Option/SAR grants to the Named Executive Officers during 1999.
<TABLE>
Aggregated Option/SAR Exercised in 1998 and Year-end Option/SAR Vaules
Number of Unexercised Value of Unexercised
Shares Options/SARs at FY-End In-the-Money Options/SARs
Aquired On Value (#) Exercisable/ ($) Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- ---------- -------- ---------------------- -------------------------
<C> <C> <C> <C> <C>
Samule J. Furrow 0 0 43,750/56,250 Not Applicable(1)
</TABLE>
(1) Based on a closing price per share for the Common Stock on
November 30, 1999 as reported by the Nasdaq SmallCap Market.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table provides information as of March 31, 2000 concerning
beneficial ownership of Common Stock by (1) each person or entity known by the
Company to beneficially won more than 5% of the outstanding Common Stock,
(2) each Director and nominee for eleciton as a Director of the Company,
(3) each Named Executive Officer, and (4) all Directors and executive officers
of the Company as a group. The information as to benficial ownership has been
furnished by the respective stockholders, Directos and executive officers of the
Company, and, unless otherwise indicated, each of the stockholders has sole
voting power with respect to the shares beneficially owned.
Shares Beneficially Owned(1)
Name Number Percent
- ---- ----- -------
Samuel J. (Sam) Furrow 1,789,106(2) 25.0%
1808 North Cherry Street
Knoxville, Tennesee 37917
Patricia Anderson-Lasko 270,071(5) 3.8%
1808 North Cherry Street
Knoxville, Tennesee 37917
Daniel A. (Dan) Page(3) 463,833(6) 6.5%
1808 North Cherry Street
Knoxville, Tennessee 37917
Samuel J. (Jay) Furrow, Jr. 113,432(3) 1.6%
1808 North Cherry Street
Knoxville, Tennessee 37917
Marc B. Crossman 30,665(4) *
1808 North Cherry Street
Knoxville, Tennessee 37917
Dr. John Looney 133,500 1.9%
1808 North Cherry Street
Knoxville, Tennessee 37917
All Executive Officers 2,778,942(2)(3)(4)(5)(6) 38.8%
and Directors as a Group(3)
(6 persons)
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission, certain
shares of the Company's common stock that a beneficial owner set forth in this
table has a right to acquire within 60 days of the date hereof pursuant to the
exercise of options or warrants for the purchase of shares of common stock are
deemed to be outstanding for the purpose of computing percentage ownership of
that owner but are not deemed outstanding for the purpose of computing
percentage of 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) Includes 52,082 shares subject to vested options.
(3) Inlcudes 52,082 shares subject to options exercisable by Mr. Furrow.
(4) Includes 29,165 shares subject to vested options.
(5) Includes 250,000 shares purchased by Ms. Anderson-Lasko pursuant to the
1997 Stock Purchase Right Award, awarded to her in February 1997. Under the
terms of the 1997 Stock Purchase Right Award, Ms. Anderson-Lasko was permitted
to, and elected to, pay for the purchase of the 250,000 shares (the "Award
Shares") by the execution of a non-recourse note (the "Note") to the Company for
the exercise price of $2,8125 per share ($703,125 in the aggregate). The Note
is due, without interest, on April 30, 2002, and is collateralized by the 1997
Award Shares purchased therewith. Ms. Anderson-Lasko may pay or prepay (without
penalty) all or any part of the Note by (i) the payment of cash, (ii) the
delivery to the Company of other shares of Common Stock (other than the 1997
Award Shares) that Ms. Anderson-Lasko has owned for a period of at least six
months, which shares would be credited against the Note on the basis of the
closing bid price for the Common Stock on the date of delivery. The 1997 Award
Shares will be forfeited and returned (at the rate of one shares per $2,8125) to
the Company to the extent the Note is not paid on or before its maturity;
accordingly, the number of shares owned by Ms. Anderson-Lasko could decrease in
the future.
(6) Includes 120,000 shares subject to options exercisable, or which become
exercisable within 60 days of the date hereof, by Mr. Page.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted apolicy requiring that any material transactions
between the Company and persons or entities affiliated with officers, Directors
or principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in arms' length transactions
with independent third parties.
On October 7, 1998, the Company entered into a Warehouse Lease Agreement with
Furrow-Holrob Development II, LLC pursuant to which the Company has leased the
78,900 square foot plant that now houses the Company's executive offices and its
manufacturing, administrative and shipping facilities. The "triple net" lease
provides for an annual base rental rate of $2.00 per square foot, or $157,800
annually, plus a pro rata share of real estate tasxes, insurance premiums and
common area expenses, with an initial five-year term and two Company five-year
renewal options (subject to agreement on any change in the base rental rate).
The Board of Directors, with Messrs. Furrow and Talbott excusing themselves from
deliberations and not voting, unanimously approved the Warehouse-Lease
Agreement.
Pursuant to the 1997 Stock Purchase Right Award awarded to her in February
1997, Ms. Anderson-Lasko purchased 250,000 shares of Common Stock (the "1997
Award Shares") with payment made by the execution of a non-recourse note (the
"Note") to the Company for the exercise price of $2,8125 per share ($703,125 in
the aggregate). The Note is due, without interest on April 30, 2002, and is
collateralized by the 1997 Award Shares. Ms. Anderson-Lasko may pay or
prepay (without penalty) all of any part of the Note by (i) the payment of cash,
or (ii) the delivery to the Company of other shares of Common Stock (other than
the 1997 Award Shares) that Ms. Anderson-Lasko has owned for a period of at
least six months, which shares would be credited against the Note on the basis
of the closing bid price for the Common Stock on the date of delivery.
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
Report of Independent Certified Public
Accountants on Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
Exhibit Reference
Number Description No.
3.1 Form of Amended and Restated Certificate
of Incorporation of Registrant. 3.1 (12)
3.2 Amended and Restated Bylaws of Registrant.* 4.2 (5)
4.1 Article Four of the Registrant's Amended and
Restated Certificate of Incorporation (included in
Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.3 Note executed by NASCO, Inc. and payable to
First Independent Bank, Gallatin, Tennessee
in the principal amount of $950,000 dated
August 6, 1992.* 10.21 (2)
10.4 Deed of Trust between NASCO, Inc. and First
Independent Bank, Gallatin, Tennessee dated
August 6, 1992.* 10.22 (2)
10.5 Authorization and Loan Agreement from the
U.S. Small Business Administration, Nashville,
Tennessee dated July 21, 1992.* 10.23 (2)
10.6 Indemnity Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee.* 10.24 (2)
10.7 Compliance Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee
dated August 6, 1992.* 10.25 (2)
10.8 Assignment of Life Insurance Policy issued
by Hawkeye National Life Insurance Company
upon the life of Patricia Anderson-Lasko to
First Independent Bank, Gallatin, Tennessee
dated July 31, 1992.* 10.26 (2)
10.9 Guaranty of Patricia Anderson-Lasko on behalf
of NASCO, Inc. in favor of First Independent
Bank, Gallatin, Tennessee dated August 6, 1992.* 10.27 (2)
10.10 Guaranty of Innovo Group Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.28 (2)
10.11 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.29 (2)
10.12 Guaranty of NASCO Products, Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.30 (2)
10.22 Form of Common Stock Put Option.* 10.61 (6)
10.28 License Agreement dated January 24, 1994
between NFL Properties Europe B.V. and NASCO
Marketing, Inc.* 10.66 (9)
10.29 License Agreement dated July 7, 1997 between
National Football League Properties, Inc. and
Innovo Group Inc.
