As filed with the Securities and Exchange Commission on July 29, 2004
Registration No. 333-
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United States
Securities and Exchange Commission
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INNOVO GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2390 11-2928178
(State or Other Jurisdiction of (Primary standard industrial (I.R.S. Employer
Incorporation or Organization) classification code number) Identification Number)
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5804 East Slauson Avenue
Commerce, California 90040
(323) 725-5516
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Samuel J. Furrow, Jr.
Chief Executive Officer
Innovo Group Inc.
5804 East Slauson Avenue
Commerce, California 90040
(323) 725-5516
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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With a copy to:
Bruce S. Mendelsohn, Esq.
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
Telephone: (202) 887-4000
Approximate date of commencement of proposed sale to the public: From time
to time as determined by the selling stockholders after the effective date of
this registration statement
If the only securities being registered on this Form are being offered
pursuant to a dividend or interest reinvestment plan, please check the following
box. |_|
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Amount to
Title of Each Class of be Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Securities to be Registered Registered(1) Price Per Unit(2) Offering Price(2) Registration Fee
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Common Stock, $0.10 par value 5,170,685 $1.30 $6,721,890.50 $851.66
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(1) Represents the estimated number of shares of common stock that may be
issuable to certain selling stockholders following the conversion of the
entire principal amount of the convertible promissory note issued to such
holders, along with shares issuable upon exercise of warrants held by
these stockholders.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based
on the average of the high and low price for the common stock of Innovo
Group Inc. on the Nasdaq SmallCap Market on July 28, 2004.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION, DATED JULY 29, 2004
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
INNOVO GROUP INC.
5804 EAST SLAUSON AVENUE
COMMERCE, CALIFORNIA 90040
COMMON STOCK
5,170,685 SHARES OF COMMON STOCK OFFERED BY SELLING STOCKHOLDERS
You should read this prospectus carefully before you invest in our common
stock offered hereby.
This prospectus registers for resale up to 5,170,685 shares of our common
stock which may be offered from time to time by the stockholders listed
beginning on page 16 of this prospectus. We will not receive any of the proceeds
from the sale of our common stock by the selling stockholders, except for
payments received in connection with the exercise of warrants held by certain of
the selling stockholders. Any payments received by us upon the exercise of the
warrants will be used for working capital and other general corporate purposes.
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"INNO."
The selling stockholders may sell the shares of common stock described in
this prospectus in a number of different ways and at varying prices. See "Plan
of Distribution" beginning on page 17 for more information about how a selling
stockholder may sell its shares of common stock. We will not be paying any
underwriting discounts or commissions in this offering.
On July 28, 2004, the last reported sale price of the common stock on the
Nasdaq SmallCap Market was $1.32 per share. See "Price Range of Common Stock."
You should obtain a current market price quotation before you buy any of the
offered shares.
The securities offered by this prospectus involve a high degree of risk.
You should carefully consider the factors described under the heading "Risk
Factors" beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 29, 2004.
TABLE OF CONTENTS
Page
Prospectus summary............................................................1
Risk factors..................................................................5
Use of proceeds...............................................................15
Dividend policy...............................................................15
Selling stockholders..........................................................16
Plan of Distribution..........................................................17
Description of capital stock..................................................18
Legal matters.................................................................19
Experts.......................................................................19
Where you can find more information...........................................20
Forward-looking statements....................................................21
In connection with this offering, no person is authorized to give any
information or to make any representations not contained or incorporated by
reference in this prospectus. If information is given or representations are
made, you may not rely on that information or representations as having been
authorized by us. This prospectus is neither an offer to sell nor a solicitation
of an offer to buy any securities other than those registered by this
prospectus, nor is it an offer to sell or a solicitation of an offer to buy
securities where an offer or solicitation would be unlawful. You may not imply
from the delivery of this prospectus, nor from any sale made under this
prospectus, that our affairs are unchanged since the date of this prospectus or
that the information contained in this prospectus is correct as of any time
after the date of this prospectus. The information in this prospectus speaks
only as of the date of this prospectus unless the information specifically
indicates that another date applies.
We are not making any representation to any purchaser of the common stock
regarding the legality of an investment in the common stock by such purchaser
under any legal investment or similar laws or regulations. You should not
consider any information in this prospectus to be legal, business or tax advice.
You should consult your own attorney, business advisor and tax advisor for
legal, business and tax advice regarding an investment in the common stock.
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In this prospectus, when we to refer to Innovo Group Inc. and its
subsidiaries, we use the terms "Innovo Group," "we," "our" and "us" when we do
not need to distinguish among these entities or their predecessors or when any
distinction is clear from the context.
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus,
including the more detailed information in our consolidated financial statements
and related notes incorporated herein by reference to this prospectus.
Our Business
Our principal business activity involves the design, development and
worldwide marketing of high quality consumer products for the apparel and
accessory markets. We do not manufacture any apparel or accessory products but
outsource the manufacturing to third parties; however, we may, from time to time
at our cost, produce sample apparel and accessory products for new or existing
customers or internal use. We sell our products to a large number of different
retail, distributors and private label customers around the world. Retail
customers and distributors purchase finished goods directly from us. Retail
customers then sell the product through their retail stores and distributors
sell our products to retailers in the international marketplace. Private label
customers outsource the production and sourcing of their private label products
to us and then sell through their own distribution channels. Private label
customers are generally retail chains who desire to sell apparel and accessory
products under their own brand name. We work with our private label customers to
create their own brand image by custom designing products. In creating a unique
brand, our private label customers may provide samples to us or may select
styles already available in our showrooms. We believe we have established a
reputation among these private label buyers for the ability to arrange for the
manufacture of apparel and accessory products on a reliable, expeditious and
cost-effective basis. Our branded label products, which include accessories and
apparel, are designed, developed and marketed by us internally pursuant to the
license agreement under which we have licensed the brand and/or mark or as
company-owned brands, such as indie(TM) for apparel and Friendship(TM) and Clear
Gear(TM) for accessories. We then outsource the manufacturing and distribution
of the branded products. We sell our branded products to the retail customers or
distributors. We are then obligated to pay a certain percentage of royalties on
our net sales of the branded products to the licensor, if it is a licensed
product. Since the beginning of the second quarter of fiscal 2004, we reduced
our non-denim branded apparel operations by the termination of license agreement
for Fetish(TM) and Hot Wheels(R) apparel and the cessation of production for
Shago(R) apparel. Without these non-denim branded apparel licenses, as well as
their respective royalty obligations, we have been able to reduce our headcount
and shift our resources to return our focus to denim and denim-related apparel
and accessories. While there can be no assurance that this shift in focus back
to our core products will result in profitability, we believe that these changes
represent steps for growth and profitability in areas of proven ability. We
continue to retain our branded accessory licenses, as well as our licenses for
our branded denim and denim-related apparel, such as Joe's Jeans(R), Betsey
Johnson(R) and our Joe's Jeans new line, indie(TM).
We operate our consumer products business through three wholly-owned
operating subsidiaries, Innovo, Inc., or Innovo, Joe's Jeans, Inc., or Joe's,
and Innovo Azteca Apparel, Inc., or IAA. Our products are currently manufactured
by independent contractors located in Los Angeles, California, Mexico and Asia,
including, Hong Kong, China, Korea, Vietnam and India. The products are then
distributed out of our warehouse facilities located in Los Angeles or directly
from the factory to the customer. For the three months ended May 29, 2004, or
second quarter of fiscal 2004, approximately 22% of our apparel and accessory
products were manufactured outside of North America. The rest of our accessory
and apparel products in the second quarter of fiscal 2004 were manufactured in
the United States (approximately 14%) and Mexico (approximately 64%). All of our
products manufactured in Mexico are manufactured by Azteca Productions
International, Inc., or Azteca, and/or its affiliates, as discussed below.
Azteca is controlled by two of our significant stockholders, Hubert Guez and
Paul Guez.
Our operations are comprised of two reportable segments: apparel and
accessory, with the operations of our Joe's and IAA subsidiaries representing
the apparel segment and our Innovo subsidiary conducting business in the
accessory segment. Segment revenues are generated from the sale of consumer
products by Joe's, IAA and Innovo. Our corporate activities are represented by
the operations of Innovo Group Inc., our parent company, or IGI, and our real
estate operations are conducted through our wholly-owned subsidiaries, Leasall
Management, Inc., or Leasall, and Innovo Realty, Inc., or IRI. Our real estate
operations do not currently require a substantial allocation of our resources
and are not a significant part of our management's daily operational functions.
Thus, our real estate operations are not currently defined as a distinct
operating segment, but are classified as "other" along with our other corporate
activities.
