ITEM 7.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
This
discussion and analysis summarizes the significant factors affecting our
results of operations and financial conditions during the fiscal years ended November 30,
2007, November 25, 2006 and November 26, 2005. This discussion should be read in conjunction
with our Consolidated Financial Statements, Notes to Consolidated Financial
Statements and supplemental information in Item 8 of this Annual Report. The discussion and analysis contains
statements that may be considered forward-looking. These statements contain a number of risks
and uncertainties as discussed, under the heading Forward-Looking Statements
of this Annual Report that could cause actual results to differ
materially. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Our future results,
performance or achievements could differ materially from those expressed or
implied in these forward-looking statements.
We do not undertake and specifically decline any obligation to publicly
revise these forward-looking statements to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
Executive
Overview
Our
principal business activity has evolved into the design, development and
worldwide marketing of our Joes® products, which include denim jeans, related
casual wear and accessories. Since Joes®
was established in 2001, the brand is recognized in the premium denim industry,
an industry term for denim jeans with price points of $120 or more, for its
quality, fit and fashion-forward designs.
Because we focus on design, development and marketing, we rely on third
parties to manufacture our apparel products and for distribution and product
fulfillment services. We sell our
products to numerous retailers, which include major department stores,
specialty stores, and distributors around the world. Historically, we also sold other branded
apparel products, such as indie, Betsey Johnson®, Fetish and Shago®, private
label denim and denim related products and craft and accessory products.
In
fiscal 2007, we continued to implement our transition plan to focus our
operations on our Joes® brand. Our
transition plan included selling the assets or ceasing operations of our other
branded and private label apparel products.
To enhance our ability to capitalize on the Joes® brand, on February 6,
2007, we entered into a merger agreement to merge with JD Holdings Inc., or JD
Holdings, the successor in interest to JD Design LLC, or JD Design, the entity
from whom we licensed the Joes® brand.
We also entered into our first license agreement for other product categories
for handbags, belts and small leather goods bearing the Joes® brand. In October 2007, we completed the merger
and acquired the Joes® brand. In
exchange for all of the rights for the Joes® brand, we issued 14,000,000
shares of our common stock, $300,000 in cash and entered into an employment
agreement with Joe Dahan, the principal designer and sole stockholder of JD
Holdings. As part of the merger
consideration, we are also obligated to pay Mr. Dahan a percentage of our
gross profits until 2017 above $11,251,000.
In addition to owning approximately 24 percent of our total shares
outstanding, after the merger, Mr. Dahan became an executive officer and a
member of our Board of Directors.
As
part of our transition plan, we reported income from operations for a full
fiscal year for the first time since 2002.
Our strategic plan for 2008 includes entering into lease agreements to
open retail stores, improving international sales, increasing sales from our mens
product line, evaluating licensing opportunities for other product categories
and enhancing the quality, fit and products available in our collection beyond
denim bottoms. In January 2008, we
entered into a lease for retail space at Woodbury Common Premium Outlets® in Central
Valley, New York. The outlet center is
approximately 50 miles outside of New York City. We expect to open the store in the fall of
2008. An outlet center will also allow
us to test our ability to open retail stores plus give us an alternative
distribution channel to sell our overstock or slow moving items at better
profit margins. To improve our
international sales, we hired two consultants based in Europe to assist us in
entering into agent and distribution agreements worldwide. In addition, we have been focusing designing
an entire collection of products to be available to our customers.
Our
business is seasonal. The majority of
the marketing and sales activities take place from late fall to early
spring. The greatest volume of shipments
and sales are generally made from late spring through the summer, which
coincides with our second and third fiscal quarters and our cash flow is
strongest in our third and fourth fiscal quarters. Due to the seasonality of our business, as
well as the evolution and changes in our business and product mix, often our
quarterly or yearly results are not necessarily indicative of the results for
the next quarter or year.
20
Since
the sale in May 2006 of certain assets of our private label business and
subsequent classification as a discontinued operation, our continuing
operations for fiscal 2006 and 2005 include net sales of our Joes® brand and
net sales of other terminated branded apparel lines. Because these other branded apparel lines
were not separate operating divisions, the terminated lines are not included as
part of our discontinued operations.
These brands are reflected in our overall net sales even though the
brands are not part of our continuing operations beyond the relevant time
periods. We also sold the assets of our
craft and accessory business operated under our Innovo subsidiary in May 2005
and reported that subsidiary as a discontinued operation as of fiscal 2004.
Our
fiscal year end is November 30.
Effective October 11, 2007, we
changed from a thirteen-week quarterly reporting period to a last day of the
month quarterly reporting period to reflect standard quarterly accounting
periods. The modification of the fiscal
year did not have a material effect on our financial condition, results of
operations, or cash flows.
Comparison
of Fiscal Year Ended November 30, 2007 to Fiscal Year Ended November 25,
2006
Results of Continuing Operations
The
following table sets forth certain statements of operations data for the
periods as indicated:
|
|
Year ended
|
|
|
|
(in thousands)
|
|
|
|
11/30/07
|
|
11/25/06
|
|
$
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
62,767
|
|
$
|
46,633
|
|
$
|
16,134
|
|
35
|
%
|
Cost of goods
sold
|
|
36,137
|
|
31,224
|
|
4,913
|
|
16
|
%
|
Gross profit
|
|
26,630
|
|
15,409
|
|
11,221
|
|
73
|
%
|
Gross margin
|
|
42
|
%
|
33
|
%
|
9
|
%
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative
|
|
23,085
|
|
21,587
|
|
1,498
|
|
7
|
%
|
Depreciation and
amortization
|
|
359
|
|
290
|
|
69
|
|
24
|
%
|
Income (loss)
from continuing operations
|
|
3,186
|
|
(6,468
|
)
|
9,654
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(828
|
)
|
(573
|
)
|
(255
|
)
|
45
|
%
|
Other expense
|
|
(13
|
)
|
(67
|
)
|
54
|
|
(81
|
)%
|
Income (loss)
from continuing operations, before taxes
|
|
2,345
|
|
(7,108
|
)
|
9,453
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
91
|
|
36
|
|
55
|
|
153
|
%
|
Income (loss)
from continuing operations
|
|
2,254
|
|
(7,144
|
)
|
9,398
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations, net of tax
|
|
|
|
(2,149
|
)
|
2,149
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
2,254
|
|
$
|
(9,293
|
)
|
$
|
11,547
|
|
(A
|
)
|
(A) Not
meaningful
21
Fiscal
Year 2007 Overview
The
following table represents a summary of our net sales, gross profit and gross
margins for the periods indicated.
|
|
(in thousands)
|
|
|
11/30/07
|
|
11/25/06
|
|
Change
|
|
% Change
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
Joes Jeans
|
|
$
|
62,767
|
|
$
|
45,264
|
|
$
|
17,503
|
|
39
|
%
|
Other branded
|
|
|
|
1,369
|
|
(1,369
|
)
|
(100
|
)%
|
|
|
$
|
62,767
|
|
$
|
46,633
|
|
$
|
16,134
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
Joes Jeans
|
|
$
|
26,630
|
|
$
|
16,910
|
|
$
|
9,720
|
|
57
|
%
|
Other branded
|
|
|
|
(1,501
|
)
|
1,501
|
|
(100
|
)%
|
|
|
$
|
26,630
|
|
$
|
15,409
|
|
$
|
11,221
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
Joes Jeans
|
|
42
|
%
|
37
|
%
|
|
|
|
|
Other branded
|
|
|
|
(110
|
)%
|
|
|
|
|
Overall
|
|
42
|
%
|
33
|
%
|
|
|
|
|
Net
Sales
Our overall net sales
increased to $62,767,000 in fiscal 2007 from $46,633,000 in fiscal 2006, a 35
percent increase.
This
increase can be attributed to a continued strong demand for premium denim
apparel products in the marketplace coupled with brand acceptance for our Joes®
products in the premium denim market and the addition of our mens line. As a result of increased brand acceptance and
awareness of our Joes® products, in fiscal 2007, we experienced growth in the
number of department store doors carrying our products, increases in the
average inventory per door and added two new department stores, Belk and Lord &
Taylor. Offsetting our increase was a
decrease of $153,000 in international net sales primarily due to the
dissolution of our agreement with our international distributor in February 2007
and a slower than expected implementation of our strategic plan to hire
consultants based in Europe to assist us with dealing directly with
distributors and agents in various countries.
Other
Branded Apparel
Net
sales of our other branded apparel for fiscal 2006 include sales from indie
and to a limited extent, Betsey Johnson®.
We had no net sales of other branded label products in fiscal 2007
compared to $1,369,000 in fiscal 2006.
Sales in fiscal 2006 were limited to sales of remaining inventory after
our decision to exit or terminate operations for these branded apparel lines.
Gross
Profit
Our
gross profit increased to $26,630,000 in fiscal 2007 from $15,409,000 in fiscal
2006, a 73 percent increase. Our overall
gross margin percentage increased to 42 percent in fiscal 2007 from 33 percent
in fiscal 2006 because of our shift in sales mix to net sales only from our Joes®
branded apparel products, which generally have a higher and more consistent
gross margin than our other branded apparel products. For example, our overall gross margins were
negatively affected by a negative 110 percent gross margin for our other
branded apparel products compared to our Joes® gross margin of 37 percent for
fiscal 2006.
22
Joes®
Our gross profit for our Joes® brand increased to
$26,630,000 in fiscal 2007 from $16,910,000 in fiscal 2006, a 57 percent
increase. Our gross margin percentage for our Joes® brand increased to 42
percent in fiscal 2007 from 37 percent in fiscal 2006. Our gross margin
increase for our Joes® brand is primarily attributable to higher and more
consistent gross margins in each quarter of fiscal 2007 compared to fiscal 2006.
In addition, we shifted slightly more production outside of the United States
during fiscal 2007 compared to fiscal 2006 and added production in Morocco
which contributed to improving gross margins. Specifically, in fiscal 2007, we
manufactured 38 percent of our products in the United States compared to 41
percent in fiscal 2006.
Other Branded Apparel
Our gross profit for our other branded apparel was a
negative $1,501,000 in fiscal 2006. Our gross margin percentage for our other
branded apparel increased to a negative 110 percent. Our negative gross profit
in fiscal 2006 was due to sales to discounters with negative or no gross
margins in order to liquidate remaining inventory and sales at less than
estimated net realizable value.
Selling, General and Administrative Expense
Selling, general and administrative, or SG&A,
expenses increased to $23,085,000 in fiscal 2007 from $21,587,000 in fiscal
2006, a 7 percent increase.
The SG&A increase in fiscal 2007 compared to
fiscal 2006 is largely a result of the following factors: (i) an increase
of $717,000 in sales commissions and royalties as a result of our 39 percent
increase in Joes® sales; (ii) an increase of $535,000 in facilities,
fulfillment and distribution costs associated with outsourcing our product
fulfillment services and storage fees for raw materials purchased to support
our increase in sales; (iii) an increase of $785,000 related to
professional fees associated with the merger to acquire the Joes® brand and
engaging consultants in Europe; and (iv) an increase of $723,000 related
to settlement expenses associated with our termination of our international
distributor during fiscal 2007. These SG&A expenses were partially offset
by (i) a reduction of $240,000 in employee and employee related expenses
due to a lower headcount in the first half of 2007; (ii) a reduction of $173,000
in sample expenses due to improved cost control; (iii) a reduction of
$540,000 in advertising fees and tradeshow expenses partially due to our
decision not to renew our billboard and taxi cab advertising commitments; and (iv) a
reduction of $931,000 in stock based compensation expenses due to the repricing
of certain management options in fiscal 2006 that we did not have in fiscal
2007.
Depreciation and Amortization Expense
Our depreciation and amortization expense increased
to $359,000 during fiscal 2007 from $290,000 during fiscal 2006, a 24 percent
increase. The increase was primarily attributable to depreciation associated
with our purchase of $272,000 of fixed assets during fiscal 2007, which
included tradeshow booths and related improvements, sewing machines and other
equipment for sample production, certain leasehold improvements to support our
growth in fiscal 2007, computers and office equipment.
Interest Expense
Our combined interest expense increased to $828,000
in fiscal 2007 from $573,000 in fiscal 2006, a 45 percent increase. Our
interest expense during fiscal 2007 and 2006 was primarily associated interest
expense from our factoring and inventory lines of credit and letters of credit
from CIT used to help support our working capital increases.
Other Expense
During fiscal 2007, other expense was $13,000
compared to other expense of $67,000 during fiscal 2006. Other expense in
fiscal 2007 was associated with an unreimbursed insurance claim. Other expense
in fiscal 2006 was associated with $68,000 of expense recorded in the second
quarter of fiscal 2006 associated with the loss of certain finished goods from
a cargo fire in Turkey which was offset by an immaterial amount of other
income.
23
Income Taxes
Our income tax expense related to continuing
operations was $91,000 in fiscal 2007 compared to $36,000 in fiscal 2006, or a
153 percent increase. Our effective tax rate was five percent for fiscal 2007
due to reporting income and zero percent for fiscal 2006 due to losses. Our tax
expense for fiscal 2007 was less than the statutory rate primarily due to the
utilization of net operating losses carryforwards. Net operating loss
carryforwards are included in deferred tax assets and are fully offset by a
valuation allowance.
Income from Continuing Operations
We incurred income from continuing operations of
$2,254,000 in fiscal 2007 compared to a loss from continuing operations of
$7,144,000 in fiscal 2006. The change in income from continuing operations in
fiscal 2007 compared to a loss from continuing operations in fiscal 2007 is
largely the result of the following factors:
(i) an increase of $16,134,000 in net sales; (ii) an increase
of $11,221,000 in gross profit which translated into a 42 percent overall gross
margin for the full fiscal year compared to a 33 percent overall gross margin
in fiscal 2006; and (iii) maintaining SG&A expenses with only a 7
percent increase in spite of a 35 percent growth in sales. These factors
contributed to our shift from reporting losses in the prior fiscal years to
reporting income for fiscal 2007.
Comparison of Fiscal Year Ended November 25, 2006 to Fiscal Year
Ended November 26, 2005
Results of Continuing Operations
The following table sets forth certain statements of
operations data for the periods as indicated:
|
|
Year ended
|
|
|
|
(in thousands)
|
|
|
|
11/25/06
|
|
11/26/05
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
46,633
|
|
$
|
35,920
|
|
$
|
10,713
|
|
30
|
%
|
Cost of goods sold
|
|
31,224
|
|
25,203
|
|
6,021
|
|
24
|
%
|
Gross profit
|
|
15,409
|
|
10,717
|
|
4,692
|
|
44
|
%
|
Gross margin
|
|
33
|
%
|
30
|
%
|
3
|
%
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative
|
|
21,587
|
|
18,245
|
|
3,342
|
|
18
|
%
|
Depreciation & amortization
|
|
290
|
|
182
|
|
108
|
|
59
|
%
|
Loss from operations
|
|
(6,468
|
)
|
(7,710
|
)
|
1,242
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(573
|
)
|
(781
|
)
|
208
|
|
(27
|
)%
|
Other (expense) income
|
|
(67
|
)
|
16
|
|
(83
|
)
|
(A
|
)
|
Loss from continuing operations, before taxes
|
|
(7,108
|
)
|
(8,475
|
)
|
1,367
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
36
|
|
13
|
|
23
|
|
177
|
%
|
Loss from continuing operations
|
|
(7,144
|
)
|
(8,488
|
)
|
1,344
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
(2,149
|
)
|
(7,945
|
)
|
5,796
|
|
(A
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(9,293
|
)
|
$
|
(16,433
|
)
|
$
|
7,140
|
|
(43
|
)%
|
(A) Not
Meaningful
24
Fiscal Year 2006 Overview
The following table represents a summary of our net
sales, gross profit and gross margins for the periods indicated.
|
|
(in thousands)
|
|
|
|
11/25/06
|
|
11/26/05
|
|
Change
|
|
% Change
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
Joes Jeans
|
|
$
|
45,264
|
|
$
|
33,304
|
|
$
|
11,960
|
|
36
|
%
|
Other Branded
|
|
1,369
|
|
2,616
|
|
(1,247
|
)
|
(48
|
)%
|
|
|
$
|
46,633
|
|
$
|
35,920
|
|
$
|
10,713
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
Joes Jeans
|
|
$
|
16,910
|
|
$
|
10,505
|
|
$
|
6,405
|
|
61
|
%
|
Other Branded
|
|
(1,501
|
)
|
212
|
|
(1,713
|
)
|
(808
|
)%
|
|
|
$
|
15,409
|
|
$
|
10,717
|
|
$
|
4,692
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
Joes Jeans
|
|
37
|
%
|
32
|
%
|
|
|
|
|
Other Branded
|
|
(110
|
)%
|
8
|
%
|
|
|
|
|
Overall
|
|
33
|
%
|
30
|
%
|
|
|
|
|
Net Sales
Our overall net sales increased to $46,633,000 in
fiscal 2006 from $35,920,000 in fiscal 2005, a 30 percent increase.
Joes®
Our net sales of our Joes branded apparel increased
to $45,264,000 during fiscal 2006 from $33,304,000 during fiscal 2005, a 36
percent increase. This increase can be attributed to a continued strong demand
for premium denim apparel products in the marketplace coupled with brand
acceptance for our Joes® products in the premium denim market and the addition
of our mens line. As a result of increased brand acceptance and awareness of
our Joes® products, in fiscal 2006, we experienced growth in the number of
department store doors carrying our products, as well as increases in the
average inventory per door. However, our domestic net sales increase of 47
percent was offset by a 45 percent decrease in international net sales. Our
international net sales decreased primarily due to delays during fiscal 2006 in
the delivery of samples to our international distributor for use at major
European apparel tradeshows and sales orders. The salesperson samples were
delayed in part because we used the same design calendar for both international
and domestic production schedules. We modified our design calendar for our
Spring 2007 collection in an effort to ensure that salesperson samples are
delivered in advance of international tradeshow dates. In January 2007, we
dissolved our agreement with our international distributor.
Other Branded Apparel
Net sales of our other branded apparel for fiscal
2006 include sales from indie and to a limited extent, Betsey Johnson®. For
fiscal 2005, our other branded label products included indie, Betsey Johnson®
and to a limited extent, Fetish and Shago®. Our net sales of other branded
label products decreased to $1,369,000 in fiscal 2006 from $2,616,000 in fiscal
2005, a 48 percent decrease, primarily due to sales of remaining inventory
after our decision to exit the operation of the indie brand in January 2006
and termination of the Betsey Johnson® license in July 2005. Our Betsey
Johnson® branded apparel had limited net sales of $38,000 in fiscal 2006
compared to net sales of $180,000 in fiscal 2005. During fiscal 2005, we had
$273,000 of sales attributable to Fetish
and Shago® products that we
did not have in fiscal 2006.
Gross Profit
Our gross profit increased to $15,409,000 in fiscal
2006 from $10,717,000 in fiscal 2005, a 44 percent increase. Our overall gross
margin percentage increased to 33 percent in fiscal 2006 from 30 percent in
fiscal 2005 because of our shift in sales mix to a higher percentage of our net
sales from our Joes® branded apparel products, which generally a higher and
more
25
consistent
gross margin than our other branded apparel products. For example, our overall
gross margins were negatively affected by a negative 110 percent gross margin
for our other branded apparel products compared to our Joes® gross margin of
37 percent for fiscal 2006.