10.32 Form of Amendment to Common Stock Put Option.* 10.72 (9)
10.33 Agreement dated July 31, 1995 between NASCO
Products, Inc. and Accessory Network Group, Inc.* 10.1 (11)
10.36 License Agreement dated August 9, 1995 between
Innovo, Inc. and NHL Enterprises, Inc.* 10.49 (12)
10.37 License Agreement dated August 9, 1995 between
NASCO Products International, Inc. and NHL
Enterprises, B.V.* 10.50 (12)
10.38 License Agreement dated December 15, 1995
between Major League Baseball Properties, Inc.
and Innovo Group Inc.* 10.51 (12)
10.39 License Agreement dated October 6, 1995
between Major League Baseball Properties
and NASCO Products International, Inc.* 10.52 (12)
10.40 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)
10.45 License Agreement between Innovo Group Inc.
and Warner Bros. dated June 25, 1996.* 10.45(15)
10.46 License Agreement between Innovo Group Inc.
and Walt Disney dated September 12, 1996.* 10.46(15)
10.47 Indenture of Lease dated October 12, 1993
between Thimble Square, Inc. and Development
Authority of Appling County, Georgia* 10.47(15)
10.48 Lease dated October 1, 1996 between Innovo,
Inc. and John F. Wilson, Terry Hale, and
William Dulworth* 10.48(15)
10.49 Incentive Stock Option between Samuel J. Furrow, Jr.
and Innovo Group Inc. 10.49
10.50 Incentive Stock Option between Samuel J. Furrow
and Innovo Group Inc. 10.50
10.51 Incentive Stock Option between Robert S. Talbott
and Innovo Group Inc. 10.51
10.53 Manufacturing and Distribution Agreement between
Nasco Products International and Action Performance
Companies, Inc. 10.53
10.56 Sale Agreement of property in Pembroke, GA between
Thimble Square and H.N. Properties, L.L.C. 10.56
10.57 Lease Agreement between Furrow-Holrob Development,
L.L.C. and Innovo Group, Inc 10.57
10.59 Promissory Note dated October 29, 1999 between
Innovo Group Inc and Samuel J. Furrow
10.60 Promissory Note dated November 22, 1999 between
Innovo Group Inc and Samuel J. Furrow
10.61 License Agreement with Roundhouse 10.61
10.62 License Agreement with Paws, Inc. 10.61
21 Subsidiaries of the Registrant 21 (13)
23.1 Consent of BDO Seidman, LLP (incorporated by
reference as Exhibit 23.2 to Registration
Statements No. 33-71576 and No. 333-12527).
27 Financial Data Schedule (appears only in
electronically filed version of this report).
_________________________
* Certain of the exhibits to this Report, indicated by an
asterisk, are incorporated by reference to other documents on file
with the Securities and Exchange Commission with which they were
physically filed, to be part hereof as of their respective dates.
Documents to which reference is made are as follows:
(1) Amendment No. 4 Registration Statement on Form S-18 (No. 33-
25912-NY) of ELORAC Corporation filed October 4, 1990.
(2) Amendment No. 2 to the Registration Statement on Form S-1 (No.
33-51724) of Innovo Group Inc. filed November 12, 1992.
(3) Annual Report on Form 10-K of Innovo Group Inc. (file no. 0-
18926) for the year ended October 31, 1993.
(4) Current Report on Form 8-K of Innovo Group Inc. (file no. 0-
18926) dated May 10, 1993 filed May 25, 1993.
(5) Registration Statement on Form S-8 (No. 33-71576) of Innovo
Group Inc. filed November 12, 1993.
(6) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1993.
(7) Amendment No. 2 to the Registration Statement on Form S-1 (No.
33-77984) of Innovo Group Inc. filed July 25, 1994.
(8) Amendment No. 4 to the Registration Statement on Form S-1 (No.
33-77984) of Innovo Group Inc. filed August 18, 1994.
(9) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1994.
(10) Registration Statement on Form S-8 (No. 33-94880) of Innovo
Group Inc. filed July 21, 1995.
(11) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926)
dated July 31, 1995 filed September 13, 1995.
(12) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1995.
(13) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926)
dated April 12, 1996, filed April 29, 1996.
(14) Registration Statement on Form S-1 (No. 333-03119) of Innovo
Group Inc., as amended June 28, 1996.
(15) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended November 30, 1996.
(b) Reports on Form 8-K
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/ Samuel J. Furrow
----------------------
Samuel J. Furrow
Chairman of the Board and Chief
Executive Officer
March 14, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
Signature and Title Date
/s/ Samuel J. Furrow, Chief Executive Officer March 14, 2000
- ----------------------------------------------
Samuel J. Furrow
Chairman of the Board,
Chief Executive Officer
and Director
/s/ Patricial Anderson-Lasko March 14, 2000
- -----------------------------
Patricia Anderson-Lasko
President and Director
/s/ Samuel J. Furrow, Jr. March 14, 2000
- -------------------------
Samuel J. Furrow, Jr.
Chief Operating Officer, Secretary and Director
/s/ Bradley T. White, Chief Financial Officer March 14, 2000
- ---------------------------------------------
Bradley T. White
Treasurer
/s/ Bradley T. White, Chief Accounting Officer March 14, 2000
- ----------------------------------------------
Bradley T. White
Treasurer
/s/ Marc B. Crossman March 14, 2000
- --------------------
Marc B. Crossman
Director
/s/ Daniel Page March 14, 2000
- ---------------
Daniel Page
Director
/s/ Dr. John Looney March 14, 2000
- -------------------
Dr. John Looney
Director
Report of Independent Certified Public Accountants on Financial
Statement Schedule
Board of Directors
Innovo Group Inc.
