SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
F o r t h e t r a n s i t i o n p e r i o d
from................to...................
Commission file number 0-18926
INNOVO GROUP INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-2928178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 North Main Street
Springfield, Tennessee 37172
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (615) 384-0100
.................................................................
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been the subject to such filing requirements for
the past 90 days.
Yes___X__ No_____
Indicate the number of shares outstanding of each issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 1, 1996
_____ ______________________________
Common stock, par
value of $.01 per share 17,481,827 shares
-1-
INNOVO GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed consolidated balance sheets as of
May 31, 1996 and October 31, 1995 3
Condensed consolidated statements of operations for the
three and six months ended May 31, 1996 and April 30, 1995 4
Condensed consolidated statements of cash flows for the
six months ended May 31, 1996 and April 30, 1995 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's except for share data)
(Unaudited)
<TABLE>
<CAPTION>
May 31, October
31,
1996 1995
________ ___________
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 94 $ 6
Accounts receivable 1,811 1,524
Inventories 1,612 1,229
Prepaid expenses 350 406
_______ ______
TOTAL CURRENT ASSETS 3,867 3,165
PROPERTY AND EQUIPMENT, net 5,402 2,126
OTHER ASSETS 1,239 376
_______ ______
$ 10,508 $ 5,667
_______ ______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,705 $ 993
Subordinated notes payable - 235
Current maturities of long-term debt 233 143
Accounts payable 995 1,942
Accrued expenses 1,505 735
_______ ______
TOTAL CURRENT LIABILITIES 4,438 4,048
LONG-TERM DEBT, less current
maturities 2,674 1,422
OTHER 284 153
_______ ______
TOTAL LIABILITIES 7,396 5,623
_______ ______
CLASS 3 TRUST 135 274
_______ ______
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
30,000,000; issued 16,578,283 shares in
1996 and 3,050,062 shares in 1995 166 30
Stock subscription - 350
Additional paid-in capital 23,386 19,137
-3-
Deficit (18,149) (17,358)
Treasury stock, 119,691 and 53,072 shares (2,426) (2,389)
_______ ______
TOTAL STOCKHOLDERS' EQUITY 2,977 (230)
_______ ______
$ 10,508 $ 5,667
_______ ______
</TABLE>
See accompanying notes to condensed consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000's except per share information)
<TABLE>
<CAPTION>
Three months
ended Six Months ended
___________________ ____________________
May 31,
April 30, May 31, April 30,
1996
1995 1996 1995
_______
_______ ______ _________
<S> <C>
<C> <C> <C>
NET SALES $ 2,081
$ 1,249 $ 3,400 $ 2,364
COST OF SALES 1,271
616 2,003 $ 1,134
_______
______ ______ ______
Gross profit 810
633 1,397 1,230
OPERATING EXPENSES
Selling, general and administrative 956
511 1,608 1,099
Depreciation and amortization 178
100 268 213
_______
______ ______ ______
Income (loss) from operations (324)
22 (479) (82)
INTEREST EXPENSE (163)
(179) (284) (283)
OTHER INCOME (EXPENSE) - Net 51
2,084 166 1,981
_______
______ ______ ______
Income (loss) before income taxes (benefit) (436)
1,927 (597) 1,616
INCOME TAXES (BENEFIT): -
- - -
_______
______ ______ ______
INCOME (LOSS) FROM CONTINUING OPERATIONS (436)
1,927 (597) 1,616
DISCONTINUED OPERATIONS:
Results of discontinued NASCO
Products operations -
(257) - (444)
_______
______ ______ ______
NET INCOME (LOSS) $ (436)
$ 1,670 $ (597) $ 1,172
-4-
_______
______ ______ ______
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.04)
$ .77 $ (.06) $ .67
Discontinued operation -
(.10) - (.18)
_______
______ ______ ______
Net income (loss) $ (.04)
$ .67 $ (.06) $ .49
_______
______ ______ ______
WEIGHTED AVERAGE SHARES OUTSTANDING 11,919
2,490 9,318 2,407
_______
______ ______ ______
</TABLE>
See accompanying notes to condensed consolidated financial statements.
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's)
<TABLE>
<CAPTION>
Six Months ended
________________________
May 31, April 30,
1996 1995
_______ _________
CASH PROVIDED BY (USED IN)
<S> <C> <C>
OPERATING ACTIVITIES $ (1,311) $ 1,323
_______ ______
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
-5-
Capital expenditures (115) -
_______ ______
Net cash provided by (used in)
investing activities (115) -
_______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,284 -
Repayments of long-term debt (56) (42)
Additions to notes payable 312 -
Repayments on notes payable (22) (1,278)
_______ ______
Net cash provided by (used in)
financing activities 1,518 (1,320)
_______ ______
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2 3
CASH AND EQUIVALENTS, (beginning of period) 92 4
_______ ______
CASH AND EQUIVALENTS, (end of period) $ 94 $ 7
______ ______
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include the
accounts of Innovo Group Inc. ("Innovo Group") and its wholly-owned
subsidiaries (collectively "the Company"). The condensed consolidated
financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements and the
notes thereto should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form
10-K for the year ended October 31, 1995.