Joes®
Our gross profit for our Joes® brand increased to
$16,910,000 in fiscal 2006 from $10,505,000 in fiscal 2005, a 61 percent
increase. Our gross margin percentage for our Joes® brand increased to 37
percent in fiscal 2006 from 32 percent in fiscal 2005. Our gross margin
increase for our Joes® brand is primarily attributable to more consistent
gross margins in each quarter of fiscal 2006 compared to fiscal 2005. For
example, in the fourth quarter of fiscal 2005, our gross margins were
negatively affected by an additional $2,700,000 of inventory reserves recorded
as a result of ending the quarter with higher than anticipated inventory levels
and the need to sell certain back pocket designs by March 31, 2006 under a
settlement agreement with Levis Strauss & Co. During fiscal 2006, we
experienced more consistent gross margins from quarter to quarter; however, in
the first quarter of fiscal 2006, we did experience lower gross margins as a
result of (i) $2,562,000 of sales sold at a discount with little or no
gross margins; and (ii) an additional reserve of $243,000 that we recorded
against certain excess inactive fabric due to a change in inventory planning.
Other Branded Apparel
Our gross profit for our other branded apparel
decreased to a negative $1,501,000 in fiscal 2006 from $212,000 in fiscal 2005,
an 808 percent decrease. Our gross margin percentage for our other branded
apparel decreased to a negative 110 percent from 8 percent in fiscal 2005. This
decrease in gross profit in fiscal 2006 was due to sales to discounters with
negative or no gross margins in order to liquidate remaining inventory and
sales at less than estimated net realizable value.
Selling, General and Administrative Expense
Selling, general and administrative, or SG&A,
expenses increased to $21,587,000 in fiscal 2006 from $18,245,000 in fiscal
2005, an 18 percent increase.
The SG&A increase in fiscal 2006 compared to
fiscal 2005 is largely a result of the following factors: (i) an increase
in sales commissions and royalties of $946,000 as a result of our 36 percent
increase in Joes® sales; (ii) an increase of $360,000 in advertising
expenses associated with expenses for booths for tradeshows, catalogs and look
books to showcase our new product offerings, including our mens line; (iii) an
increase of $883,000 in sample expenses due to increased costs associated with
testing different washes and finishes associated with development and sample
production, including producing samples for our re-launched Joes® mens
product line ; (iv) an increase of $498,000 in facilities and distribution
costs associated with outsourcing our product fulfillment services and moving
office space; (v) an increase of $370,000 in termination and settlement
expenses due to severance payments in the first quarter of fiscal 2006
associated with terminating our former CEO and amounts paid for the assignment
of office space in New York; and (vi) an increase of $1,044,000 in
stock-based compensation charges related to the adoption of Statement of
Financial Accounting Standards No. 123(R). These SG&A expenses were
partially offset by (i) a reduction of $53,000 in employee and employee
related expenses; and (ii) a reduction of $686,000 in professional fees
primarily associated with maintenance and compliance with, rather than
implementation of, the requirements of the Sarbanes-Oxley Act of 2002.
Depreciation and Amortization Expense
Our depreciation and amortization expense increased
to $290,000 during fiscal 2006 from $182,000 during fiscal 2005, a 59 percent
increase. The increase was primarily attributable to depreciation associated
with our purchase of $668,000 of fixed assets during fiscal 2006, which
included tradeshow booths and related improvements, sewing machines and other
equipment for sample production, certain leasehold improvements to support our
move in July 2006 to the shared facility, computers and office equipment.
Interest Expense
Our combined interest expense decreased to $573,000
in fiscal 2006 from $781,000 in fiscal 2005, a 27 percent decrease. Our
interest expense during fiscal 2006 was primarily associated with $576,000 of
interest expense from our factoring and inventory lines of credit and letters
of credit from CIT used to help support our working capital increases which
26
was
partially offset by interest received on a promissory note from the purchaser
of our former headquarters in Springfield, Tennessee.
Other Income (Expense)
During fiscal 2006, other expense, net was $67,000
compared to other income of $16,000 during fiscal 2005. Other expense in fiscal
2006 was associated with $68,000 of expense recorded in the second quarter of
fiscal 2006 associated with the loss of certain finished goods from a cargo
fire in Turkey which was offset by an immaterial amount of other income. During
fiscal 2005, other income of $16,000 was associated with $8,000 in settlement
funds in connection with a cease and desist letter sent to protect our
trademarks and $8,000 in additional income from sales of licensed branded
apparel in Japan.
Income Taxes
Our income tax expense related to continuing
operations was $36,000 in fiscal 2006 compared to $13,000 in fiscal 2005, or a
177 percent increase. Our effective tax rate was zero percent for fiscal 2006
and 2005 due to continued losses. There is no tax benefit for fiscal 2006 or
2005 because of a full valuation allowance for our deferred tax assets,
including net operating loss carryforwards.
Loss from Continuing Operations
We incurred a loss from continuing operations of
$7,144,000 in fiscal 2006 compared to a loss from continuing operations of
$8,488,000 in fiscal 2005, a 16 percent decrease. Our loss from continuing
operations in fiscal 2006 is largely the result of the following factors: (i) an increase of $3,342,000 in
SG&A expenses primarily associated with increased commissions and
royalties, sample costs, advertising costs, facilities and distribution costs
and stock-based compensation charges of $1,044,000 related to the adoption of
Statement of Financial Accounting Standards No. 123(R); and (ii) an
increase of $108,000 in depreciation and amortization expenses primarily due to
fixed assets purchased to support our facility move in July 2006. However,
our loss from continuing operations decreased as a result of an increase in
gross profit of $15,409,000 and a corresponding three percentage point increase
in overall gross margins. In an effort to focus our operations on our Joes®
brand, we had additional costs in fiscal 2006 that we do not expect to have in
fiscal 2007, which we expect will assist us in reducing expenses and achieving
profitability.
Discontinued Operations
Beginning
in fiscal 2004, we classified certain of our operations as discontinued as a
result of such operations meeting certain accounting criteria of an asset held
for sale. As a result, in fiscal 2004, our commercial rental property served as
our former headquarters located in Springfield, Tennessee and the remaining
assets of our craft and accessory business segment conducted through our Innovo
Inc. subsidiary were classified as discontinued operations. On May 17,
2005, we completed the sale of the assets of our craft and accessory segment of
operations. In February 2006, we completed an auction of our former
headquarters for an aggregate sales price of $741,000 before net selling costs
of approximately $126,000. In connection with the sale, we received a
promissory note issued by the purchaser in the original principal amount of
$50,000, which represented a portion of the purchase price. As of November 30,
2007, there was no remaining balance on the promissory note. On May 12,
2006, we completed the sale of our private label apparel division and
accordingly, reported it as a discontinued operation. As such, all prior
periods have been reclassified to reflect this operating division as a
discontinued operation.
The
following is a summary of loss and other information of the discontinued operations
for fiscal 2005 and 2006. There was no loss in connection with the discontinued
operations for fiscal 2007. Pre-tax loss from discontinued operations does not
include an allocation of corporate overhead costs.
27
|
|
(in thousands)
|
|
|
|
Private Label
Business
|
|
Innovo, Inc.
|
|
Leaseall
Management
|
|
Total
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,393
|
|
$
|
|
|
$
|
|
|
$
|
20,393
|
|
Pre-tax income (loss)
|
|
487
|
|
(3
|
)
|
(19
|
)
|
465
|
|
Loss on sale
|
|
(2,614
|
)
|
|
|
|
|
(2,614
|
)
|
Income taxes expense (benefit)
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
$
|
(2,127
|
)
|
$
|
(3
|
)
|
$
|
(19
|
)
|
$
|
(2,149
|
)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
72,670
|
|
$
|
2,491
|
|
$
|
|
|
$
|
75,161
|
|
Impairment loss of goodwill
|
|
12,572
|
|
|
|
|
|
12,572
|
|
Pre-tax loss
|
|
(7,941
|
)
|
(258
|
)
|
(120
|
)
|
(8,319
|
)
|
Gain on sale
|
|
|
|
374
|
|
|
|
374
|
|
Income taxes expense (benefit)
|
|
|
|
1
|
|
(1
|
)
|
|
|
Discontinued operations, net of tax
|
|
$
|
(7,941
|
)
|
$
|
115
|
|
$
|
(119
|
)
|
$
|
(7,945
|
)
|
Liquidity and Capital Resources
Our primary sources of liquidity are: (i) cash
from sales of our products; and (ii) sales from accounts receivable
factoring facilities and advances against inventory. Cash used in continuing
operating activities was $7,471,000 in fiscal 2007. Cash used in investing
activities was $788,000. These cash uses were financed by $9,205,000 of cash
provided by financing activities to fund operating expenses and purchase
inventory. Our cash balance was $1,331,000 as of November 30, 2007.
We are dependent on credit arrangements with
suppliers and factoring and inventory based agreements for working capital
needs. From time to time, we have conducted equity financing through private
placement transactions and obtained increases in our cash availability from CIT
Commercial Services, Inc., a unit of CIT Group, or CIT, through guarantees
by certain related parties. In fiscal 2007, we conducted two equity financings
and received approximately $6,715,000 in net proceeds, including proceeds from
the exercise of warrants issued in the financings.
During fiscal 2007, our primary method to obtain the
cash necessary for operating needs was through the sale of our accounts
receivable pursuant to our factoring agreements and obtaining advances under
our inventory security agreements with CIT. The accounts receivable are sold
for up to 85 percent of the face amount on either a recourse or non-recourse
basis depending on the creditworthiness of the customer. In addition, the
agreements allow us to obtain advances for up to 50 percent of the value of
certain eligible inventory. CIT currently permits us to sell our accounts
receivable at the maximum level of 85 percent and allows advances of up to
$6,000,000 for eligible inventory. CIT has the ability, in its discretion at
any time or from time to time, to adjust or revise any limits on the amount of
loans or advances made to us pursuant to these agreements. As further assurance
to CIT, cross guarantees were executed by and among us and all of our
subsidiaries to guarantee each subsidiarys obligations. Historically, we have
obtained personal guarantees or pledges of additional collateral from directors
and stockholders to contribute to our ability to obtain cash under these
agreements. However, as of November 30, 2007, CIT no longer required any
personal guarantees or additional collateral from us or others. As of November 30,
2007, our cash availability with CIT was approximately $749,000. This amount
fluctuates on a daily basis based upon invoicing and collection related
activity by CIT on our behalf. In connection with the agreements with CIT, most
of our tangible assets are pledged to CIT, including all of our inventory,
merchandise, and/or goods, including raw materials through finished goods and
receivables. Our trademarks are not encumbered.
The agreements may be terminated by CIT upon 60 days
prior written notice or immediately upon the occurrence of an event of default,
as defined in the agreement. The agreements may be terminated by us upon 60
days advanced written notice prior to June 30, 2010 or earlier provided
that the minimum factoring fees have been paid for the respective period.
28
The factoring rate that we pay to CIT to factor
accounts is at 0.6 percent for accounts which CIT bears the credit risk and 0.4
percent for accounts which we bear the credit risk and the interest rate
associated with the agreements is at 0.25 percent plus the Chase prime rate.
We have also established a letter of credit facility
with CIT to allow us to open letters of credit for a fee of 0.25 percent of the
letter of credit face value with international and domestic suppliers, subject
to cash availability on our inventory line of credit.
As of November 30, 2007, we had $9,124,000 of
factored receivables with CIT and a loan balance of $4,542,000 for inventory
advances. We had 14 letters of credit in the aggregate amount of $791,000
outstanding as of November 30, 2007.
For fiscal 2008, our primary capital needs are for
our operating expenses, including funds to support our retail strategy, which
includes opening retail stores, and working capital necessary to fund inventory
purchases, capital expenditures for our expected retail stores and finance
extensions of our trade credit to our customers. We anticipate funding our
operations through working capital generated by the following: (i) cash
flow from sales of our products; (ii) reducing our inventory levels and
managing our operating expenses; (iii) maximizing our trade payables with
our domestic and international suppliers; (iv) increasing collection
efforts on existing accounts receivables; and (v) utilizing our receivable
and inventory-based agreements with CIT.
Based on our cash on hand, cash flow from operations
and the expected cash availability under our agreements with CIT, we believe
that we have the working capital resources necessary to meet our projected
operational needs for fiscal 2008. However, if we require more capital for
growth or experience operating losses, we believe that it will be necessary to
obtain additional working capital through credit arrangements or debt or equity
financings. We believe that any additional capital, to the extent needed, may
be obtained from additional sales of equity securities or other loans or credit
arrangements. There can be no assurance that this or other financings will be
available if needed. Our inability to fulfill any interim working capital
requirements would force us to constrict our operations.
We believe that the rate of inflation over the past
few years has not had a significant adverse impact on our net sales or income
(losses) from continuing operations.
Commitments and Contractual Obligations
The following table sets forth our contractual
obligations and commercial commitments for our continuing operations as of November 30,
2007 (in thousands):
|
|
Payments due by period
|
|
|
|
(in thousands)
|
|
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Operating lease obligations
|
|
$
|
306
|
|
150
|
|
131
|
|
20
|
|
4
|
|
1
|
|
Advertising commitments
|
|
$
|
60
|
|
60
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
$
|
2,104
|
|
2,104
|
|
|
|
|
|
|
|
|
|
Letters of Credit
|
|
$
|
791
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,261
|
|
$
|
3,105
|
|
$
|
131
|
|
$
|
20
|
|
$
|
4
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Managements Discussion of Critical Accounting Policies
We believe that the accounting policies discussed
below are important to an understanding of our financial statements because
they require management to exercise judgment and estimate the effects of
uncertain matters in the preparation and reporting of financial results. Accordingly,
we caution that these policies and the judgments and estimates they involve are
29
subject
to revision and adjustment in the future. While they involve less judgment,
management believes that the other accounting policies discussed in Notes to
Consolidated Financial Statements - Note 2 Summary of Significant Accounting
Policies included in this Annual Report are also important to an understanding
of our financial statements. We believe that the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition
Revenues are recorded on the accrual basis of
accounting when title transfers to the customer, which is typically at the
shipping point. We record estimated reductions to revenue for customer
programs, including co-op advertising, other advertising programs or
allowances, based upon a percentage of sales. We also allow for returns based
upon pre-approval or in the case of damaged goods. Such returns are estimated
based on historical experience and an allowance is provided at the time of
sale.
Accounts Receivable and Due from Factor and Allowance for Customer
Credits and Other Allowances
We evaluate our ability to collect on accounts
receivable and charge-backs (disputes from the customer) based upon a
combination of factors. In circumstances where we are aware of a specific
customers inability to meet its financial obligations (e.g., bankruptcy
filings, substantial downgrading of credit sources), a specific reserve for bad
debts is taken against amounts due to reduce the net recognized receivable to
the amount reasonably expected to be collected. For all other customers, we
recognize reserves for bad debts and charge-backs based on our historical
collection experience. If collection experience deteriorates (i.e., an
unexpected material adverse change in a major customers ability to meet its
financial obligations to us), the estimates of the recoverability of amounts
due to us could be reduced by a material amount.
For fiscal 2007, the balance in the allowance for
uncollectible accounts, customer credits and allowances was $652,000 compared
to $469,000 for fiscal 2006 for non-factored accounts receivables.
Inventory
We continually evaluate the composition of our
inventories, assessing slow-turning, ongoing product as well as product from
prior seasons. Market value of distressed inventory is valued based on
historical sales trends on our individual product lines, the impact of market
trends and economic conditions, and the value of current orders relating to the
future sales of this type of inventory. Significant changes in market values
could cause us to record additional inventory markdowns.
Valuation of Long-lived and Intangible Assets and Goodwill
We assess the impairment of identifiable
intangibles, long-lived assets and goodwill annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important that could trigger an impairment
review other than on an annual basis include the following:
·
A significant underperformance relative to expected historical or
projected future operating results;
·
A significant change in the manner of the use of the acquired asset or
the strategy for the overall business; or
·
A significant negative industry or economic trend.
When we determine that the carrying value of
intangibles, long-lived assets and goodwill may not be recoverable based upon
the existence of one or more of the above indicators of impairment, we will
measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management.
In fiscal 2007, we acquired through merger all of
the intangible assets and goodwill related to the Joes®, Joes Jeans and JD®
logo and marks. For fiscal 2007, we did not recognize any impairment related to
the intangible assets and goodwill of our Joes® brand since we acquired it in October 2007.
We have assigned an indefinite life to these intangible assets and therefore,
no amortization expenses are expected to be recognized. However, we will test
the assets for impairment annually in accordance with our critical accounting
policies.
30
Additional Merger Consideration (Earn-out)
In
connection with the merger with JD Holdings, we agreed to pay to Mr. Dahan
the following additional payments in the applicable fiscal year for 120 months
following October 25, 2007:
·
No earn out if the gross
profit is less than $11,250,000 in the applicable fiscal year;
·
11.33% of the gross profit
above $11,251,000 to $22,500,000; plus
·
an additional 3% of the
gross profit from $22,501,000 to $31,500,000; plus
·
an additional 2% of the
gross profit from $31,501,000 to $40,500,000; plus
·
an additional 1% of the
gross profit above $40,501,000.
The
additional merger consideration, or earn-out, will be paid in advance on a
monthly basis based upon estimates of gross profits after the assumption has
been reached that the payments will likely be paid. At the end of each quarter,
any overpayments will be offset against future payments and any underpayments
will promptly be made.
EITF
95-8, Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination, addresses accounting
for consideration transferred to settle a contingency based on earnings or
other performance measures. It sets forth the criteria to determine whether
contingent consideration based on earnings or other performance measures should
be accounted for as (1) adjustment of the purchase price of the acquired
enterprise or (2) compensation for services, use of property, or profit
sharing.
The
determination of how to account for the contingent consideration is a matter of
judgment that depends on the relevant facts and circumstances. Based upon our
evaluation of the relevant facts and circumstances, we have determined that
accounting for the earn-out as additional purchase price is proper. Advanced
earn-out payments are recorded against goodwill. As of November 30, 2007,
we have recorded $125,000 against goodwill.
Income Taxes
As part of the process of preparing our consolidated
financial statements, management is required to estimate income taxes in each
of the jurisdictions in which we operate. The process involves estimating
actual current tax expense along with assessing temporary differences resulting
from differing treatment of items for book and tax purposes. These timing
differences result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. Management records a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be
realized. Management has considered future taxable income and ongoing tax
planning strategies in assessing the need for the valuation allowance. Increases
in the valuation allowance result in additional expense to be reflected within
the tax provision in the consolidated statement of income. Reserves are also estimated
for ongoing audits regarding Federal and state issues that are currently
unresolved. We routinely monitor the potential impact of these situations. Based
on managements assessment, there has been no reduction of the valuation
allowance other than to the extent current year net income was offset by net
operating losses that carried forward.