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Strategic relationship with two of our significant stockholders, Hubert
Guez and Paul Guez, and affiliated companies
Beginning in the summer of 2000, we entered into a series of transactions
with two of our significant stockholders, Hubert Guez and Paul Guez, or
collectively, the Guez Brothers, and/or their affiliated companies, such as
Azteca Production International, Inc., or Azteca, and/or Commerce Investment
Group LLC, or Commerce. The Guez Brothers and their affiliated companies have in
the aggregate more that 50 years of experience in the apparel industry with a
specialty in denim apparel and related products. As discussed in greater detail
below, our strategic relationship with the Guez Brothers and their affiliated
companies has had many tangible benefits for us.
Our relationship with the Guez Brothers began in the summer of 2000 when
the Guez Brothers through their affiliated company, Commerce, which the Guez
Brothers control, invested in our company. Pursuant to a stock and warrant
purchase agreement, Commerce acquired 2,863,637 shares of our common stock and
3,300,000 common stock purchase warrants. An investor rights agreement also
provides Commerce with a contractual right to nominate three individuals to our
board of directors. Commerce has not exercised this right at this time. Based on
a Schedule 13D/A filed with the Securities and Exchange Commission, or SEC, on
May 18, 2004 and a Form 4 filed on May 20, 2004, by Commerce, the Guez Brothers
and/or their affiliates, they beneficially own in the aggregate approximately
24.98% of our common stock.
As part of Commerce's equity investment in our company, we entered into
several other arrangements with Commerce in order to reduce our manufacturing
and distribution costs and to increase the effectiveness and capacity of our
distribution network. Pursuant to a supply agreement and distribution agreement
with Commerce, we agreed to purchase all of our accessory products, which at the
time primarily consisted of denim tote bags and aprons, from Commerce and to
have Commerce distribute these products out of its Los Angeles distribution
facility. Commerce manufactures our accessory products out of its facilities in
Mexico. These agreements were renewed in August 2002 for an additional two-year
term and are automatically renewed for additional two-year terms unless
terminated by either party with 90 days notice.
Our strategic relationship with Commerce allowed us to close our domestic
manufacturing and distribution facilities and to move forward with diversifying
our product mix and offerings to include apparel products in addition to
accessory products. In an effort to enter the apparel market quickly and
efficiently we, through IAA, acquired Azteca's knit apparel division in August
2001 in exchange for 700,000 shares of our common stock and promissory notes in
the amount of $3.6 million.
In February 2001, we continued to expand our apparel business by acquiring
a ten-year license for the "Joe's" and "Joe's Jean's" brands from JD Design, LLC
and forming our Joe's subsidiary. This license agreement enables Joe's to
create, design and market high-end denim apparel products. Our strategic
relationship with the Guez Brothers allowed us to quickly and efficiently
capitalize on this license and enter into the denim apparel market by
outsourcing the manufacture and distribution of the denim apparel products
created pursuant to the license to Commerce and its affiliates.
During fiscal 2001 and 2002, the combined accessory and denim apparel
products purchased from and other services provided by Commerce and/or its
affiliates were approximately $5.7 million and $16.0 million, respectively, or
90% and 80%, respectively, of our manufacturing and distribution costs for such
periods. During fiscal 2003, our dependence on Commerce and its affiliates
decreased for these services but still constituted 68% of our manufacturing and
distribution costs for fiscal 2003, or approximately $47.9 million of accessory,
craft and denim apparel products from and other services provided by Commerce
and/or its affiliates. Although we now use additional suppliers to meet our
needs, we intend to continue to take advantage of Commerce's expertise with
denim products so long as we believe it is in our best interest.
To further solidify our presence in the apparel market and enhance and
complement our existing private label business, in July 2003, we, through IAA,
entered into an asset purchase agreement, or Blue Concept APA, with Azteca and
the Guez Brothers to acquire the Blue Concept Division from Azteca in exchange
for a seven-year convertible promissory note, subject to adjustment, or the Blue
Concept Note, in the original principal amount of $21.8 million dollars. In
connection with the acquisition of the Blue Concept Division, we obtained the
rights relating to the design, manufacture and wholesaling of denim jeans to
American Eagle Outfitters, Inc., or AEO. On March 5, 2004, our stockholders
approved the conversion of $12.5 million of principal amount of the convertible
promissory note into 3,125,000 shares of our common stock initially, with the
potential issuance of up to 1,041,667 additional shares of our common stock upon
the occurrence of certain contingencies described in the Blue Concept APA. As a
result of this conversion, the Blue Concept Note has been reduced to $9.3
million. In addition, as part of the transaction, we entered into another supply
agreement with an Azteca affiliate to purchase products to be sold by our Blue
Concept Division.
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We have continued to expand our denim product mix by entering into an
assignment with Blue Concept LLC, which is controlled by Paul Guez, for all the
rights, benefits and obligations of a license agreement between Blue Concept LLC
and B.J. Vines, Inc., the owner of the Betsey Johnson(R) brand, for exclusive
right to design, market and distribute women's jeans and coordinating denim
related apparel, such as t-shirts and tops under the Betsey Johnson(R) brand
name in the United States, its territories and possessions, and Canada. We did
not compensate Paul Guez for this assignment.
On February 16, 2004, Joe's entered into a Master Distribution Agreement,
or MDA, with Beyond Blue, Inc., or Beyond Blue, whereby Joe's granted Beyond
Blue exclusive distribution rights for Joe's products outside the United States.
Beyond Blue, a Los Angeles-based company that specializes in international
consulting, distribution and licensing for apparel products, secured an
exclusive right to distribute Joe's products outside the United States, subject
to current license agreements such as the license with Itochu and Joe's Canadian
distributor remaining in place.
In June 2004, we announced that our Joe's subsidiary was designing and
developing a new denim line under the brand name indie(TM). Our indie(TM)
collection will initially include women's denim jeans and skirts, tops and
jackets, with the first collection expected to be available to limited retailers
for the Fall/Holiday season 2004 and full availability in Spring 2005. The focus
of the indie(TM) collection will be on the price conscious consumer with a
desire for quality and style at retail price points between $78 and $88 for the
collection.
During fiscal 2003, we moved our headquarters and principal executive
offices from 5900 S. Eastern Avenue, Suite 120, Commerce, California 90040 to
5804 East Slauson Avenue, Commerce, California 90040. The 5804 East Slauson
Avenue space is utilized under a verbal agreement with Azteca, pursuant to which
we pay to Azteca a fee for allocated expenses associated with our use of office
and warehouse space and expenses incurred in connection with maintaining such
office and warehouse space. These allocated expenses include, but are not
limited to: rent, security, office supplies, machine leases and utilities. In
addition, we have verbal agreements with Azteca and/or its affiliates regarding
the supply and distribution of other denim-related apparel products we sell.
Other Third Party Manufacturers
As discussed above, historically, we have primarily used Commerce and its
affiliates for our manufacturing needs. In fiscal 2003, we significantly
diversified our apparel products to include a wider array of products,
including, but not limited to, denim products. These non-denim products, as well
as some denim products, are purchased from third party independent suppliers,
including Commerce and/or its affiliates. While we now use numerous suppliers to
meet our needs, we intend to continue to take advantage of Commerce's and its
affiliates' expertise with denim products when it is in our best interest to do
so.
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We are incorporated under the laws of the State of Delaware. Our corporate
headquarters are located at 5804 East Slauson Avenue, Commerce, California,
90040. Our telephone number is (323) 725-5516. We also have operational offices
and/or showrooms in Los Angeles, New York, Knoxville and Hong Kong and third
party showrooms in New York, Los Angeles, Tokyo and Paris. Although we maintain
a website at www.innovogroup.com, we do not intend that the information
available through our website be incorporated into this prospectus. For
additional information about us and our businesses, see "Where You Can Find More
Information."
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The Offering
Issuer................................. Innovo Group Inc.
Common stock offered by the
selling stockholders (1)............... 5,170,685
Common stock outstanding before
and after the offering (2)............. 29,090,390 (excludes 75,960 shares
held as treasury shares, which are
issued but not outstanding)
Use of Proceeds........................ We will not receive any proceeds
from this offering, except we may
receive proceeds from the exercise
of warrants held by selling
stockholders offered hereby.
Registration Rights.................... We have agreed to use all
reasonable efforts to keep the
shelf registration statement, of
which this prospectus forms a
part, effective until the earlier
of:
o the first anniversary of the
declaration by the SEC that
the shelf registration
statement is effective;
o the sale of all of the
shares of common stock
covered by the shelf
registration statement; and
o the expiration of the
holding period applicable to
the shares of common stock
held by non-affiliates of
Innovo under Rule 144(k) of
the Securities Act, or any
successor provision, subject
to certain exceptions.