The audits referred to in our report to Innovo Group Inc. and
subsidiaries, dated January 13, 2000, except for Note 13, as to which
the date is March 8, 2000, 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
January 13, 2000, except for Note 13,
as to which the date is March 8, 2000
INNOVO GROUP INC AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance at Charged Charged to
Beginning to Costs Other Accounts- Deductions- Ending Year
Description of Period and Expense Describe Describe Balance
- ----------- --------- ----------- --------------- ------------ ------------
Allowance for doubtful accounts:
Year ended November 30, 1999 $ 67,000 $ 86,000 $ - - $ - - $ 153,000
Year ended November 30, 1998 106,000 39,000 - - 78,000 (A) 67,000
Year ended November 30, 1997 66,000 49,000 - - 9,000 (A) 106,000
Allowance for inventories:
Year ended November 30, 1999 $ 36,000 $ 68,000 $ - - $ - - $ 104,000
Year ended November 30, 1998 36,000 - - - - - - (B) 36,000
Year ended November 30, 1997 73,000 - - - - 37,000 (B) 36,000
Allowance for deferred taxes:
Year ended November 30, 1999 $3,808,000 $459,000 $ - - $ - - $4,267,036
Year ended November 30, 1998 3,860,000 - - - - 52,000 3,808,000
Year ended November 30, 1997 3,415,000 - - 445,000 - - 3,860,000
</TABLE>
Note A - Uncollected receivables written off, net of receivables.
Note B - Recovery of valuation reserve.
EXHIBIT 10.59
PROMISSORY NOTE (LUMP SUM)
$50,000 October 29, 1999
Knoxville, Tennessee
FOR VALUE RECEIVED, the undersigned, Innovo Group, Inc., a
Delaware corporation, (the "Borrower"), promises to pay to the order
of Knoxville Motor Company, a Tennessee partnership (herein the
"Lender"), the principal sum of Fifty Thousand Dollars ($50,000),
with interest at the rate of ten percent (10%) per annum on the
outstanding principal balance of this Promissory Note (the "Note")
from the date hereof until fully paid as hereinafter provided.
The principal and interest due hereunder shall be payable to
Lender in one lump sum on June 30, 2000, in lawful money of the
United States of America, at 1808 North Cherry St., Knoxville,
Tennessee 37917, or at such other place as Lender may designate from
time to time in writing to Borrower. Borrower may prepay this Note
in full or in part at any time without notice, penalty, prepayment
fee, or payment of unearned interest. All payments hereunder
received by Lender shall be applied first to accrued interest and
then to principal.
Borrower agrees to pay Lender its reasonable attorneys' fees
if an attorney is employed to collect this Note, whether or not suit
is brought, and whether incurred in connection with collection,
trial, appeal, or otherwise.
In no event shall the amount of interest due or payable
hereunder exceed the maximum rate of interest allowed by applicable
law, and in the event any such payment is inadvertently paid by
Borrower or inadvertently received by Lender, then such excess sum
shall be credited as a payment of principal, unless Borrower shall
notify Lender, in writing, that Borrower elects to have such excess
sum returned to it forthwith. It is the express intent hereof that
Borrower not pay and Lender not receive, directly or indirectly, in
any manner whatsoever, interest in excess of that which may be
lawfully paid by Borrower under applicable law.
Any failure by Lender to exercise any right, remedy, or
recourse shall not be deemed a waiver of such right, remedy, or
recourse unless set forth in a written document executed by Lender,
and then only to the extent specifically recited therein. A waiver
or release with reference to one event shall not be construed as
continuing, as a bar to, or as a waiver or release of any subsequent
right, remedy, or recourse as to any subsequent event.
Borrower hereby (a) waives demand, presentment of payment,
notice of nonpayment, protest, notice of protest and all other
notice, filing of suit, and diligence in collecting this Note, in
enforcing the Guaranty or the Pledge; (b) agrees to any
substitution, addition, or release of any collateral or any party or
person primarily or secondarily liable hereon; (c) agrees that
Lender shall not be required first to institute any suit, or to
exhaust its remedies against Borrower or any person liable under the
Guaranty, the Pledge or any other agreement with respect hereto, or
against any collateral in order to enforce payment of this Note; (d)
consents to any extension, rearrangement, renewal, or postponement
of the time of payment of this Note or the performance of any
obligations under the Guaranty or the Pledge and to any other
indulgence with respect thereto without notice, consent, or
consideration; and (e) agrees that, notwithstanding the occurrence
of any of the foregoing (except with the express written release by
Lender or any such person), Borrower shall be and remain jointly and
severally, directly, and primarily, liable for all sums due under
this Note.
Each of the following shall constitute an Event of Default
hereunder:
(a) Borrower shall fail to make any payment hereunder when
due;
(b) A proceeding shall be commenced against Borrower, under
Title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy law or
other similar law, or seeking the appointment of a receiver,
liquidator, assignee, trustee, custodian, or similar official with
respect to Borrower or any substantial part of Borrower's
properties, and any such proceeding or any order or decree entered
therein shall not have been dismissed within a period of forty-five
(45) days after the commencement thereof; and
(c) Borrower shall file a petition, answer or consent
seeking relief under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal or
state bankruptcy law or other similar law, or Borrower shall consent
to the institution of proceedings thereunder or to the filing of any
such petition or to the appointment or taking possession of a
receiver, liquidator, assignee, trustee, custodian, or other similar
official with respect to Borrower or of any substantial part of
Borrower's properties, or Borrower shall fail generally to pay its
debts as such debts become due; and
Upon the occurrence of any Event of Default, the entire unpaid
principal balance hereof, together with all unpaid interest accrued
thereon, shall, at the option of Lender and without notice to
Borrower, at once become due and payable and may be collected
forthwith regardless of the stipulated date of maturity.
Time is of the essence of this Note.
This Note shall be construed and enforced in accordance with
the laws of the State of Tennessee.
The pronouns used herein shall include, when appropriate,
either gender and both singular and plural, and the grammatical
construction of sentences shall conform thereto.
All references herein to any document, instrument, or
agreement shall be deemed to refer to such document, instrument, or
agreement as the same may be amended, modified, restated,
supplemented, or replaced from time to time.
This Note is not a negotiable instrument.
IN WITNESS WHEREOF, Borrower has executed this instrument
under seal as of the day and year first above written.
INNOVO GROUP, INC
By: /s/ Pat Anderson
----------------
Title: President
---------
Attest: ____________________________
Title: __________________________
EXHIBIT 10.60
PROMISSORY NOTE (LUMP SUM)
$50,000 November 22, 1999
Knoxville, Tennessee
FOR VALUE RECEIVED, the undersigned, Innovo Group, Inc., a
Delaware corporation, (the "Borrower"), promises to pay to the order
of Knoxville Motor Company, a Tennessee partnership (herein the
"Lender"), the principal sum of Fifty Thousand Dollars ($50,000),
with interest at the rate of ten percent (10%) per annum on the
outstanding principal balance of this Promissory Note (the "Note")
from the date hereof until fully paid as hereinafter provided.