Contingencies
We
account for contingencies in accordance with Statement of Financial Accounting
Standards, or SFAS No. 5, Accounting for Contingencies. SFAS No. 5
requires that we record an estimated loss from a loss contingency when
information available prior to issuance of our financial statements indicates
that it is probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount of the loss can
be reasonably estimated. Accounting for contingencies such as legal and income
tax matters requires management to use judgment. Many of these legal and tax
contingencies can take years to be resolved. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. Management believes that the
accruals for these matters are adequate. Should events or circumstances change,
we could have to record additional accruals.
Stock Based Compensation
We
adopted the provisions of and account for stock-based compensation in
accordance with Statement of Financial Accounting Standards, or SFAS, 123(R), Share
Based Payment on November 27, 2005. We elected the modified prospective
method where prior periods are not revised for comparative purposes. Under the
fair value recognition provisions of SFAS
31
123(R), stock based
compensation is measured at grant date based upon the fair value of the award
and expense is recognized on a straight-line basis over the vesting period. We
use the Black-Scholes option pricing model to determine the fair value of stock
options, which requires management to use estimates and assumptions. The
determination of the fair value of stock based option awards on the date of
grant is based upon the exercise price as well as assumptions regarding
subjective variables. These variables include our expected life of the option,
expected stock price volatility over the term of the award, determination of a
risk free interest rate and an estimated dividend yield. We estimate the
expected life of the option by calculating the average term based upon historical
experience. We estimate the expected stock price volatility by using implied
volatility in market traded stock over the same period as the vesting period. We
base the risk-free interest rate on zero coupon yields implied from U.S.
Treasury issues with remaining terms similar to the term on the options. We do
not expect to pay dividends in the foreseeable future and therefore use an
expected dividend yield of zero. If factors change or we employ different
assumptions for estimating fair value of the stock option, our estimates may be
different than future estimates or actual values realized upon the exercise,
expiration, early termination or forfeiture of those awards in the future. At
this time, we believe that our current method for accounting for stock based
compensation is reasonable.
Furthermore, under SFAS 123(R), an entity
may elect either an accelerated recognition method or a straight-line
recognition method for awards subject to graded vesting based on a service
condition, regardless of how the fair value of the award is measured. For all
stock based compensation awards that contain graded vesting based on service
conditions, we have elected to apply a straight-line recognition method to
account for these awards.
However,
SFAS 123(R) guidance is relatively new and the application of these
principles over time may be subject to further interpretation or refinement. See
Notes to Consolidated Financial Statements - Note 2 Summary of Significant
Accounting Policies Stock-Based Compensation and Note 8 Stockholders
Equity Stock Incentive Plans for additional discussion of SFAS 123(R).
Recent Accounting Pronouncements
On July 13, 2006, the FASB issued
Interpretation No. 48, or FIN No. 48, Accounting for Uncertainty in
Income Taxes: An interpretation of FASB Statement No. 109. This interpretation clarifies the accounting
for uncertainty in income taxes recognized in an entitys financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition
threshold and measurement principles for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. This interpretation is
effective for fiscal years beginning after December 15, 2006. We do not
expect that the adoption of FIN No. 48 will have any material effect on
our results of operations or consolidated financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS No. 157 requires companies
to disclose the fair value of their financial instruments according to a fair
value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies
are required to provide enhanced disclosure regarding instruments in the level
3 category, including a reconciliation of the beginning and ending balances
separately for each major category of assets and liabilities. SFAS No. 157
will be effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. We are currently evaluating the
impact adoption may have on our results of operations or consolidated financial
position.
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115,
or SFAS No. 159. SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after November 15,
2007, which is the year beginning December 1, 2007 for us. We are
currently evaluating the impact that the adoption of SFAS No. 159 will
have on our
results of
operations or consolidated financial position.
On December 4,
2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations,
or SFAS No. 141(R). SFAS No. 141(R) will significantly change
the accounting for business combinations. Under SFAS No. 141(R), an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141(R) also includes a substantial
number of new disclosure requirements. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008, which is the year beginning December 1, 2009 for us. We are
currently evaluating the impact that SFAS No. 141(R) will have on our
financial statements.
32
On December 4,
2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements-an Amendment of Accounting Research Bulletin
(ARB) No. 51, or SFAS No. 160. SFAS No. 160 establishes new
accounting and reporting standards for a non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a non-controlling interest (minority
interest) as equity in the consolidated financial statements separate from the
parents equity. The amount of net income attributable to the non-controlling
interest will be included in consolidated net income on the face of the income
statement. SFAS No. 160 clarifies that changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the non-controlling equity investment on the
deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its non-controlling
interest. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, which
is the year beginning December 1, 2009 for us. We are currently evaluating
the impact that SFAS No. 160 will have on our financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from
transactions in the normal course of our business. Such risk is principally
associated with interest rate and changes in our credit standing.
Interest Rate Risk
Our obligations under our receivable and inventory
agreements bear interest at floating rates (primarily JP Morgan Chase prime
rate), we are sensitive to changes in prevailing interest rates. We believe
that a one percent increase or decrease in market interest rates that affect
our financial instruments would have an immaterial impact on earnings or cash
flow during the next fiscal year.
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions,
including firm commitments and anticipated contracts, denominated in a currency
other than an entitys functional currency and from foreign-denominated
revenues translated into U.S. dollars.
We generally purchase and sell our products in U.S.
dollars. However, we sell some of our products in Euros and source some of our
products overseas. 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.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
information required by Item 8 is included in Item 15. Exhibits, Financial
Statement Schedules of our consolidated financial statements and notes
thereto, and the consolidated financial statement schedule filed on this Annual
Report.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There
have been no changes in or disagreements with our independent registered public
accounting firm, Ernst & Young LLP.
33
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of November 30, 2007, the end of the period
covered by this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15
and 15d-15.
Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act
of 1934, or 1934 Act, is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms. Management
recognizes that a control system, no matter how well conceived and operated,
can provide only reasonable assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues within the company have been detected. Therefore, assessing the
costs and benefits of such controls and procedures necessarily involves the
exercise of judgment by management. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving the objective of ensuring
that information required to be disclosed in our reports filed or submitted
under the 1934 Act is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms. In addition, our
disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that the information required to be disclosed by
us in the reports we file or submit under the 1934 Act is accumulated and
communicated to management, including our principal executive and principal
financial officers or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial
Officer have concluded, based on our evaluation of our disclosure controls and
procedures, that our disclosure controls and procedures under Rule 13a-15(e) and
Rule 15d-15(e) of the Securities Exchange Act of 1934 are effective
at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
We
made no changes in our internal control over financial reporting during the
fourth quarter of the fiscal year covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
9B.
OTHER INFORMATION
We
did not fail to file any reports required to be filed on Form 8-K for the
last fiscal quarter.
PART III
Certain
information required by Part III is omitted on this Annual Report since we
intend to file our Definitive Proxy Statement for our next Annual Meeting of
Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, or Exchange Act, no later than March 29, 2008, and
certain information to be included in the Definitive Proxy Statement is
incorporated herein by reference.
ITEM
10.
DIRECTORS, EXECUTIVE OFFICERS OF
THE REGISTRANT AND CORPORATE GOVERNANCE
The
information required by Item 10 as to directors, executive officers and Section 16
reporting compliance is incorporated by reference from our Definitive Proxy
Statement.
Our Board of Directors has a standing Audit
Committee established in accordance with section 3(a)(58)(A) of the
Exchange Act (a) to assist our Board of Directors in its oversight
responsibilities regarding (1) the integrity of our financial statements, (2) our
compliance with legal and regulatory requirements, (3) the independent
accountants qualifications and
34
independence
and (4) the performance of the our internal audit function; (b) to
prepare the report required by the SEC for inclusion in the our annual proxy
statement; (c) to retain and terminate our independent accountant; (d) to
approve audit and non-audit services to be performed by the independent
accountant; and (e) to perform such other functions as our Board of
Directors may from time to time assign. The current members of our Audit
Committee are Suhail Rizvi, Kelly Hoffman and Tom ORiordan and we have
determined that at least one person serving on the Audit Committee is an audit
committee financial expert as defined under Item 401(h) of Regulation S-K.
Suhail Rizvi, the Chairman of the Audit Committee, is an audit committee
financial expert and is independent as defined under applicable SEC and Nasdaq
rules.
Our Board of Directors adopted a Code of Business
Conduct and Ethics for all of our directors, officers and employees on May 22,
2003. Our Code of Business Conduct and Ethics is available on our website at
www.innovogroup.com or you may request a free copy of our Code of Business
Conduct and Ethics from:
Joes Jeans Inc.
Attention: General Counsel
5901 South Eastern Avenue
Commerce, CA 90040
(323) 837-3700
To date, there have been no waivers under our Code
of Business Conduct and Ethics. We intend to disclose any amendments to our
Code of Business Conduct and Ethics and any waiver from a provision of the Code
granted on a Form 8-K filed with the SEC within four business days following
such amendment or waiver or on our website at www.innovogroup.com within four
business days following such amendment or waiver. The information contained or
connected to our website is not incorporated by reference into this Annual
Report and should not be considered a part of this or any other report that we
file or furnish to the SEC.
ITEM
11.
EXECUTIVE COMPENSATION
The
information required by Item 11 as to executive compensation is incorporated by
reference from our Definitive Proxy Statement.
ITEM
12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The
information required by Item 12 as to the security ownership of certain
beneficial owners and management and related stockholder matters is incorporated
by reference from our Definitive Proxy Statement.
ITEM
13.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
, AND
DIRECTOR INDEPENDENCE
The
information required by Item 13 as to certain relationships and related
transactions is incorporated by reference from our Definitive Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES
AND SERVICES
The
information required by Item 14 as to principal accountant fees and services is
incorporated by reference from our Definitive Proxy Statement.
35
PART IV
ITEM 15.
EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
(a) List of documents
filed as a part of this Annual Report:
1
and 2. Financial Statements and Financial Statement Schedules
Audited Consolidated Financial Statements:
|
|
Report of
Independent Registered Public Ac/counting Firm
|
F-1
|
|
|
Consolidated Balance
Sheets at November 30, 2007 and November 25, 2006
|
F-2
|
|
|
Consolidated
Statements of Operations for the years ended November 30, 2007,
November 25, 2006 and November 26, 2005
|
F-3
|
|
|
Consolidated
Statements of Stockholders Equity for the years ended November 30,
2007, November 25, 2006 and November 26, 2005
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the years ended November 30, 2007,
November 25, 2006 and November 26, 2005
|
F-5
|
|
|
Notes to
Consolidated Financial Statements
|
F-6
|
|
|
Schedule II Valuation of
Qualifying Accounts
|
F-33
|
(a) 3.
Exhibits (listed according to the number assigned in the table in Item
601 of Regulation S-K)
Exhibit
Number
|
|
Description
|
|
Document if Incorporated by
Reference
|
2.1
|
|
Agreement and Plan of
Merger dated February 6, 2007 by and among Innovo Group Inc., Joes
Jeans, Inc., JD Holdings, Inc. and Joseph M. Dahan*
|
|
Exhibit 2.1 to the
Quarterly Report on Form 10-Q for the period ended February 24,
2007 filed on April 10, 2007
|
|
|
|
|
|
2.2
|
|
First Amendment to
Agreement and Plan of Merger dated June 25, 2007 by and among Innovo
Group Inc., Joes Jeans, Inc., JD Holdings, Inc. and Joseph M.
Dahan*
|
|
Exhibit 2.1 to
Current Report on Form 8-K filed on June 26, 2007
|
|
|
|
|
|
2.3
|
|
Exhibit A to
Agreement and Plan of Merger Amended and Restated Plan of Merger
|
|
Exhibit 2.2 to
Current Report on Form 8-K filed on June 26, 2007
|
|
|
|
|
|
3.1
|
|
Seventh Amended and
Restated Certificate of Incorporation of the Registrant
|
|
Exhibit 4.1 to
Current Report on Form 8- K filed
on October 17, 2007
|
|
|
|
|
|
3.2
|
|
Amended and Restated
Bylaws of Registrant
|
|
Exhibit 4.2 to
Registration Statement on Form S-8 filed on November 12, 1993
|
|
|
|
|
|
4.1
|
|
Common Stock Purchase
Warrant Agreement between Innovo Group Inc. and Sanders Morris
Harris, Inc. dated June 30, 2003
|
|
Exhibit 4.3 to
Quarterly Report on Form 10-Q for the period ended May 31, 2003
filed on July 15, 2003
|
|
|
|
|
|
4.2
|
|
Common Stock Purchase
Warrant Agreement between Innovo Group Inc. and certain purchasers dated
August 29, 2003
|
|
Exhibit 4.5 to
Quarterly Report on Form 10-Q/A for the period ended August 30,
2003 filed on October 17, 2003
|
36
4.3
|
|
Form of Common
Stock Purchase Warrant
|
|
Exhibit 4.2 to
Current Report on Form 8-K filed on June 23, 2004
|
|
|
|
|
|
4.4
|
|
Form of
Registration Rights Agreement
|
|
Exhibit 4.3 to
Current Report on Form 8-K filed on June 23, 2004
|
|
|
|
|
|
4.5
|
|
Form of Securities
Purchase Agreement dated December 19, 2006
|
|
Exhibit 4.1 to
Current Report on Form 8-K filed on December 26, 2006
|
|
|
|
|
|
4.6
|
|
Form of Common
Stock Purchase Warrant dated December 19, 2006
|
|
Exhibit 4.2 to
Current Report on Form 8-K filed on December 26, 2006
|
|
|
|
|
|
4.7
|
|
Form of Common
Stock Purchase Warrant dated December 26, 2006
|
|
Exhibit 4.1 to
Current Report on Form 8-K filed on January 3, 2007
|
|
|
|
|
|
4.8
|
|
Form of Securities
Purchase Agreement dated June 27, 2007
|
|
Exhibit 4.1 to
Current Report on Form 8-K filed on July 3, 2007
|
|
|
|
|
|
4.9
|
|
Form of Common
Stock Purchase Warrant dated June 27, 2007
|
|
Exhibit 4.2 to
Current Report on Form 8-K filed on July 3, 2007
|
|
|
|
|
|
10.1
|
|
Amended and Restated
Employment Agreement by and between Joes Jeans Inc. and Joseph M. Dahan to
be effective upon closing of the Merger Agreement (Schedule 6.2(c) to
Merger Agreement)
|
|
Exhibit 10.1 to
Current Report on Form 8-K filed on June 26, 2007
|
|
|
|
|
|
10.2
|
|
Investor Rights
Agreement by and between Joes Jeans Inc. and Joseph M. Dahan
|
|
Exhibit 10.2 to
Current Report on Form 8-K filed on October 31, 2007
|
|
|
|
|
|
10.3
|
|
Factoring Agreement
dated June 1, 2001 between Joes Jeans, Inc. and CIT Commercial
Services
|
|
Exhibit 10.4 to
Quarterly Report on Form 10-Q/A for the period ended August 30,
2003 filed on October 17, 2003
|
|
|
|
|
|
10.4
|
|
Inventory Security
Agreement dated August 20, 2002 between Joes Jeans Inc. and CIT
Commercial Services
|
|
Exhibit 10.7 to
Quarterly Report on Form 10-Q/A for the period ended August 30,
2003 filed on October 17, 2003
|
|
|
|
|
|
10.5
|
|
Amendment to Factoring
Agreement originally dated June 1, 2001 between Joes Jeans Inc. and CIT
Commercial Services dated effective April 23, 2003
|
|
Exhibit 10.6 to
Quarterly Report on Form 10-Q for the period ended May 31, 2003
filed on July 15, 2003
|
|
|
|
|
|
10.6
|
|
2000 Employee Stock
Incentive Plan, as amended
|
|
Exhibit 99.1 to
Current Report on Form 8-K dated July 18, 2003 filed on
August 1, 2003
|
|
|
|
|
|
10.7
|
|
2000 Director Option
Plan
|
|
Attachment E to
Definitive Proxy Statement on Schedule 14A filed on September 19, 2000
|
|
|
|
|
|
10.8
|
|
2004 Stock Incentive
Plan
|
|
Attachment A to
Definitive Proxy Statement on Schedule 14A filed on September 5, 2007
|
|
|
|
|
|
10.9
|
|
Separation Agreement by
and between Innovo Group Inc. and Samuel J. Furrow, Jr.
|
|
Exhibit 10.1 to
the Current Report on Form 8-K/A filed on February 2, 2006
|
37
10.10
|
|
Dissolution Agreement
with Beyond Blue Inc. dated February 1, 2007
|
|
Exhibit 10.1 to
the Current Report on Form 8-K filed on February 7, 2007
|
|
|
|
|
|
10.11
|
|
Settlement Agreement
and Release with Beyond Blue Inc. dated July 3, 2007*
|
|
Exhibit 10.1 to
the Current Report on Form 8-K filed on July 9, 2007
|
|
|
|
|
|
10.12
|
|
Offer Letter by and
between Innovo Group Inc. and Hamish Sandhu
|
|
Exhibit 10.1 to
the Current Report on Form 8-K filed on August 27, 2007
|
|
|
|
|
|
10.13
|
|
Amendment to Factoring
Agreement by and among Joes Jeans Subsidiary Inc. (formerly Joes Jeans
Inc.), Joes Jeans Inc. (formerly Innovo Group Inc.) and The CIT
Group/Commercial Services, Inc. dated October 24, 2007
|
|
Exhibit 10.1 to
the Current Report on Form 8-K filed on October 30, 2007
|
|
|
|
|
|
10.14
|
|
Amendment to Guaranty
Agreement by and between Joes Jeans Inc. (formerly Innovo Group Inc.) and
The CIT Group/Commercial Services, Inc. dated October 24, 2007
|
|
Exhibit 10.2 to
the Current Report on Form 8-K filed on October 30, 2007
|
|
|
|
|
|
10.15
|
|
Termination Agreement
by and between Joes Jeans Inc. and JD Holdings, Inc. dated
October 25, 2007
|
|
Exhibit 10.3 to
the Current Report on Form 8-K filed on October 30, 2007
|
|
|
|
|
|
10.16
|
|
Form of Restricted
Stock Agreement for Members of the Board of Directors
|
|
Exhibit 10.1 to
the Current Report on Form 8-K filed on December 20, 2007
|
|
|
|
|
|
10.17
|
|
Restricted Stock
Agreement for Marc B. Crossman
|
|
Exhibit 10.2 to
the Current Report on Form 8-K filed on December 20, 2007
|
|
|
|
|
|
10.18
|
|
Form of Restricted
Stock Unit Agreement
|
|
Exhibit 10.3 to
the Current Report on Form 8-K filed on December 20, 2007
|
|
|
|
|
|
14
|
|
Code of Business
Conduct and Ethics adopted as of May 22, 2003
|
|
Exhibit 14 to the
Annual Report on Form 10-K for the year ended November 29, 2003
filed on February 27, 2004
|
|
|
|
|
|
21
|
|
Subsidiaries of the
Registrant
|
|
Filed herewith
|
|
|
|
|
|
23
|
|
Consent of Independent
Registered Public Accounting Firm
|
|
Filed herewith
|
|
|
|
|
|
24.1
|
|
Power of Attorney
(included on page 38)
|
|
Filed herewith
|
|
|
|
|
|
31.1
|
|
Certification of the
Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
|
|
Filed herewith
|
|
|
|
|
|
31.2
|
|
Certification of
the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
|
|
|
|
32
|
|
Certification of
the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
* We have omitted certain
schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K and
shall furnish supplementally to the Commission copies of any of the omitted
schedules and exhibits upon request.