Trading................................ Our common stock is traded on the
Nasdaq SmallCap Market under the
symbol "INNO."
Risk Factors........................... See "Risk Factors" and the other
information in this prospectus for
a discussion of the factors you
should carefully consider before
deciding to invest in our common
stock.
(1) Includes 312,500 shares of common stock issuable upon the exercise of
warrants and 1,733,185 shares of common stock issuable upon conversion of
convertible promissory notes. 1,733,185 shares represent the estimated
maximum number of shares of common stock issuable as payment of the entire
outstanding principal amount, in the aggregate, of the convertible
promissory notes issued to such holders in lieu of cash repayment.
(2) Assumes the sale, exercise and conversion of all of the securities being
registered hereunder.
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The outstanding share information is based on our shares outstanding as of
July 29, 2004. This information excludes 2,474,828 shares of common stock
issuable upon the exercise of outstanding stock options at a weighted average
exercise price of $2.00 per share and an aggregate of 945,172 shares of common
stock available for future issuance under our 2004 Stock Incentive Plan for
employees, directors and consultants as of July 29, 2004.
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RISK FACTORS
Before you invest in our common stock by purchasing shares from a selling
stockholder named in this prospectus, you should be aware that there are various
risks involved in investing in our common stock. We have described below all of
the risks which we deem material to your investment decision. You should
consider carefully these risk factors, together with all of the other
information included in this prospectus and in the periodic reports we have
filed with the SEC under the Securities Exchange Act of 1934, or Exchange Act,
before you decide to purchase any shares of our common stock. Additional risks
that we do not yet know of or that we currently think are immaterial may also
impair our business operations.
Certain Risk Factors
Risk Factors Relating to our Common Stock
The 5,170,685 shares of our common stock registered for resale by this
prospectus may adversely affect the market price of our common stock.
As of July 29, 2004, 29,090,390 shares of our common stock were issued and
outstanding, excluding 75,960 shares issued but held as treasury shares and not
considered to be outstanding. This prospectus registers for resale 5,170,685
shares, or 17.77% of our outstanding common stock.
We are unable to predict the effect that sales into the market of
5,170,685 shares may have on the then prevailing market price of our common
stock. On July 28, 2004, the last reported sale price of our common stock on the
Nasdaq SmallCap Market was $1.32. During the four weeks prior to July 28, 2004,
the average daily volume of trading of our common stock was 81,829 shares. It is
likely that market sales of the 5,170,685 shares offered for resale pursuant to
this prospectus (or the potential for those sales even if they do not actually
occur) may have the effect of depressing the market price of our common stock.
As a result, the potential resale and possible fluctuations in trading volume of
such a substantial amount of our stock may affect the share price negatively
beyond our control.
We do not anticipate paying dividends on our common stock in the foreseeable
future.
We have not paid any dividends nor do we anticipate paying any dividends
on our common stock in the foreseeable future. We intend to retain earnings, if
any, to fund our operations and to develop and expand our business.
We have a substantial number of authorized common and preferred shares available
for future issuance that could cause dilution of our stockholder's interest and
adversely impact the rights of holders of our common stock.
We have a total of 40,000,000 shares of common stock and 5,000,000 shares
of "blank check" preferred stock authorized for issuance. As of July 29, 2004,
we had 10,833,650 shares of common stock and 4,806,000 shares of preferred stock
available for issuance. On March 5, 2004, we held a special meeting of our
stockholders to approve the conversion of $12.5 million in principal amount of
indebtedness from a convertible promissory note issued in connection with the
purchase of the Blue Concepts Division from Azteca into a maximum of 4,166,667
shares of our common stock. The conversion was approved by our stockholders and,
as a result, Azteca has initially been issued 3,125,000 shares of our common
stock, which are registered for resale in this prospectus, with the possible
issuance of up to 1,041,667 additional shares of common stock upon the
occurrence of certain contingencies described in the Blue Concept APA. In June
2004, we raised approximately $2.5 million through the sale and issuance of
convertible promissory notes that are convertible into 1,733,185 shares of our
common stock and warrants to purchase up to 312,500 shares of our common stock
that are registered for resale in this prospectus. We expect to continue to seek
financing which could result in the issuance of additional shares of our capital
stock and/or rights to acquire additional shares of our capital stock. Those
additional issuances of capital stock would result in a reduction of your
percentage interest in us. Furthermore, the book value per share of our common
stock may be reduced. This reduction would occur if the exercise price of the
options or warrants or the conversion ratio
5
of the preferred stock was lower than the book value per share of our common
stock at the time of such exercise or conversion.
The addition of a substantial number of shares of our common stock into
the market or by the registration of any of our other securities under the
Securities Act may significantly and negatively affect the prevailing market
price for our common stock. The future sales of shares of our common stock
issuable upon the exercise of outstanding warrants and options may have a
depressive effect on the market price of our common stock, as such warrants and
options would be more likely to be exercised at a time when the price of our
common stock is greater than the exercise price.
Our board of directors has the power to establish the dividend rates,
preferential payments on any liquidation, voting rights, redemption and
conversion terms and privileges for any series of our preferred stock. The sale
or issuance of any shares of our preferred stock having rights superior to those
of our common stock may result in a decrease in the value or market price of our
common stock. The issuance of preferred stock could have the effect of delaying,
deferring or preventing a change of ownership without further vote or action by
our stockholders and may adversely affect the voting and other rights of the
holders of our common stock.
We are controlled by our management and other related parties.
As of July 29, 2004, our executive officers and directors beneficially
owned approximately 21.26% of our common stock, including options exercisable
within 60 days of July 29, 2004, in the aggregate. Furthermore, in connection
with investments made by (1) Commerce and other investors affiliated with Hubert
Guez and Paul Guez, or collectively, the Commerce Group, and (2) Mr. Joseph
Mizrachi in fiscal 2000, each of the Commerce Group and Mr. Mizrachi have the
right to designate three individuals and one individual, respectively, for
election to our board of directors. If any or all of the Commerce Group or
Mizrachi designated directors are elected, then our board has the obligation to
appoint at least one Commerce and/or Mizrachi designated director to each of its
committees. Based on the Schedule 13D/A filed by Messrs. Simon Mizrachi and
Joseph Mizrachi on October 30, 2003, the Mizrachis beneficially owned
approximately 1.2% of our shares. As of February 21, 2003, the Mizrachis ceased
to be the beneficial owners of more than 5% of our securities. As discussed
above in "Strategic relationship with two of our significant stockholders,
Hubert Guez and Paul Guez, and affiliated companies," at a special meeting of
our stockholders on March 5, 2004, our stockholders approved the conversion of
the Blue Concept Note into a maximum of 4,166,667 shares of our common stock, As
a result, Azteca was initially issued 3,125,000 shares of our common stock with
the possible issuance of up to 1,041,667 additional shares of common stock upon
the occurrence of certain contingencies described in the Blue Concept APA. Based
upon a Schedule 13D/A filed by Messrs. Hubert Guez and Paul Guez on May 18, 2004
and a Form 4 filed on May 20, 2004 the Guez Brothers beneficially own
approximately 24.98% of our common stock in the aggregate.
Because of their stock ownership and/or relationships with us, the
Mizrachis and the Guez Brothers have been and will continue to be in a position
to greatly influence the election of our board of directors and thus control our
affairs. Additionally, our bylaws limit the ability of stockholders to call a
meeting of the stockholders. These bylaw provisions could have the effect of
discouraging a takeover of us, and therefore may adversely affect the market
price and liquidity of our securities. We are also subject to a Delaware statute
regulating business combinations that may hinder or delay a change in control.
The anti-takeover provisions of the Delaware statute may adversely affect the
market price and liquidity of our securities.
Our common stock price is extremely volatile and may decrease rapidly.
The trading price and volume of our common stock has historically been
subject to wide fluctuation in response to variations in actual or anticipated
operating results, announcements of new product lines or by us or our
competitors, and general conditions in the apparel and accessory industry. In
the 52 week period prior to July 29, 2004, the closing price of our common stock
has ranged from $1.09 to $7.80. In addition, stock markets generally have
experienced extreme price and volume trading volatility in recent years. This
volatility has had a substantial effect on the market prices of securities of
many companies for reasons frequently unrelated to the operating performance of
the specific companies. These broad market fluctuations may significantly and
negatively affect the market price of our common stock.
6
If we cannot meet the Nasdaq SmallCap Market maintenance requirements and Nasdaq
rules, Nasdaq may delist our common stock, which could negatively affect the
price of the common stock and your ability to sell the common stock.
