UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 29, 2003
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 (I.R.S. Employer Identification No.)
incorporation or organization)
5804 East Slauson Avenue, Commerce, California 90040
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (323) 725-5516
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 (Title of Class)
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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act.) Yes |_| No |X|
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant based on the closing price of the registrant's
common stock on the Nasdaq Stock Market, Inc. as of May 30, 2003, was
approximately $43,267,092.
The number of shares of the registrant's common stock outstanding as of February
25, 2004 was 25,793,850.
Documents incorporated by reference: Annual Report on Form 10-K for the fiscal
year ended November 29, 2003 filed with the Securities and Exchange Commission
on February 27, 2004.
Explanatory Note
This Amendment No. 1 on Form 10-K/A, or Amendment No.1, is being filed by
Innovo Group Inc. to amend our Annual Report on Form 10-K for the fiscal year
ended November 29, 2003 filed with the Securities and Exchange Commission, or
SEC, on February 27, 2004, or the Initial Report, to amend the Initial Report to
include the information originally intended to be incorporated by reference from
our Definitive Proxy Statement for our next annual meeting of stockholders
pursuant to Regulation 14A of the Securities Act of 1934, as amended, that we
would file with the SEC no later than March 29, 2004. Since we will not be
filing our Definitive Proxy Statement by the end of 120 days following our
fiscal year end as originally intended, we are hereby filing this Amendment No.
1 to provide the information we originally intended to incorporate by reference.
Such information is the information required by Part II, Item 5 relating to
Equity Compensation Plans and Part III Items 10-14 for an Annual Report on Form
10-K. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as
amended, Part II of the Initial Report is hereby amended to add the following
additional information as set forth below, Part III of the Initial Report is
hereby deleted in its entirety and replaced with the following Part III as set
forth below, and Part IV is amended to add the exhibits set forth in such
exhibit list to be filed herewith. This Amendment No. 1 does not change our
previously reported financial statements and other financial disclosures
contained in our Initial Report.
As used in this Amendment No. 1, the terms "we," "us," "our," and "Innovo
Group" refer to Innovo Group Inc. and our subsidiaries and affiliates, unless
the context indicates otherwise.
1
PART II
ITEM. 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Item 5 of our Initial Report is hereby amended to add the following
additional information as set forth below.
Equity Compensation Plan Information
The following table sets forth certain information about our common stock
that may be issued upon the exercise of options, warrants and rights under all
of the our compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance as of March 29,
2004, which includes our 2000 Employee Stock Incentive Plan and 2000 Director
Stock Incentive Plan.
Number of Securities
Remaining Available for
Number of Securities to Weighted Average Exercise Issuance Under Equity
be Issued Upon Exercise Price of Outstanding Compensation Plan (excluding
of Outstanding Options, Options, Warrants and securities reflected in
Plan Category Warrants and Rights Rights column (a))
------------- ----------------------- ------------------------- ----------------------------
Equity Compensation Plans (a) (b) (c)
approved by security holders(1):
2000 Employee Plan 2,030,000 $2.19 970,000
2000 Director Plan 204,828 $0.78 295,172
Equity Compensation Plans not
approved by security holders:
Samuel J. Furrow, Jr. (2) 100,000 $4.75 0
Marc B. Crossman (3) 100,000 $4.75 0
------------------------ --------------------------
TOTAL 2,434,828 0 1,265,172
======================== ==========================
(1) See "2000 Employee Stock Incentive Plan" and "2000 Director Stock
Incentive Plan" described herein.
(2) Includes 100,000 shares subject to currently exercisable options pursuant
to an option grant made in February 1999 with an exercise price of $4.75
per share that expired unexercised in February 2004 in connection with the
initial appointment as a member of our Board of Directors.
(3) Includes 100,000 shares subject to currently exercisable options pursuant
to an option grant made in February 1999 with an exercise price of $4.75
per share that expired unexercised in February 2004 in connection with the
initial appointment as a member of our Board of Directors.
2
STOCK PLANS
2000 Employee Stock Incentive Plan
The 2000 Employee Stock Incentive Plan, or the 2000 Employee Plan,
provides for the grant of options to our officers, employees and consultants and
to our affiliates. The 2000 Employee Plan continues in effect until March 2010
unless terminated earlier. The 2000 Employee Plan was amended at the annual
meeting of stockholders held on May 22, 2003 to increase the number of shares
available for issuance under the 2000 Employee Plan from 1,000,000 to 3,000,000,
as well as to increase the number of shares that may be issued to any one
individual under the 2000 Employee Plan in any calendar year from 500,000 to
1,250,000. Options granted under the 2000 Employee Plan may be either "incentive
stock options," or ISOs, within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or "nonqualified stock options," or NQSOs.
The 2000 Employee Plan is administered by the Compensation and Stock
Option Committee of our Board of Directors. The Compensation and Stock Option
Committee of our Board of Directors has been delegated the full authority in its
discretion to determine which of our officers, key employees, consultants or
affiliates will be granted stock options and to determine the terms and
provisions of such stock incentive options, subject to the requirements and
limitations of the 2000 Employee Plan. Subject to the provisions of the 2000
Employee Plan, the Compensation and Stock Option Committee of our Board of
Directors has full and conclusive authority to interpret the 2000 Employee Plan,
to prescribe, amend and rescind rules and regulations relating to the 2000
Employee Plan, to determine the terms and provisions of the respective stock
incentive agreements and to make all other determinations necessary or advisable
for the proper administration of the 2000 Employee Plan.
The 2000 Employee Plan is intended to: (a) provide incentive to our
officers and key employees and our affiliates to stimulate their efforts toward
our continued success and to operate and manage the business in a manner that
will provide for our long-term growth and profitability; (b) encourage stock
ownership by officers and key employees by providing them with a means to
acquire a proprietary interest in us, acquire shares of stock, or to receive
compensation which is based upon appreciation in the value of the stock; and (c)
provide means of obtaining, rewarding and retaining key personnel and
consultants.
The number of shares of stock as to which a stock incentive may be granted
will be determined by the Compensation and Stock Option Committee of our Board
of Directors, in its sole discretion, subject to the limitations of the 2000
Employee Plan. To the extent required under Section 162(m) of the Code and the
regulations thereunder for compensation to be treated as qualified performance
based compensation, the maximum number of shares of stock with respect to which
options may be granted during any one year period to any employee may not exceed
1,250,000.
Stock option grants issued under the 2000 Employee Plan may be granted
only to our officers, key employees, consultants or to any of our affiliates.
The aggregate fair market value (determined as of the date an ISO is granted) of
stock with respect to which stock options intended to meet the requirements of
Section 422 of the Code become exercisable for the first time by an individual
during any calendar year under all of our plans and our subsidiaries may not
exceed $100,000; provided further, that if the limitation is exceeded, the ISOs
which cause the limitation to be exceeded will be treated as NQSOs.
The 2000 Employee Plan was adopted by our Board of Directors on March 12,
2000 and approved by our common stockholders at the 2000 annual meeting of
stockholders and amended at the at the annual meeting of stockholders held on
May 22, 2003. Up to 3,000,000 shares of our common stock, subject to adjustment
as provided in the 2000 Employee Plan, may be issued under the 2000 Employee
Plan. As of March 29, 2004, 2,030,000 shares have been issued under our 2000
Employee Plan. Awards under the 2000 Employee Plan are discretionary. Therefore,
it is not possible to determine the benefits that will be received in the future
by participants in the 2000 Employee Plan.
3
2000 Director Stock Incentive Plan
The purpose of the 2000 Director Stock Incentive Plan, or 2000 Director
Plan, is to permit the granting of stock options to our Board of Directors who
are not our employees at an exercise price less than market value at the date of
grant in lieu of paying Board of Directors' fees in cash, thereby advancing our
interests by encouraging and enabling the acquisition of our common stock by our
Board of Directors whose judgment and ability we rely upon for the attainment of
our long-term growth and development. However, beginning in fiscal 2003, we
commenced paying all non-employee directors a cash fee in addition to this grant
of stock options. Accordingly the 2000 Director Plan is intended to promote a
close identity of interest among us, our Board of Directors, and our common
stockholders, as well as to provide a means to attract and attain well-qualified
members of our Board of Directors. The 2000 Director Plan was adopted by our
Board of Directors on September 13, 2000 and approved by our common stockholders
at the 1999 annual meeting of stockholders.