38
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
JOES JEANS INC.
|
|
|
|
|
|
|
By:
|
/s/ Marc B. Crossman
|
|
|
|
Marc B. Crossman
|
|
|
|
Chief Executive Officer (Principal Executive
|
|
|
|
Officer) and President
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Hamish Sandhu
|
|
|
|
Hamish Sandhu
|
|
|
|
Chief Financial
Officer (Principal
|
|
|
|
Financial
Officer and Principal
|
|
|
|
Accounting
Officer)
|
February 28,
2008
KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints Marc Crossman, his attorney-in-fact, each with the power of
substitution for him or any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said
attorney-in-fact, or his or her substitutes, may do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
/s/ Marc B. Crossman
|
|
Chief Executive Officer
|
|
February 28, 2008
|
Marc B. Crossman
|
|
(Principal Executive Officer), President,
|
|
|
|
|
and Director
|
|
|
|
|
|
|
|
/s/ Hamish Sandhu
|
|
Chief Financial Officer (Principal
|
|
February 28, 2008
|
Hamish Sandhu
|
|
Financial Officer and Principal
|
|
|
|
|
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Samuel J. Furrow
|
|
Chairman of the Board of Directors
|
|
February 28, 2008
|
Samuel J. Furrow
|
|
|
|
|
|
|
|
|
|
/s/ Joseph M. Dahan
|
|
Director
|
|
February 28, 2008
|
Joseph M. Dahan
|
|
|
|
|
|
|
|
|
|
/s/ Kelly Hoffman
|
|
Director
|
|
February 28, 2008
|
Kelly Hoffman
|
|
|
|
|
|
|
|
|
|
/s/ Suhail R. Rizvi
|
|
Director
|
|
February 28, 2008
|
Suhail R. Rizvi
|
|
|
|
|
|
|
|
|
|
/s/ Thomas ORiordan
|
|
Director
|
|
February 28, 2008
|
Thomas ORiordan
|
|
|
|
|
|
|
|
|
|
/s/ Kent Savage
|
|
Director
|
|
February 28, 2008
|
Kent Savage
|
|
|
|
|
39
Joes Jeans
Inc. and Subsidiaries
Index to
Consolidated Financial Statements
Audited Consolidated Financial Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
Consolidated
Balance Sheets at November 30, 2007 and November 25, 2006
|
|
F-2
|
|
|
|
Consolidated
Statements of Operations for the years ended November 30, 2007,
November 25, 2006 and November 26, 2005
|
|
F-3
|
|
|
|
Consolidated
Statements of Stockholders Equity for the years ended November 30,
2007, November 25, 2006 and November 26, 2005
|
|
F-4
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended November 30, 2007,
November 25, 2006 and November 26, 2005
|
|
F-5
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-6
|
|
|
|
Schedule
II Valuation of Qualifying Accounts
|
|
F-33
|
F-i
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders of Joes Jeans Inc.
We
have audited the accompanying consolidated balance sheets of Joes Jeans Inc.
and subsidiaries as of November 30, 2007 and November 25, 2006, and
the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three fiscal years in the period ended November 30,
2007. Our audits also included the
financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are
the responsibility of Joes Jeans Inc.s management. Our responsibility is to express an opinion
on these consolidated financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material
misstatement. We were not engaged to
perform an
audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no
such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Joes Jeans Inc. and
subsidiaries as of November 30, 2007 and November 25, 2006 and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended November 30, 2007 in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
As discussed in Note 2
Summary of Significant Accounting Policies to the consolidated financial statements,
Joes Jeans Inc. changed its method of accounting for share-based payments in
accordance with Statement of Financial Accounting Standards No. 123
(revised 2004) on November 27, 2005.
|
|
/s/ Ernst & Young LLP
|
|
|
|
Los Angeles, California
|
|
|
February 26, 2008
|
|
|
F-1
JOES
JEANS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in
thousands)
|
|
November 30, 2007
|
|
November 25, 2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
1,331
|
|
$
|
385
|
|
Accounts
receivable, net of allowance for customer credits and returns of $652 (2007)
and $469 (2006)
|
|
803
|
|
498
|
|
Inventories, net
|
|
20,803
|
|
6,267
|
|
Due from related
parties
|
|
|
|
2,163
|
|
Prepaid expenses
and other current assets
|
|
282
|
|
671
|
|
Total current
assets
|
|
23,219
|
|
9,984
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
792
|
|
837
|
|
Goodwill
|
|
10,415
|
|
20
|
|
Intangible
assets, net
|
|
13,200
|
|
200
|
|
Other assets
|
|
|
|
56
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
47,626
|
|
$
|
11,097
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Accounts payable
and accrued expenses
|
|
$
|
7,794
|
|
$
|
6,819
|
|
Due to factor
|
|
3,040
|
|
888
|
|
Due to related
parties
|
|
1,142
|
|
82
|
|
Total current
liabilities
|
|
11,976
|
|
7,789
|
|
|
|
|
|
|
|
Deferred tax
liability
|
|
5,254
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
Preferred stock,
$0.10 par value: 5,000 shares authorized, no shares issued or outstanding
|
|
|
|
|
|
Common stock,
$0.10 par value: 100,000 shares authorized (2007), 80,000 shares authorized
(2006), 59,862 shares issued and 59,750 outstanding (2007) and 34,455 shares
issued and 34,343 outstanding (2006)
|
|
5,988
|
|
3,447
|
|
Additional
paid-in capital
|
|
102,056
|
|
79,763
|
|
Accumulated
deficit
|
|
(74,872
|
)
|
(77,126
|
)
|
Treasury stock,
112 shares
|
|
(2,776
|
)
|
(2,776
|
)
|
Total
stockholders equity
|
|
30,396
|
|
3,308
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
47,626
|
|
$
|
11,097
|
|
The accompanying
notes are an integral part of these financial statements.
F-2
JOES
JEANS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
|
Year ended
|
|
|
|
November 30, 2007
|
|
November 25, 2006
|
|
November 26, 2005
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
62,767
|
|
$
|
46,633
|
|
$
|
35,920
|
|
Cost of goods
sold
|
|
36,137
|
|
31,224
|
|
25,203
|
|
Gross profit
|
|
26,630
|
|
15,409
|
|
10,717
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling, general
and administrative
|
|
23,085
|
|
21,587
|
|
18,245
|
|
Depreciation and
amortization
|
|
359
|
|
290
|
|
182
|
|
|
|
23,444
|
|
21,877
|
|
18,427
|
|
Income (loss)
from continuing operations
|
|
3,186
|
|
(6,468
|
)
|
(7,710
|
)
|
Interest expense
|
|
(828
|
)
|
(573
|
)
|
(781
|
)
|
Other (expense)
income, net
|
|
(13
|
)
|
(67
|
)
|
16
|
|
Income (loss)
from continuing operations, before taxes
|
|
2,345
|
|
(7,108
|
)
|
(8,475
|
)
|
Income taxes
|
|
91
|
|
36
|
|
13
|
|
Income (loss)
from continuing operations
|
|
2,254
|
|
(7,144
|
)
|
(8,488
|
)
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations, net of tax
|
|
|
|
(2,149
|
)
|
(7,945
|
)
|
Net income
(loss)
|
|
$
|
2,254
|
|
$
|
(9,293
|
)
|
$
|
(16,433
|
)
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share - Basic
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
0.05
|
|
$
|
(0.21
|
)
|
$
|
(0.26
|
)
|
Loss from
discontinued operations
|
|
|
|
(0.06
|
)
|
(0.25
|
)
|
Earnings (loss)
per common share - Basic
|
|
$
|
0.05
|
|
$
|
(0.27
|
)
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share - Diluted
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
0.05
|
|
$
|
(0.21
|
)
|
$
|
(0.26
|
)
|
Loss from
discontinued operations
|
|
|
|
(0.06
|
)
|
(0.25
|
)
|
Earnings (loss)
per common share - Diluted
|
|
$
|
0.05
|
|
$
|
(0.27
|
)
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
43,840
|
|
33,853
|
|
31,942
|
|
Diluted
|
|
45,000
|
|
33,853
|
|
31,942
|
|
The accompanying
notes are an integral part of these financial statements.
F-3
JOES
JEANS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Note-
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
former
|
|
Treasury
|
|
Stockholders
|
|
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Deficit
|
|
officer
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 27, 2004
|
|
194
|
|
$
|
|
|
29,266
|
|
$
|
2,927
|
|
$
|
72,043
|
|
$
|
(51,400
|
)
|
$
|
(703
|
)
|
$
|
(2,588
|
)
|
$
|
20,279
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(16,433
|
)
|
|
|
|
|
(16,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of
promissory note-former officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
703
|
|
Redemption of
preferred stock
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
convertible notes payable to common stock
|
|
|
|
|
|
2,560
|
|
256
|
|
4,129
|
|
|
|
|
|
|
|
4,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
registration related expense
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
Exercise of stock
options
|
|
|
|
|
|
623
|
|
63
|
|
470
|
|
|
|
|
|
(188
|
)
|
345
|
|
Exercise of
warrants
|
|
|
|
|
|
965
|
|
97
|
|
2,187
|
|
|
|
|
|
|
|
2,284
|
|
Balance,
November 26, 2005
|
|
|
|
|
|
33,414
|
|
3,343
|
|
78,823
|
|
(67,833
|
)
|
|
|
(2,776
|
)
|
11,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(9,293
|
)
|
|
|
|
|
(9,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued to related party
|
|
|
|
|
|
1,041
|
|
104
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
1,044
|
|
|
|
|
|
|
|
1,044
|
|
Balance,
November 25, 2006
|
|
|
|
|
|
34,455
|
|
3,447
|
|
79,763
|
|
(77,126
|
)
|
|
|
(2,776
|
)
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
2,254
|
|
|
|
|
|
2,254
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
Restricted common
stock issued to Board of Directors
|
|
|
|
|
|
556
|
|
56
|
|
24
|
|
|
|
|
|
|
|
80
|
|
Exercise of stock
options
|
|
|
|
|
|
367
|
|
37
|
|
301
|
|
|
|
|
|
|
|
338
|
|
Exercise of
warrants
|
|
|
|
|
|
2,050
|
|
205
|
|
984
|
|
|
|
|
|
|
|
1,189
|
|
Common stock
issued in private placements, net
|
|
|
|
|
|
8,434
|
|
843
|
|
4,683
|
|
|
|
|
|
|
|
5,526
|
|
Common stock
issued in connection with merger
|
|
|
|
|
|
14,000
|
|
1,400
|
|
16,267
|
|
|
|
|
|
|
|
17,667
|
|
Balance,
November 30, 2007
|
|
|
|
$
|
|
|
59,862
|
|
$
|
5,988
|
|
$
|
102,056
|
|
$
|
(74,872
|
)
|
$
|
|
|
$
|
(2,776
|
)
|
$
|
30,396
|
|
The accompanying notes
are an integral part of these financial statements.
F-4
JOES
JEANS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Year ended
|
|
|
|
November 30, 2007
|
|
November 25, 2006
|
|
November 26, 2005
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
2,254
|
|
$
|
(9,293
|
)
|
$
|
(16,433
|
)
|
Net loss from
discontinued operations
|
|
|
|
(2,149
|
)
|
(7,945
|
)
|
Net income
(loss) from continuing operations
|
|
2,254
|
|
(7,144
|
)
|
(8,488
|
)
|
|
|
|
|
|
|
|
|
Adjustment to
reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
315
|
|
242
|
|
140
|
|
Loss on sale of
property and equipment
|
|
|
|
17
|
|
433
|
|
Amortization of
intangibles
|
|
44
|
|
48
|
|
48
|
|
Amortization of
debt discount
|
|
|
|
|
|
253
|
|
Stock-based
compensation
|
|
114
|
|
1,044
|
|
|
|
Provision for
uncollectible accounts
|
|
184
|
|
169
|
|
(584
|
)
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(489
|
)
|
(495
|
)
|
2,631
|
|
Inventories
|
|
(14,536
|
)
|
5,007
|
|
(6,597
|
)
|
Prepaid expenses
and other
|
|
445
|
|
(544
|
)
|
198
|
|
Due to/from
related parties
|
|
3,223
|
|
535
|
|
7,803
|
|
Accounts payable
and accrued expenses
|
|
975
|
|
2,957
|
|
736
|
|
Net cash
provided by (used in) continuing operating activities
|
|
(7,471
|
)
|
1,836
|
|
(3,427
|
)
|
Net cash
provided by (used in) discontinued operations
|
|
|
|
555
|
|
(3,039
|
)
|
Net cash
provided by (used in) operating activities
|
|
(7,471
|
)
|
2,391
|
|
(6,466
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds from
sales of property and equipment
|
|
2
|
|
|
|
|
|
Purchases of
property and equipment
|
|
(272
|
)
|
(668
|
)
|
(399
|
)
|
Expenditures in
connection with merger
|
|
(518
|
)
|
|
|
|
|
Net cash used in
continuing investing activities
|
|
(788
|
)
|
(668
|
)
|
(399
|
)
|
Net cash provided
by discontinued operations
|
|
|
|
614
|
|
1,650
|
|
Net cash (used
in) provided by investing activities
|
|
(788
|
)
|
(54
|
)
|
1,251
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds from
(payments on) factor borrowing, net
|
|
2,152
|
|
(1,270
|
)
|
2,912
|
|
Payments on note
payable to officer, net
|
|
|
|
|
|
(439
|
)
|
Proceeds from
promissory note - former officer
|
|
|
|
|
|
703
|
|
Exercise of
stock options
|
|
338
|
|
|
|
567
|
|
Exercise of
warrants
|
|
1,189
|
|
|
|
2,284
|
|
Issuance of
stock, net of registration expense
|
|
5,526
|
|
|
|
(6
|
)
|
Net cash
provided by (used in) continuing activities
|
|
9,205
|
|
(1,270
|
)
|
6,021
|
|
Net cash used in
discontinued operations
|
|
|
|
(1,242
|
)
|
(558
|
)
|
Net cash
provided by (used in) financing activities
|
|
9,205
|
|
(2,512
|
)
|
5,463
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
946
|
|
(175
|
)
|
248
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, at beginning of period
|
|
385
|
|
560
|
|
312
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, at end of period
|
|
$
|
1,331
|
|
$
|
385
|
|
$
|
560
|
|
The accompanying
notes are an integral part of these financial statements.
F-5
JOES JEANS
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Business
Description and Basis of Presentation
Joes
Jeans Inc.s, or Joes, principal business activity involves the design,
development and worldwide marketing of apparel products. Joes primary current operating subsidiary is
Joes Jeans Subsidiary Inc. All
significant inter-company transactions have been eliminated. Currently, Joes has only one segment of
operations, primarily apparel, which includes an immaterial amount of revenue
from a license agreement for accessories.
Prior to fiscal 2004, Joes operated in two segments - apparel and
accessories.
On October 12,
2007, Joes filed an amended and restated certificate of incorporation in
Delaware to change its corporate name from Innovo Group Inc. to Joes Jeans
Inc. and to increase the shares of common stock authorized for issuance to
100,000,000.
Joes
fiscal year end is November 30.
Effective
October 11, 2007, Joes changed from a thirteen-week quarterly reporting
period to a last day of the month quarterly reporting period. This change was made to conform to standard
quarterly accounting periods.
Prior to a change in its fiscal year in October 2007,
Joes fiscal year end was the Saturday closest to November 30 based upon a
52 week period. For fiscal years 2006
and 2005, the years ended on November 25, 2006 and November 26, 2005,
respectively. These fiscal year periods
are referred to as fiscal 2006 and fiscal 2005, respectively, in the
accompanying Notes to Consolidated Financial Statements and the quarterly
periods consisted of 13 week periods based on a Sunday to Saturday week. Fiscal years as presented have 52 weeks and 6
days for the year ending November 30, 2007, 52 weeks for each of the years
ended November 25, 2006 and November 26, 2005. The modification of the fiscal years did not
have a material effect on Joes financial condition, results of operations, or
cash flows.
As
a result of the sale of assets related to certain areas of its operations, Joes
reclassified and reported the following operating divisions of its various
subsidiaries as Discontinued Operations:
(1) its craft and accessories division operated under its Innovo
Inc. subsidiary, or Innovo, sold in May 2005; (2) its former
headquarters in Springfield, Tennessee that was used as a commercial rental
property operated under its Leaseall Management Inc. subsidiary, or Leaseall,
sold in February 2006; and (3) its private label apparel division
operated under its Innovo Azteca Apparel, Inc., or IAA, subsidiary and
sold in May 2006. Continuing
operations include the results of Joes branded apparel business, including
certain terminated branded apparel lines, which were not separate operating
divisions and thus, not considered to be part of Discontinued Operations.
2.
Summary
of Significant Accounting Policies
Use of
Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these
estimates.
Revenue
Recognition
Revenues
are recorded when title transfers to the customer, which is typically at the
shipping point for most of our customers or when it reaches a designated
consolidator for some major department store customers. Joes records estimated
reductions to revenue for customer programs, including co-op advertising, other
advertising programs or allowances which are based upon a percentage of
sales. Joes also allows for returns
based upon pre-approval or for damaged goods.
Such returns are estimated based on historical experience and an
allowance is provided at the time of sale.
Inventory
Inventory
is valued at the lower of cost or market with cost determined by the first-in,
first-out method. Inventory consists of
finished goods, work-in-process and raw materials. Joes continually evaluates its inventories
by assessing slow moving current product.
Market value of non-current inventory is estimated based on historical
sales trends for this category of inventory for individual product lines, the
impact of market trends, an evaluation of economic conditions and the value of
F-6
current orders relating to future sales of this type of inventory. Inventory reserves establish a new cost basis
for inventory. Such reserves are not
reversed until the related inventory is sold or otherwise disposed. Costs capitalized in inventory include raw
materials and finished goods purchase price plus in-bound transportation costs
and import fees and duties.
Costs of Goods Sold
The
types of costs classified in costs of goods sold include product, freight in,
freight out, inventory reserves, inventory markdowns, and other various
charges.
Selling, General and
Administrative Expenses
The
types of costs classified in selling, general and administrative expenses
include salaries and benefits, travel and entertainment, professional fees,
advertising, marketing, sample expenses, facilities, fulfillment and
distribution.
Earnings
(Loss) Per Share
Net
earnings (loss) per share has been computed in accordance with Financial
Accounting Standard Board (FASB) Statement No. 128, Earnings Per Share.
Advertising
Costs
Advertising
costs are charged to expense as incurred, or, in the case of media ads, upon
first airing. Brochures and catalogues
are capitalized and amortized over their expected period of future benefits,
which is typically twelve months or less.
Capitalized
costs related to catalogues and brochures are included in prepaid expenses and
other current assets. Amounts
capitalized were $0 and $14,000 at November 30, 2007 and November 25,
2006, respectively. Advertising and tradeshow
expenses included in selling, general and administrative expenses were
approximately $806,000, $1,637,000 and $1,350,000 for fiscal 2007, 2006 and
2005, respectively.