In the future, we may not be able to meet the listing maintenance
requirements of the Nasdaq SmallCap Market and Nasdaq rules, which require,
among other things, minimum net tangible assets of $2 million, a minimum bid
price for our common stock of $1.00, and stockholder approval prior to the
issuance of securities in connection with a transaction involving the sale or
issuance of common stock equal to 20 percent or more of a company's outstanding
common stock before the issuance for less than the greater of book or market
value of the stock. If we are unable to satisfy the Nasdaq criteria for
maintaining listing, our common stock would be subject to delisting. Trading, if
any, of our common stock 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., or 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 our common
stock.
If Nasdaq delists our common stock, you would need to comply with the penny
stock regulations which could make it more difficult to sell your common stock.
In the event that our securities are not listed on the Nasdaq SmallCap
Market, trading of our common stock would be conducted in the "pink sheets" or
through the NASD's Electronic Bulletin Board and covered by Rule 15g-9 under the
Exchange Act. Under that rule, broker/dealers who recommend these securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the subscriber and receive the
subscriber's written agreement to a transaction prior to sale. Securities are
exempt from this rule if their market price is at least $5.00 per share.
SEC regulations generally define a penny stock as any equity security that
has a market price of less than $5.00 per share, with certain exceptions. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated with it. If our common stock were
considered a penny stock, the ability of broker/dealers to sell our common stock
and the ability of our stockholders to sell their securities in the secondary
market would be limited. As a result, the market liquidity for our common stock
would be severely and adversely affected. We cannot assure you that trading in
our securities will not be subject to these or other regulations in the future
which would negatively affect the market for such securities.
Risk Factors Relating to our Operations
Due to our negative cash flows we could be required to cut back or stop
operations if we are unable to raise or obtain needed funding.
Our ability to continue operations will depend on our positive cash flow,
if any, from future operations and on our ability to raise additional funds
through equity or debt financing. In March 2004, we converted $12.5 million of
debt issued in connection with the acquisition of the Blue Concept Division from
Azteca into shares of our common stock. While this issuance of common stock
resulted in existing stockholders becoming "diluted" or owning a smaller
percentage of the total shares outstanding as of the date of such dilution, it
reduced our long term debt by 56% and resulted in less interest accruing and due
under the Blue Concept Note. In June 2004, we raised approximately $2.5 million
through the sale and issuance of convertible promissory notes that are
convertible into 1,733,185 shares of our common stock and warrants to purchase
up to 312,500 shares of our common stock that are registered for resale in this
prospectus. The proceeds received from this source of financing will be used to
fund our continuing operations and for working capital purposes. In addition, we
also obtain cash for working capital by utilizing a credit arrangement on our
receivables and inventory with CIT Commercial Services, a unit of CIT Group
Inc., or CIT. As of May 29, 2004, our loan balance with CIT was $9,316,000 and
an aggregate amount of $327,000 of open letters of credit were outstanding.
Although we had this liability with CIT as of May 29, 2004 due to the amount of
factored receivables, our financial position may change such that there may be
the need for us to continue to raise needed funds through a mix of equity and
debt financing to fund our operations and working capital. Equity financing will
usually result in existing stockholders becoming "diluted," as discussed above.
A high degree of
7
dilution can make it difficult for the price of our common stock to rise
rapidly, among other things. Dilution also lessens a stockholder's voting power.
We do not know if we will be able to continue to raise additional funding or if
such funding will be available on favorable terms. We could be required to cut
back or stop operations if we are unable to raise or obtain needed funding.
Our cash requirements to run our business have been and will continue to
be significant.
Since 1997, our negative operating cash flow and losses from continuing
operations have been as follows:
(Negative) positive
Cash Flow
from Operating (Losses) income
Activities of from
Continuing Operations Continuing Operations
--------------------- ---------------------
Fiscal Year Ended:
------------------
November 29, 2003 ($ 9,857,000) ($ 8,317,000)
November 30, 2002 $ 1,504,000 $ 572,000
December 1, 2001 ($ 632,000) ($ 618,000)
November 30, 2000 ($ 4,598,000) ($ 5,056,000)
November 30, 1999 ($ 2,124,000) ($ 1,340,000)
November 30, 1998 ($ 1,238,000) ($ 2,267,000)
November 30, 1997 ($ 1,339,000) ($ 1,729,000)
Since November 30, 1997, we have experienced negative cash flow from our
operating activities except for the year ending November 30, 2002. As of May 29,
2004, we had an accumulated deficit of approximately $53,523,000.
Although we have undertaken numerous measures to increase sales and
operate more efficiently, we may experience further losses and negative cash
flows. We can give you no assurance that we will in fact operate profitably in
the future.
We must expand sales of our existing products and successfully introduce new
products that respond to constantly changing fashion trends and consumer demands
to increase revenues and attain profitability.
Our success will depend on our ability to expand sales of our current
products to new and existing customers, as well as the development or
acquisition of new product designs and the acquisition of new licenses that
appeal to a broad range of consumers. We have little control over the demand for
our existing products, and we cannot assure you that the new products we
introduce will be successfully received by consumers. For example, in the past
year, we have terminated or ceased production under our licenses to design and
market apparel and accessory products for the recording artists and entertainers
known as "Bow Wow" and "Eve" and sold under the Shago(R) and Fetish(TM) brand,
respectively. Since we acquired these licenses, we spent considerable resources
to develop and market each of these brands, which resulted in significant
losses. Because of these losses and other factors, we have terminated our
license agreement for apparel products with the Fetish(TM) brand and ceased
production of our Shago(R) branded apparel and accessory products. Further, due
to lack of interest in the consumer marketplace and since we did not have any
sales under a license agreement with Mattel, Inc. for Hot Wheels(R) branded
adult apparel and accessories, we terminated this license agreement as well in
June of 2004.
Any failure on our part to anticipate, identify and respond effectively to
changing consumer demands and fashion trends could adversely affect the
acceptance of our products and leave us with a substantial amount of unsold
inventory or missed opportunities. If that occurs, we may be forced to rely on
markdowns or promotional sales to dispose of excess, slow-moving inventory,
which may negatively affect our ability to achieve profitability.
8
At the same time, our focus on tight management of inventory may result, from
time to time, in our not having an adequate supply of products to meet consumer
demand and may cause us to lose sales.
A substantial portion of our net sales and gross profit is derived from a small
number of large customers.
Our 10 largest customers accounted for approximately 67% of our gross
sales during fiscal 2003. We do not enter into any type of long-term agreements
with any of our customers. Instead, we enter into a number of individual
purchase order commitments with our customers. A decision by the controlling
owner of a group of stores or store or any other significant customer, whether
motivated by competitive conditions, financial difficulties or otherwise, to
decrease the amount of merchandise purchased from us, or to change their manner
of doing business with us, could have a material adverse effect on our financial
condition and results of operations.
We are dependent on certain contractual relationships to generate revenues.
Our sales are dependent to a significant degree upon the contractual
relationships we can establish with licensors to exploit, on generally a
non-exclusive basis, proprietary rights in well-known logos, marks and
characters. Although we believe we will continue to meet all of our material
obligations under such license agreements, there can be no assurance that such
license rights will continue or will be available for renewal on favorable
terms. Failure to obtain new licenses or extensions on current licenses or to
sell such products, for any reason, could have a significant negative impact on
our business. For the fiscal year ended November 29, 2003 and for the six months
ended May 29, 2004, $16,092,000 (or 54%) and $18,290,000 (or 35%), respectively,
of our gross revenues were generated from licensed apparel and accessory
products.
We are primarily dependent upon revenues from a certain number of
licenses, namely our licenses to produce the Joe's Jeans(R) and Bongo(R)
accessory and apparel products. As of May 29, 2004, we recorded $777,000 and
$6,707,000 in gross sales of product under our Bongo(R) license and Joe's
Jeans(R) license, respectively. We terminated our license agreement for
Fetish(TM) apparel products in May 2004, however we continue to have a limited
license for Fetish(TM) accessory products through March 31, 2005. Further, we
have ceased production for Shago(R) apparel and accessory products under our
license agreement and are in discussions with the licensor regarding the future
of the Shago(R) brand. While the termination of the Fetish(TM) license agreement
and the cessation of production of products under the Shago(R) license agreement
will result in a decrease in our overall net sales, the overall effect may
result in a negative impact on our business in the second quarter and even
extend into future quarters, however, we cannot predict its overall impact on
our financial statements.
We are currently dependent on supply and distribution arrangements with Commerce
Investment Group, LLC, or Commerce, and its related entities to generate a
substantial portion of our revenues.