There are authorized for issuance or delivery upon the exercise of options
to be granted from time to time under the 2000 Director Plan an aggregate of
500,000 shares of our common stock, subject to adjustment as provided in the
2000 Director Plan. As of March 29, 2004, 204,828 shares have been issued under
the 2000 Director Plan. The 2000 Director Plan is administered by the
Compensation and Stock Option Committee of our Board of Directors, which will
consist of not less than three members, all of whom will be deemed to be
independent, and appointed by our Board of Directors.
Pursuant to our 2000 Director Plan, each non-employee director receives
annual compensation at the first annual meeting of stockholders following his or
her appointment and annually thereafter a grant in the form of options to buy
common stock with an aggregate fair market value of $10,000. These options are
exercisable beginning one year from the date of grant and expire ten years from
the date of grant. The exercise price is set at 50% of the fair market value of
the common stock on the date of grant. This discount was originally proposed in
lieu of directors' fees. A member of our Board of Directors who is also an
employee of ours receives no additional compensation for his or her service as
member of our Board of Directors. Members of our Board of Directors who also
serve on one or more committees of the Board of Directors do not receive any
additional compensation for such service. In addition to this stock option
compensation, at the annual meeting of stockholders on May 22, 2003, our Board
of Directors voted to compensate in cash each non-employee director at an annual
rate of $12,500 for service as a member of our Board of Directors. After our
annual meeting of stockholders for 2004, which we expect to hold in June of
2004, our Board of Directors will meet to discuss compensation arrangements for
members of the Board of Directors for service in fiscal 2004.
Each option has an exercise price equal to one-half of the market price on
the date of grant, and covers a number of shares equal to $10,000 divided by the
exercise price per share. The market price is determined as of the close of
business on the day of our Board meeting immediately following our annual
shareholder meeting. The 2000 Director Plan will continue in effect until
September 2010, unless terminated earlier. Options granted under the 2000
Director Plan are nonqualified stock options. During 2003, each of our
non-employee directors received an option to purchase up to 7,692 shares of our
common stock with an exercise price of $1.30 per share vesting on a monthly
basis beginning May 22, 2003 under our 2000 Director Plan in addition to cash
fees. These options have a ten year term and expire on May 22, 2013.
4
PART III
Part III of our Initial Report is hereby deleted in its entirety and
replaced with the following Part III as set forth below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to our directors and executive officers and
their ages and positions as of March 29, 2004 are as follows:
Year First
Elected
Name Age Position Director
---- --- -------- --------
Samuel J. (Sam) Furrow 62 Chairman of the Board of Directors 1998
Samuel J. (Jay) Furrow, Jr. 30 Chief Executive Officer and Director 1999
Patricia Anderson 43 President and Director 1990
Marc B. Crossman 32 Chief Financial Officer and Director 1999
Shane Whalen 33 Chief Operating Officer N/A
John G. Looney, MD(1)(2)(3) 62 Director 1999
Daniel A. Page(1)(3) 52 Director 1997
Suhail R. Rizvi(1)(2)(3) 38 Director 2003
Vincent Sanfilippo 38 Director 2003
Kent Savage 42 Director 2003
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
(3) Member of the Nominating and Governance Committee
Samuel J. (Sam) Furrow has served as Chairman of our Board of Directors
since October 1998. Mr. Furrow became a member of our Board of Directors in
April 1998 and served as our Chief Executive Officer from October 1998 until
December 2000, after which Patricia Anderson resumed the position. Mr. Furrow
also has been Chairman of the Board of Furrow Auction Company, a real estate and
equipment sales company with its headquarters in Knoxville, Tennessee, since
April 1968; Chairman of Furrow-Justice Machinery Corporation, a six-branch
industrial and construction equipment dealer, since 1983; owner of Knoxville
Motor Company-Mercedes Benz and Land Rover of Knoxville since December 1980 and
July 1997, respectively. Mr. Furrow has been a Director of Southeastern
Advertising Inc., an advertising agency, since April 1968; a Director of First
American National Bank since September 1993; and a Director of Goody's Family
Clothing, Inc. (NASDAQ: GDYS), a publicly traded retail clothing chain, since
1995. Mr. Furrow received his undergraduate and J.D. degree from the University
of Tennessee. Sam Furrow is the father of our Chief Executive Officer, Samuel J.
(Jay) Furrow, Jr.
Samuel J. (Jay) Furrow, Jr. has served as our Chief Executive Officer
since July 2002 and a member of our Board of Directors since January 1999. Prior
to that, Mr. Furrow served as our President from December 2000 until July 2002,
served as our Chief Operating Officer from April 1999 until March 2003, our
Acting Chief Financial Officer from August 2000 until March 2003, and our
Vice-President for Corporate Development and In-House Counsel from August 1998
until April 1999. Mr. Furrow currently serves on the Board of Directors of
Northgate Innovations, Inc. (NGTE.OB), a publicly traded manufacturer and
distributor of personal computers. Mr. Furrow received his J.D. degree from
Southern Methodist University School of Law and a B.S. degree in Political
Science from Vanderbilt University. Jay Furrow is the son of the Chairman of our
Board of Directors, Samuel J. (Sam) Furrow.
5
Patricia Anderson has served as our President since July 2002 and a member
of our Board of Directors since August 1990. Ms. Anderson served as our Chief
Executive Officer from December 2000 until July 2002, our President from August
1990 until December 2000, and Chairman of our Board of Directors from August
1990 until August 1997. Prior to founding Innovo, Inc., Ms. Anderson worked as
Vice President of Sales and Marketing for Lexem, Inc., an import wholesale
houseware gift company located in Houston, Texas, from August 1985 until July
1987. Prior to that, Ms. Anderson owned and operated three retail stores
focusing on home decorating/gift shops all under the name of Basket Case from
November 1979 until April 1983. Ms. Anderson attended the University of Texas
and the University of Houston, with a focus on Accounting and Food Management.
Marc B. Crossman has served as our Chief Financial Officer since March
2003 and a member of our Board of Directors since January 1999. Prior to joining
our company, Mr. Crossman served as a Vice President and Equity Analyst with
J.P. Morgan Securities Inc., New York City, New York, from January 1999 until
March 2003. Prior to joining J.P. Morgan Securities, Inc., Mr. Crossman served
as a Vice President and Equity Analyst with CIBC Oppenheimer Corporation from
September 1997 until January 1999. Mr. Crossman also serves on the Board of
Directors of Northgate Innovations, Inc. (NGTE.OB), a publicly traded
manufacturer and distributor of personal computers. Mr. Crossman received a B.S.
degree in Mathematics from Vanderbilt University.
Shane Whalen has served as our Chief Operating Officer since April 2003.
Prior to that, Mr. Whalen served as our Vice President of Corporate Development
from October 2002 until April 2003. Prior to joining our company, Mr. Whalen was
an independent business consultant from November 2000 until September 2002.
Prior to that, Mr. Whalen served as Chief Operating Officer for Next Generation,
LLC, an entertainment production company, from August 1998 until November 2000.
Prior to that, Mr. Whalen served as Manager of Financial Services &
Transportation for Accenture Consulting from January 1994 until August 1998. Mr.
Whalen received a B.A. degree in Economics from Vanderbilt University.
John G. Looney, M.D. has served as a member of our Board of Directors
since August 1999. Dr. Looney is a tenured Professor of Psychiatry and an
Associate Professor of Pediatrics at Duke University Medical Center. Dr. Looney
has been in the Duke University faculty since 1986. Dr. Looney serves on the
Investment Oversight Committee of the American Psychiatric Association (APA),
which manages the investments of the assets of the APA. In addition to his
numerous professional appointments within his field, Dr. Looney serves as
Consultant to the Board of Directors for Eieico, Inc., a private agricultural
biotechnology company that holds exclusive rights to bring to the marketplace
patents from the School of Agriculture and College of Veterinary Medicine at
Pennsylvania State University. Dr. Looney also serves as a consultant to the
Board of Directors for Piper Plastics, one of the nation's largest manufacturers
of plastic crates for the dairy and beverage industries. Dr. Looney received a
B.A. degree from Cornell University, a B.M.S. degree from Dartmouth Medical
School, his M.D. degree from Southwestern Medical School, and an M.B.A. degree
from Southern Methodist University.