Financial
Instruments
The
fair values of Joes financial instruments (consisting of cash, accounts
receivable, accounts payable, due to factor and notes payable) do not differ
materially from their recorded amounts because of the relatively short period
of time between origination of the instruments and their expected realization. Joes neither holds, nor is obligated under,
financial instruments that possess off-balance sheet credit or market risk.
Impairment of Long-Lived Assets
and Intangibles
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Joes
accounts for goodwill and other intangible assets in accordance with Financial
Accounting Standards Board, or FASB, Statement of Financial Accounting
Standards, or SFAS, No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but,
instead, tested at least annually for impairment while intangible assets that
have finite useful lives continue to be amortized over their respective useful
lives. Accordingly, Joes did not
amortize any goodwill in fiscal 2007, 2006, 2005. However, identifiable intangible assets are
amortized using the straight line method over a life of 10 years. Amortization expense related to the license
agreement pursuant to which Joes originally acquired the right to use the Joes®
brand, totaled $44,000, $48,000 and $48,000 for fiscal 2007, 2006 and 2005,
respectively. In connection with the merger with JD Holdings, Inc., Joes
acquired all right, title and interest in the Joes®, Joes Jeans and JD®
logos and marks. Pursuant to SFAS No. 142,
Joes has assigned an indefinite life to these intangible assets and therefore,
no amortization expense was recognized after the date of acquisition. However, Joes will test the asset for impairment
annually as described below.
SFAS
No. 142 requires that goodwill and other intangibles be tested for
impairment using a two-step process. The
F-7
first step is to determine the fair value of each reporting unit, which
may be calculated using a discounted cash flow methodology, and compare this
value to its carrying value. If the fair
value exceeds the carrying value, no further work is required and no impairment
loss would be recognized. The second
step is an allocation of the fair value of a reporting unit to each reporting
units assets and liabilities under a hypothetical purchase price allocation
based upon internal estimates of expected cash flows.
As
of November 30, 2007, Joes did not recognize any impairment related to
the intangible assets and goodwill of its Joes® brand since it was acquired in
October 2007 and a fair value analysis completed as part of the
acquisition exceeded its carrying value.
Cash
Equivalents
Joes
considers all highly liquid investments that are both readily convertible into
known amounts of cash and mature within 90 days from their date of purchase to
be cash equivalents.
Concentration
of Credit Risk
Financial
instruments that potentially subject Joes to significant concentrations of
credit risk consist principally of cash, cash equivalents, accounts receivable
and amounts due from factor. Joes
maintains cash and cash equivalents with various financial institutions. The
policy is designed to limit exposure to any one institution. Joes performs periodic evaluations of the
relative credit rating of those financial institutions that are considered in
Joes investment strategy.
Joes
does not require collateral for trade accounts receivable. However, Joes sells a portion of its
accounts receivable to CIT Commercial Services, Inc., or CIT, on a
non-recourse basis. In that instance,
Joes is no longer at risk if the customer fails to pay. However, for accounts receivable that are not
sold to CIT or sold on a recourse basis, Joes continues to be at risk if these
customers fail to pay. Joes provides an
allowance for estimated losses to be incurred in the collection of accounts
receivable based upon the aging of outstanding balances and other account
monitoring analysis. The net carrying
value approximates the fair value for these assets. Such losses have historically been within
managements expectations. Uncollectible
accounts are written off once collection efforts are deemed by management to
have been exhausted.
For
fiscal 2007, 2006 and 2005, sales to customers or customer groups representing
greater than 10 percent of net sales from continuing operations recalculated to
conform to the current year presentation are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Nordstrom, Inc.
|
|
17.9
|
%
|
16.0
|
%
|
11.3
|
%
|
Federated
Department Stores, Inc.
|
|
17.6
|
%
|
16.8
|
%
|
11.1
|
%
|
Beyond
Blue, Inc.
|
|
|
*
|
|
*
|
17.4
|
%
|
* Less than 10%.
Beyond
Blue, Inc. was Joes international distributor until February 2007
and not a retail or specialty store.
Stock-Based Compensation
In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 123(R) Share
Based Payment, which requires all share-based payments to employees and
directors, including grants to employees and directors of stock options, to be
recognized in the statement of operations based upon their fair values. Pro forma disclosure is no longer an
alternative. Joes adopted SFAS No. 123(R) utilizing
the modified prospective basis method on November 27, 2005, the
beginning of its 2006 fiscal year. A modified
prospective method is where compensation cost is recognized beginning on November 27,
2005 for all share-based payments granted after that date and for all awards
that remain unvested as of that date.
Under the modified prospective application transition method, no
cumulative effect of change in accounting principle charge is required for Joes
and prior periods have not been restated.
If
F-8
Joes had elected to recognize compensation cost for stock options
based on their fair value at the grant dates consistent with the method
prescribed by SFAS No. 123(R), the pro forma net loss and net loss per
share for fiscal 2005 would have been as follows:
|
|
Year ended
|
|
|
|
(in thousands, except
per share data)
|
|
|
|
2005
|
|
|
|
|
|
Net loss as
reported
|
|
$
|
(16,433
|
)
|
Add:
|
|
|
|
Stock based
employee compensation expense included in reported net income, net of
related tax effects
|
|
|
|
Deduct:
|
|
|
|
Total stock
based employee compensation expense determined under fair market value based
method for all awards
|
|
5,048
|
|
Pro forma net
loss
|
|
$
|
(21,481
|
)
|
|
|
|
|
Net loss per
share
|
|
|
|
As reported -
basic
|
|
$
|
(0.51
|
)
|
As reported -
diluted
|
|
$
|
(0.51
|
)
|
|
|
|
|
Pro forma -
basic
|
|
$
|
(0.67
|
)
|
Pro forma -
diluted
|
|
$
|
(0.67
|
)
|
Furthermore, under SFAS
123(R), an entity may elect either an accelerated recognition method or a
straight-line recognition method for awards subject to graded vesting based on
a service condition, regardless of how the fair value of the award is
measured. For all stock based
compensation awards that contain graded vesting based on service conditions,
Joes has elected to apply a straight-line recognition method to account for
these awards.
Property
and Equipment
Property
and equipment are stated at the lesser of cost or fair value in the case of
impaired assets. Depreciation is
computed on a straight-line basis over the estimated useful lives of the assets
and includes capital lease amortization, if any. Leasehold improvements are amortized over the
lives of the respective leases or the estimated service lives of the
improvements, whichever is shorter.
Maintenance and repairs are charged to expense as incurred. On sale or retirement, the asset cost and
related accumulated depreciation or amortization is removed from the accounts,
and any related gain or loss is included in the determination of net income
(loss).
Income
Taxes
Joes
accounts for income taxes using the asset and liability approach as promulgated
by SFAS 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are established for temporary
differences between the financial reporting bases and the tax bases of Joes
assets and liabilities at tax rates expected to be in effect when such assets
or liabilities are realized or settle.
Deferred income tax assets are reduced by a valuation allowance if, in
the judgment of Joes management, it is not more likely than not that such assets
will be realized.
Reclassifications
Certain
reclassifications have been made to prior year consolidated financial
statements to conform to the current year presentation.
Discontinued Operations
In
accordance with the provisions of SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets, the accompanying consolidated
financial statements reflect the results of operations and financial position
of its commercial rental property, its craft and accessory business segment and
its private label apparel division separately as discontinued operations.
F-9
Other
Recently Issued Financial Accounting Standards
On
July 13, 2006, the FASB issued Interpretation No. 48, or FIN No. 48,
Accounting for Uncertainty in Income Taxes: An interpretation of FASB
Statement No. 109. This
interpretation clarifies the accounting for and disclosure of uncertainty in
income taxes recognized in an entitys financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes. This interpretation defines the criteria that
must be met for the benefits of a tax position to be recognized in the
financial statements and the measurement of tax benefits recognized. The provisions of FIN 48 become effective for
fiscal years beginning after December 15, 2006. Joes does not expect that FIN 48 will have a
material impact on its results of operations, consolidated financial position
or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS No. 157, which defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements. SFAS No. 157 requires companies to disclose the fair
value of their financial instruments according to a fair value hierarchy (i.e.,
levels 1, 2, and 3, as defined).
Additionally, companies are required to provide enhanced disclosure
regarding instruments in the level 3 category, including a reconciliation of
the beginning and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 will
be effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Joes is currently evaluating the
impact adoption may have on its results of operations or consolidated financial
position.
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115,
or SFAS No. 159. SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be recognized in earnings at each
subsequent reporting date. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007,
which is the year beginning December 1, 2007 for Joes. Joes is currently
evaluating the impact that the adoption of SFAS No. 159 will have on its
consolidated results of operations and financial condition.
On December 4, 2007,
the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or
SFAS No. 141(R). SFAS No. 141(R) will
significantly change the accounting for business combinations. Under SFAS No. 141(R),
an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141(R) also includes a substantial
number of new disclosure requirements.
SFAS No. 141(R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, which is the
year beginning December 1, 2009 for Joes. Joes is currently evaluating
the impact that SFAS No. 141(R) will have on its financial
statements.
On December 4, 2007,
the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements-an Amendment of Accounting Research Bulletin (ARB) No. 51,
or SFAS No. 160. SFAS No. 160
establishes new accounting and reporting standards for a non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically,
this statement requires the recognition of a non-controlling interest (minority
interest) as equity in the consolidated financial statements separate from the
parents equity. The amount of net income attributable to the non-controlling
interest will be included in consolidated net income on the face of the income
statement. SFAS No. 160 clarifies that changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the non-controlling equity investment on the deconsolidation
date. SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15,
2008, which is the year beginning December 1, 2009 for Joes. Joes is currently evaluating the impact that
SFAS No. 160 will have on its financial statements.
3.
Due
(to) Factor
During
fiscal 2007, Joes primary method to obtain the cash necessary for operating
needs was through the sale of accounts receivable pursuant to factoring
agreements and obtaining advances under inventory security agreements with CIT,
the factor.
F-10
As
a result of these agreements, amounts due to factor consist of the following
(in thousands):
|
|
2007
|
|
2006
|
|
Non-recourse
receivables assigned to factor
|
|
$
|
8,346
|
|
$
|
7,354
|
|
Client recourse
receivables
|
|
778
|
|
2,717
|
|
Total
receivables assigned to factor
|
|
9,124
|
|
10,071
|
|
Allowance for
customer credits and doubtful accounts
|
|
(1,421
|
)
|
(821
|
)
|
Net loan balance
from factored accounts receivable
|
|
(6,201
|
)
|
(9,023
|
)
|
Net loan balance
from inventory advances
|
|
(4,542
|
)
|
(1,115
|
)
|
Due to factor
|
|
$
|
(3,040
|
)
|
$
|
(888
|
)
|
|
|
|
|
|
|
Non-factored
accounts receivable
|
|
$
|
1,455
|
|
$
|
967
|
|
Allowance for
customer credits and doubtful accounts
|
|
(652
|
)
|
(469
|
)
|
Accounts
receivable, net of allowance
|
|
$
|
803
|
|
$
|
498
|
|
Of
the total amount of receivables sold by Joes as of November 30, 2007 and November 25,
2006, Joes bears the risk of payment of $778,000 and $2,717,000, respectively,
in the event of non-payment by the customers.
CIT Commercial Services
On
June 1, 2001, the Joes Jeans Subsidiary entered into the accounts
receivable factoring agreement and inventory security agreement with CIT. In prior years, Joes other active
subsidiaries also entered into substantially identical agreements. These agreements give Joes the ability to
obtain cash by selling to CIT certain of its accounts receivable. The accounts receivables are sold for up to
85 percent of the face amount on either a recourse or non-recourse basis
depending on the creditworthiness of the customer. In addition, the agreements allow Joes to
obtain advances for up to 50 percent of the value of certain eligible
inventory. CIT currently permits Joes
to sell its accounts receivables at the maximum level of 85 percent and allows
advances of up to $6,000,000 for eligible inventory. CIT has the ability, in its discretion at any
time or from time to time, to adjust or revise any limits on the amount of
loans or advances made to Joes pursuant to these agreements. As further assurance to CIT, cross guarantees
were executed by and among Joes and all of its subsidiaries to guarantee each
subsidiaries obligations. From time to
time, personal guarantees or pledges of additional collateral have been
executed by directors or stockholders to contribute to Joes ability to obtain
cash under the agreements. As of November 30,
2007, CIT did not require any additional agreements to permit additional
funding to Joes.
As
of November 30, 2007, Joes cash availability with CIT was approximately
$749,000. This amount fluctuates on a
daily basis based upon invoicing and collection related activity by CIT for the
receivables sold. In connection with the
agreements with CIT, certain assets are pledged to CIT, including all of the
inventory, merchandise, and/or goods, including raw materials through finished
goods and receivables.
The
agreements may be terminated by CIT upon 60 days prior written notice or
immediately upon the occurrence of an event of default, as defined in the
agreement. The agreements may be
terminated by Joes upon 60 days advanced written notice prior to June 30,
2010 or earlier provided that the minimum factoring fees have been paid for the
respective period.
The
factoring rate that Joes pays to CIT to factor accounts is at 0.6 percent for
accounts which CIT bears the credit risk and 0.4 percent for accounts which Joes
bears the credit risk and the interest rate associated with borrowings under
the inventory lines and factoring facility is at 0.25 percent plus the Chase
prime rate. As of November 30,
2007, the Chase prime rate was 7.5 percent.
In
addition, in the event Joes needs additional funds, Joes has also established
a letter of credit facility with CIT to allow it to open letters of credit for
a fee of 0.25 percent of the letter of credit face value with international and
domestic suppliers, subject to availability.
F-11
4.
Merger Transaction
Merger Agreement
Joes, Joes Subsidiary,
JD Holdings, Inc., or JD Holdings, and Joseph Dahan, the sole stockholder
of JD Holdings, entered into a definitive Agreement and Plan of Merger on February 6,
2007, as amended on June 25, 2007, or the Merger Agreement. JD Holdings primary asset is all rights,
title and interest in all intellectual property, including the trademarks,
related to the Joes®, Joes Jeans and JD brand and marks, or the Joes
Brand. At the time of entering into the
Merger Agreement, Mr. Dahan was a current employee of Joes, serving as
president of Joes Subsidiary. In
addition, JD Holdings was the successor to JD Design, the entity from whom Joes
licensed the Joes Brand. The license
agreement terminated automatically upon completion of the merger.
Under the terms and
subject to the conditions set forth in the Merger Agreement, on October 25,
2007, the Joes and JD Holdings completed the merger. In connection with the merger, Joes
Subsidiary merged with and into JD Holdings, with Joes Subsidiary as the
surviving entity and a wholly owned subsidiary of Joes. In addition, Joes issued 14,000,000 shares
of its common stock, made a cash payment of $300,000 to JD Holdings in exchange
for all of its outstanding shares and incurred $93,000 of merger related
expenses. As a result of the merger, Joes now owns all rights, title and
interest in the Joes Brand.
Furthermore, under the
revised Merger Agreement, Mr. Dahan will continue to be entitled to, for a
period of 120 months following October 25, 2007, a certain percentage of
the gross profit earned by Joes in any applicable fiscal year. The additional merger consideration, or earn-out,
will be paid in advance on a monthly basis based upon estimates of gross
profits after the assumption has been reached that the payments will likely be
paid. At the end of each quarter, any
overpayments will be offset against future payments and any underpayments will
promptly be made. Advanced earn-out
payments are recorded against goodwill.
As of November 30, 2007, Joes has recorded $125,000 against goodwill. See Note 9 Commitments and Contingencies
Earn Out for a further discussion of the earn-out obligation. In addition, the Merger Agreement contains a
restrictive covenant relating to non-competition and non-solicitation for one
year following the termination of Dahans service.
Effective upon completion of the merger, on October 25,
2007, Mr. Dahan became an officer, director and greater than 10 percent
stockholder of Joes. In connection with
the completion of the merger, an Employment Agreement and Investor Rights
Agreement became effective.
The merger has been
accounted for as a purchase under U.S. generally accepted accounting
principles. Accordingly, management, with the assistance from independent
valuation specialists, has allocated the purchase price to the assets and
liabilities of JD Holdings in Joes financial statements as of the completion
of the merger at their respective fair values.
The valuations of intangible assets, income taxes and certain other
items are preliminary. Management
expects to complete the purchase price allocations during the first or second
quarter of fiscal 2008.
The assets acquired in
this merger consisted of intangible assets.
JD Holdings had an immaterial amount of other assets, including
incidental office equipment that were distributed to Mr. Dahan as the sole
stockholder prior to the closing of the transaction. Pursuant to the Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, Joes
has determined that the useful life of the acquired assets is indefinite and
therefore no amortization expense will initially need to be recognized.
However, Joes will test the assets for impairment annually and/or if events or
changes in circumstances indicate that the assets might be impaired.
Additionally, a deferred tax liability has been established in the allocation
of the purchase price with respect to the identified indefinite long lived
intangible assets acquired.
Under the purchase method
of accounting, the total consideration as shown in the table below is allocated
to JD Holdings intangible assets based on their estimated fair values as of
the date of the completion of the merger. The consideration is allocated as
follows:
F-12
Allocation of Purchase Price
|
|
|
|
Calculation of Consideration:
|
|
|
|
Purchase of JD
Holdings common shares (1)
|
|
$
|
17,667,000
|
|
Cash payments
for JD Holdings shares (2)
|
|
300,000
|
|
Direct
transaction fees and expenses (3)
|
|
93,000
|
|
Goodwill and
trademark rights from predecessor agreement
|
|
176,000
|
|
Total
consideration (4)
|
|
$
|
18,236,000
|
|
Consideration Allocated to Acquired Net Assets Based
on Fair Value:
|
|
|
|
JD Holdings
historical book value of net assets acquired
|
|
$
|
|
|
Adjustments to
bring acquired assets and liabilities to fair value:
|
|
|
|
Trademark
contract right
|
|
13,200,000
|
|
Goodwill
|
|
10,290,000
|
|
Less deferred
tax liability
|
|
(5,254,000
|
)
|
Fair value of
net assets acquired
|
|
$
|
18,236,000
|
|
(1) Represents the value of 14,000,000
shares of our common stock to be issued in exchange for the outstanding shares
of JD Holdings common stock in the merger, based on 1,000 shares of JD Holdings
common stock outstanding as of October 25, 2007 and based on the average
price of $1.3975 of Joes common stock as reported on NASDAQ for the two day
period before and after the date the merger, as amended, was announced (June 25,
2007) less a 9.7% discount for the restrictions on resale as a result that the
shares will not initially be registered for resale and will be contractually
restricted for certain periods under the Merger Agreement.
(2) Represents the cash consideration
paid under the Merger Agreement.
(3) Represents direct merger costs,
including financial advisory, legal, accounting and other costs.
(4) The indicated value of the contingent
consideration, which is not contingent upon Mr. Dahans continued
employment, is not included in the fair value of the net assets acquired at the
acquisition date. This contingent consideration will be accounted for in the
future as additional purchase price under the terms of the Merger Agreement.