The principal and interest due hereunder shall be payable to
Lender in one lump sum on June 30, 2000, in lawful money of the
United States of America, at 1808 North Cherry St., Knoxville,
Tennessee 37917, or at such other place as Lender may designate from
time to time in writing to Borrower. Borrower may prepay this Note
in full or in part at any time without notice, penalty, prepayment
fee, or payment of unearned interest. All payments hereunder
received by Lender shall be applied first to accrued interest and
then to principal.
Borrower agrees to pay Lender its reasonable attorneys' fees
if an attorney is employed to collect this Note, whether or not suit
is brought, and whether incurred in connection with collection,
trial, appeal, or otherwise.
In no event shall the amount of interest due or payable
hereunder exceed the maximum rate of interest allowed by applicable
law, and in the event any such payment is inadvertently paid by
Borrower or inadvertently received by Lender, then such excess sum
shall be credited as a payment of principal, unless Borrower shall
notify Lender, in writing, that Borrower elects to have such excess
sum returned to it forthwith. It is the express intent hereof that
Borrower not pay and Lender not receive, directly or indirectly, in
any manner whatsoever, interest in excess of that which may be
lawfully paid by Borrower under applicable law.
Any failure by Lender to exercise any right, remedy, or
recourse shall not be deemed a waiver of such right, remedy, or
recourse unless set forth in a written document executed by Lender,
and then only to the extent specifically recited therein. A waiver
or release with reference to one event shall not be construed as
continuing, as a bar to, or as a waiver or release of any subsequent
right, remedy, or recourse as to any subsequent event.
Borrower hereby (a) waives demand, presentment of payment,
notice of nonpayment, protest, notice of protest and all other
notice, filing of suit, and diligence in collecting this Note, in
enforcing the Guaranty or the Pledge; (b) agrees to any
substitution, addition, or release of any collateral or any party or
person primarily or secondarily liable hereon; (c) agrees that
Lender shall not be required first to institute any suit, or to
exhaust its remedies against Borrower or any person liable under the
Guaranty, the Pledge or any other agreement with respect hereto, or
against any collateral in order to enforce payment of this Note; (d)
consents to any extension, rearrangement, renewal, or postponement
of the time of payment of this Note or the performance of any
obligations under the Guaranty or the Pledge and to any other
indulgence with respect thereto without notice, consent, or
consideration; and (e) agrees that, notwithstanding the occurrence
of any of the foregoing (except with the express written release by
Lender or any such person), Borrower shall be and remain jointly and
severally, directly, and primarily, liable for all sums due under
this Note.
Each of the following shall constitute an Event of Default
hereunder:
(b) Borrower shall fail to make any payment hereunder when
due;
(b) A proceeding shall be commenced against Borrower, under
Title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy law or
other similar law, or seeking the appointment of a receiver,
liquidator, assignee, trustee, custodian, or similar official with
respect to Borrower or any substantial part of Borrower's
properties, and any such proceeding or any order or decree entered
therein shall not have been dismissed within a period of forty-five
(45) days after the commencement thereof; and
(c) Borrower shall file a petition, answer or consent
seeking relief under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal or
state bankruptcy law or other similar law, or Borrower shall consent
to the institution of proceedings thereunder or to the filing of any
such petition or to the appointment or taking possession of a
receiver, liquidator, assignee, trustee, custodian, or other similar
official with respect to Borrower or of any substantial part of
Borrower's properties, or Borrower shall fail generally to pay its
debts as such debts become due; and
Upon the occurrence of any Event of Default, the entire unpaid
principal balance hereof, together with all unpaid interest accrued
thereon, shall, at the option of Lender and without notice to
Borrower, at once become due and payable and may be collected
forthwith regardless of the stipulated date of maturity.
Time is of the essence of this Note.
This Note shall be construed and enforced in accordance with
the laws of the State of Tennessee.
The pronouns used herein shall include, when appropriate,
either gender and both singular and plural, and the grammatical
construction of sentences shall conform thereto.
All references herein to any document, instrument, or
agreement shall be deemed to refer to such document, instrument, or
agreement as the same may be amended, modified, restated,
supplemented, or replaced from time to time.
This Note is not a negotiable instrument.
IN WITNESS WHEREOF, Borrower has executed this instrument
under seal as of the day and year first above written.
INNOVO GROUP, INC
By: /s/ Pat Anderson
----------------
Title: President
---------
Attest: ____________________________
Title: __________________________
SALES AND MARKETING
AGREEMENT
THIS AGREEMENT, made this 7th day of September, 1999, by and between
Innovo, Inc. (hereafter "Innovo"), with its principal places of
business at 1808 North Cherry Street, Knoxville, Tennessee and
Roundhouse Inc. (hereafter "Roundhouse"), with a principal place of
business at 18700 Laurel Park Road, Rancho Dominguez, CA 90220, in
consideration of the following promises and covenants agree as
follows:
WITNESSETH:
WHEREAS, Innovo holds licenses for the use of the logos of
numerous organizations to include the National Football League, the
National Basketball Association, Major League Baseball, the National
Hockey League, over 130 colleges, Garfield, several NASCAR drivers,
Walt Disney and Warner Brothers as described further in exhibit A
(hereinafter "Licenses").
WHERAS, Innovo currently designs, manufactures and markets
soft-sided coolers as well as other products displaying its current
licenses. Innovo will continue to design, market and manufacture
soft-sided coolers displaying its current licenses as well as newly
acquired licenses.
WHEREAS, Roundhouse designs, manufactures and markets soft-
sided coolers under the brand names of Glacier Gear and Northland.
WHEREAS, Innovo and Roundhouse desire to enter into an
agreement where
Innovo shall market and sell Glacier Gear and Northland products as
set forth in Exhibit
B to this agreement ("The Products"). Said Products to display
various licenses owned by
Innovo in place of the Glacier Gear or Northland logos.
WHEREAS, Innovo desires that Roundhouse present the Products
for sale to certain accounts as set forth in Exhibit C to this
agreement ("Roundhouse Accounts").
NOW, THEREFORE, in consideration of the mutual promises herein
contained and for good and valuable consideration, receipt of which
is hereby acknowledged by the parties, it is hereby agreed:
1. Upon the terrns and conditions set forth herein, Roundhouse
shall grant
Innovo the right to sell and market the Glacier Gear and
Northland products set forth in Exhibit B to this
agreement. Said Products to bear Innovo's current and
future licenses.
2. Innovo shall purchase the Products and any products
using the same or substantially similar designs as the
Products solely through Roundhouse's partner, DS MAX.