During fiscal 2000, we entered into supply and distribution arrangements
with Commerce and its affiliated entities, whom we will collectively refer to as
the Commerce Group. Under the terms of the distribution arrangements, Commerce
purchased our equity securities and we became obligated to manufacture and
distribute all of our craft products with the Commerce Group for a two-year
period. The distribution arrangements contained an automatic renewal for an
additional two-year term. In fiscal 2002, we renewed these arrangements for
another two years. In July 2003, we entered into another supply agreement with
an Azteca affiliate, AZT International SA de CV, a Mexico corporation, or AZT.
Pursuant to this agreement, we are obligated to purchase certain products,
particularly the products that are sold by us under our Blue Concept Division
acquired on July 17, 2003 from Azteca. In addition, we have verbal agreements
with Azteca and/or its affiliates regarding the supply and distribution of our
other apparel products, including certain denim products for our branded and
private label accessory and apparel lines. We also utilize warehouse space in
Los Angeles under a verbal agreement from Azteca, pursuant to which we pay a fee
for allocated expenses associated with our use of office and warehouse space and
expenses incurred in connection with maintaining such office and warehouse
space. These allocated expenses include, but are not limited to, rent, security,
office supplies, machines leases and utilities. The loss of our supply and
distribution arrangements with the Commerce Group could adversely affect our
current supply and distribution responsibilities, primarily because if we, due
to unforeseen circumstances that may occur in the future, are unable to utilize
the services for manufacturing, warehouse and distribution provided by the
Commerce Group, such inability may adversely affect our operations until we are
able to secure manufacturing, warehousing and distribution
9
arrangements with other suppliers that could provide the magnitude of services
to us that the Commerce Group currently provides.
Commerce is an entity controlled by Hubert Guez and Paul Guez, who are
affiliates of us. On March 5, 2004, after the conversion of the promissory note
was approved at the special stockholders meeting into a maximum of 4,166,667
shares, Azteca and the Guez Brothers were initially issued 3,125,000 shares of
our common stock with the possible issuance of up to 1,041,667 additional shares
of common stock upon the occurrence of certain contingencies described in the
Blue Concept APA. Based on a Schedule 13D/A filed by Commerce and/or the Guez
Brothers with the SEC on May 18, 2004 and a Form 4 filed on May 20, 2004, the
Guez Brothers beneficially own approximately 24.98% of our outstanding common
stock in the aggregate. See "Strategic relationship with two of our significant
stockholders, Hubert Guez and Paul Guez, and affiliated companies" for a further
discussion of our relationship with the Guez Brothers.
We outsource a substantial amount of our products to be manufactured to
Commerce. In fiscal 2003, we purchased approximately $47.9 million in goods and
services or 68% of our manufacturing and distribution costs from Commerce Group.
Should we, due to unforeseen circumstances that may occur in the future,
be unable to utilize the services of Commerce Group for manufacturing, warehouse
and distribution provided by Commerce Group through our agreements or verbal
arrangements, such inability may adversely affect our operations until we are
able to secure manufacturing, warehousing and distribution agreements with other
suppliers that could provide the magnitude of services that Commerce Group
currently provides to us.
The seasonal nature of our business makes management more difficult, severely
reduces cash flow and liquidity during parts of the year and could force us to
curtail our operations.
Our business is seasonal. The majority of our marketing and sales
activities take place from late fall to early spring. Our greatest volume of
shipments and sales occur from late spring through the summer, which coincides
with our second and third fiscal quarters. Historically speaking, our cash flow
is strongest in the third and fourth fiscal quarters. Unfavorable economic
conditions affecting retailers during the fall and holiday seasons in any year
could have a material adverse effect on our results of operations for the year.
We are likely to experience periods of negative cash flow throughout each year
and a drop-off in business commencing each December, which could force us to
curtail operations if adequate liquidity is not available. We cannot assure you
that the effects of such seasonality will diminish in the future.
The loss of the services of key personnel could have a material adverse effect
on our business.
Our executive officers have substantial experience and expertise in our
business and have made significant contributions to our growth and success. The
unexpected loss of services of one or more of these individuals could also
adversely affect us. We are currently not protected by a key-man or similar life
insurance covering any of our executive officers, nor do we have written
employment agreements with our Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer or President. If, for example, any one of these
executive officers should leave us, his or her services would likely have a
substantial impact on our ability to operate, on a daily basis because we would
be forced to find and hire similarly experienced personnel to fill one or more
of those positions, and daily operations may suffer temporarily as a result.
Furthermore, with respect to Joe's, while we maintain an employment
agreement with Joe Dahan, its president, should Mr. Dahan leave Joe's, his
experience, design capabilities, and name recognition in the apparel and
accessory industry could materially adversely affect the operations of Joe's,
because Joe's relies heavily on Mr. Dahan's capabilities to design, direct and
produce product for the Joe's brand.
Our business could be negatively impacted by the financial instability or
consolidation of our customers.
We sell our product primarily to retail, private label and distribution
companies around the world based on pre-qualified payment terms. Financial
difficulties of a customer could cause us to curtail business with that
customer. We may also assume more credit risk relating to that customer's
receivables. Our inability to collect on
10
our trade accounts receivable from any one of these customers could have a
material adverse effect on our business or financial condition. More
specifically, we are dependent primarily on lines of credit that we establish
from time to time with customers, and should a substantial number of customers
become unable to pay their respective debts as they become due, we may be unable
to collect some or all of the monies owed by those customers.
Our current practice is to extend credit terms to a majority of our
customers, which is based on such factors as past credit history with us,
reputation of creditworthiness within our industry, and timelines of payments
made to us. A small percentage of our customers are required to pay by either
credit card or C.O.D., which is also based on such factors as lack of credit
history, reputation (or lack thereof) within our industry and/or prior negative
payment history. For those customers to whom we extend credit, typical terms are
net 30 to 60 days. Based on industry practices applicable to our business,
financial awareness of the customers with whom we conduct business, and business
experience of our industry, our management exercises professional judgment in
determining which customers will be extended credit. As of May 29, 2004, we had
$1,394,000 in net accounts receivable and due from factor from our customers
with an allowance for customer credits.
Furthermore, in recent years, the retail industry has experienced
consolidation and other ownership changes. Some of our customers have operated
under the protection of the federal bankruptcy laws. While to date these changes
in the retail industry have not had a material adverse effect on our business or
financial condition, our business could be materially affected by these changes
in the future.
Our business could suffer as a result of manufacturer's inability to produce our
goods on time and to our specifications.
We do not own or operate any manufacturing facilities and therefore depend
upon independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications by both domestic and
international manufacturers. During fiscal 2003, approximately 13% of our
products were manufactured in the United States and approximately 87% of our
products were manufactured in foreign countries. The inability of a manufacturer
to ship orders of our products in a timely manner or to meet our quality
standards could cause us to miss the delivery date requirements of our customers
for those items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect on our financial condition and results of operations. Because of
the seasonality of our business, and the apparel and fashion business in
particular, the dates on which customers need and require shipments of products
from us are critical, as styles and consumer tastes change so rapidly in the
apparel and fashion business, particularly from one season to the next. Further,
because quality is a leading factor when customers and retailers accept or
reject goods, any decline in quality by our third-party manufacturers could be
detrimental not only to a particular order, but also to our future relationship
with that particular customer.
Our business could suffer if we need to replace manufacturers.
We compete with other companies for the production capacity of our
manufacturers and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we experience a
significant increase in demand, or if an existing manufacturer of ours must be
replaced, we may have to expand our third-party manufacturing capacity. We
cannot assure you that this additional capacity will be available when required
on terms that are acceptable to us or similar to existing terms which we have
with our manufacturers, either from a production standpoint or a financial
standpoint. We enter into a number of purchase order commitments each season
specifying a time for delivery, method of payment, design and quality
specifications and other standard industry provisions, but do not have long-term
contracts with any manufacturer. None of the manufacturers we use produces our
products exclusively.
Should we be forced to replace one or more of our manufacturers,
particularly a manufacturer that we may rely upon for a substantial portion of
its production needs, such as Commerce, then we may experience an adverse
financial impact, or an adverse operational impact, such as being forced to pay
increased costs for such replacement manufacturing or delays upon distribution
and delivery of our products to our customers, which could cause us to lose
customers or lose revenues because of late shipments.
11
If an independent manufacturer or license partner of ours fails to use
acceptable labor practices, our business could suffer.
While we require our independent manufacturers to operate in compliance
with applicable laws and regulations, we have no control over the ultimate
actions of our independent manufacturers. While our internal and vendor
operating guidelines promote ethical business practices and our staff
periodically visits and monitors the operations of our independent
manufacturers, we do not control these manufacturers or their labor practices.