Employment Agreement
In connection with the
completion of the Merger, Mr. Dahans employment agreement automatically
became effective upon the closing of the merger for Mr. Dahan to serve as
Creative Director for the Joes Brand.
The initial term of
employment is 5 years with automatic renewals for successive one year periods
thereafter, unless terminated earlier in accordance with the agreement. Under
the employment agreement, Mr. Dahan is entitled to an annual salary of
$300,000 and other discretionary benefits that the Compensation Committee of
the Board of Directors may deem appropriate in its sole and absolute
discretion.
Under the terms of the
employment agreement, Joes may terminate Mr. Dahan for cause or if he
becomes disabled, as defined in the agreement.
Should Joes terminate Mr. Dahans employment for cause or
disability, Joes would only be required to pay him through the date of
termination. Joes may terminate Mr. Dahans employment without cause at
any time upon two weeks notice, provided that it pays to him the present value
of the annual salary amounts otherwise due to him for the remainder of the
initial term of employment or any renewal term. Mr. Dahan may terminate
his employment for good reason at any time within 30 days written notice. In the event that Mr. Dahan terminates
his employment for good reason, then he will be entitled to the present value
of the annual salary amounts otherwise due to him for the remainder of the term
of employment. Further, Mr. Dahan may terminate his employment for any
reason upon ten business days notice and only be entitled to his salary as of
the date of termination on a pro rata basis.
The employment agreement
contains customary terms and conditions related to confidentiality of
information, ownership by Joes of all intellectual property, including future
designs and trademarks, alternative dispute resolution and Mr. Dahans
duties and responsibilities to Joes and the Joes Brand as Creative Director.
F-13
Investor Rights Agreement
Upon the closing of the
merger, Joes also entered into an investor rights agreement. Pursuant to the investor rights agreement,
Joes agreed to register for resale, on a periodic basis at the request of Mr. Dahan,
the shares of common stock eligible for resale issued in connection with the
merger. The shares of common stock issued as Merger consideration become
eligible for resale beginning on the six month anniversary of the closing date
of the Merger at an initial rate of 1/6 of the shares issued and every six
months thereafter at the same rate until all the shares are fully released on
the third anniversary of the closing date.
Joes agreed to bear all expenses associated with registering these
shares for resale and have granted to Mr. Dahan certain piggyback rights
with respect to future registration statements filed by Joes. The investor
rights agreement contains customary terms and conditions related to
registration procedures, trading suspensions, and indemnification of the
parties.
5.
Inventories
Inventory
is valued at the lower of cost or market with cost determined by the first-in,
first-out method. Inventories consisted
of the following (in thousands):
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
7,450
|
|
$
|
5,026
|
|
Work in progress
|
|
1,998
|
|
468
|
|
Raw materials
|
|
11,969
|
|
1,292
|
|
|
|
21,417
|
|
6,786
|
|
Less allowance for obsolescence and slow moving
items
|
|
(614
|
)
|
(519
|
)
|
|
|
$
|
20,803
|
|
$
|
6,267
|
|
Joes
recorded charges to its inventory reserve allowance of $316,000, $680,000 and
$3,463,000 in fiscal 2007, 2006 and 2005, respectively.
6.
Property
and Equipment
Property
and equipment consisted of the following (in thousands):
|
|
Useful lives
(years)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Computer and equipment
|
|
2-7
|
|
$
|
1,088
|
|
$
|
625
|
|
Furniture and fixtures
|
|
3-7
|
|
221
|
|
457
|
|
Leasehold improvements
|
|
5
|
|
189
|
|
146
|
|
|
|
|
|
1,498
|
|
1,228
|
|
Less accumulated depreciation
|
|
|
|
(706
|
)
|
(391
|
)
|
Net property and equipment
|
|
|
|
$
|
792
|
|
$
|
837
|
|
Depreciation
expenses aggregated $315,000, $242,000 and $140,000 for fiscal 2007, 2006 and
2005, respectively.
F-14
7.
Income
Taxes
The
provision (benefit) for domestic and foreign income taxes from continuing
operations is as follows:
|
|
Year ended
|
|
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
65
|
|
$
|
|
|
$
|
|
|
State
|
|
26
|
|
36
|
|
13
|
|
|
|
91
|
|
36
|
|
13
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
1,293
|
|
(6,342
|
)
|
(5,400
|
)
|
State
|
|
|
|
|
|
|
|
|
|
1,293
|
|
(6,342
|
)
|
(5,400
|
)
|
|
|
|
|
|
|
|
|
Change in
valuation allowance
|
|
(1,293
|
)
|
6,342
|
|
5,400
|
|
Total
|
|
$
|
91
|
|
$
|
36
|
|
$
|
13
|
|
Because
of losses, there was no effect for income tax benefits realized by Joes for
fiscal 2006 and fiscal 2005.
Net
deferred tax assets result from the following temporary differences between the
book and tax bases of assets and liabilities:
|
|
Year ended
|
|
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
Deferred tax
assets:
|
|
|
|
|
|
Property and
equipment basis difference
|
|
$
|
233
|
|
$
|
263
|
|
Allowance for
doubtful accounts
|
|
829
|
|
840
|
|
Inventory
valuation
|
|
246
|
|
208
|
|
Benefit of net
operating loss carryforwards
|
|
19,461
|
|
21,129
|
|
Alternative
minimum tax
|
|
63
|
|
|
|
Goodwill and
intangible assets
|
|
52
|
|
37
|
|
Other
|
|
848
|
|
548
|
|
Deferred tax
assets
|
|
21,732
|
|
23,025
|
|
Valuation
allowance
|
|
(21,732
|
)
|
(23,025
|
)
|
Total deferred
tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
liability:
|
|
|
|
|
|
Long-lived
intangible asset
|
|
(5,254
|
)
|
|
|
Total deferred
tax liability
|
|
(5,254
|
)
|
|
|
Total net
deferred tax liability
|
|
$
|
(5,254
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
For
continuing operations, the reconciliation of the effective income tax rate to
the federal statutory rate for the years ended is as follows:
|
|
Year ended
|
|
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Computed tax
provision (benefit) at the statutory rate
|
|
34
|
%
|
(34
|
)%
|
(34
|
)%
|
State income tax
|
|
6
|
%
|
|
|
|
|
All others
|
|
1
|
%
|
|
|
|
|
Change in
valuation allowance
|
|
(37
|
)%
|
34
|
%
|
34
|
%
|
Effective tax
rate
|
|
4
|
%
|
0
|
%
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Joes
has consolidated net operating loss carryforwards for federal purposes of
approximately $47,000,000 expiring through 2025. Certain limitations may be placed on net
operating loss carryforwards as a result of changes in control as defined in Section 382
of the Internal Revenue Code. In the
event a change in control occurs, it will have the effect of limiting the
annual usage of the carryforwards in future years. Additional changes in control in future
periods could result in further limitations of Joes ability to offset taxable
income. Management believes that certain
changes in control have occurred which resulted in limitations on its net
operating loss carryforwards. Management
has determined that realization of the net deferred tax assets does not meet
the more likely than not criteria. As a
result, a valuation allowance has been provided for.
8.
Stockholders
Equity
Preferred Stock
In April 2002, Joes issued 195,295 shares of
$100, 8 percent Series A Redeemable Cumulative Preferred Stock, or Series A
Shares, to certain holders in connection with its Innovo Realty Inc., or IRI,
subsidiary. In April 2005, Joes
executed a settlement agreement with the holders of its Series A Shares
and redeemed all of the Series A Shares in exchange for the transfer of
all of the stock of its IRI subsidiary.
No shares were outstanding as of November 30, 2007, November 25,
2006, and November 26, 2005, respectively.
Recent Issuances of Common Stock
In
July 2003, Joes entered into an asset purchase agreement with Azteca
Production International Inc., or Azteca, for the purchase of Aztecas private
label division. In connection with the
agreement, Joes was obligated to issue additional shares of its common stock
in the event that it traded at an average stock price of less than $3.00 per
share for the period between February 10, 2006 and March 12,
2006. On May 17, 2006, Joes issued
an additional 1,041,667 shares as a result of this provision in this
agreement. The share issuance has been
recognized in the Statement of Stockholders Equity.
In December 2006, Joes issued 6,834,347 shares
of its common stock at a purchase price of $0.53 per share, 2,050,304 warrants
to purchase common stock at an exercise price of $0.58 per share and 125,000
warrants to purchase common stock at an exercise price of $0.66 per share in a
private placement transaction. In June 2007,
Joes issued 1,600,000 shares of its common stock at a purchase price of $1.25
per share and 480,000 warrants to purchase shares of its common stock at a
purchase price of $1.36 per share. See Note
14- Private Placement Transactions for a further discussion of this equity
financing transaction.
On
June 27, 2007, Joes received notices from two holders of warrants that it
was exercising certain previously issued warrants and issued 2,050,304 shares of its common stock. Joes received gross proceeds of $1,189,000
in connection with the warrant exercise.
F-16
After approval by Joes
stockholders and in connection with the closing of the merger, Joes issued to Mr. Dahan,
as sole stockholder of JD Holdings, 14,000,000 shares of its common stock in
exchange for all of the outstanding shares of JD Holdings.
Warrants
Joes
has issued warrants in conjunction with various private placements of its
common stock, debt to equity conversions, acquisitions and in exchange for
services. All warrants are currently exercisable. As of November 30, 2007,
outstanding common stock warrants are as follows:
Exercise price
|
|
Shares
|
|
Issued
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
200,000
|
|
June 2003
|
|
June 2008
|
|
3.62
|
|
|
17,500
|
|
August 2003
|
|
August 2008
|
|
4.00
|
|
|
373,333
|
|
November 2003
|
|
November 2008
|
|
1.53
|
|
|
125,000
|
|
June 2004
|
|
June 2009
|
|
2.28
|
|
|
62,500
|
|
October 2004
|
|
October 2009
|
|
0.66
|
|
|
125,000
|
|
December 2006
|
|
December 2011
|
|
1.36
|
|
|
480,000
|
|
June 2007
|
|
June 2012
|
|
|
|
1,383,333
|
|
|
|
|
|
In
December 2006 and June 2007, in connection with equity financing
private placement transactions, Joes issued 2,050,304 warrants to purchase common stock at an exercise price of $0.58
per share, 125,000 warrants to purchase common stock at an exercise price of
$0.66 per share and 480,000 warrants to purchase common stock at an exercise
price of $1.36 per share. See Note 14-
Private Placement Transactions for a further discussion of this equity
financing transaction.
Stock Incentive Plans
In
March 2000, Joes adopted the 2000 Employee Stock Option Plan, or the 2000
Employee Plan. In May 2003, the
2000 Employee Plan was amended to provide for incentive and nonqualified
options for up to 3,000,000 shares, subject to adjustment, of common stock that
may be granted to employees, officers, directors and consultants. On June 3, 2004, in connection with
stockholder approval of the 2004 Stock Incentive Plan, Joes stated that it
would no longer grant options pursuant to the 2000 Employee Plan, however, the
2000 Employee Plan remains in effect for awards outstanding as of June 3,
2004. The exercise price for incentive
options may not be less than the fair market value of Joes common stock on the
date of grant and the exercise period may not exceed ten years. Vesting periods and option terms are
determined by the Board of Directors. As
of November 30, 2007, options to purchase up to 200,000 remained
outstanding under the 2000 Employee Plan.
In
September 2000, Joes adopted the 2000 Director Stock Incentive Plan, or
the 2000 Director Plan, under which nonqualified options for up to 500,000
shares of common stock may be granted.
At the first annual meeting of stockholders following appointment to the
board and annually thereafter during their term, each non-employee director
received an option to purchase common stock with an aggregate fair value of
$10,000. These options vested on a
monthly basis and were generally exercisable in full one year from the date of grant
and expire ten years after the date of grant.
The exercise price was set at 50 percent of the fair market value of the
common stock on the date of grant. The
discount was in lieu of cash director fees.
On June 3, 2004, in connection with stockholder approval of the
2004 Stock Incentive Plan, Joes stated that it would no longer grant options
pursuant to the 2000 Director Plan; however, the 2000 Director Plan remains in
effect for awards outstanding as of June 3, 2004. As of November 30, 2007, options to
purchase up to 203,546 remained outstanding under the 2000 Director Plan.
On
June 3, 2004, Joes stockholders adopted the 2004 Stock Incentive Plan, or
the 2004 Incentive Plan. On October 11,
2007, Joes stockholders amended it to increase the number of shares authorized
for issuance to 8,265,172 shares of common stock. Under the 2004 Incentive Plan, grants may be
made to employees, officers, directors and consultants under a variety of
awards based upon underlying equity, including, but not limited to, stock
options, restricted common stock, restricted stock units or performance
shares. The 2004 Incentive Plan limits
the number of shares that can be awarded to any employee in one year to
1,250,000. Exercise price for incentive
options may not be less than the fair market value of Joes common stock on the
date of grant and the exercise period may not exceed ten years. Vesting periods, terms and types of awards
are determined
F-17
by the Board of Directors
and/or its Compensation and Stock Option Committee, or Compensation
Committee. The 2004 Incentive Plan
includes a provision for the acceleration of vesting of all awards upon a
change of control as well as a provision that allows forfeited or unexercised
awards that have expired to be available again for future issuance. During the fourth quarter of fiscal 2007, Joes
granted 555,849 shares of restricted common stock to its directors and CEO
pursuant to the 2004 Stock Incentive Plan. The issuance of these shares of
restricted common stock resulted in a stock-based compensation charge of
$80,000 in fiscal 2007. As of November 30, 2007, 4,020,990 shares remained
available for issuance under the 2004 Incentive Plan.
The
shares of common stock issued upon exercise of a previously granted stock
option or a grant of restricted common stock are considered new issuances from
shares reserved for issuance in connection with the adoption of the various
plans. Joes requires that the option
holder provide a written notice of exercise in accordance with the option
agreement and plan to the stock plan administrator and full payment for the
shares be made prior to issuance. All
issuances are made under the terms and conditions set forth in the applicable
plan.
For all stock based
compensation awards that contain graded vesting based on service conditions,
Joes has elected to apply a straight-line recognition method to account for
these awards.
The total stock
based compensation expense for fiscal 2007 was $114,000. For existing grants that were not fully
vested at November 25, 2006, there was a total of $20,000 of stock based
compensation expense recognized in fiscal 2007.
In the fourth quarter of fiscal 2007, Joes granted an option to
purchase 100,000 shares that vested on a monthly basis over a two year period;
however, this option was cancelled and replaced with the consent of the option
holder with a restricted stock unit grant for 100,000 shares of common stock in
December 2007.
The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Estimated
dividend yield
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
Expected stock
price volatility
|
|
100.40
|
%
|
92-94
|
%
|
82-94
|
%
|
Risk-free
interest rate
|
|
4.20
|
%
|
4.5-5.0
|
%
|
3.99
|
%
|
Expected life of
options-in years
|
|
2.79
|
yrs
|
3.1-3.3
|
yrs
|
4
|
yrs
|
The
Black-Scholes model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully
transferable. In addition, the
assumptions used in option valuation models are subjective and can materially
impact fair value estimates. Therefore,
the actual value of stock options may differ materially to values computed
under the Black-Scholes model.
The
following summarizes option grants and restricted common stock issued to
members of the Board of Directors for the fiscal years 2002 through 2007 (in
actual amounts) for service as a member:
|
|
November 30, 2007
|
|
|
|
As of:
|
|
Number of options
|
|
Exercise price
|
|
2002
|
|
40,000
|
|
$
|
1.00
|
|
2002
|
|
31,496
|
|
$
|
1.27
|
|
2003
|
|
30,768
|
|
$
|
1.30
|
|
2004
|
|
320,000
|
|
$
|
1.58
|
|
2005
|
|
300,000
|
|
$
|
5.91
|
|
2006
|
|
450,000
|
|
$
|
1.02
|
|
2007
|
|
|
|
|
|
|
|
Number of restricted
shares isssued
|
|
2007
|
|
320,000
|
|
F-18
Stock activity in the
aggregate for the periods indicated are as follows (in actual amounts):
|
|
Options
|
|
Weighted
average exercise
price
|
|
Weighted average
remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
November 25, 2006
|
|
4,092,296
|
|
$
|
1.68
|
|
|
|
|
|
Granted
|
|
100,000
|
|
1.92
|
|
|
|
|
|
Exercised
|
|
(366,250
|
)
|
0.92
|
|
|
|
|
|
Forfeited/expired
|
|
(200,000
|
)
|
1.02
|
|
|
|
|
|
Outstanding at
November 30, 2007
|
|
3,626,046
|
|
$
|
1.80
|
|
7.00
|
|
$
|
1,047,465
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and
vested at November 30, 2007
|
|
3,476,046
|
|
$
|
1.82
|
|
6.90
|
|
$
|
972,419
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
per option fair value of options granted during the year
|
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
Options
|
|
Weighted
average exercise
price
|
|
Weighted average
remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
November 26, 2005
|
|
4,123,963
|
|
$
|
2.91
|
|
|
|
|
|
Granted
|
|
1,650,000
|
|
1.02
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
(1,681,667
|
)
|
(2.24
|
)
|
|
|
|
|
Outstanding at
November 25, 2006
|
|
4,092,296
|
|
$
|
1.68
|
|
8.03
|
|
$
|
67,718
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and
vested at November 25, 2006
|
|
3,954,796
|
|
$
|
1.72
|
|
7.97
|
|
$
|
31,968
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
per option fair value of options granted during the year
|
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
Options
|
|
Weighted
average exercise
price
|
|
Weighted average
remaining contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
November 27, 2004
|
|
3,198,554
|
|
$
|
1.93
|
|
|
|
|
|
Granted
|
|
1,625,000
|
|
4.12
|
|
|
|
|
|
Exercised
|
|
(699,591
|
)
|
(1.25
|
)
|
|
|
|
|
Forfeited/expired
|
|
|
|
|
|
|
|
|
|
Outstanding at
November 26, 2005
|
|
4,123,963
|
|
$
|
2.91
|
|
8.20
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and
vested at November 26, 2005
|
|
4,123,963
|
|
$
|
2.95
|
|
8.20
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
per option fair value of options granted during the year
|
|
|
|
$
|
2.62
|
|
|
|
|
|
As of November 30,
2007, there was $123,000 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the 2004 Incentive
Plan. That unrecognized compensation
cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of shares of stock
options vested during the fiscal years ended November 30, 2007, November 25,
2006 and November 26, 2005, was $34,000, $997,000 and $4,846,000,
respectively.