Daniel A. Page has served as a member of our Board of Directors since
August 1997. Mr. Page served as our Chief Operating Officer from August 1997
until April 1999. From June 1993 until August 1997, Mr. Page was the principal
operating and executive officer of Southeast Mat Company, a privately held
manufacturer of automobile floor mats. Prior to that, Mr. Page was the president
of Tennessee Properties Company, a privately held real estate development
company, from 1980 until 1993.
6
Suhail R. Rizvi has served as a member of our Board of Directors since
April 2003. Mr. Rizvi has served as Chairman of the Board of Directors for the
Avatar Group, formerly known as Electronic Manufacturing Services, Inc. a Puerto
Rico-based manufacturing company, since December 1995. Mr. Rizvi also serves as
a member of the Board of Directors for Varsity Television, a TV network
dedicated to teens; Northgate Innovations, Inc. (NGTE.OB), a publicly traded
manufacturer and distributor of personal computers; Doublespace Holdings, a
brand strategy and web development firm based in New York; and International
Sourcing Group, a distributor of electronic components. Mr. Rizvi received his
B.S. degree in Economics from the Wharton School of the University of
Pennsylvania.
Vincent Sanfilippo has served as a member of our Board of Directors since
July 2003. Mr. Sanfilippo is the Chief Investment Officer and Principal of
Urdang & Associates Real Estate Advisors, Inc., a real estate investment
management firm with a portfolio of real estate investments valued at
approximately $2 billion. Mr. Sanfilippo has been responsible for originating or
overseeing the acquisition of approximately $3 billion of real estate assets
during his 15 years with Urdang & Associates. Mr. Sanfilippo received his B.S.
degree in Economics from the University of Pennsylvania's Wharton Business
School.
Kent Savage has served as a member of our Board of Directors since July
2003. Mr. Savage currently serves as Chief Executive Officer for Northgate
Innovations, Inc. (NGTE:OB). Prior to joining Northgate in January 2004, Mr.
Savage served as co-founder, Chief Sales and Marketing Officer for TippingPoint,
Technologies (NASDAQ: TPTI) from September 2002 until February 2003. Prior to
joining TippingPoint, Mr. Savage served as co-founder, CEO and President for
Netpliance, Inc., from February 1999 until August 2001. Prior to joining
Netpliance, Mr. Savage served as General Manager, Broadband for Cisco Systems
Inc. Service Provider Line of Business from April 1998 until February 1999.
Prior to joining Cisco, Mr. Savage served as Vice President, Sales and Marketing
for NetSpeed, Inc., from July 1996 until April 1998. Mr. Savage received his
B.S. in Business from Oklahoma State University, attended University of
Virginia's Executive Leadership Program, and earned his MBA from Southern
Methodist University.
Other Significant Employees
Joe Dahan has served as the President and head designer for our Joe's
Jeans, Inc. subsidiary, or Joe's, since its formation in February 2001. Mr.
Dahan is responsible for the design, development and marketing of Joe's
products. Prior to Joe's, Mr. Dahan was the head designer for Azteca Production
International, Inc., or Azteca, where he was responsible for the design,
development and merchandising of product lines developed by Azteca from 1996
until 2001. Azteca, which is owned by two of our significant common
stockholders, is one of the world's largest manufacturers of denim related
products. Prior to his employment with Azteca, Mr. Dahan was engaged in the
design and development of apparel products for a company of which he was an
owner and operator from 1989 until 1996.
Pierre Levy has served as our General Manager of Apparel Operations since
February 2003. Prior to that, Mr. Levy was our Head of Product Sourcing from
July 2003 until February 2003. Mr. Levy initially joined our company in
connection with our acquisition of the Blue Concept division from Azteca, as
discussed in Item 13 `Certain Relationships and Related Transactions" in this
Amendment No. 1. While at Azteca, Mr. Levy served as the Chief Operating Officer
with the primary responsibility of managing thousands of employees in the United
States and Mexico and ensuring the manufacturing of millions of garments per
month for brands such as Tommy Hilfiger, Calvin Klein, J. Crew, American Eagle
Outfitters and Bongo. Prior to joining Azteca, Mr. Levy was the owner and
President of Olive, a Los Angeles based manufacturing company focusing on the
design, marketing and distribution of apparel products worldwide.
7
Code of Business Conduct and Ethics
Our Board of Directors adopted a Code of Business Conduct and Ethics for
all of our directors, officers and employees on May 22, 2003. Our Code of
Business Conduct and Ethics is available on our website at www.innovogroup.com
or you may request a free copy of our Code of Business Conduct and Ethics from
our Chief Operating Officer at our corporate headquarters at the following
address: 5804 East Slauson Avenue, Commerce, California 90040 or by calling
(323) 725-5526. You may also find a copy of our Code of Business Conduct and
Ethics as Exhibit 14 to our Initial Report filed with the SEC.
To date, there have been no waivers under our Code of Business Conduct and
Ethics. We intend to disclose any amendments to our Code of Business Conduct and
Ethics and any waiver granted from a provision of such Code on a Form 8-K filed
with the SEC within five business days following such amendment or waiver or on
our website at www.innovogroup.com within five business days following such
amendment or waiver. The information contained or connected to our website is
not incorporated by reference into this Amendment No.1 and should not be
considered a part of this or any other report that we file or furnish to the
SEC.
Committees of our Board of Directors
Our Board of Directors has an Audit Committee, Compensation and Stock
Option Committee and Nominating and Governance Committee.
Audit Committee. The Audit Committee is currently comprised of Messrs.
Rizvi, Looney and Page. Mr. Rizvi serves as Chairman of the Audit Committee.
The Audit Committee has been established to: (a) assist our Board of
Directors in its oversight responsibilities regarding (1) the integrity of our
financial statements, (2) our compliance with legal and regulatory requirements,
(3) the independent accountant's qualifications and independence and (4) the
performance of the our internal audit function; (b) prepare the report required
by the SEC for inclusion in the our annual proxy statement; (c) retain and
terminate our independent accountant; (d) approve audit and non-audit services
to be performed by the independent accountant; and (e) perform such other
functions as our Board of Directors may from time to time assign to the Audit
Committee. The Audit Committee has a charter that details its duties and
responsibilities, which was adopted by our Board of Directors on May 22, 2003.
Currently, all Audit Committee members are "independent" under NASDAQ listing
standards and as such term is defined in the rules and regulations of the SEC,
and Mr. Rizvi has also been designated to be an "audit committee financial
expert" as such term is defined in the rules and regulations of the SEC. A copy
of the Audit Committee charter can be found on our website at
www.innovogroup.com under our Investor Relations heading.
Compensation and Stock Option Committee. The Compensation and Stock Option
Committee is currently comprised of Messrs. Rizvi and Looney. Mr. Rizvi serves
as Chairman of the Compensation and Stock Option Committee.
The principal responsibilities of the Compensation and Stock Option
Committee are to (a) assist our Board of Directors in ensuring that a proper
system of long-term and short-term compensation is in place to provide
performance-oriented incentives to management, and that compensation plans are
appropriate and competitive and properly reflect the objectives and performance
of management and the company; (b) discharge our Board of Director's
responsibilities relating to compensation of our executive officers; (c)
evaluate our Chief Executive Officer and set his remuneration package; (d)
prepare an annual report on executive compensation for inclusion in our annual
proxy statement; (e) make recommendations to our Board of Directors with respect
to incentive-compensation plans and equity-based plans; and (f) perform such
other functions as our Board of Directors may from time to time assign. The
Compensation and Stock Option Committee has a charter that details its duties
and responsibilities, which was adopted by our Board of Directors on May 22,
2003. Currently, all Compensation and Stock Option Committee members are
"independent" under NASDAQ listing standards. A copy of the Compensation and
Stock Option Committee charter can be found on our website at
www.innovogroup.com under our Investor Relations heading.