Should DS MAX's current vendors be unable to supply the
Products within reasonable timelines, Innovo shall have
the right to introduce new vendors to DS MAX, and may
purchase the Products from these vendors through DS MAX.
Said vendors shall be mutually approved by Innovo, DS MAX
and Roundhouse.
3. Innovo shall pay to Roundhouse, through DS MAX, a licensing
fee of 30% of the first cost of the Products, or products of
the same or substantially similar design, when Innovo has
initiated the sale to the account, or 50% of the first cost of
the Products or or products of the same or substantially
similar design, when Roundhouse has initiated the sale and the
account is one of said accounts set forth in Exhibit C to this
agreement Said licensing fee shall be paid at the time of the
purchase of the Product. First cost shall be the price for the
Products from the supplier, F.O.B. Hong Kong.
4. Roundhouse shall provide Innovo with all product designs, and
specifications required for the manufacturing of the products
underlying the Product Line. Innovo will be responsible for
providing finished artwork to be used with the products in the
Product Line.
5. Innovo shall be responsible for all aspects of account and
inventory management, including, but not limited to:
forecasting, purchasing, order processing, customer service,
invoicing, shipping and returns. Roundhouse makes no claims or
warranties as to the Products and it is understood that DS MAX
and its suppliers are solely responsible for defects in the
materials or workmanship of the Products.
6. Upon change of control of Innovo's parent company Innovo Group
Inc., Innovo shall have the right to terminate this agreement
upon 30 days written notice. Change of control shall be deemed
to occur upon the change in ownership of more than 50% of
Innovo Group Inc. stock.
6. Nothing in this Agreement shall be construed as creating
ajoint venture or partnership between Seller and Purchaser.
Nor shall either party have the right, power or authority to
create any obligation or duty, express or implied, on behalf
of the other.
7. In the event any provision of this Agreement is determined to
be invalid, illegal, void or unenforceable, in whole or in
part, such determination shall not be construed to invalidate
the remaining provisions of this Agreement which shall remain
in full force and effect.
8. Any claim or controvery arising out of or relating to this Agreement
shall be settled by arbitration in accordance with the rules of the American
Arbitration Association (or other mutually agreeable arbitrator) before a single
arbitrator selected in accordance with those rules, and judgment upon the
award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
9. This Agreement shall be governed by and
construed in accordance with the laws of the
State of Tennessee.
10. This Agreement shall run for a term of 18
months and may be renewed or extended by
the mutual, written agreement of Innovo and
Roundhouse at or before its expiration.
11. Any notice required or permitted to be
delivered to pursuant to this Agreement
shall be in writing and given by registered
mail, facsimile transmission, telegram or
in person to the parties at the following
address:
(a) Innovo:
Innovo Inc
1808 North Cherry Street
Knoxville, TN 37917
Attn: Pat Anderson
Telephone: (423) 546-1110
Facsimile: (423) 546-9277
(b) Roundhouse:
Roundhouse Inc.
18700 Laurel Park Road
Rancho Dominguez, CA 90220
Attn: Steven Oldroyd
Telephone: (310) 537-6000
Facshnile: (310) 537-6090
Any notice given shall be deemed
received as follows: for notice given by
registered mail, upon the fourth day following
the official postmark date; for facsimile,
immediately upon transmission; for telegram
upon receipt.
11. This Agreement sets forth the entire
understanding of Innovo and Roundhouse
regarding the subject of this Agreement and
supersedes all prior proposals, discussions or
writings.
IN WITNESS WHEREOF, Innovo and Roundhouse have
signed this Agreement on the 7th day of
September, 1999.
Innovo Roundhouse
/s/ Pat Anderson, President /s/ Marc Chateau, VP Marketing
- --------------------------- ------------------------------
"GARFIELD" LICENSING AGREEMENT
To: Innovo, Inc.
1808 North Cherry Street
Knoxville, Tn 37917
United States
Contact Person: Lori Brewington
Telephone: 423.546.1110
Fax: 423.546.9277
1. As the sole and exclusive worldwide owner of the copyrights in
the characters that have regularly appeared in the "GARFIELD" comic
strip created by Jim Davis (the "Licensed Property"), Paws,
Incorporated ("Paws") grants to you, under the terms and conditions
of this Agreement, a non-exclusive license to use the Licensed
Property solely on or in connection with the manufacture, sale and
advertisement of the following described articles ("Licensed
Articles") solely within the United States, its territories and
possessions, and Canada (the "Licensed Territory"):
Licensed Articles:
Tote bags; carry-all bags; sport bags; laundry bags; backpacks;
trolly carts; lunch bags; soft sided lunch bag coolers; aprons
(Kiddy, adult gourmet with or without pockets, chef's choice,
waist, bar-b-que); and, adult vests and pencil cases.
This license includes the right to affix the Licensed Property on
or to packaging, advertising and
promotional materials sold or used in connection with the Licensed
Articles ("Collateral Materials").
The Licensed Property may not be used by you in any way on or in
connection with the Internet
(including the World Wide Web) without the advance, written consent
of Paws.
Trademarks owned by Paws in the Licensed Territory ("Paws'
Trademarks") and associated with the
Licensed Property may be used by you on or in connection with the
Licensed Articles and Collateral
Materials, subject to the terms of this Agreement.
2. This license will commence on March 1, 1999 and will continue
until March 31, 2001, provided you honor the terms of this
Agreement. So long as you are in compliance with the terms of
this Agreement and upon your written request, Paws agrees to
commence negotiations with you for a possible renewal of this
Agreement 90 days before the expiration date of this Agreement.
3. You agree to pay Paws royalties equal to 10.00% of your usual
"net sales price" for all Licensed Articles sold to third
parties in the course of your sales activities. If you sell any
Licensed Article(s) to any party affiliated with you, or in any
way directly or indirectly related to or under common control
with you, at a price less than the regular price charged to
third parties, the royalty payable to Paws shall be computed on
the basis of the regular price charged to third parties. A
Licensed Article is considered "sold" when you first claim a
right to payment. "Net Sales Price" means gross sales price less
sales tax, and customary trade discounts and returns, but
without deduction for any other items like commissions,
assessments, expenses, or uncollectible accounts. As a credit
against royalties, your non-refundable advance is $2,500.00,
which is due upon your execution of this Agreement. In addition,
you guarantee that you will pay Paws minimum royalties in the
amount of $12,500.00 (which is over and above your advance) on
or before expiration or earlier termination of this Agreement.
Therefore, the total of your advance and minimum guarantee is
$15,000.00. You agree to make the following additional
nonrefundable advance payments, in the amounts and on the dates
specified, unless exceeded by earned royalties due on the
payment date:
Five (5) payments in the amount of $2,500 USD each on the
following payment dates: January 31, 2000; April 30, 2000; July 31,
2000; October 31, 2000; and, on January 31, 2001.