F-19
Exercise
prices for options outstanding as of November 30, 2007 are as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number of shares
|
|
Weighted-Average
Remaining Contractual
Life
|
|
Number of options
vested
|
|
Weighted-Average
Remaining Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
$0.39 - $0.40
|
|
190,064
|
|
5.7
|
|
127,564
|
|
4.2
|
|
$1.00 - $1.02
|
|
2,015,000
|
|
7.7
|
|
2,015,000
|
|
7.7
|
|
$1.27 - $1.30
|
|
60,982
|
|
5.2
|
|
60,982
|
|
5.2
|
|
$1.58 - $1.63
|
|
610,000
|
|
6.7
|
|
610,000
|
|
6.7
|
|
$1.92
|
|
100,000
|
|
9.7
|
|
12,500
|
|
9.7
|
|
$2.40
|
|
200,000
|
|
0.0
|
|
200,000
|
|
0.0
|
|
$5.91
|
|
450,000
|
|
7.5
|
|
450,000
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,626,046
|
|
7.0
|
|
3,476,046
|
|
6.9
|
|
The following table
summarizes stock activity by plan.
|
|
Total Number
of Shares
|
|
2004 Incentive
Plan
|
|
2000 Employee
Plan
|
|
2000 Director
Plan
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
November 25, 2006
|
|
4,092,296
|
|
3,688,750
|
|
200,000
|
|
203,546
|
|
Options Granted
|
|
100,000
|
|
100,000
|
|
|
|
|
|
Restricted stock
granted
|
|
555,849
|
|
555,849
|
|
|
|
|
|
Restricted stock
issued
|
|
(555,849
|
)
|
(555,849
|
)
|
|
|
|
|
Exercised
|
|
(366,250
|
)
|
(366,250
|
)
|
|
|
|
|
Forfeited /
Cancelled
|
|
(200,000
|
)
|
(200,000
|
)
|
|
|
|
|
Outstanding at
November 30, 2007
|
|
3,626,046
|
|
3,222,500
|
|
200,000
|
|
203,546
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
November 30, 2007
|
|
3,476,046
|
|
3,072,500
|
|
200,000
|
|
203,546
|
|
The weighted-average
grant-date fair value of options granted during fiscal years 2007, 2006 and
2005, was $1.23, $0.35 and $2.62, respectively.
The total intrinsic value of options exercised during the fiscal years
ended November 30, 2007, November 25, 2006 and November 26,
2005, was $651,000, $0 and $2,840,000, respectively.
F-20
A summary of the status of restricted stock as of November 25,
2006, and changes during the year ended November 30, 2007, is presented
below:
|
|
Shares
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
|
|
|
|
|
|
Restricted stock
at November 25, 2006
|
|
|
|
$
|
|
|
Granted
|
|
555,849
|
|
$
|
1.59
|
|
Vested
|
|
(26,667
|
)
|
$
|
(1.59
|
)
|
Forfeited
|
|
|
|
$
|
|
|
Restricted stock
at November 30, 2007
|
|
529,182
|
|
$
|
1.59
|
|
|
|
|
|
|
|
F-21
Earnings (Loss) Per Share
Earnings (loss) per share
are computed using weighted average common shares and dilutive common
equivalent shares outstanding.
Potentially dilutive securities consist of outstanding convertible
notes, options and warrants. A reconciliation
of the numerator and denominator of basic earnings per share and diluted
earnings per share is as follows:
|
|
Year Ended
|
|
|
|
(in thousands, except per share data)
|
|
|
|
November 30, 2007
|
|
November 25, 2006
|
|
November 26, 2005
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per share Computation:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
2,254
|
|
$
|
(7,144
|
)
|
$
|
(8,488
|
)
|
Loss from
discontinued operations
|
|
|
|
(2,149
|
)
|
(7,945
|
)
|
Net income
(loss)
|
|
$
|
2,254
|
|
$
|
(9,293
|
)
|
$
|
(16,433
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
43,840
|
|
33,853
|
|
31,942
|
|
|
|
|
|
|
|
|
|
Income
(loss) per Common Share - Basic
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
0.05
|
|
$
|
(0.21
|
)
|
$
|
(0.26
|
)
|
Loss from
discontinued operations
|
|
|
|
(0.06
|
)
|
(0.25
|
)
|
Net income
(loss)
|
|
$
|
0.05
|
|
$
|
(0.27
|
)
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
Diluted
Earnings per share Computation:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
2,254
|
|
$
|
(7,144
|
)
|
$
|
(8,488
|
)
|
Loss from
discontinued operations
|
|
|
|
(2,149
|
)
|
(7,945
|
)
|
Net income
(loss)
|
|
$
|
2,254
|
|
$
|
(9,293
|
)
|
$
|
(16,433
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
43,840
|
|
33,853
|
|
31,942
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
Options and
warrants
|
|
1,160
|
|
|
|
|
|
Dilutive
potential common shares
|
|
45,000
|
|
33,853
|
|
31,942
|
|
|
|
|
|
|
|
|
|
Income
(loss) per Common Share - Dilutive
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
0.05
|
|
$
|
(0.21
|
)
|
$
|
(0.26
|
)
|
Loss from
discontinued operations
|
|
|
|
(0.06
|
)
|
(0.25
|
)
|
Net income
(loss)
|
|
$
|
0.05
|
|
$
|
(0.27
|
)
|
$
|
(0.51
|
)
|
Potentially
dilutive convertible notes, options and warrants in the aggregate of 4,870,629
and 4,902,296 in fiscal 2006 and fiscal 2005, respectively, have been excluded
from the calculation of the diluted loss per share as their effect would have
been anti-dilutive.
For
fiscal 2007, currently exercisable options and warrants in the aggregate of
1,868,301 have been excluded from the
F-22
calculation of diluted
income per share because the exercise prices of such options and warrants were
out-of-the-money.
Shares Reserved for Future
Issuance
As
of November 30, 2007, shares reserved for future issuance include (i) 3,476,046
shares of common stock issuable upon the exercise of outstanding stock options;
(ii) an aggregate of 4,020,990 shares of common stock available for future
issuance under the 2004 Stock Incentive Plan as of November 30, 2007; and (iii) 1,383,333
shares of common stock issuable upon the exercise of outstanding warrants.
9. Commitments and Contingencies
Operating
Lease Obligations
Joes
leases certain equipment and office space under separate lease
arrangements. The leases generally
contain renewal provisions. Equipment
and office rental expenses under such leases for the years ended November 30,
2007, November 25, 2006 and November 26, 2005, were approximately
$512,000, $371,000 and $602,000, respectively, for continuing operations.
In
October 2006, Joes entered into an assignment and assumption of sublease
for office space in New York, New York for the remainder of the original
sublease term and paid an assignment fee of $344,000, including miscellaneous
expense and real estate commissions.
This amount was charged to selling, general and administrative
expenses. In connection with the
assignment, the original guaranty of payment for the sublease remains in effect
until the end of the original term of the sublease, which is July 2009. Therefore, Joes may be obligated to pay the
monthly sublease fee of approximately $30,000 in the event the assignee
defaults on its obligations to the sublandlord or landlord until the end of the
lease term.
Until
July 2006, Joes also used space under a verbal month-to-month arrangement
with Azteca, a related party, for its headquarters and principal executive
offices. Under this arrangement, Joes
paid to Azteca a monthly fee for allocated expenses associated with its use of
office and warehouse space and expenses in connection with maintaining such
office and warehouse space. These
allocated expenses included, but were not limited to, rent, security, office
supplies, machine leases and utilities.
In addition, Joes paid to Azteca distribution
fees for distribution services in addition to the monthly rental fee. Expenses for the fiscal years 2006 and 2005
under this arrangement were $557,000 and $1,039,000, respectively.
In
July 2006, Joes moved its headquarters and principal executive offices to
another facility under a verbal month-to-month arrangement with a third party
who provides its product fulfillment, warehousing and distribution
services. Under this arrangement
commencing in December 2007, Joes pays a monthly fee of approximately
$160,000 for allocated expenses associated with its use of office and warehouse
space including its product fulfillment, warehousing and distribution services.
Expenses under this arrangement were $1,427,000 and $568,000 for fiscal 2007
and 2006, respectively.
Joes
continues to be obligated under its lease in the amount of approximately $8,000
per month for its executive office space in Los Angeles because the sublessee,
an entity that is owned or controlled by a member of one of Joes board of
directors, leases on a month-to-month basis until December 31, 2009. In addition, Joes leases additional space in
the amount of approximately $2,000 in New York under a short term lease that
terminates on March 31, 2008.
Future
operating lease obligations are as follows (in thousands):
2008
|
|
$
|
150
|
|
2009
|
|
131
|
|
2010
|
|
20
|
|
2011
|
|
4
|
|
2012
|
|
1
|
|
|
|
$
|
306
|
|
F-23
Advertising Commitments
During
fiscal 2006 and into part of fiscal 2007, Joes had advertising commitments
with certain parties for billboard advertisement in Los Angeles, California and
advertising space on the tops of taxi cabs in New York City. In January 2007, all advertising
commitments had expired under the terms of the original commitment and were not
renewed. In January 2008, Joes
entered into an agreement for short term billboard advertising space in various
locations in and around New York and Los Angeles but does not have any
commitment to pay a minimum amount.
Letter of Credits
Joes
has a contingent liability for $791,000 in open letter of credits as of November 30,
2007.
Earn Out
As part of the consideration paid in connection with
the completion of the merger, Mr. Dahan will be entitled to a certain
percentage of the gross profit earned by Joes in any applicable fiscal year
until October 2017. Mr. Dahan
will be entitled to the following: (i) 11.33 percent of the gross profit
from $11,251,000 to $22,500,000; plus (ii) 3 percent of the gross profit
from $22,501,000 to $31,500,000; plus (iii) 2 percent of the gross profit
from $31,501,000 to $40,500,000; plus (iv) 1 percent of the gross profit
above $40,501,000. The payments will be made in advance and then be compared
against amounts actually earned after the applicable quarter or fiscal year
with shortfalls paid immediately and overpayments offset against future
earnings. No payment will be made if the gross profit is less than $11,250,000.
Gross Profit is defined as net sales of the Joes® brand less cost of goods
sold as reported in periodic filings with the SEC.
Litigation
Joes
is involved from time to time in routine legal matters incidental to its
business. In the opinion of Joes management, resolution of such matters will
not have a material effect on its financial position or results of operations.
10. Segment Reporting and Operations by Geographic Areas
Segment Reporting
Joes
has only one segment of operations, primarily apparel, which includes an
immaterial amount of revenue from a license agreement for accessories. Prior to fiscal 2004, Joes operated in two
segments - apparel and accessories. In May 2005,
Joes sold the remaining assets of its craft and accessories segment of
operations and in May 2006, Joes sold certain assets related to its
private label apparel division.
Accordingly, each of these activities has been classified as a Discontinued
Operations and reported as such.
Operations by Geographic Areas
Historically,
Joes presented information about
operations in the United States and Asia with intercompany revenues and
assets eliminated to arrive at the consolidated amounts. Beginning in fiscal 2004, Joes no longer had
reportable operations outside of the United States.
11. Related Party and Other Transactions
As of November 30, 2007 and November 25,
2006, Joes related party balance consisted of amounts due (to) or due from
certain related parties, as further described below, as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Commerce
Investment Group and affliates
|
|
$
|
(1,031
|
)
|
$
|
2,163
|
|
JD
Holdings, Inc.
|
|
(111
|
)
|
(82
|
)
|
Due from related
parties, net
|
|
$
|
(1,142
|
)
|
$
|
2,081
|
|
F-24
Former
Related Parties
Commerce
Investment Group and affiliates
Historically,
Joes has a strategic relationship with certain of its stockholders, Hubert
Guez, Paul Guez and their affiliated companies, including Azteca, AZT and
Commerce Investment Group LLC, or Commerce.
By virtue of this relationship, Joes has entered into the following
agreements, at various times, with Hubert Guez, Paul Guez and their affiliated
companies, Azteca, AZT and/or Commerce, entities in which Hubert Guez and Paul
Guez have controlling interests. These
entities are no longer related parties as they are not officers, directors or
greater than 10 percent stockholders nor do they have the ability to control,
directly or indirectly, Joes.
The
following table represents charges from the affiliated companies pursuant to
Joes relationship with them, including its discontinued operations, as
follows:
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Continuing
operations
|
|
|
|
|
|
|
|
Purchase order
arrangements
|
|
$
|
10,727
|
|
$
|
12,845
|
|
$
|
2,560
|
|
Verbal
facilities arrangement
|
|
|
|
256
|
|
315
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Supply agreement
/ Purchase order arrangements
|
|
|
|
16,851
|
|
60,898
|
|
Earn-out due to
Sweet Sportswear
|
|
|
|
248
|
|
1,323
|
|
Verbal
facilities agreement
|
|
|
|
301
|
|
724
|
|
Principal and
interest on note payable
|
|
|
|
1,088
|
|
1,057
|
|
Supply and
Distribution agreement
|
|
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations - Purchase Order Arrangement
Until
August 2007, Joes used AZT as a supplier on a purchase order basis for
certain of its Joes® denim products produced in Mexico. Under this arrangement, Joes advanced the
funds to purchase raw materials, which primarily includes fabric, anticipated
for production of its products and paid for the production cost less credit for
the advances on raw materials. Joes
purchased these products in various stages of production from partial to
completed finished goods. In August 2007,
Joes began using a third party vendor for the production of its products in
Mexico.
Continuing Operations - Verbal Facilities Arrangement
Until
mid-July 2006, Joes used space for its headquarters and principal
executive offices under a verbal month-to-month arrangement with Azteca. Under this arrangement, Joes paid to Azteca
a monthly fee for allocated expenses associated with its use of office and
warehouse space, including a fee charged on a per unit basis for inventory, and
expenses in connection with maintaining such office and warehouse space. These allocated expenses included, but were
not limited to, rent, security, office supplies, machine leases and
utilities. In mid-July 2006, Joes
moved its headquarters and principal executive offices to nearby office and warehouse
space and accordingly, no longer has any obligation to pay Azteca under the
verbal facilities arrangement.
Discontinued Operations Supply Agreement/Purchase Order Arrangements
In
July 2003, under an asset purchase agreement, or Blue Concept APA, with
Azteca, Hubert Guez and Paul Guez, Joes IAA subsidiary acquired the Blue
Concept Division of Azteca, a division which sold denim apparel primarily to
American Eagle Outfitters, Inc., or AEO.
Simultaneous with the Blue Concept APA, IAA entered into a non-exclusive
Supply Agreement with AZT for the purchase of denim products to be sold to AEO,
which expired on July 17, 2005.
Under the terms of the Supply Agreement, AZT agreed that the purchase
price on the products supplied would provide for a margin per unit of 15
percent. After the expiration of the
supply agreement, Joes continued to use AZT as a supplier on a purchase order
basis for
F-25
its
AEO products under similar terms. Upon
completion of the sale of IAAs private label division to Cygne Designs, Inc.,
or Cygne, as discussed in Note 15 Discontinued Operations, Cygne assumed
$2,500,000 of the amount owed to AZT under this purchase order supply
arrangement.
Discontinued Operations - Earn-out Due to Sweet Sportswear LLC
The
Blue Concept APA also provided for the calculation and payment, on a quarterly
basis, to Sweet Sportswear LLC, an entity owned by Hubert and Paul Guez, of an
amount equal to 2.5 percent of the gross sales solely attributable to AEO. In May 2006, Cygne assumed the future
liability associated with this payment.
Discontinued Operations - Principal and Interest on Note Payable
Joes
originally incurred long-term debt in connection with the purchase of the Blue
Concept Division from Azteca. In July 2003,
IAA issued a seven-year unsecured, convertible promissory note in the principal
amount of $21.8 million, or the Blue Concept Note. The Blue Concept Note bore interest at a rate
of 6 percent and required payment of interest only during the first 24 months
and then was fully amortized over the remaining five-year period. On March 5, 2004, after stockholder
approval, a portion of the Blue Concept Note was converted into 3,125,000
shares of common stock at a value per share of $4.00. In May 2006, Cygne
assumed the remaining principal balance of the Blue Concept Note and Azteca
released Joes from any and all remaining obligations. The Blue Concept Note has been reclassified
as a discontinued operation liability.
Under the terms of the original asset purchase agreement, in addition to
the shares previously issued, Joes issued on May 17, 2006 an additional
1,041,667 shares of its common stock as a result of its average stock price
trading at less than $3.00 per share for the period between February 10,
2006 and March 12, 2006. This share
issuance has been recognized in the Statement of Stockholders Equity.
Discontinued Operations - Craft and accessories Supply and
Distribution Agreement
In
August 2000, Joes entered into a supply agreement and a distribution
agreement for its craft products with Commerce.
In connection with the sale of the craft inventory and certain other
assets of its Innovo subsidiary in May 2005, both the supply agreement and
the distribution agreement were terminated.
Aggregate balances by entities
As
of November 30, 2007 and November 25, 2006, respectively, the
balances due (to) or due from these related parties and certain of their
affiliates are as follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
AZT International
SA de CV
|
|
$
|
1,800
|
|
$
|
4,994
|
|
Commerce
Investment Group
|
|
(2,822
|
)
|
(2,822
|
)
|
Sweet
Sportswear, LLC
|
|
(4
|
)
|
(4
|
)
|
Cygne Design
Inc.
|
|
(5
|
)
|
(5
|
)
|
|
|
$
|
(1,031
|
)
|
$
|
2,163
|
|
The
AZT balance represented the balances due as a result of production efforts in
Mexico as of November 30, 2007.
Upon completion of the sale of IAAs private label division to Cygne, as
discussed in Note 15 Discontinued Operations, Cygne assumed the aggregate
liability in the amount of $2,500,000 owed to Commerce and its affiliates. The balance due to Commerce represents the
adjusted balance remaining that Joes continued to be obligated for after the
completion of the transaction with Cygne.
The balance of $5,000 due to Cygne represented the amount Joes owed to
Cygne as a result of certain chargebacks to former customers.
F-26
Current
Related Party
JD
Holdings Inc.
On
February 7, 2001, Joes acquired a license for the rights to the Joes®
brand from JD Design LLC, which was subsequently merged with and into JD
Holdings. Under the license agreement,
JD Holdings was entitled to a royalty of 3 percent on net sales of licensed
products.
In October 2005, Joes granted JD
Holdings the right to develop the childrens branded apparel line under an
amendment to its master license agreement in exchange for a 5 percent royalty
on net sales of those products. On October 25,
2007, in connection with the merger, the license agreement terminated.
As part of the
consideration paid in connection with the completion of the merger, Mr. Dahan
will be entitled to a certain percentage of the gross profit earned by Joes in
any applicable fiscal year until October 2017. See Note 4 Merger Transaction for a
further discussion on the merger agreement and the earn-out.
For
fiscal 2007 and 2006, the following table sets forth earn-out, royalties, fees
and income paid in connection with the Joes® brand.
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Expense
(income):
|
|
|
|
|
|
|
|
Joes Jeans
royalty expense
|
|
$
|
1,647
|
|
$
|
1,363
|
|
$
|
999
|
|
Joes Kids
license, royalty income
|
|
(88
|
)
|
(40
|
)
|
|
|
indie Design fee
|
|
|
|
39
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of Mr. Dahans
appointment as a director and executive officer and his ownership of
approximately 24 percent of Joes total shares outstanding, an additional
related party transaction occurred in the past fiscal year. Mr. Dahans brother is the managing
member of a company Shipson LLC, or Shipson, to whom Joes outsources its
E-shop operated on its Joes Jeans website.
Joes sells its Joes® products to Shipson at its wholesale price on
normal and customary terms and conditions similar to those that it offers other
customers to fulfill purchases by customers on the E-shop. As of November 30, 2007, Shipson
currently owes $163,000 to Joes for purchase orders.