8
Nominating and Governance Committee. The Nominating and Governance
Committee is currently comprised of Messrs. Looney, Page and Rizvi. Dr. Looney
serves as Chairman of the Nominating and Governance Committee.
The principal responsibilities of the Nominating and Governance Committee
are to (a) assist our Board of Directors in determining the desired experience,
mix of skills and other qualities to assure appropriate Board composition,
taking into account the current Board members and the specific needs of the
company and the Board of Directors; (b) identifying highly qualified individuals
meeting those criteria to serve on our Board of Directors; (c) proposing to our
Board of Directors a slate of nominees for election by our common stockholders
at the annual meeting of stockholders and prospective director candidates in the
event of the resignation, death, removal or retirement of directors or a change
in our Board of Directors composition requirements; (d) developing plans
regarding the size and composition of our Board of Directors and its committees;
(e) reviewing management succession plans; (f) reviewing the Corporate
Governance Guidelines of our Board of Directors at least annually and monitoring
and making recommendations with respect to the corporate governance principles
applicable to the company; and (g) such other functions as the Board of
Directors may from time to time assign to the Nominating and Governance
Committee.
The Nominating and Governance Committee has a charter that details its
duties and responsibilities, which was adopted by our Board of Directors on May
22, 2003. Currently, all Nominating and Governance Committee members are
"independent" under NASDAQ listing standards. There is no specific procedure
outlined in the charter for the Nominating and Governance Committee to consider
nominees to our Board of Directors that are recommended by our common
stockholders, but such nominees will be considered in accordance with the
principal responsibilities of the Nominating and Governance Committee, our
bylaws and all applicable rules and regulations relating to such nominations by
our common stockholders. The Nominating and Governance Committee has the
responsibility for developing criteria for the selection of new directors and
nominees for vacancies. The members of the Nominating and Governance Committee
have the discretion to choose candidates that have the desired experience, mix
of skills and other qualities to assure appropriate composition while taking
into account the current members and the specific needs of Innovo Group and our
Board of Directors. To date, no more specific criteria has been developed than
that set forth in the charter. Furthermore, we have not had a stockholder
propose a nominee to our Board of Directors nor have we paid any third party a
fee to assist us in the process of identifying or evaluating candidates for our
Board of Directors. A copy of the Nominating and Governance Committee charter
can be found on our website at www.innovogroup.com under our Investor Relations
heading.
9
Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors, officers and persons who beneficially own more than ten percent
of a registered class of our equity securities, to file reports of ownership and
changes in ownership with the SEC on a timely basis. Directors, officers and
greater than ten percent beneficial owners are required by the SEC's regulations
to furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such forms furnished to us and
certain of our internal records, or upon written representations that no Form 5s
were required, we believe that during the year ended December 31, 2003, all
Section 16(a) filing requirements applicable to our directors, officers and
greater than ten percent beneficial owners were satisfied on a timely basis
except as follows: the Form 3s to be filed upon election to our Board of
Directors for Vincent Sanfilippo, Kent Savage and Suhail R. Rizvi were
inadvertently not timely filed upon their election to our Board of Directors, a
Form 3 for Shane Whalen filed upon his appointment as an officer subject to
Section 16 and a Form 4 relating to one grant of stock options were
inadvertently not timely filed, two Form 4s for Seymour Braun relating to
thirteen individual sale transactions were inadvertently not timely filed, one
Form 4 for Samuel J. Furrow relating to four individual grants of stock options
was inadvertently not timely filed, one Form 4 for Marc B. Crossman relating to
two individual grants of stock options was inadvertently not timely filed, one
Form 4 for John G. Looney relating to four individual grants of stock options
was inadvertently not timely filed, one Form 4 for Daniel A. Page relating to
four individual grants of stock options and one sale transaction was
inadvertently not timely filed, one Form 4 for Suhail R. Rizvi relating to one
grant of stock options was inadvertently not timely filed, and one Form 4 for
Hubert Guez relating to three individual sale transactions was inadvertently not
timely filed.
10
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth certain information with respect to
compensation for the years ended November 29, 2003, November 30, 2002 and
December 1, 2001, respectively, paid to our chief executive officer and our
other most highly compensated executive officers as of November 29, 2003. In
this Amendment No. 1, we refer to these individuals as our Named Executive
Officers.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
Securities All Other
Name and Other Annual Underlying Options Compensation
Principal Position Year Salary Bonus Compensation (#) ($)
($)
Samuel J. Furrow, Jr. 2003 $ 275,000 -- -- 100,000 --
Chief Executive Officer 2002 160,000 -- -- -- --
2001 143,000 -- -- 150,000 --
Patricia Anderson 2003 $ 275,000 -- -- 100,000 --
President 2002 206,000 -- -- -- --
2001 200,000 -- -- 300,000 --
Marc B. Crossman 2003 $ 275,000 -- $ 12,000(2) 1,000,000 --
Chief Financial Officer 2002 -- -- -- 10,000(3) --
2001 -- -- -- -- --
Shane Whalen 2003 $ 125,000 -- $ 1,000(2) 50,000 --
Chief Operating Officer 2002 9,170(4) -- -- -- --
2001 -- -- -- -- --
(1) No executive officer received restricted stock awards or option grants
during the fiscal year ending November 30, 2002.
(2) This amount represents payments made in connection with relocation
expenses.
(3) These options were issued in connection with Mr. Crossman's service as a
member of our Board of Directors.
(4) Mr. Whalen commenced employment with us in October 2002 as our Vice
President of Corporate Development.
Employment Contracts, Termination of Employment and Change in Control
We have not entered into any employment or severance agreements with any
of our Named Executive Officers. However, in connection with Mr. Crossman's
option agreement, in the event of a change in control of the company, all of Mr.
Crossman's options, to the extent not otherwise exercisable, will immediately
become exercisable.
11
Stock Option Grants
The following table sets forth the stock options we granted during the
fiscal year ended November 29, 2003 to each of our Named Executive Officers. We
have never granted any stock appreciation rights.
Amounts shown as potential realizable values are based on compounded
annual rates of share price appreciation of five and ten percent over the
10-year term of the options, as mandated by rules of the SEC, and are not
indicative of expected share price performance. Actual gains, if any, on share
option exercises are dependent on future performance of the overall market
conditions, as well as the option holders' continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved or may be exceeded. The indicated amounts are net of the option
exercise price but before taxes that may be payable upon exercise.
Option Grants in the Fiscal Year Ended November 29, 2003
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
--------------------------------------------------------------------------------------------------------------------------------
(1) (2)
Number of
Securities % of Total
Underlying Options Granted Exercise or
Options Granted to Employees in Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
---- --------------- --------------- ------------ ---------- ----------- ------------
Samuel J. Furrow, Jr. 100,000 8% $2.40 12/02/07 $ 66,000 $ 147,000
Patricia Anderson 100,000 8% $2.40 12/02/07 $ 66,000 $ 147,000
Marc B. Crossman 1,000,000 77% $2.86 3/25/13 $ 1,800,000 $ 4,560,000
Shane Whalen 50,000 4% $2.60 5/22/13 $ 82,000 $ 207,000
12
Fiscal Year End Option Values
The following table sets forth certain information with respect to stock
options exercised by the Named Executive Officers during the fiscal year ended
November 29, 2003. In addition, the table sets forth the number of shares
covered by unexercised stock options held by the Named Executive Officers as
November 29, 2003, and the value of "in-the-money" stock options, which
represents the positive spread between the exercise price of a stock and the
market price of the shares subject to such option as of November 29, 2003.
Aggregated Option Exercises in Fiscal Year Ended November 29, 2003 and
Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)(1)
---------------------- ----------------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
--------------------- --------------- -------------- ---------------------- ----------------------
Samuel J. Furrow, Jr. 0 $ 0 350,000(2)/0 $ 597,500/$ 0
Patricia Anderson 0 $ 0 400,000/0 $ 1,025,000/$ 0
Marc B. Crossman 0 $ 0 468,974(2)/666,667 $ 539,461/$ 826,667
Shane Whalen 0 $ 0 25,000/25,000 $ 37,500/$ 37,500
------------
(1) Based on a closing price per share of $4.10 for the Common Stock on
Friday, November 28, 2003, as reported by the NASDAQ SmallCap Market.
