UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): October 19,
2006 (October 13, 2006)
Innovo Group Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-18926 11-2928178
(Commission File Number) (IRS Employer Identification No.)
5901 South Eastern Avenue, Commerce, California 90040
(Address of Principal Executive Offices) (Zip Code)
(323) 837-3700
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is
intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions (see General
Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the
Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the
Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b)
under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c)
under the Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01 Entry into a Material Definitive Agreement
Item 2.03 Creation of a Direct Financial Obligation or an
Obligation under an Off-Balance Sheet Arrangement of a Registrant.
Effective as of October 13, 2006, JD Design, LLC ("JD
Design"), a California limited liability company and licensor of
the Joe's Jeans brand (the "Brand") to Innovo Group Inc. and its
subsidiary, Joe's Jeans, Inc. (collectively, the "Company"),
granted a security interest in and to the Brand to the CIT
Group/Commercial Services, Inc. ("CIT"), the Company's current
primary lender. Joe Dahan, the managing member of JD Design, is
employed by the Company as the president of its Joe's Jeans Inc.
subsidiary. This grant by JD Design was for the purpose of
providing CIT additional collateral under its current factoring
and inventory security agreements with the Company (the
"Financing Facilities"), which will allow the Company to obtain
additional working capital. CIT makes advances and purchases the
Company's accounts receivables under the Financing Facilities in
such percentage amounts that can be increased or decreased in its
sole discretion. As previously disclosed in the Company's
Quarterly Report on Form 10-Q for the period ended August 26,
2006, under the Financing Facilities, the Company obtained funds
at 85% of factored invoices and under the inventory security
agreement for up to $1,000,000. Because JD Design entered into
the agreements with CIT, CIT agreed to increase the maximum
availability advanced on inventory at CIT's discretion.
In exchange for JD Design agreeing to provide this grant of
a security interest to CIT, the Company entered into a Collateral
Protection Agreement ("CPA") with JD Design to provide additional
consideration to JD Design in the event that the guaranty is
called upon or CIT enforces its security interest in the
collateral. The CPA states that in the event (i) there is a
default by the Company under its Financing Facilities which
remains uncured for a period of thirty (30) days from written
notice by CIT to the Company, (ii) demand is made to JD Design by
CIT under the guaranty and demand is not withdrawn within 10 days
of the date of receipt of such demand by JD Design, (iii) CIT
commences an action to enforce its security interest in the
collateral, (iv) there is a materially false, misleading,
erroneous or incorrect representation or warranty made by the
Company under or in connection with the CPA; or (v) the Company
fails to perform or observe any term, covenant or undertaking in
the CPA (collectively, an "Event of Default"), then the Company
will be obligated to issue shares of its common stock to JD
Design as consideration for JD Design satisfying its obligations
to CIT. The Company reserved 6,834,347 shares as the maximum
number of shares that could potentially be issued under the CPA
(the "Default Reserve"), which represents 19.9% of its total
shares outstanding. If an Event of Default occurs, then the
amount of shares to be issued would be calculated by dividing the
amount owed by the Company to CIT (not to exceed $2,000,000) by
the greater of (i) $0.01 or (ii) the closing price of the
Company's shares of common stock as reported by Nasdaq on the
date that JD Design fulfills its obligations to CIT. The CPA
affirmatively states that in no event shall the amount of shares
issued to JD Design exceed the Default Reserve.
The CPA further provides for additional consideration to be
paid to JD Design in certain instances, such as failure by the
Company to obtain CIT's consent to terminate the agreements with
JD Design by April 13, 2007. In the event that the agreements
are not terminated by this date, the Company shall be obligated
to issue to JD Design 200,000 shares of its common stock.
Additionally, if on April 13, 2008, the agreements with JD Design
are still in effect, then the Company shall be required to pay to
JD Design $25,000 for each quarterly period that the documents
remain in effect. If one or both of these additional
distributions are made, JD Design shall still be entitled to the
default shares in the amount and instances described above.
However, if the 200,000 shares are issued, the Default Reserve
shall be reduced by 200,000.
In addition, the CPA also contemplates that JD Design shall
be entitled to certain registration rights in the event that the
default shares are issued. The Company would enter into a
registration rights agreement with JD Design simultaneously with
the issuance of the shares.
The CPA contains normal and customary representations and
warranties, as well as certain covenants related to the
preservation of the entity, membership interest, collateral and
further assurances so long as the CPA or documents with CIT are
in effect.
A copy of the CPA is expected to be filed as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
November 25, 2006 to be filed with the Securities and Exchange
Commission on or before its due date.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INNOVO GROUP INC.
(Registrant)
Date: October 19, 2006 By: /s/Marc B. Crossman
Marc Crossman
Chief Executive Officer,
President, Chief Financial
Officer and Director
(Principal Executive Officer
and Principal Financial
Officer)