The violation of labor or other laws by one of our independent manufacturers, or
by one of our license partners, or the divergence of an independent
manufacturer's or license partner's labor practices from those generally
accepted as ethical in the United States, could interrupt or otherwise disrupt
the shipment of finished products to us or damage our reputation. Any of these,
in turn, could have a material adverse effect on our financial condition and
results of operations. In particular, the laws governing garment manufacturers
in the State of California impose joint liability upon us and our independent
manufacturers for the labor practices of those independent manufacturers. As a
result, should one of our independent manufacturers be found in violation of
state labor laws, we could suffer financial or other unforeseen consequences.
Our trademark and other intellectual property rights may not be adequately
protected outside the United States.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent as do the laws of the United States.
We cannot assure the successful implementation of our growth strategy.
As part of our growth strategy, we seek to expand our geographic coverage,
strategically acquiring select licensees and enhancing our operations. We may
have difficulty hiring and retaining qualified key employees or otherwise
successfully managing the required expansion of our infrastructure in our
current United States market and other international markets we may enter.
Furthermore, we cannot assure you that we will be able to successfully integrate
the business of any licensee that we acquire into our own business or achieve
any expected cost savings or synergies from such integration.
Our business is exposed to domestic and foreign currency fluctuations.
We generally purchase our products in U.S. dollars. However, we source
most of our products overseas and, as such, the cost of these products may be
affected by changes in the value of the relevant currencies. Changes in currency
exchange rates may also affect the relative prices at which we and our foreign
competitors sell products in the same market. We currently do not hedge our
exposure to changes in foreign currency exchange rates. We cannot assure you
that foreign currency fluctuations will not have a material adverse impact on
our financial condition and results of operations. For example, we are subject
to currency fluctuations in Japan and Hong Kong. In fiscal 2003, our earnings
were positively impacted by $154,000 due to currency fluctuations in Japan and
Hong Kong. As of May 29, 2004, our earnings were negatively impacted by $97,000
due to currency fluctuations in Japan and Hong Kong.
Our ability to conduct business in international markets may be affected by
legal, regulatory, political and economic risks.
Our ability to capitalize on growth in new international markets and to
maintain the current level of operations in our existing international markets
is subject to risks associated with international operations. Some of these
risks include:
12
- the burdens of complying with a variety of foreign laws and
regulations,
- unexpected changes in regulatory requirements, and
- new tariffs or other barriers to some international markets.
We are also subject to general political and economic risks associated with
conducting international business, including:
- political instability,
- changes in diplomatic and trade relationships, and
- general economic fluctuations in specific countries or markets.
We cannot predict whether quotas, duties, taxes, or other similar
restrictions will be imposed by the United States, the European Union, Canada,
China, Japan, India, Korea or other countries upon the import or export of our
products in the future, or what effect any of these actions would have on our
business, financial condition or results of operations. Changes in regulatory or
geopolitical policies and other factors may adversely affect our business in the
future or may require us to modify our current business practices.
We face intense competition in the worldwide apparel and accessory industry.
We face a variety of competitive challenges from other domestic and
foreign fashion-oriented apparel and accessory producers, some of whom may be
significantly larger and more diversified and have greater financial and
marketing resources than we have. We do not currently hold a dominant
competitive position in any market. We compete with competitors such as
Kellwood, Jones Apparel Group, and VF Corp. primarily on the basis of:
- anticipating and responding to changing consumer demands in a timely
manner,
- maintaining favorable brand recognition,
- developing innovative, high-quality products in sizes, colors and
styles that appeal to consumers,
- appropriately pricing products,
- providing strong and effective marketing support,
- creating an acceptable value proposition for retail customers,
- ensuring product availability and optimizing supply chain
efficiencies with manufacturers and retailers, and
- obtaining sufficient retail floor space and effective presentation
of our products at retail.
A downturn in the economy may affect consumer purchases of discretionary
items, which could adversely affect our sales.
The fashion apparel and accessory industry in which we operate is
cyclical. Many factors affect the level of consumer spending in the apparel,
accessories and craft industries, including, among others:
- general business conditions,
- interest rates,
- the availability of consumer credit,
13
- taxation, and
- consumer confidence in future economic conditions.
Consumer purchases of discretionary items, including accessory and apparel
products, including our products, may decline during recessionary periods and
also may decline at other times when disposable income is lower. A downturn in
the economies in which we sell our products, whether in the United States or
abroad, may adversely affect our sales.
Impact of potential future acquisitions.
From time to time, we have pursued, and may continue to pursue,
acquisitions. Most recently, we acquired our Blue Concept Division from Azteca,
which is owned by our affiliates, Mr. Hubert Guez and Mr. Paul Guez. We issued a
$21.8 million convertible note for the acquisition, which has increased our
long-term debt by over 600%. On March 5, 2004, our stockholders approved the
partial conversion of the note into a maximum of 4,166,667 shares of our common
stock. As a result of this partial conversion, the note was reduced by $12.5
million to leave a balance of $9.3 million. Additional acquisitions may result
in us becoming substantially more leveraged on a consolidated basis and may
adversely affect our ability to respond to adverse changes in economic, business
or market conditions.
14
USE OF PROCEEDS
Each selling stockholder will receive all of the proceeds from the sale of
its common stock offered by this prospectus. We will not receive any of the
proceeds from the sale of the shares of common stock offered by the selling
stockholders. We will, however, receive the exercise price with respect to
warrants to purchase 312,500 shares of our common stock, when exercised by the
selling stockholders who hold them. If all the warrants are exercised, we
estimate our net proceeds would be $451,875. Any proceeds received will be used
for working capital and other general corporate purposes.
DIVIDEND POLICY
We have never declared or paid a dividend on our common stock. We intend
to retain earnings to finance the growth and development of our business and do
not expect to declare or pay any cash dividends on our common stock in the
foreseeable future. The declaration of dividends is within the discretion of our
board of directors, which will review this dividend policy from time to time.
See "Risk Factors - We Do Not Anticipate Paying Any Dividends on the Common
Stock."
15
SELLING STOCKHOLDERS
The table below sets forth information regarding ownership of our common
stock by the selling stockholders on July 29, 2004 and the shares of common
stock to be sold by them under this prospectus. Beneficial ownership is
determined in accordance with SEC rules and includes voting or investment power
with respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. SEC rules require that the number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying the warrants or options
held by such person that are currently exercisable or exercisable within 60 days
of July 29, 2004 are deemed to be outstanding and to be beneficially owned by
the person holding the options for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. As of July 29, 2004,
29,090,390 shares of our common stock were outstanding.
Shares Beneficially Owned
Prior to the Shares Beneficially Owned
Offering After Offering
--------------------------- ---------------- --------------------------
Number of Shares
Number of Percent of to be Sold in Number of Percent of
Name of Selling Stockholder Shares Class the Offering Shares Class
---------------------------------------- --------- ---------- ----------------- --------- ----------
Azteca Production International, Inc. 3,825,000(1) 13.15% 3,125,000 700,000 2.41%
CPR Investors Partnership 778,595(2) 2.68% 778,595 0 *%
Fred R. Langley 834,220(3) 2.87% 834,220 0 *%
Salek Family Trust dated April 21, 1999 432,870(4) 1.49% 432,870 0 *%
--------- ---------
TOTAL for Selling Stockholders: 5,870,685 5,170,685
========= =========
----------
* Represents beneficial ownership of less than 1%.
(1) Includes (i) 3,125,000 shares offered hereby and held for the
account of Azteca Production International, Inc. ("Azteca"), an
entity jointly owned by Mr. Hubert Guez and Mr. Paul Guez, as to
1,625,000 such shares which Mr. Hubert Guez exercises sole voting
and investment control over and as to 1,500,000 such shares which
Mr. Paul Guez exercises sole 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 and as to which such
shares Mr. Paul Guez exercises sole voting and investment control.
(2) Includes (i) a maximum of 653,595 shares issuable in the event of
conversion of a convertible promissory note; and (ii) 125,000 shares
issuable upon exercise of currently exercisable warrants held for
the account of CPR Investors Partnership. The partnership interest
of CPR Investors Partnership is owned as follows: (i) 33.33% is
owned by P. Ricky Hinchey, as managing general partner; (ii) 33.33%
is owned by C. Randy Massey, as general partner; and (iii) 33.34% is
owned by Joseph R. Zappa, Jr., as general partner. As managing
general partner of CPR Investors Partnership, P. Ricky Hinchey may
be deemed to have sole voting power with respect to these shares;
however, a majority vote of the general partners is required to
exercise the warrants, convert the note or otherwise exercise
dispositive power over the shares.
16
(3) Includes (i) a maximum of 709,220 shares issuable in the event
of conversion of a convertible promissory note; and (ii)
125,000 shares issuable upon exercise of currently exercisable
warrants held for the account of Mr. Langley.