(2) Includes 100,000 shares that expired unexercised on February 24, 2004 at
an exercise price of $4.75.
13
Option Repricing
The following table sets forth information concerning the repricing of
options held by Marc Crossman, our Chief Financial Officer, with respect to
options that were originally granted in connection with commencement of his
employment as our Chief Financial Officer. However, on the original date of the
grant of the options to Mr. Crossman, there were not enough shares authorized
under the 2000 Employee Stock Incentive Plan to grant Mr. Crossman the options.
As a result, Mr. Crossman's options were cancelled and reissued upon stockholder
approval of an increase in shares authorized and available for grant under the
2000 Employee Stock Incentive Plan. The term of the reissued option was 10 years
rather than the 20 year term of the original option.
Ten Year Option Repricings
Length of
Original
Number of Option Term
Securities Market Price of Remaining at
Underlying Stock at Time of Exercise Price at New Date of
Options Repriced Repricing or Time of Repricing Exercise Repricing or
Name and Position Date or Amended (#) Amendment ($) or Amendment ($) Price ($) Amendment
----------------- ---- ---------------- ---------------- ----------------- --------- ------------
Marc B. Crossman
Chief Financial
Officer and Director 5/22/03 1,000,000 $2.60 $2.86 $2.86 19.8 years
401(k) Plan
On December 1, 2002, we established a tax qualified defined contribution
401(k) Profit Sharing Plan . All employees who have worked for us for 30
consecutive days may participate in the 401(k) Profit Sharing Plan and may
contribute up to 100% of their salary to the plan. Our elective matching
contributions may be made on a discretionary basis. All employees who have
worked 500 hours qualify for profit sharing in the event at the end of each year
we decide to do so. Costs of the plan charged to operations were $20,000 for the
year ended November 29, 2003.
Compensation Committee Interlocks and Insider Participation
During 2003, the Compensation and Stock Option Committee of our Board of
Directors was comprised of Dr. Looney and Mr. Rizvi. The Compensation and Stock
Option Committee is responsible for determining the salaries and incentive
compensation of our executive officers and for providing recommendations for the
salaries and incentive compensation of all other employees and consultants. The
Compensation and Stock Option Committee also administers our benefit plans,
including the 2000 Employee Stock Incentive Plan. Mr. Rizvi serves as Chairman
of the Compensation and Stock Option Committee. Neither Mr. Rizvi nor Dr. Looney
has served as an executive officer or employee of Innovo Group. However,
beginning in December 2003, Messrs. Furrow and Crossman, two of our executive
officers and members of our Board of Directors, became members of the Board of
Directors for Northgate Innovations, Inc. (NGTE.OB), of which Mr. Savage
currently serves as Chief Executive Officer. Furthermore, one additional member
of our Board of Directors, Mr. Rizvi, also serves as a member of the Board of
Directors for Northgate Innovations, Inc. (NGTE.OB). Neither Mr. Furrow nor Mr.
Crossman is a member of the Compensation Committee of the Board of Directors for
Northgate Innovations, Inc. (NGTE.OB).
14
Compensation of Directors
For fiscal 2003 and pursuant to our 2000 Director Stock Incentive Plan,
each non-employee director receives annual compensation at the first annual
meeting of stockholders following his or her appointment and annually thereafter
a grant in the form of options to buy common stock with an aggregate fair market
value of $10,000. These options are exercisable beginning one year from the date
of grant and expire ten years from the date of grant. The exercise price is set
at 50% of the fair market value of the common stock on the date of grant. The
discount was originally proposed to be in lieu of director fees. A member of our
Board of Directors who is also our employee receives no additional compensation
for his or her service as member of our Board of Directors. Members of our Board
of Directors who also serve on one or more committees of our Board of Directors
do not receive any additional compensation for such service. In addition to this
stock option compensation, at the annual meeting of stockholders held on May 22,
2003, our Board of Directors voted to compensate all non-employee directors in
the form of a cash payment at an annual rate of $12,500 for service as a member
of our Board of Directors. After our annual meeting of stockholders for 2004,
which we expect to hold in June of 2004, our Board of Directors will meet to
discuss compensation arrangements for members of the Board of Directors for
service in fiscal 2004.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
As our business grows, our Compensation and Stock Option Committee expects
to work closely with management to design an executive compensation program to
assist us in attracting and retaining needed outstanding executives and senior
management personnel. The design and implementation of such program will evolve
as needed, but will be based primarily on two elements: (i) providing
compensation opportunities that are competitive with competing companies of
similar size; and (ii) linking executives' compensation with our or a division's
financial performance by rewarding the achievement of our short-term and
long-term objectives.
The three principal components of the executive compensation program are
annual base salary, short-term incentive compensation in the form of performance
bonuses payable in cash each year, and long-term incentive compensation in the
form of stock options and other equity awards. In fiscal 2003, we needed to
attract additional executive management through our compensation arrangement,
including our Chief Financial Officer and our Chief Operating Officer. Our
executive officers are elected on an annual basis and serve at the discretion of
our Board of Directors.
Mr. Jay Furrow became Chief Executive Officer in July 2002, succeeding Ms.
Patricia Anderson, who currently serves as our President. Prior to December
2002, the annual base salary for Mr. Furrow and Ms. Anderson was $150,000 and
$200,000, respectively. In December of 2002, the annual compensation for both
Mr. Furrow and Ms. Anderson was increased to $275,000 in base salary and each
person received a stock option to purchase up to 100,000 shares of common stock
with an exercise price of $2.40 per share expiring in December 2007.
During fiscal 2003, the Compensation and Stock Option Committee met a
total of four times. At the November 27, 2002 meeting, the compensation
arrangement discussed above for Mr. Furrow and Ms. Anderson was approved. Upon
the appointment of Marc Crossman as Chief Financial Officer, Mr. Crossman was
hired at the same base salary as Mr. Furrow and Ms. Anderson and was granted an
option to purchase up to 1,000,000 shares of our common stock, as discussed
elsewhere in this Amendment No. 1. The original compensation arrangement, as
well as Mr. Crossman's compensation arrangement, was recommend by the
Compensation and Stock Option Committee and approved by the full Board of
Directors and was based on individual performance and analysis of compensation
for the positions at comparative companies.
15
Neither Ms. Anderson, Mr. Furrow nor Mr. Crossman has an employment
agreement with us, but Mr. Crossman does have a change in control provision in
his stock option grant which provides for immediate vesting of all options to
the extent not otherwise exercisable will immediately become exercisable in the
event of a change in control of the company, as discussed elsewhere in this
Amendment No. 1.
The SEC requires that this report of the Compensation and Stock Option
Committee comment on our policy with respect to Section 162(m) of the Code which
limits the deductibility of our tax return of nonperformance-based compensation
in excess of $1 million dollars paid to any of our Named Executive Officers. The
Compensation and Stock Option Committee is monitoring the effects of our
compensation program with respect to Section 162(m) of the Code. To date, we
have not suffered a loss of compensation as a result of the $1 million dollar
limitation. The Compensation and Stock Option Committee reserves the right to
design programs that recognize a full range of performance criteria critical to
our success, even where the compensation paid under such programs may not be
deductible.
REPORT ON CEO COMPENSATION
Mr. Furrow's 2003 annual base salary and grant of stock options were based
on the overall principles of executive compensation described above. The
Compensation and Stock Option Committee reviewed Mr. Furrow's compensation and
overall assessment of his performance during its November 2002 meeting. As
discussed above, we made adjustments to Mr. Furrow's base salary to be effective
in December 2002 at the beginning of our first fiscal 2003 quarter and granted
him additional stock options in order to realign his compensation with market
and organizational considerations. Upon the hiring of Mr. Crossman in March
2003, the Compensation and Stock Option Committee again reviewed Mr. Furrow's
2003 annual base salary and grant of stock options and concluded that his annual
base salary and grant of stock options were consistent with the overall
performance of the company and industry standards for executives with similar
responsibilities in similar companies.