Paws is under no obligation to execute this Agreement. To be
considered for execution, this Agreement must be returned to
Paws within thirty (30) days along with payment of the above
stated advance (if any). Paws will not negotiate the advance
payment until after it has signed this Agreement.
4. Throughout the term of this Agreement you agree to use
reasonable and good faith efforts to advertise, promote and sell
the Licensed Articles in the Licensed Territory. You have also
agreed to sell the Licensed Articles at a competitive price.
"Bundling" or other use of the Licensed Articles designed to
encourage or facilitate the sale of your other products or
services shall be subject to the advance written consent of
Paws. In no event will you "dump" or sell or offer to sell the
Licensed Articles at a price below cost. If you are unable to
maintain regular sales of a particular Licensed Article, Paws
will have the right on 30 days advance notice to you to
terminate the license granted by this Agreement with respect to
such Licensed Article.
5. You also agree to exert your reasonable and good faith efforts
to perform in accordance with written Marketing Plans for the
Licensed Articles that you provide to Paws. If you have not
already done so, you agree to provide Paws with your initial
Marketing Plan within 30 days of your signing of this Agreement.
Additional Marketing Plans will be done by you on each yearly
anniversary of the commencement date of this Agreement. Your
Marketing Plans will describe for each Licensed Article your
marketing timetable, sales projections, channels and methods of
distribution, anticipated advertising support, and such other
information as Paws may reasonably request.
6. You agree that you will not grant sublicenses under this
Agreement and that you will not transfer or assign the license
granted by this Agreement, and that you will not delegate your
duties to anyone else. If you do not at all times manufacture
the Licensed Articles, you agree that: (a) you will at all times
provide Paws with a complete and accurate list of each and every
manufacturer, including name, address, contact person, phone
number, and articles manufactured; (b) no manufacturer will
produce any Licensed Article unless it has received and is in
compliance with a Conditional Consent to Manufacture letter from
Paws; and (c) a failure of a manufacturer to at all times comply
with the conditions of the Conditional Consent to Manufacture
letter shall also constitute a breach under this Agreement.
Upon advance notice and during normal business hours, you agree to
enable Paws or its representative to inspect the facilities
where the Licensed Articles are being manufactured, and to
review, inspect and copy all applicable production and shipping
records relating to the Licensed Articles.
7. Before you may use the Licensed Property (or Paws' Trademarks) in
any fashion, you agree to submit to us for our approval the
following materials for each Licensed Article: (1) a generic sample
of each Licensed Article showing the general quality of each
Licensed Article to be sold by you; (2) a concept for each proposed
Licensed Article, showing rough art and product design; (3) finished
artwork for each Licensed Article; and (4) a pre-production
prototype sample of each Licensed Article, showing the exact form,
finish and quality that each Licensed Article will have when sold.
You agree to get Paws' prior written approval for each Licensed
Article at each of the above steps, as well as our prior written
approval of any Collateral Materials for each Licensed Article.
Upon approval of the prototypes and/or Collateral Materials, you
agree that all Licensed Articles sold shall conform to the
approved prototype(s) in all material respects, and that the
Collateral Materials will not be modified in any material
fashion without the advance consent of Paws. You agree to send
immediately to Paws twelve production samples from the first
production run for each Licensed Article, and for all Collateral
Materials. You agree that you will not sell, distribute or use,
or permit any third party to sell, distribute or use any
Licensed Article or any Collateral Material that is damaged,
defective, a second, or that otherwise fails to conform in all
material respects to the approved prototypes and/or Collateral
Materials as approved.
Paws will respond to your requests for approval as soon as it
reasonably can, and in case of disapproval, Paws will explain to
you why. Paws will exercise its approval rights in good faith.
Paws will have no duty to respond to requests for approval
during any period of time that money owed by you to Paws is due
and unpaid, or during any period of time that you are otherwise
not in compliance with your duties and obligations under this
Agreement. From time to time after you have commenced production
of the Licensed Articles, you agree, at your own expense, to
furnish Paws upon request with a reasonable number of random
production samples of any Licensed Article and/or any Collateral
Materials. Paws may purchase additional samples from you at your
cost of manufacture plus ten percent (10%).
You agree that Paws may require the artwork of the Licensed
Property to be updated on any Licensed Articles or Collateral
Materials three years after Paws' first approval of the item.
8. Unless Paws gives you permission in writing, all character art
and editorial for the Licensed Articles and Collateral Materials
must be provided by Paws, and only current art may be used. Paws
will provide you with existing art at its standard rates for
reproduction, handling and mailing. All custom art work must be
done by Paws (unless you are authorized in writing by Paws), and
you will be charged a competitive price. If Paws authorizes you
to do art and/or editorial for a Licensed Article or Collateral
Materials, you agree that all rights in such works, including
but not limited to the copyrights therein, and/or the trademarks
(excepting your previously established trademarks), including
goodwill represented thereby, shall upon creation be transferred
and assigned to Paws and shall be deemed to be the property of
Paws. The original media upon which all art and editorial
relating to the Licensed Property resides, whether created by
you or any other person at your request, shall be owned by us
and will be delivered to us with the items described in
paragraph 19 below. You agree to execute and cause to be
executed by your employees and/or contractors such documents as
Paws may request to carry out the intent of this paragraph.
All art which Paws provides to you, in whatever media and for
whatever purpose, shall be promptly returned to Paws upon the
request of Paws, except for art reasonably required for
authorized current production of Licensed Articles. You
acknowledge that all such art is proprietary to Paws, may only
be used for your authorized activities under this Agreement, and
you agree that such art shall not be delivered to or made
available for use by any third party.
9. Paws will obtain in its own name and at its own expense
trademark, copyright or other proprietary protection for the
Licensed Property or the Licensed Articles and/or Collateral
Materials as Paws deems appropriate. In order for Paws to
accomplish this, you agree to provide Paws upon request with
information relating to the date when a Licensed Article was
first placed on sale, the dates of first use of the Licensed
Property on any Licensed Article, and such other information as
Paws may reasonably request, including similar information
relating to Collateral Materials. You agree that you will not
seek or obtain any trademark, copyright or other protection or
take any other action which rnight affect Paws' ownership of any
of the rights in the Licensed Property (or Paws' Trademarks).
You understand and agree that your use of the Licensed Property
(and Paws' Trademarks) shall inure to Paws' exclusive benefit
and that you will not acquire any rights by virtue of any use
you may make of the Licensed Property (or Paws' Trademarks),
other than as specifically set out in this Agreement.