(4) Includes (i) a maximum of 370,370 shares issuable in the event
of conversion of a convertible promissory note; and (ii)
62,500 shares issuable upon exercise of currently exercisable
warrants held for the account of Salek Family Trust dated
April 21, 1999, or Salek Family Trust. In their capacity as
trustees of the Salek Family Trust, Sohrab Rob Salek and
Fattaneh Salek exercise voting and investment control over the
shares held by the Salek Family Trust.
Except as otherwise disclosed above or in documents incorporated herein by
reference, the selling stockholders, have not within the past three years had
any position, office or other material relationship with us or any of our
predecessors or affiliates. Because the selling stockholders may sell all or
some portion of the shares of common stock beneficially owned by them, only an
estimate (assuming the selling stockholders sell all of the shares offered
hereby) can be given as to the number of shares of common stock that will be
beneficially owned by the selling stockholders after this offering. In addition,
the selling stockholders may have sold, transferred or otherwise disposed of, or
may sell, transfer or otherwise dispose of, at any time or from time to time
since the dates on which they provided the information regarding the shares
beneficially owned by them, all or a portion of the shares beneficially owned by
them in transactions registered under other effective registration.
The preceding table has been prepared based upon the information furnished
to us by the selling stockholders. The selling stockholders identified above may
have sold, transferred or otherwise disposed of some or all of their common
stock in transactions exempt from the registration requirements of the
Securities Act since the dates on which they provided the information regarding
the common stock beneficially owned by them. Information concerning the selling
stockholder may change from time to time and, if necessary, we will supplement
this prospectus accordingly.
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. A selling stockholder is a person named on page 16 and also
includes any donnee, pledgee, transferee or other successor-in-interest selling
shares received after the date of this prospectus from a selling stockholder as
a gift, pledge, partnership or limited liability company distribution or other
non-sale related transfer.
The selling stockholders may offer their shares of common stock at various
times in one or more of the following transactions:
o on any U.S. securities exchange on which our common stock may be
listed at the time of such sale;
o in the over-the-counter market;
o in transactions other than on such exchanges or in the
over-the-counter market;
o in connection with short sales; or
o in a combination of any of the above transactions.
The selling stockholders may offer their shares of common stock at
prevailing market prices, at prices related to the prevailing market prices, at
negotiated prices or at fixed prices. The selling stockholders may transfer
shares to discharge indebtedness, as payment for goods or services, or for other
non-cash consideration.
17
The selling stockholders may use broker-dealers to sell their shares of
common stock. If this occurs, broker-dealers will either receive discounts or
commission from the selling stockholder, or they will receive commissions from
the purchasers of shares of common stock for whom they acted as agents. These
brokers may act as dealers by purchasing any and all of the shares covered by
this prospectus either as agents for others or as principals for their own
accounts and reselling these securities under the prospectus.
The selling stockholders and any broker-dealers or other persons acting on
the behalf of parties that participate in the distribution of the shares may be
considered underwriters under the Securities Act. As such, any commissions or
profits they receive on the resale of the shares may be considered underwriting
discounts and commissions under the Securities Act.
As of the date of this prospectus, we are not aware of any agreement,
arrangement or understanding between any broker or dealer and any of the selling
stockholders with respect to the offer or sale of the shares under this
prospectus.
Certain of the agreements with the selling stockholders contain reciprocal
indemnification provisions between us and the selling stockholder to indemnify
each other against certain liabilities, including liabilities under the
Securities Act, which may be based upon, among other things, any untrue
statement or alleged untrue statement of a material fact or any omission or
alleged omission of a material fact.
DESCRIPTION OF CAPITAL STOCK
Common Stock
Pursuant to our Amended and Restated Certificate of Incorporation, we are
authorized to issue 40,000,000 shares of common stock, $.10 par value per share.
As of July 29, 2004, we had outstanding 29,090,390 validly issued, fully paid
and non-assessable shares of common stock.
Holders of the common stock are entitled to one vote for each share held
of record in each matter properly submitted to such holders for a vote. Subject
to the rights of the holders of any other outstanding series of stock our board
of directors may designate from time to time, holders of common stock are
entitled to receive their pro rata share of (i) any dividends that may be
declared by the board of directors out of assets legally available therefore,
and (ii) any excess assets available upon the liquidation, dissolution, or
winding up of our company.
Our Board of Directors may issue the additional shares of common stock, up
to the authorization of 40 million shares, without soliciting additional
stockholder approval. The existence of authorized but unissued shares of the
common stock could tend to discourage or render more difficult the completion of
a hostile merger, tender offer or proxy contest. For example, if in the due
exercise of its fiduciary obligations, the board of directors were to determine
that a takeover proposal was not in the best interest of the company and its
stockholders, the ability to issue additional shares of stock without further
stockholder approval could have the effect of rendering more difficult or costly
the completion of the takeover transaction, by diluting the voting or other
rights of the proposed acquirer or insurgent stockholder group, by creating a
substantial voting block in hands that might support the position of the board
of directors, by effecting an acquisition that might complicate or preclude the
takeover, or otherwise.
Preferred Stock
Our Amended and Restated Certificate of Incorporation authorizes the
issuance of up to 5 million shares of preferred stock with designations, rights
and preferences determined from time to time by the board of directors.
Accordingly, the board of directors is empowered, without stockholder approval,
to issue preferred stock with dividends, liquidation, conversion, voting and
other rights that could adversely affect the voting power or other rights of the
holders of common stock. In the event of issuance, the preferred stock could be
used, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of Innovo. As of July 29, 2004, we had
outstanding 4,806,000 validly issued, fully paid and non-assessable shares of
preferred stock.
18
Certain Provisions Relating to Share Acquisitions
Section 203 of the Delaware General Corporation Law generally prevents a
corporation from entering into certain business combinations with an interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) or its affiliates for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless (i) the transaction is approved by the board of
directors of the corporation prior to such business combination, (ii) the
interested stockholder acquires 85% of the corporation's voting stock in the
same transaction in which it exceeds 15%, or (iii) the business combination is
approved by the board of directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. The Delaware
General Corporation Law provides that a corporation may elect not to be governed
by Section 203. We have made no such election and are therefore governed by
Section 203. Such anti-takeover provision may have an adverse effect on the
market for our securities.
Indemnification and Limitation of Liability
Our Amended and Restated Certificate of Incorporation provides that we
shall indemnify our officers and directors to the fullest extent permitted by
Delaware law, including some instances in which indemnification is otherwise
discretionary under Delaware law. The Amended and Restated Certificate of
Incorporation also provides that, pursuant to Delaware law, our directors shall
not be liable for monetary damages for breach of the director's fiduciary duty
of care to the company and its stockholders. This provision does not eliminate
the duty of care, and, in appropriate circumstances, equitable remedies such as
an injunction or other forms of non-monetary relief would remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the company, for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities for environmental laws.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
Transfer Agent and Registrar for our Common Stock and Warrants
The transfer agent and registrar for our common stock is North American
Transfer Company located at 147 West Merrick Road, Freeport, New York 11520, and
its telephone number is (516) 379-8501.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for our company by our general counsel, Dustin A. Huffine, Esq.
Mr. Huffine beneficially owns 5,500 shares of common stock held for his personal
account.
EXPERTS
Ernst & Young LLP, independent registered public accounting firm, have
audited our consolidated financial statements and schedule included in our
Annual Report on Form 10-K for the year ended November 29, 2003, as set forth in
their report, which is incorporated by reference in this prospectus and
elsewhere in the registration statement. Our financial statements and schedule
are incorporated by reference in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
19
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms at 450 Fifth Street, N.W., Washington, DC 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov. We also make such documents that we file with the
SEC available on our website at http://www.innovogroup.com as soon as reasonably
practicable after such reports are electronically filed with or furnished to the
SEC. However, we do not intend that the information available through our
website be incorporated into this prospectus.
We have filed a registration statement on Form S-3 with the SEC to
register the offering of the shares of common stock offered pursuant to this
prospectus. This prospectus is part of that registration statement and, as
permitted by the SEC's rules, does not contain all of the information included
in the registration statement. For further information about us, this offering
and our common stock, you may refer to the registration statement and its
exhibits and schedules as well as the documents described herein. You can review
and copy these documents at the public reference facilities maintained by the
SEC or on the SEC's website as described above.
This prospectus may contain summaries of contracts or other documents.