The Compensation and Stock Option Committee:
Suhail R. Rizvi, Chairman of the Compensation and Stock Option Committee
John G. Looney, MD
Stock Performance Graph
The following graph compares the cumulative total stockholder return for
our company, the NASDAQ Stock Market (U.S. companies) Index, or the NASDAQ
Market Index, and the Standard and Poor's 600 SmallCap Index, or S&P 600
SmallCap. Measurement points are the last trading day of each of our fiscal
years ended November 30, 1997, November 30, 1998, November 30, 1999, November
30, 2000, December 1, 2001, November 30, 2002, and November 29, 2003. The graph
assumes that $100 was invested on November 30, 1997 in our common stock, the
NASDAQ Market Index and the S&P 600 SmallCap and assumes reinvestment of any
dividends. The stock price performance on the following graph is not necessary
indicative of future stock price performance.
16
INNOVO GROUP, INC.
COMPARISON OF CUMULATIVE TOTAL RETURN
TO NASDAQ MARKET INDEX AND
S&P 600 SMALLCAP INDEX
(PERFORMANCE GRAPH)
[GRAPHIC OMITTED]
1997 1998 1999 2000 2001 2002 2003
Innovo Group Inc. $ 100 $ 21.91 $ 24.29 $ 12.39 $ 29.86 $ 39.60 $ 62.45
NASDAQ Stock Market (US) $ 100 $122.59 $ 210.61 $163.33 $121.68 $ 93.92 $ 124.50
S&P 600 SmallCap Market $ 100 $ 93.88 $ 102.91 $110.09 $122.45 $114.60 $ 149.64
Notwithstanding anything to the contrary set forth in any of our previous
or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this
Amendment No. 1 or our future filings under those statutes, the Compensation and
Stock Option Committee Report and the Stock Performance Graph are not deemed
filed with the SEC and will not be deemed incorporated by reference into any of
those prior filings or into any future filings made by us under those statutes.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
The following table provides information as of March 29, 2004 concerning
beneficial ownership of common stock held by (1) each person or entity known by
us to beneficially own more than 5% of our outstanding common stock, (2) each of
our directors and nominee for election as a director, (3) each of our Named
Executive Officers, and (4) all of our directors and executive officers as a
group. The information as to beneficial ownership has been furnished by our
respective common stockholders, directors and executive officers, and, unless
otherwise indicated, each of our common stockholders has sole voting and
investment power with respect to the shares beneficially owned. Beneficial
ownership is determined under the rules of the SEC and generally includes voting
or investment power with respect to securities.
Unless indicated below, to our knowledge, the persons and entities named
in the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
Pursuant to the rules of the SEC, certain shares of our common stock that a
beneficial owner set forth in this table has a right to acquire within 60 days
of the date hereof pursuant to the exercise of options or warrants for the
purchase of shares of common stock are deemed to be outstanding for the purpose
of computing the percentage ownership of that owner but are not deemed
outstanding for the purpose of computing percentage ownership of any other
beneficial owner shown in the table. Percentages are calculated based on
29,074,593 shares outstanding as of March 25, 2004. The address for the officers
and directors is our corporate office located at 5804 East Slauson Avenue,
Commerce, California, 90040.
Number of Shares Percentage of
Beneficial Owner Beneficially Owned Common Stock
---------------- ------------------ -------------
Samuel J. (Jay) Furrow, Jr. 1,369,104(1) 4.71%
Chief Executive Officer and Director
Patricia Anderson 683,146(2) 2.35%
President and Director
Marc B. Crossman 650,348(3) 2.24%
Chief Financial Officer and Director
Shane Whalen 50,000(4) *%
Chief Operating Officer
Samuel J. (Sam) Furrow 3,134,805(5) 10.78%
Chairman of Board of Directors
John G. Looney, MD 196,207(6) *%
Director
Daniel A. Page 368,340(7) 1.27%
Director
Suhail R. Rizvi 7,692(8) *%
Director
18
Number of Shares Percentage of
Beneficial Owner Beneficially Owned Common Stock
---------------- ------------------ -------------
Vincent Sanfilippo 0 0%
Director
Kent Savage 0 0%
Director
Azteca Production International, Inc. 3,825,000(9) 13.16%
Over 5% Stockholder
5804 East Slauson Avenue
Commerce, California 90040
Commerce Investment Group LLC 2,069,690(10) 7.12%
Over 5% Stockholder
5804 East Slauson Avenue
Commerce, California 90040
Hubert Guez 5,218,590(11) 17.95%
Over 5% Stockholder
5804 East Slauson Avenue
Commerce, California 90040
Paul Guez 5,560,714(12) 19.13%
Over 5% Stockholder
5804 East Slauson Avenue
Commerce, California 90040
Seymour Braun, Innavation LLC, 2,547,820(13) 8.76%
Yardworth Mortgage Corp., and
Praha Trust
Over 5% Stockholder
Braun & Goldberg
110 East 59th Street, Suite 3201
New York, New York 10022
All directors and executive 6,459,642 22.12%
officers,as a group (10 persons) (1)(2)(3)(4)(5)(6)(7)(8)
______________
* Represents beneficial ownership of less than 1%.
(1) Includes (i) 1,119,104 shares held for the personal account of Mr.
Jay Furrow; and (ii) 250,000 shares issuable upon the exercise of
currently exercisable (or exercisable within 60 days) options held
for Mr. Furrow's personal account.
(2) Includes (i) 283,146 shares held for Ms. Anderson's personal
account; and (ii) 400,000 shares issuable upon the exercise of
currently exercisable (or exercisable within 60 days) options held
for Ms. Anderson's personal account.
(3) Includes (i) 23,500 shares held for Mr. Crossman's personal account;
and (ii) 626,848 shares issuable upon the exercise of currently
exercisable (or exercisable within 60 days) options held for Mr.
Crossman's personal account.
19
(4) Includes 50,000 shares issuable upon the exercise of currently
exercisable (or exercisable within 60 days) options held for Mr.
Whalen's personal account.
(5) Includes (i) 3,083,598 shares held for the personal account of Mr.
Sam Furrow; and (ii) 51,207 shares issuable upon the exercise of
currently exercisable (or exercisable within 60 days) options held
for Mr. Furrow's personal account.
(6) Includes (i) 145,000 shares held for Dr. Looney's personal account;
and (ii) 51,207 shares issuable upon the exercise of currently
exercisable (or exercisable within 60 days) options held for Dr.
Looney's personal account.
(7) Includes (i) 317,133 shares held for Mr. Page's personal account;
and (ii) 51,207 shares issuable upon the exercise of currently
exercisable (or exercisable within 60 days) options held for Mr.
Page's personal account.
(8) Includes 7,692 shares issuable upon the exercise of currently
exercisable (or exercisable within 60 days) options held for Mr.
Rizvi's personal account.
(9) Includes (i) 3,125,000 shares held for the account of Azteca
Production International, Inc., or Azteca, an entity jointly owned
by Mr. Hubert Guez and Mr. Paul Guez, as to which such shares Mr.
Hubert Guez and Mr. Paul Guez exercise shared voting and investment
control; and (ii) 700,000 shares held for the account of Azteca, an
entity jointly owned by Mr. Hubert Guez and Mr. Paul Guez, as to
which such shares Mr. Paul Guez exercises sole voting and investment
control. This information is based upon a Schedule 13D/A filed with
the SEC on March 9, 2004.
(10) Includes (i) 1,769,690 shares held for the account of Commerce
Investment Group, LLC, a California limited liability company, or
CIG, an entity jointly owned by Mr. Hubert Guez and Mr. Paul Guez,
as to which such shares Mr. Hubert Guez exercises sole voting and
investment control; and (ii) 300,000 shares issuable upon exercise
of currently exercisable warrants held for CIG's account, as to
which such shares Mr. Hubert Guez exercises sole voting and
investment control. This information is based upon a Schedule 13D/A
filed with the SEC on March 9, 2004.