You agree that the Licensed Articles and all Collateral Materials
shall bear such permanent copyright and other proprietary rights
notices as Paws may direct, and incorporate a Paws' Trademark if
requested by Paws. Further, if requested by Paws, you agree that
you will cause to appear on or within each Licensed Article, by
means of a tag, label, imprint or other specified device,
information to establish that the Licensed Article is an
authorized licensed product properly produced and sold under
this Agreement. You also agree that the placement of your own
legitimate proprietary notices on the Licensed Articles or any
Collateral Materials will be subject to the advance approval of
Paws, which approval will not be unreasonably withheld.
If Paws thinks it appropriate, you also agree to execute and cause
to be executed by your employees and/or contractors such
documents as Paws may request to carry out the intent of this
paragraph.
10. You agree that the quality and style of the Licensed Articles
as well as the quality and style of all Collateral Materials
shall be at least as high as the best quality of similar
products and promotional, advertising and packaging material
sold or distributed by you in the Licensed Territory. You also
warrant that the Licensed Articles and Collateral Materials: (1)
will not infringe upon or violate any rights of any third party
(exclusive of Paws' rights in the Licensed Property); (2) will
be of high standard in style, appearance and quality; (3) will
be safe for use by consumers and others; (4) will be in
compliance with all applicable governmental laws, rules or
regulations; and (5) will not be sold or distributed in any
manner or in any place not specifically authorized by this
Agreement.
11. Upon obtaining the advance written consent of Paws, the
Licensed Articles may be used as gifts with purchases or as
premiums (such as in connection with joint merchandising
programs; giveaways; or other kinds of promotional programs
designed to promote the sale of the Licensed Articles or other
goods or services). The license granted by this Agreement does
not include, however, the right to sell, distribute, or offer to
sell or distribute, the Licensed Articles for purposes of sale:
(a) outside of the Licensed Territory; (b) in connection with or
in relation to the release of a movie featuring the Licensed
Property in any format, and whether a theatrical release, or
release in any format principally designed for home
entertainment, or in any other manner; or (c) in connection with
or in relation to a themed attraction, such as a themed
restaurant, theme park, themed attraction at a park, et cetera.
12. Within thirty (30) days after the end of each calendar quarter,
you agree to provide Paws with payment in U.S. dollars of all
royalties due on all Licensed Articles sold in such period,
together with a complete and accurate statement of your Net
Sales of the Licensed Articles for such period. Each statement
will include information by s.k.u. and by country (if the
Licensed Territory includes more than one country) as to the
number, description and gross selling price of the Licensed
Articles shipped or sold by you during each such period, earned
royalties due, the nature and amount of any allowable deductions
and/or credits, and such other information as we may reasonably
request. Each statement shall be due regardless of whether or
not royalties are payable with respect to such period. Each
payment for a given reporting period shall be the greater of:
(a) royalties owed on account of sales occurring during the
reporting period; or (b) scheduled nonrefundable advance
payments (if applicable); or (c) due and unpaid balance of a
minimum royalty guarantee. The reporting and payment period
shall be changed from quarterly to monthly upon default by you
under this Agreement, unless Paws otherwise agrees in writing.
Should Paws elect to do so during the term of this Agreement or
within 2 years after the expiration or termination of this
Agreement, you agree to allow Paws (or its designee) access to
your books and records and/or facilities and you agree to
cooperate with Paws in conducting an audit of your activities
relating to this Agreement. Acceptance by Paws of any statement
furnished or royalty paid will not preclude Paws from
questioning the correctness thereof.
You also agree that time is of the essence with respect to all
royalty payments to be made under this Agreement, and that any
sums of money that are owed to Paws by you under this Agreement
and not paid when due shall bear interest at the rate of one and
one-half percent (1-1/2%) per month. if any audit performed by
Paws, or on Paws' behalf, identifies a shortfall of 5% or more
in royalties due for any Licensed Article in any calendar
quarter, you agree to reimburse Paws for its reasonable charges
and expenses associated with conducting the audit, including but
not limited to out of pocket expenses and professional fees
paid. If any audit performed by Paws, or on Paws' behalf,
identifies an overpayment by you in royalties for any Licensed
Article in any calendar quarter, Paws agrees to reimburse you
after first deducting its reasonable charges and expenses
associated with conducting the audit, including but not limited
to out of pocket expenses and professional fees paid.
All royalty payments and all royalty statements shall be submitted
to Paws at: Paws, Incorporated, 5440 E. County Road 450 N.,
Albany, Indiana, U.S.A. 47320-9728, or as may otherwise be
directed by Paws in writing.
13. You agree to promptly advise Paws as soon as you become aware
of any unauthorized use of the Licensed Property and to
reasonably cooperate (without direct expense to you) with Paws
in stopping or attempting to stop any such infringing activity.
14. If requested by Paws to do so, you agree to deliver to
authorized Paws' licensee(s), at your cost of duplication or
fabrication plus 10%, a duplicate of all molds, dies, films,
patterns, or similar items from which the Licensed Articles and
any Collateral Materials were made, and which incorporate
element(s) of the Licensed Property (or Paws' Trademarks). Such
licensees shall be authorized by Paws to use such materials only
for advertising and sales outside of the Licensed Territory.
15. Paws represents to you that it has the exclusive right to grant
this license for the Licensed Property to you, and if anyone
claims that your approved use of the Licensed Property infringes
any ownership right or claim of another person, you agree to
notify Paws immediately. Paws will then take over the handling
of the claim and protect you against monetary losses (but
excluding lost profits) that you sustain as a result of such a
claim. You agree to reasonably cooperate with Paws (without
direct expense to you) in handling and resolving the claim and
to do nothing to interfere with the ability of Paws to defend
and resolve the same.
16. You agree to defend, indemnify and save Paws harmless from and
against any and all claims, demands, causes of action,
judgments, damages, losses, costs and expenses (including
reasonable attorneys' fees) arising from any claim or demand
made against Paws by any third party and arising from or in
connection with the conduct of your business, or your activities
under this Agreement (except for claims covered by the preceding
paragraph). Your obligation under this paragraph will include
any claims or demands arising out of the activities of and/or
made by your employees, agents, representatives, distributors,
retailers, or manufacturers.
Paws agrees to defend, indemnify and save you harmless from and
against any and all claims, demands, causes of action,
judgments, damages, losses, costs and expenses (including
reasonable attorneys' fees) arising from any claim or demand
made against you by any third party and arising from or in
connection with the conduct by Paws of it's business, or the
activities of Paws under this Agreement, excluding those claims
covered by paragraph fifteen (15) above. The obligation of Paws
under this paragraph will include any claims or demands arising
out of the activities of and/or made by Paws' agents or
employees.