In October 2006, Joes
entered into a collateral protection agreement with JD Holdings in connection
with the pledge of certain collateral to CIT for increased availability. Under the collateral protection agreement,
Joes agreed to issue JD Holdings shares of its common stock in the event of a
default under its agreements with CIT.
In October 2007 in connection with the merger and the release of
the pledge by CIT, the collateral protection agreement was terminated.
F-27
12. Supplemental Cash Flow Information
|
|
Year ended
|
|
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Significant
non-cash transactions
|
|
|
|
|
|
|
|
In fiscal 2007,
Joes Jeans issued 14,000,000 shares in connection with the merger with JD
Holdings and recorded deferred taxes of $5,254,000
|
|
$
|
22,921
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2006,
Innovo Group sold certain assets of its private label division in a non-cash
transaction consisting of:
|
|
|
|
|
|
|
|
Assumption of
notes payable & certain liabilities
|
|
$
|
|
|
$
|
10,437
|
|
$
|
|
|
Non-cash loss on
sale of the assets
|
|
$
|
|
|
$
|
2,428
|
|
$
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2006,
Innovo Group issued of 1,041,667 shares of common stock to Azteca as required
per the July 2003 asset purchase agreement. No cash or other
consideration was received.
|
|
$
|
|
|
$
|
104
|
|
$
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2005,
Innovo Group converted of its convertible notes payable into 2,560,000 shares
of common stock
|
|
$
|
|
|
$
|
|
|
$
|
4,385
|
|
|
|
|
|
|
|
|
|
Additional
cash flow information
|
|
|
|
|
|
|
|
Cash paid during
the year for interest
|
|
$
|
830
|
|
$
|
1,026
|
|
$
|
1,467
|
|
Cash paid during
the year for income taxes
|
|
$
|
87
|
|
$
|
42
|
|
$
|
32
|
|
13. Employee Benefit Plans
On
December 1, 2002, Joes established a tax qualified defined contribution
401(k) Profit Sharing Plan, or the Plan.
All employees who have worked for Joes for 30 consecutive days may
participate in the Plan and may contribute up to 100 percent, subject to
certain limitations, of their salary to the plan. Joes contributions may be made on a
discretionary basis. All employees who
have worked 500 hours qualify for profit sharing in the event at the end of
each year Joes decides to do so. Costs
of the Plan charged to operations for administrative fees, in actual numbers,
were $6,000, $13,000 and $4,300 for fiscal 2007, 2006 and 2005,
respectively. In addition, Joes matches
its employees contributions under the Plan in the lesser of the following
amounts: (i) up to 2 percent of the employees compensation, or (ii) 1/3
of the employees contribution up to 6 percent of the employees salary. For fiscal 2007, Joes contributed $37,000 to
employees under the match portion of the Plan.
14. Private Placement Transactions
In
December 2006, Joes consummated a private placement of its common stock
and warrants to purchase common stock to two accredited investors pursuant to
Rule 506 of Regulation D under the Securities Act. The proceeds from the transaction were used
for general working capital purposes. The
transaction raised gross proceeds of $3,622,000 or $4,811,000 assuming full
exercise of all of the warrants issued.
Joes
issued 6,834,347 shares at a purchase price of $0.53 per share and warrants to
purchase an additional 2,050,304 shares of common stock to these investors at
an exercise price of $0.58 per share. In
addition, on December 26, 2006, Joes issued an additional 125,000
warrants with an exercise price of $0.66 per share to an individual, also an
accredited investor, in exchange for introducing one of the investors to the
company.
Each
of the warrants issued includes a cashless exercise option, pursuant to which
the holder can exercise the warrant without paying the exercise price in
cash. If the holder elects to use this
cashless exercise option, it will receive a fewer number of our shares than it
would have received if the exercise price were paid in cash. The number of shares of common stock a
F-28
holder
of the warrant would receive in connection with a cashless exercise is
determined in accordance with a formula set forth in the warrant. The warrants issued in connection with the
private placement have a term of five years and were first exercisable on June 18,
2007 and June 25, 2007, respectively.
On June 27, 2007, all but 125,000 of the warrants were exercised
resulting in cash proceeds of approximately $1,189,000.
Joes
used the Black-Scholes pricing model to determine the fair value of each of the
warrants granted in connection with this transaction. Joes determined the fair
value of the warrants at the date of grant using the Black-Scholes option
pricing model based on the market value of the underlying common stock, a
volatility rate of 82.80 percent and 82.84 percent, respectively, based upon
the implied volatility in market traded stock over the same period as the
vesting period, zero dividends, a risk free interest rate of 4.56 percent and
an expected life of 5 years. The
aggregate fair value of $56,000 of the 125,000 warrants issued was treated as a
deal cost. In addition, Joes incurred
$28,831 in other transaction costs through May 26, 2007. All transaction costs to date have been
charged against the gross proceeds and the net proceeds of $3,594,000 were
allocated to the common stock and warrants based upon fair values.
In
June 2007, Joes consummated a private placement transaction on similar
terms and conditions described above.
The June 2007 transaction raised gross proceeds of approximately
$2,000,000 initially and an additional $653,000 assuming the full exercise of
all of the warrants. The warrants issued
have the same features as described above and first became exercisable on December 25,
2007.
Joes
used the Black-Scholes pricing model to determine the fair value of each of the
additional warrants granted in connection with the June transaction. Joes
determined the fair value of the warrants at the date of grant using the
Black-Scholes option pricing model based on the market value of the underlying
common stock, a volatility rate of 88.7 percent based upon the implied
volatility in market traded stock over the same period as the vesting period,
zero dividends, a risk free interest rate of 5.03 percent and an expected life
of 5 years. The aggregate fair value for
the 480,000 warrants issued was $470,000.
15. Discontinued Operations
Beginning
in fiscal 2004, Joes classified certain of its operations as discontinued as a
result of such operations meeting certain accounting criteria of an asset held
for sale. In fiscal 2004, the commercial
rental property that served as its former headquarters located in Springfield,
Tennessee and the remaining assets of its craft and accessory business segment
conducted through its Innovo Inc. subsidiary were both classified as a
discontinued operations. On May 17,
2005, Joes Innovo subsidiary completed the sale of the assets of its craft and
accessory segment of operations. In February 2006,
Joes Leaseall Management subsidiary completed the sale of its former
headquarters. In connection with the
sale of its former headquarters, Joes received a promissory note for a portion
of the purchase price. As of November 30,
2007, there was no remaining balance on the promissory note. On May 12, 2006, Joes completed the
sale of its private label apparel division.
As such, all prior periods have been reclassified to reflect this
operating division as a discontinued operation.
Under
the asset purchase agreement for the private label division entered into with
Cygne, the assets sold included the private label divisions customer list, the
assumption of certain existing purchase orders and inventory related to the
private label division, and the assumption of the benefit of a non-compete
clause in favor of Azteca, the original seller of the private label division to
Joes. In exchange for the purchased
assets, Cygne assumed certain liabilities associated with the private label
division, including, the remaining obligation under the original promissory
note executed in favor of Azteca, all other liabilities, excluding the original
promissory note, owed in connection with our operation of the private label
division to Azteca in excess of $1,500,000, certain liabilities associated with
outstanding purchase orders and inventory schedules listed in the asset
purchase agreement, the obligation to continue to pay the earn-out under the
original asset purchase agreement with Azteca and the liabilities related to
the workforce of the private label division.
The aggregate value of the assumed liabilities which represented the
purchase price for the transaction was approximately $10,437,000 as of the
closing date. Joes also recorded an
approximate charge of $36,000 for certain property and equipment disposed of or
abandoned as part of discontinuing these operations. The following table sets forth a summary of
the assumption of the liabilities less the net book value of the assets and Joes
resulting loss on the sale of these assets (in thousands):
F-29
Note payable -
related party
|
|
$
|
7,937
|
|
Other related
party liabilities
|
|
2,500
|
|
Total purchase
price (liabilities assumed by buyer)
|
|
$
|
10,437
|
|
|
|
|
|
Net intangible
asset - customer relationship
|
|
$
|
9,469
|
|
Raw material
inventory
|
|
3,360
|
|
Disposition of
property and equipment
|
|
36
|
|
Net book value
of assets sold
|
|
$
|
12,865
|
|
|
|
|
|
Loss, before
transaction costs
|
|
$
|
2,428
|
|
Transaction
costs
|
|
186
|
|
Loss on sale of
private label apparel division
|
|
$
|
2,614
|
|
The
assets and liabilities of the discontinued operations are presented in the
consolidated balance sheet under the captions Assets of Discontinued
Operations and Liabilities of Discontinued Operations. The underlying assets and liabilities of the
discontinued operations for 2005 (there are none in fiscal 2006 and 2007) are
as follows:
|
|
(in thousands)
|
|
|
|
Private Label
Business
|
|
Innovo, Inc.
|
|
Leaseall
Management
|
|
Total
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
68
|
|
$
|
5
|
|
$
|
|
|
$
|
73
|
|
Accounts
receivable and due from factor, net of allowance for
|
|
|
|
|
|
|
|
|
|
customer credits
and allowances of $23 (2005)
|
|
8
|
|
|
|
16
|
|
24
|
|
Inventories, net
|
|
366
|
|
|
|
|
|
366
|
|
Prepaid expenses
and other current assets
|
|
20
|
|
|
|
18
|
|
38
|
|
Property, plant
and equipment, net
|
|
59
|
|
|
|
599
|
|
658
|
|
Intangible
assets, net
|
|
10,074
|
|
|
|
|
|
10,074
|
|
Assets of
discontinued operations
|
|
$
|
10,595
|
|
$
|
5
|
|
$
|
633
|
|
$
|
11,233
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses
|
|
$
|
87
|
|
$
|
|
|
$
|
5
|
|
$
|
92
|
|
Due to factor
|
|
130
|
|
|
|
|
|
$
|
130
|
|
Note payable
|
|
|
|
|
|
287
|
|
287
|
|
Note payable -
related party
|
|
8,762
|
|
|
|
|
|
8,762
|
|
Liabilities of
discontinued operations
|
|
$
|
8,979
|
|
$
|
|
|
$
|
292
|
|
$
|
9,271
|
|
The
following is a summary of loss and other information of the discontinued
operations for fiscal 2005 and 2006.
There was no loss in connection with the discontinued operations for
fiscal 2007. Pre-tax loss from
discontinued operations does not include an allocation of corporate overhead
costs.
F-30
|
|
(in thousands)
|
|
|
|
Private Label
Business
|
|
Innovo, Inc.
|
|
Leaseall
Management
|
|
Total
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,393
|
|
$
|
|
|
$
|
|
|
$
|
20,393
|
|
Pre-tax income
(loss)
|
|
487
|
|
(3
|
)
|
(19
|
)
|
465
|
|
Loss on sale
|
|
(2,614
|
)
|
|
|
|
|
(2,614
|
)
|
Income taxes
expense (benefit)
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
$
|
(2,127
|
)
|
$
|
(3
|
)
|
$
|
(19
|
)
|
$
|
(2,149
|
)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
72,670
|
|
$
|
2,491
|
|
$
|
|
|
$
|
75,161
|
|
Impairment loss
of goodwill
|
|
12,572
|
|
|
|
|
|
12,572
|
|
Pre-tax loss
|
|
(7,941
|
)
|
(258
|
)
|
(120
|
)
|
(8,319
|
)
|
Gain on sale
|
|
|
|
374
|
|
|
|
374
|
|
Income taxes
expense (benefit)
|
|
|
|
1
|
|
(1
|
)
|
|
|
Discontinued
operations, net of tax
|
|
$
|
(7,941
|
)
|
$
|
115
|
|
$
|
(119
|
)
|
$
|
(7,945
|
)
|
16. Real Estate Transactions
In April 2005, Joes executed a settlement agreement with the
holders of its Series A Redeemable Cumulative Preferred Stock, or the Series A
Shares, and the Series A Holders, respectively. Under the terms of the settlement agreement,
Joes redeemed all of the Series A Shares in exchange for the transfer of
all of the stock of its Innovo Realty Inc. subsidiary, or IRI. Further, the parties agreed to a mutual
release of all claims, all obligations in the Certificate of Designation for
the Series A Shares and to dismiss with prejudice for the lawsuit filed in
August 2004 by the Series A Holders.
In connection with the settlement agreement, Joes received a lump sum
payment in the amount of approximately $100,000 and an indemnification for up
to $50,000 for future tax liabilities from the past or future sale of any of
the properties by the partnerships. Joes
originally issued the Series A Shares in April 2002 in connection
with its IRI subsidiary acquiring a 30 percent limited partnership interest in
each of 22 separate partnerships that invested in real estate apartment
complexes located throughout the United States.
Since fiscal 2005, IRI had no operating activity.
Joes
did not give any accounting recognition to the value of its investment in the
limited partnerships, because it determined that the asset was contingent and
only had value to the extent that cash flow from the operations of the
properties or from the sale of underlying assets was in excess of the 8 percent
coupon and redemption of the Series A Preferred Shares. Additionally, Joes determined that the Series A
Preferred Shares would not be accounted for as a component of equity as the
shares were redeemable outside of its control.
No value was ascribed to the Series A Preferred Shares for
financial reporting purposes as Joes would have only be obligated to pay the 8
percent coupon or redeem the shares if Joes received cash flow from the
limited partnerships adequate to make the payments.
17. Subsequent Events
In January 2008, Joes
entered into a lease agreement for the lease of retail space at Woodbury Common
Premium Outlets® in Central Valley, New York.
Under the lease agreement, Joes takes possession of the space on August 1,
2008 and expects to open its retail outlet in the fall of 2008. The term of the lease is for 10 years and the
annual base rent be $147,000 plus an obligation to pay certain advertising
fees, operating costs charges, a percentage rent based upon sales and other
customary charges for retail leased space.
The rent and other operating charges will increase at a fixed rate or
based upon inflation after the first year and thereafter until the end of the
term.
Subsequent
to the end of the 2007 fiscal year, in December 2007, Joes issued 745,000
restricted common stock units pursuant to the 2004 Stock Incentive Plan to its
employees.
F-31
18. Quarterly Results of Operations (Unaudited)
The
following is a summary of the quarterly results of operations for the years
ended November 30, 2007 and November 25, 2006, respectively:
|
|
Quarter ended
|
|
|
|
(in thousands, except per share data)
|
|
2007
|
|
February 24
|
|
May 26
|
|
August 25
|
|
November 30
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
13,814
|
|
$
|
15,171
|
|
$
|
15,708
|
|
$
|
18,074
|
|
Gross profit
|
|
5,095
|
|
7,349
|
|
6,585
|
|
7,601
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
(165
|
)
|
427
|
|
956
|
|
1,127
|
|
Income taxes
|
|
8
|
|
5
|
|
43
|
|
35
|
|
Net income
(loss)
|
|
$
|
(173
|
)
|
$
|
422
|
|
$
|
913
|
|
$
|
1,092
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
earnings from continuing operations
|
|
$
|
(0.00
|
)
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
from continuing operations
|
|
$
|
(0.00
|
)
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
|
(in thousands, except per share data)
|
|
2006
|
|
February 25
|
|
May 27
|
|
August 26
|
|
November 25
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,427
|
|
$
|
9,787
|
|
$
|
12,448
|
|
$
|
13,971
|
|
Gross profit
|
|
1,820
|
|
3,231
|
|
4,963
|
|
5,395
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations, before taxes
|
|
(4,102
|
)
|
(2,510
|
)
|
(416
|
)
|
(80
|
)
|
Income taxes
|
|
8
|
|
7
|
|
13
|
|
8
|
|
Loss from
continuing operations
|
|
(4,110
|
)
|
(2,517
|
)
|
(429
|
)
|
(88
|
)
|
Discontinued
operations, net of tax
|
|
418
|
|
(2,461
|
)
|
(95
|
)
|
(11
|
)
|
Net Loss
|
|
$
|
(3,692
|
)
|
$
|
(4,978
|
)
|
$
|
(524
|
)
|
$
|
(99
|
)
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
(Loss) earnings
from continuing operations
|
|
$
|
(0.12
|
)
|
$
|
(0.08
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
Earnings (loss)
from discontinued operations
|
|
0.01
|
|
(0.07
|
)
|
(0.00
|
)
|
(0.00
|
)
|
|
|
$
|
(0.11
|
)
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
(Loss) earnings
from continuing operations
|
|
$
|
(0.12
|
)
|
$
|
(0.08
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
Earnings (loss)
from discontinued operations
|
|
0.01
|
|
(0.07
|
)
|
(0.00
|
)
|
(0.00
|
)
|
|
|
$
|
(0.11
|
)
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
F-32
ITEM 16.2
Joes Inc. and Subsidiaries
Schedule II
Valuation of Qualifying Accounts
|
|
(in thousands)
|
|
Description
|
|
Balance at
Beginning of
Period
|
|
Additions
Charged to Costs
& Expenses
|
|
Charged
to Other
Accounts
|
|
Deductions
(1)
|
|
Balance at
End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
uncollectible accounts:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
November 30, 2007
|
|
$
|
400
|
|
576
|
|
|
|
(427
|
)
|
$
|
549
|
|
Year ended
November 25, 2006
|
|
$
|
285
|
|
210
|
|
|
|
(95
|
)
|
$
|
400
|
|
Year ended
November 26, 2005
|
|
$
|
511
|
|
74
|
|
|
|
(300
|
)
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
customer credits and returns:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
November 30, 2007
|
|
$
|
69
|
|
142
|
|
|
|
(108
|
)
|
$
|
103
|
|
Year ended
November 25, 2006
|
|
$
|
128
|
|
555
|
|
|
|
(614
|
)
|
$
|
69
|
|
Year ended
November 26, 2005
|
|
$
|
416
|
|
618
|
|
|
|
(906
|
)
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for
inventories:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
November 30, 2007
|
|
$
|
519
|
|
316
|
|
|
|
(221
|
)
|
$
|
614
|
|
Year ended
November 25, 2006
|
|
$
|
3,709
|
|
680
|
|
|
|
(3,870
|
)
|
$
|
519
|
|
Year ended
November 26, 2005
|
|
$
|
292
|
|
3,463
|
|
|
|
(46
|
)
|
$
|
3,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
November 30, 2007
|
|
$
|
23,025
|
|
|
|
|
|
(1,293
|
)
|
$
|
21,732
|
|
Year ended
November 25, 2006
|
|
$
|
16,683
|
|
6,342
|
|
|
|
|
|
$
|
23,025
|
|
Year ended
November 26, 2005
|
|
$
|
11,283
|
|
5,400
|
|
|
|
|
|
$
|
16,683
|
|
(1) Deductions represent the actual amount
of write-off of an asset against a reserve previously recorded, or in the case
of inventories, a deduction could represent the write-off upon disposition or a
markdown of carrying value. In the case of deferred taxes, deductions result
from changes in timing differences on a year-to-year basis.
F-33
Differential Brands Group Inc. (NASDAQ:DFBG)
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Differential Brands Group Inc. (NASDAQ:DFBG)
과거 데이터 주식 차트
부터 7월(7) 2023 으로 7월(7) 2024