(11) Includes (i) 23,900 shares held for the personal account of Hubert
Guez; (ii) 1,769,690 shares held for the account of CIG, an entity
jointly owned by Mr. Hubert Guez and Mr. Paul Guez, as to which such
shares Mr. Hubert Guez exercises sole voting and investment control;
(iii) 300,000 shares issuable upon exercise of currently exercisable
warrants held for the account of CIG, as to which such shares Mr.
Hubert Guez exercises sole voting and investment control; and (iv)
3,125,000 shares offered hereby and held for the account of Azteca,
an entity jointly owned by Mr. Hubert Guez and Mr. Paul Guez, as to
which such shares Mr. Hubert Guez exercises shared voting and
investment control. This information is based upon a Schedule 13D/A
filed with the SEC on March 9, 2004.
(12) Includes (i) 3,125,000 shares held for the account of Azteca, an
entity jointly owned by Mr. Hubert Guez and Mr. Paul Guez, as to
which such shares Mr. Paul Guez exercises shared voting and
investment control; (ii) 700,000 shares held for the account of
Azteca, an entity jointly owned by Mr. Hubert Guez and Mr. Paul Guez
and as to which such shares Mr. Paul Guez exercises sole voting and
investment control; (iii) 285,714 shares held for the account of
S.H.D. Investments, LLC, a California limited liability company for
which Mr. Paul Guez serves as President and as to which such shares
Mr. Paul Guez exercises sole voting and investment control; and (iv)
1,450,000 shares held for the account of Integrated Apparel
Resources, LLC, a California limited liability company jointly owned
by Mr. Hubert Guez and Mr. Paul Guez, as to which such shares Mr.
Paul Guez exercises sole voting and investment control. This
information is based upon a Schedule 13D/A filed with the SEC on
March 9, 2004.
20
(13) Innavation, LLC, a Delaware limited liability company, is owned 85%
by Yardworth Mortgage Corp., or Yardworth, a corporation organized
under the laws of Aruba. The beneficial owner of Yardworth is Praha
Trust, a trust organized under the laws of Canada. As sole trustee
of Praha Trust, Mr. Seymour Braun has the right to vote all shares
owned by Innavation, LLC. This information is based upon a Form 4
filed with the SEC on February 9, 2004.
See Item 5 of this Amendment No. 1 for a discussion of our securities
authorized for issuance under our equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have adopted a policy requiring that any material transaction between
us and persons or entities affiliated with officers, directors or principal
common stockholders of our company be on terms no less favorable to us than
reasonably could have been obtained in arms' length transactions with
independent third parties and all transactions between us and related parties
must be approved by our Audit Committee.
Anderson Stock Purchase Agreement
Pursuant to a Stock Purchase Right Award granted in February 1997, our
President, Pat Anderson, purchased 250,000 shares of common stock, or the Award
Shares, with payment made by the execution of a non-recourse note, or the
Anderson Note, for the exercise price of $2.81 per share, or $703,125 in the
aggregate. The Anderson Note was due, without interest, on April 30, 2002, and
was collateralized by the 1997 Award Shares. The Anderson Note may be paid or
prepaid (without penalty) by (i) cash, or (ii) the delivery of our common stock
(other than the Award Shares) held for a period of at least six months, which
shares would be credited against the Anderson Note on the basis of the closing
bid price for the common stock on the date of delivery.
On July 18, 2002, our Board of Directors voted in favor of extending the
term of the Anderson Note until April 30, 2005. The remaining provisions of the
Anderson Note remained the same. As of November 29, 2003, $703,125 remains
outstanding under the Anderson Note.
Crossman Loan
On February 7, 2003 and on February 13, 2003, we entered into two
promissory note loan agreements with Marc Crossman, then a member of our Board
of Directors and now also our Chief Financial Officer, whereby Mr. Crossman
loaned to us an aggregate of $500,000. The loan was funded in two phases of
$250,000 each on February 7, 2003 and February 13, 2003. In the event of
default, each loan is collateralized by 125,000 shares of our common stock as
well as a general unsecured claim on our assets, subordinate to existing
lenders. Each loan matures six months and one day from the date of its
respective funding, at which point the principal amount loaned and any unpaid
accrued interest is due and payable in full without demand. The loan carries an
8% annualized interest rate with interest payable in equal monthly installments.
The loan may be repaid by us at any time during the term of the loan without
penalty. Further, prior to the maturity of the loan and the original due dates,
we elected, at our sole option, to extend the term of the loan for an additional
period of six months and one day. A majority of our disinterested directors
approved the loan from Mr. Crossman. Subsequent to the year ended November 29,
2003 and prior to the maturity of the loans in February 2004, the parties agreed
to extend the term of the loan for an additional period of ninety days. Further,
pursuant to the extension of the loan, the loan was amended to provide Mr.
Crossman with the sole and exclusive option to continue to extend the term of
the loan for three additional ninety day periods by giving notice of such
extension on or before the due date of the loan.
21
Purchases of Goods and Services
As required under the terms of the investment by Commerce Group LLC, or
Commerce, and its affiliates, our Innovo, Inc., or Innovo, Joe's Jeans Inc., or
Joe's, and Innovo Azteca Apparel, Inc., or IAA, subsidiaries each purchased its
craft goods and distribution and operational services from Commerce and its
affiliates in fiscal 2003, fiscal 2002 and fiscal 2001. The services purchased
included but were not limited to accounts receivable collections, certain
general accounting functions, inventory management and distribution logistics.
The following schedule represents Innovo's, Joe's and IAA's purchases from
Commerce and its affiliates during fiscal 2003, fiscal 2002 and fiscal 2001 (in
thousands):
Innovo
---------------------------
Year Ended
(in thousands)
---------------------------
2003 2002 2001
-------- -------- --------
Goods $ 2,898 $ 3,317 $ 2,320
Distribution Services 615 644 362
Operational Services 228 203 112
======= ======= =======
Total $ 3,741 $ 4,164 $ 2,794
------- -------- -------
Joe's IAA
----------------------------- --------------------------
Year Ended Year Ended
(in thousands) (in thousands)
----------------------------- --------------------------
2003 2002 2001 2003 2002 2001
------- ------- ------- -------- ------- -------
Goods $ 2,195 $ 6,102 $ 1,102 $ 41,798 $ 6,171 $ 1,794
Distribution Services 127 107 20 -- -- --
======= ======= ======= ======== ======= =======
Total $ 2,322 $ 6,209 $ 1,122 $ 41,798 $ 6,171 $ 1,794
------- ------- ------- -------- ------- -------
Additionally, we are charged an allocation expense from Commerce and its
affiliates for expenses associated with us occupying space in Commerce's
Commerce, California facility and the use of general business machines and
communication services. These expenses totaled approximately $343,000 for fiscal
2003 and $25,000 for fiscal 2002 and fiscal 2001. We also utilize office space
and office equipment under a cost sharing arrangement with Commerce and its
affiliates.
We believe that all the transactions conducted between us and Commerce and
its affiliates were completed on terms that were competitive and at market
rates. Included in due to related parties on our balance sheet is $390,000 and
$4,159,000 at November 29, 2003 and November 30, 2002, respectively, relating to
amounts due to Commerce and affiliated entities for goods and services described
above.
22
Azteca Production International, Inc.
In the third quarter of fiscal 2001, we acquired Azteca Production
International, Inc.'s Knit Division and formed our IAA subsidiary. Pursuant to
equity transactions completed in fiscal 2000, the principals of Azteca
Production International, Inc., or Azteca, became our affiliates. We purchased
the Knit Division's customer list, the right to manufacture and market all of
the Knit Division's current products and entered into certain non-compete and
nonsolicitation agreements and other intangible assets associated with the Knit
Division. As consideration, we issued to Azteca, 700,000 shares of our common
stock valued at $1.27 per share based upon the closing price of the common stock
on August 24, 2001, and promissory notes in the amount of $3.6 million.