17. You also agree to carry and maintain in effect at your expense
during the term of this Agreement (and for 3 years thereafter if
it is a "claims made" policy as opposed to an "occurrence"
policy) Comprehensive General Liability Insurance (including
product liability insurance) from a qualified insurance company
providing protection in the minimum amount of Two Million
Dollars per person and Five Million Dollars per occurrence, and
providing protection against any claim, liability, damage, loss,
cost or expense arising out of any alleged or actual negligence
or other fault chargeable to you. Such insurance shall name
Paws, its directors, officers, employees and agents, as
additional insureds, and provide that no modification, lapse or
termination shall occur without 30 days advance written notice
to Paws. You agree to provide Paws with a certificate evidencing
that such insurance is in place.
18. (a) You shall be considered in breach of this Agreement if: (a)
you sell or offer to sell any item not included within the
description of Licensed Article(s); or (b) you sell or offer to
sell any Licensed Article which has not been approved in advance
by Paws as required by the terms of this Agreement; or (c) if
you should fail to perform any of your other obligations under
this Agreement, and such failure continues for fifteen (15) days
after Paws has notified you in writing of the failure. If you
are in breach of this Agreement, then Paws may, at its option,
and upon written notice to you: (i) terminate this Agreement,
whereupon all guarantees, and accrued royalties, shall be
immediately due and payable; (ii) declare all guarantees
immediately due and payable; (iii) suspend the performance of
any of its duties, including the right to suspend responding to
requests for approvals; and/or (iv) pursue any and all remedies
available at law or in equity. Upon expiration or termination of
this Agreement, all rights granted in this Agreement shall
revert to Paws, and you agree to immediately stop doing
everything relating to the Licensed Articles and the Licensed
Property (or Paws' Trademarks). Paws will also be entitled to
recover all of its costs and expenses (including reasonable
attorney fees) which it incurs in enforcing its rights. Written
notice under this paragraph may be given by facsimile
transmittal.
(b) Before Paws shall be considered in breach of this Agreement,
or as having failed to perform any duty or obligation to you,
you must first notify Paws in writing of any such failure,
describing the alleged failure with specificity, whereupon Paws
shall have a period of fifteen (15) business days to cure or
remedy any such failure. if any such failure is not remedied
within said fifteen (15) business days, then you are entitled to
pursue such remedies as may be available to you.
19. Upon the earlier of (i) expiration of this Agreement; (ii)
termination of this Agreement; or (iii) regular sales are no
longer being made for a particular Article(s), you agree to
deliver to Paws all molds, dies, films, patterns, or similar
items from which the Licensed Articles and any Collateral
Materials were made, together with all original art work, all of
which shall be deemed as solely owned by Paws; provided, that
the preceding sentence shall not apply to items created by you
and which do not incorporate element(s) of the Licensed Property
(or Paws' Trademarks) and which are readily distinguishable from
the Licensed Property (or Paws' Trademarks). In addition, upon
expiration or earlier termination, you agree to terminate all
agreements with manufacturers, distributors, and others which
relate to the manufacture, sale, distribution and use of the
Licensed Property (or Paws' Trademarks) and/or the Licensed
Articles.
20. Thirty (30) days before expiration of this Agreement, you
promise to give Paws a written inventory of all Licensed
Articles in your possession or control, whereupon you will have
the non-exclusive right to sell-off the Licensed Articles so
listed for a period of 90 days following the expiration date of
this Agreement, subject to the payment of royalties on such
sales in accordance with the terms of this Agreement. Paws will
have the right, if it so elects, to buy any or all of the
Licensed Articles listed on the inventory at your cost of
manufacture. You will not have any sell-off rights in the event
of termination of this Agreement, but you must nonetheless
provide to us, within 15 days after termination, a written
inventory of all Licensed Articles in your possession or
control.
21. You agree that this Agreement does not create a partnership or
joint venture between you and Paws, and that you will have no
power to obligate or bind Paws in any manner whatsoever. While
this Agreement is in effect, you grant permission to Paws to use
your name to notify others that you are an authorized GARFIELD
Licensee, and to promote the Licensed Articles. if you develop
or maintain any list of consumers of the Licensed Articles, you
agree to provide a copy upon request to Paws.
22. You agree that no waiver by Paws of your failure to perform any
of your obligations under this Agreement and/or any material
breach of any provision of this Agreement shall be deemed a
waiver of a subsequent failure and/or breach. You acknowledge
that you have had this Agreement reviewed by your attorney (or
have had the opportunity to do so), and that you have had the
opportunity to request changes or revisions; accordingly, you
agree that any rule of contract interpretation or construction
to the effect that ambiguities or uncertainties will be
construed against the drafting party shall not be applied to the
interpretation or construction of this Agreement.
23. This Agreement constitutes the entire agreement between you and
Paws and supersedes all prior discussions and agreements with
respect to the Licensed Articles for the term hereof. You agree
that this Agreement will be controlled by the laws of the State
of Indiana, regardless of the place or places of its physical
execution and performance. This Agreement may only be modified
in writing, signed by both parties. If any term or provision is
declared invalid, all other provisions shall remain in full
force and effect. Each party agrees to notify the other of any
change in mailing address or change in operational personnel.
Paws, Incorporated
By: /s/ Richard Hamilton, Vice President
-----------------------------------
Date: 4-8-99
------
Innovo, Inc.
By: /s/ Pat Anderson
----------------
Printed Name and Title: Pat Anderson, President
-----------------------
EX-27
Financial Data Schedule
[S] [C] [C]
[PERIOD-TYPE] 12-MOS 12-MOS
[FISCAL-YEAR-END] NOV-30-1999 NOV-30-1998
<PERIOD END> NOV-30-1999 NOV-30-1998
[CASH] 0 1078
[SECURITIES] 0 0
[RECEIVABLES] 1314 775
[ALLOWANCES] (153) (67)
[INVENTORY] 1968 1101
[CURRENT-ASSETS] 3132 3154
[PP&E] 5322 6119
[DEPRECIATION] (2280) (2082)
[TOTAL-ASSETS] 6222 7232
[CURRENT-LIABILITIES] 2513 3229
[BONDS] 1979 2234
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 629 538
[OTHER-SE] 1101 1184
[TOTAL-LIABILITY-AND-EQUITY] 6222 7232
[SALES] 10837 6790
[TOTAL-REVENUES] 10837 6790
[CGS] 6252 4493
[TOTAL-COSTS] 11490 8696
[OTHER-EXPENSES] (280) (142)
[LOSS-PROVISION] 109 58
[INTEREST-EXPENSE] 517 503
[INCOME-PRETAX] (1340) (2267)
[INCOME-TAX] 0 0
[INCOME-CONTINUING] (1340) (267)
[DISCONTINUED] (1) 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] (1341) (4014)
[EPS-BASIC] (0.22) (0.49)
[EPS-DILUTED] (0.22) (0.49)