In the opinion of the management of the Company, the
accompanying unaudited condensed consolidated financial statements
contain all necessary adjustments to present fairly the financial
position, the results of operations and cash flows for the periods
reported. All adjustments are of a normal recurring nature.
The results of operations for the above periods are not
necessarily indicative of the results to be expected for the full year.
Effective November 1, 1995, the Company changed its fiscal year
to end on November 30. Previously the Company's fiscal year ended on
October 31. The results of operations and cash flows for the
transition period of November 1, 1995 to November 30, 1995 were
separately presented in the Company's Quarterly Report on Form 10-Q for
the quarter ended February 29, 1996.
NOTE 2: ACQUISITION
On April 12, 1996, the Company acquired 100% of the outstanding
common stock of Thimble Square, Inc. ("Thimble Square") for an
aggregate of $1.1 million, paid by the issuance of shares of the
restricted common stock of the Company. In a concurrent transaction,
Thimble Square acquired from its stockholders a plant it had previously
leased from them in exchange for (a) $300,000 paid by the issuance of
shares of the restricted common stock of Innovo Group, and (b) the
issuance by Thimble Square of $200,000 of unsecured notes payable due,
without interest, on August 31, 1996 (with certain prepayments required
in the event of certain refinancings or asset sales by Thimble Square).
The Company also issued 95,686 shares in payment of a finder's fee
related to the acquisition.
A total of 2,840,784 shares of the Company's common stock were
issued to effect the acquisition. However, at the time of the
acquisition Thimble Square owned 1,080,000 shares of the Company's
-7-
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2: ACQUISITION (continued)
common stock as a result of the January, 1996 manufacturing agreement
between the companies (see Note 6). As a result of the acquisition,
Innovo Group reacquired, and retired, those shares, and the net increase
in the number of shares of Innovo Group common stock outstanding was
1,760,784 shares.
The aggregate purchase price of $1,849,000 (which includes the
finder's fee of $49,000 and acquisition costs of $200,000) was
allocated to Thimble Square's assets and liabilities, based on their
fair values , as follows:
(000's)
<TABLE>
<S> <C>
Current assets $ 220
Property and equipment 1,850
Investment in Innovo Group
common stock 551
Goodwill 773
Current liabilities (924)
Long-term debt (546)
Other liabilities (75)
______
$ 1,849
______
</TABLE>
The purchase price is subject to downward revision based on the
results of certain appraisals of Thimble Square's property and
equipment which are expected to be completed during the third quarter
of fiscal 1996, and the amounts allocated to property and equipment and
goodwill could be revised as the result of those appraisals or any
revision to the purchase price.
The acquisition was accounted for as a purchase, and Thimble
Square's operating results are included in the consolidated results of
operations from April 12, 1996. The following unaudited pro forma
information indicates what net sales, income from continuing
operations, and income from continuing operations per share, would have
been had the acquisition of Thimble Square been completed on December
1, 1995 and November 1, 1994, respectively. This unaudited pro forma
information has been prepared for illustrative purposes only and is not
necessarily indicative of the Company's future financial position or
results of operations.
-8-
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2: ACQUISITION (concluded)
<TABLE>
<CAPTION>
Six months ended
___________________
May 31, April 30,
1996 1995
_______ _________
(000's except per share amounts)
<S> <C> <C>
Sales $ 3,833 $ 4,632
Income (loss) from continuing
operations (809) 1,652
Income (loss) per share from
continuing operations (.08) .40
</TABLE>
The goodwill arising from the acquisition of Thimble Square is
being amortized over a period of 10 years. The Company will
periodically assess the recoverability of the goodwill by comparison to
the projected undiscounted operating cash flows from the acquired
operations over the remaining amortization period. If such a
comparison indicates impairment, unamortized goodwill will be reduced
to equal the present value of such projected cash flows.
NOTE 3: DISCONTINUED OPERATIONS
On July 31, 1995 the Company executed an agreement with
Accessory Network Group ("ANG") under which ANG succeeded to all of the
rights held by NASCO Products to market and distribute in the United
States the National Football League, NBA, Major League Baseball and
National Hockey League logoed sports bags, backpacks and equipment bags
NASCO Products previously imported and distributed. The products
marketed and sold under those license rights represented a separate
class of products and previously issued 1995 financial statements have
been restated to report the results of those operations as a
discontinued operation.