Blue Concept Division Acquisition
On July 17, 2003, IAA entered into an asset purchase agreement, or APA,
with Azteca, Hubert Guez and Paul Guez, whereby IAA acquired the division known
as the Blue Concept division, or the Blue Concept Division, of Azteca. The Blue
Concept Division primarily sells denim jeans to American Eagle Outfitters, Inc,
or AEO, a national retailer. Hubert Guez and Paul Guez, two of our substantial
common stockholders and parties to the APA, together have a controlling interest
in Azteca. Based upon the Schedule 13D/A filed with the SEC on March 9, 2004,
Hubert Guez, Paul Guez and their affiliates beneficially owned in the aggregate
approximately 26.47% of our common stock on a fully diluted basis.
Pursuant to the terms of the APA, IAA paid $21.8 million for the Blue
Concept Division, subject to adjustment as noted below. IAA issued a seven-year
convertible promissory note for $21.8 million, or the Blue Concept Note. The
Blue Concept Note bears interest at a rate of 6% per annum and requires payment
of interest only during the first 24 months and then is fully amortized over the
remaining five-year period. On March 5, 2004, upon shareholder approval and
pursuant to the terms of the APA, we converted a portion of the Blue Concept
Note into equity through the issuance of 3,125,000 shares of our common stock
valued at $4.00 per share, or the Conversion Price. As a result, on March 5,
2004, the Blue Concept Note was reduced by $12.5 million to $9.3 million. The
reduction in price was determined by the product of the Conversion Price and
3,125,000, and the shares issued pursuant to the conversion are subject to
certain lock-up periods. Up to 1,041,667 additional shares may be issued upon
the occurrence of certain future contingencies relating to our stock price for
the 30 day period ending March 6, 2005, however, the Blue Concept Note will not
be reduced any further. Pursuant to the APA, IAA employed all of the existing
employees of the Blue Concept Division but did not assume any of the Blue
Concept Division's or Azteca's existing liabilities.
In the event that sales of the Blue Concept Division fall below $70
million during the first 17-month period, or Period I, following the closing of
the acquisition, or $65 million during the 12-month period, or Period II
following Period I, certain terms of the APA allow for a reduction in the
purchase price through a decrease in the principal balance of the Blue Concept
Note and/or the return of certain locked-up shares of our common stock. In the
event the Blue Concept Note is reduced during Period I and the sales of the Blue
Concept Division in Period II are greater than $65 million, the Blue Concept
Note will be increased by half of the amount greater than $65 million, but in no
event will the Blue Concept Note be increased by an amount greater than the
decrease in Period I.
In the event the principal amount of the Blue Concept Note needs to be
reduced beyond the outstanding principal balance of such Blue Concept Note, then
an amount of the locked-up shares equal to the balance of the required reduction
will be returned to us. For these purposes, the locked-up shares will be valued
at $4.00 per share. Additionally, if during the 12-month period following the
closing, AEO is no longer a customer of IAA, the locked-up shares will be
returned to us, and any amount remaining on the balance of the Blue Concept Note
will be forgiven.
23
In the event the revenues of the Blue Concept Division decrease to $35
million or less during Period I or Period II, IAA will have the right to sell
the purchased assets back to Azteca, and Azteca will have the right to buy back
the purchased assets for the remaining balance of the Blue Concept Note and any
and all locked -up shares will be returned to us.
As part of the transaction, IAA and AZT International SA de CV, a Mexico
corporation and wholly-owned subsidiary of Azteca, or AZT, entered into a
two-year, renewable, non-exclusive Supply Agreement for products to be sold by
the Blue Concept Division. In addition to customary obligations, the Supply
Agreement requires that AZT will receive payment immediately upon receipt of
invoices for our purchase orders and that AZT will charge a per unit price such
that IAA will have a guaranteed profit margin of 15 percent on a "per unit"
basis. In addition, AZT is responsible for all quality defects in merchandise
manufactured.
IAA also utilizes AZT to distribute goods manufactured under the Supply
Agreement and until such time that we can establish a Mexican subsidiary to
invoice and collect payments from AEO, temporarily has AZT invoice and collect
payments from AEO for goods manufactured in Mexico.
JD Design, LLC
Pursuant to the license agreement entered into with JD Design, LLC under
which we obtained the license rights to Joe's Jeans, Joe's is obligated to pay a
3% royalty on the net sales of all products bearing the Joe's Jeans or JD
trademark or logo to JD Design, LLC. For fiscal 2003, fiscal 2002 and fiscal
2001, this amount totaled $339,000, $277,000 and $46,000, respectively. Included
in due to related parties on our balance sheet are accrued royalties of $189,000
and $91,000 for fiscal 2003 and fiscal 2002, respectively.
Facility Lease Arrangements
We currently lease our Knoxville, Tennessee office and storage space from
a company owned by Sam Furrow, Chairman of our Board of Directors. The office
space is approximately 5,000 square feet consisting of the first floor of a
two-story building located in downtown Knoxville, Tennessee, with a monthly
rental of $3,500 triple net. The storage space is used by us to store our
documents and is currently rented on a month-to-month basis for $450 per month.
24
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal years ended November 29, 2003 and November 30, 2002, Ernst
& Young, LLP, or E&Y, our independent auditors, billed the approximate fees as
further described below.
Audit Fees
Fees for audit services totaled approximately $513,000 for the year ended
November 29, 2003 and approximately $205,000 for the year ended November 30,
2002, including fees associated with the annual audit, reviews of our quarterly
reports on Form 10-Q, and assistance with and review of registration statements
filed with the SEC including consents related to registration statements for
equity issuances.
Audit-Related Fees
Fees for audit-related services totaled approximately $63,000 for the year
ended November 29, 2003 and approximately $52,000 for the year ended November
30, 2002. Audit related services principally included consultation on
transactions and acquisitions and assistance with internal control requirements
under Section 404 of the Sarbanes-Oxley Act of 2002.
Tax Fees
Fees for tax services, including tax compliance, tax advice, and tax
planning, totaled approximately $103,000 for the year ended November 29, 2003
and approximately $63,000 for the year ended November 30, 2002.
All Other Fees
There were no other fees for the year ended November 29, 2003 or for the
year ended November 30, 2002.
The Audit Committee of our Board of Directors has adopted a policy which
requires the Audit Committee's pre-approval of audit and non-audit services
performed by the independent auditor to assure that the provision of such
services does not impair the auditor's independence. Our Audit Committee
approves such services on an on going basis prior to the incurrence of any such
audit and non-audit services. Our Audit Committee pre-approved all of the audit
and non-audit services rendered by E&Y listed above.
Our Audit Committee has determined that the services provided by E&Y were
compatible with maintaining E&Y's independence.
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Part IV of our Initial Report is hereby amended solely to add the
following exhibits required to be filed in connection with this Amendment No. 1.
(a)3. Exhibits (listed according to the number assigned in the table in Item 601
of Regulation S-K)
Exhibit Document if
Number Description Incorporated by Reference
------ ----------- -------------------------
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Filed herewith
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Filed herewith
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of the Chief Executive Officer and Chief Financial Filed herewith
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
26
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, Jr.
-------------------------
Samuel J. Furrow, Jr.
Chief Executive Officer
March 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the following persons by Samuel J. Furrow,
Jr., as Attorney-In-Fact, on behalf of the registrant in the capacities and on
the dates indicated.
Signature Capacity Date
--------- -------- ----
Chief Executive Officer (Principal
/s/ Samuel J. Furrow, Jr. Executive Officer) and Director March 29, 2004
-------------------------
Samuel J. Furrow, Jr.
* Chief Financial Officer (Principal
------------------------- Financial Officer) and Director March 29, 2004
Marc B. Crossman
*
------------------------- President and Director March 29, 2004
Patricia Anderson
*
------------------------- Chairman of the Board of Directors March 29, 2004
Samuel J. Furrow
*
------------------------- Director March 29, 2004
John Looney, M.D.
*
------------------------- Director March 29, 2004
Daniel Page
*
------------------------- Director March 29, 2004
Suhail R. Rizvi
*
------------------------- Director March 29, 2004
Kent Savage
* Director March 29, 2004
-------------------------
Vincent Sanfilippo
* by /s/ Samuel J. Furrow, Jr.
-------------------------
Attorney-In-Fact
27