Because they are summaries, they will not contain all of the information that
may be important to you. If you would like complete information about a contract
or other document, you should read the copy filed as an exhibit to the
registration statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information we incorporate by reference is
considered to be an important part of this prospectus, and information that we
file with the SEC at a later date will automatically update or supersede this
information. We incorporate by reference the following documents as well as any
future filing we will make with the SEC (File No. 0-18926) under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, provided, however, we
are not incorporating any information furnished under either Item 9 or Item 12
of any Current Report on Form 8-K:
1. Our annual report on Form 10-K for the fiscal year ended November
29, 2003, as amended by Amendment No. 1 to our annual report on Form
10-K filing filed with the SEC on February 27, 2004 and March 29,
2004;
2. Our Definitive Revised Proxy Statement on Schedule 14A filed with
the SEC on April 29, 2004;
3. Our Quarterly Report on Form 10-Q for the three and six months ended
May 29, 2004;
4. Our Quarterly Report on Form 10-Q for the three months ended
February 28, 2004;
5. Our Current Report on Form 8-K filed with the SEC on June 23, 2004;
6. Our Current Report on Form 8-K filed with the SEC on June 14, 2004;
7. Our Current Report on Form 8-K filed with the SEC on June 3, 2004;
8. Our Current Report on Form 8-K filed with the SEC on May 27, 2004;
9. Our Current Report on Form 8-K filed with the SEC on May 18, 2004;
10. Our Current Report on Form 8-K filed with the SEC on April 26, 2004;
11. Our Current Report on Form 8-K filed with the SEC on March 8, 2004;
12. Our Current Report on Form 8-K filed with the SEC on December 2,
2003;
20
13. Our description of common stock that is referenced in our
registration statement on Form 8-A, File No. 000-18926, filed with
the SEC on December 6, 1990 (which incorporates by reference the
description of Common Stock that is contained in our Post Effective
Amendment No. 6 to Form S-18, File No. 33-25912, filed with the SEC
on November 29, 1990), including all amendments or reports filed for
the purpose of updating such description.
You, including any beneficial owner of any security to whom a prospectus
is delivered, may request a copy of these filings or any exhibits thereto, at no
cost, by writing to or calling Donna Drewrey, Innovo Group Inc., 2633 Kingston
Pike, Suite 100, Knoxville, Tennessee 37919, telephone 865-546-1110.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference in this
prospectus contain both historical and forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. Forward-looking statements are not
statements of historical fact but rather reflect our current expectations,
estimates and predictions about future results and events. These statements may
use words such as "anticipate," "believe," "estimate," "expect," "intend,"
"predict," "project" and similar expressions as they relate to us or our
management. When we make forward-looking statements, we are basing them on our
management's beliefs and assumptions, using information currently available to
us. These forward-looking statements are subject to risks, uncertainties and
assumptions, including but not limited to, risks, uncertainties and assumptions
discussed in this prospectus. Factors that can cause or contribute to these
differences include those described under the headings "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These forward looking statements include, but are not limited to,
statements regarding the following: growth opportunities and increasing market
share, earnings estimates, future financial performance and other matters.
Although we believe that the expectations contained in these forward-looking
statements are reasonable, you cannot be assured that these expectations will
prove correct.
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from what we projected. Any forward-looking statements you read in
this prospectus and the documents incorporated by reference in this prospectus
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
carefully review and consider all information, including the information
included in the section entitled "Risk Factors" and the financial statements and
the notes to the financial statements and related disclosures incorporated by
reference in this prospectus before making an investment decision. We are under
no duty to update any of the forward-looking statements after the date of this
prospectus or to conform these statements to actual results.
CAUTIONARY STATEMENTS
No person has been authorized to give any information or to make any
representation not contained in this prospectus in connection with this offering
of common stock and, if given or made, no one may rely on such unauthorized
information or representations. This prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any securities other than the common
stock to which it relates, or an offer to sell or the solicitation of an offer
to buy such securities in any jurisdiction in which such offer or solicitation
may not be legally made. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
21
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information contained in this document is current
only as of its date.
5,170,685 SHARES
INNOVO GROUP INC.
COMMON STOCK
------------
PROSPECTUS
------------
Until ___, all dealers that effect transactions in these securities,
whether or not participating in this offering may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
July 29, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by us in
connection with the sale of the shares of common stock being registered hereby.
All amounts are estimates except for the SEC registration fee.
SEC registration fee ......................................... $ 851.66
Accounting fees and expenses ................................. $ 7,500.00
Legal fees and expenses ...................................... $ 7,500.00
Transfer agent and registrar fees and expenses ............... $ 1,000.00
Miscellaneous expenses ....................................... $ 1,000.00
Total ............................................... $17,851.66
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. In actions brought by or in the right of a corporation, however,
Section 145 provides that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless, and only to the extent that, the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in review of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper. Article Nine of our Amended and
Restated Certificate of Incorporation requires that we indemnify our directors
and officers for certain liabilities incurred in the performance of their duties
on our behalf to the fullest extent allowed by Delaware law.
Our Amended and Restated Certificate of Incorporation relieves our
directors from personal liability to us or our stockholders for breach of any of
such director's fiduciary duty as a director to the fullest extent permitted by
the Delaware General Corporation Law. Under Section 102(b)(7) of the Delaware
General Corporation Law, a corporation may relieve its directors from personal
liability to such corporation or its stockholders for monetary damages for any
breach of their fiduciary duties as directors except (i) for a breach of the
duty of loyalty, (ii) for failure to act in good faith, (iii) for intentional
misconduct or knowing violation of law, (iv) for willful or negligent violations
of certain provisions of the Delaware General Corporation Law imposing certain
requirements with respect to stock repurchases, redemptions and dividends, or
(v) for any transaction from which such director derived an improper personal
benefit.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 16. Exhibits.
The following exhibits are filed herewith and as a part of this
registration statement:
Exhibit Document if
Number Description Incorporated by Reference
------ ----------- -------------------------
4.1 Form of Convertible Promissory Note Incorporated by reference to
Exhibit 4.1 to Current Report on
Form 8-K filed on June 23, 2004
4.2 Form of Common Stock Purchase Warrant Incorporated by reference to
Exhibit 4.2 to Current Report on
Form 8-K filed on June 23, 2004
4.3 Form of Registration Rights Agreement Incorporated by reference to
Exhibit 4.3 to Current Report on
Form 8-K filed on June 23, 2004
5 Opinion of Dustin A. Huffine, Esq. Filed herewith
23.1 Consent of Dustin A. Huffine, Esq. (included in Exhibit 5) Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
24 Power of Attorney (included on page II-4and II-5) Filed herewith
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post - effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information in this
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) herein do not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the undersigned
registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in this registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer of controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Commerce, State of California, on the 29th day of
July, 2004.
INNOVO GROUP INC.
By: /s/ Samuel J. Furrow, Jr.
-------------------------
Samuel J. Furrow, Jr.
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS that each individual whose signature
appears below constitute and appoints Samuel J. Furrow, Jr., and his or her true
and lawful attorneys-in-fact and agents with full power of substitution, for him
or her and in his or her name, place and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
registration statement, and to sign any registration statement for he same
offering covered by the registration statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
his, her or their substitute or substitutes, may lawfully do or cause to be done
or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGE TO FOLLOW.]
II-4
Signature Capacity Date
--------- -------- ----
/s/ Samuel J. Furrow, Jr. Chief Executive Officer (Principal
------------------------- Executive Officer) and Director July 26, 2004
Samuel J. Furrow, Jr.
/s/ Marc B. Crossman Chief Financial Officer (Principal
------------------------- Financial Officer) and Director July 26, 2004
Marc B. Crossman
/s/ Patricia Anderson President and Director July 26, 2004
-------------------------
Patricia Anderson
/s/ Samuel J. Furrow Chairman of the Board of Directors July 26, 2004
-------------------------
Samuel J. Furrow
/s/ Dean Factor Director July 26, 2004
-------------------------
Dean Factor
/s/ Kelly Hoffman Director July 27, 2004
-------------------------
Kelly Hoffman
/s/ Suhail R. Rizvi Director July 23, 2004
-------------------------
Suhail R. Rizvi
/s/ Vincent Sanfilippo Director July 27, 2004
-------------------------
Vincent Sanfilippo
/s/ Kent A. Savage Director July 26, 2004
-------------------------
Kent A. Savage
II-5
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
4.1 Form of Convertible Promissory Note **
4.2 Form of Common Stock Purchase Warrant **
4.3 Form of Registration Rights Agreement **
5 Opinion of Dustin A. Huffine, Esq. *
23.1 Consent of Dustin A. Huffine, Esq.
(included in Exhibit 5 hereto) *
23.2 Consent of Ernst & Young, LLP *
24 Power of Attorney (included in the signature page of this
Registration Statement)*
----------
* Filed herewith.
** Previously filed.