For each license ANG is paying NASCO Products $187,500
($750,000 in the aggregate), of which $100,000 was paid on July 31,
1995. The remaining $650,000 is payable, without interest, in monthly
installments equal to 5% of ANG's aggregate sales of the licensed
products, with the final payment due July 31, 1998. ANG assumed all of
NASCO Products' obligations under the licenses, including payment of
royalties and minimum royalties. NASCO Products also transferred to
ANG its existing inventory of these products, for which ANG paid
approximately 67% of NASCO Products' cost over a six month period. The
payments to be received from the sale of the NASCO Products' domestic
operations were recorded at their present value, discounted 10% per
annum.
In addition, ANG will make an ongoing annual payment to NASCO
Products of 2% of sales under each of the National Football League,
Major League Baseball and National Hockey League licenses, and 1% of
-9-
sales under the NBA license, up to aggregate sales of $15 million, and
1.5% and .5% of sales thereafter. The payments will continue for forty
years unless a license expires or is terminated and is not renewed or
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3: DISCONTINUED OPERATIONS (concluded)
reinstated within twelve months.
NOTE 4: INVENTORIES
Inventory consisted of the following:
<TABLE>
<CAPTION>
May 31, October 31,
1996 1995
_______ ___________
(000's)
<S> <C> <C>
Finished goods $ 696 $ 601
Work-in-process 287 177
Raw materials 649 469
Inventory reserve (20) (18)
______ ______
Total $ 1,612 $ 1,229
----- -----
</TABLE>
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT
(a) Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
May 31, October 31,
1996 1995
_______ ___________
(000's)
Innovo factoring
<S> <C> <C>
facility $ 728 $ 356
Bank credit facility 106 202
Working capital loan 407 407
NPI International loan 100 -
Thimble Square acquisition
(Note 2) 200 -
Other 164 28
______ ______
$ 1,705 $ 993
______ ______
</TABLE>
In December, 1995 the Company obtained a $300,000 short term
loan collateralized by the common stock of NPI International. The loan
bears interest at an annual rate of 12% and is due July 31, 1996.
$200,000 of such note was repaid in the second quarter fiscal 1996.
(b) Long-Term Debt
-10-
In November, 1995 the Company acquired a facility which it is
developing as an indoor retail outlet featuring antique and flea market
shops. The $1.5 million purchase price was paid by the issuance to the
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT (concluded)
seller of (i) options to purchase 1 million shares of the Company's
common stock, exercisable at $.01 per share through March, 1998, and
(ii) an $800,000 first lien non-recourse mortgage secured by the
property. The mortgage is payable $25,500 quarterly, beginning July 1,
1996; all unpaid principal, and interest (which accrues at the rate of
9.5% per annum) is due January, 2006. The stock option was exercised
in March, 1996. The Company also issued a warrant, exercisable for the
purchase of 100,000 shares at $.01 per share, as a finder's fee on the
property acquisition. The warrant was exercised in April, 1996.
NOTE 6: STOCKHOLDERS' EQUITY
The changes in common stock, additional paid-in capital, and
treasury stock during the month of November, 1995 and during the first
quarter of fiscal 1996 were as follows:
<TABLE>
<CAPTION>
Additional
Common Stock Stock
paid-in Treasury Stock
Shares Amount
Subscription capital Shares Amount
______ ______
____________ _________ ______ ______
(000's) (000's)
(000's) (000's)
<S> <C> <C> <C>
<C> <C> <C>
Balance, October 31, 1995 3,050,062 $ 30 $ 350
$ 19,137 (53,072) $(2,389)
Issuances of common stock
Exercise of warrants 750,000 8 -
232 - -
Subscription agreement 60,793 1 (58)
57 - -
Spirco reorganization 18,000 - -
12 - -
Issuance of option (Note 5) - - -
700 - -
_________ ____ ______
_______ _______ _______
Balance, November 30, 1995 3,878,855 39 292
20,138 (53,072) (2,389)
Issuances of common stock
Cash 5,450,480 54 -
1,195 - -
Subscription agreement 311,356 3 (292)
289 - -
Spirco reorganization 80,630 1 -
57 - -
Manufacturing agreement 1,200,000 12 -
388 - -
Thimble Square acquisition
(Note 2) 1,760,784 18 -
881 - -
Extinguishment of debt 322,110 3 -
412 - -
Exercise of warrants and
options (below and Note 5) 3,372,730 34 -
111 - -
Loan fees 87,052 1 -
25 - -
Debt settlement - - -
- (66,619) (37)
Issuance costs 114,286 1 -
(110) - -
_________ _____ _______
________ _______ _______
Balance, May 31, 1996 16,578,283 $ 166 $ -
$ 23,386 (119,691) $(2,426)
</TABLE>
In October, 1995 the holder of unsecured notes aggregating
$319,000 tendered the notes, and accrued interest of $31,000, as a
subscription for shares of the Company's common stock. Under the
-11-
subscription agreement the Company issued between November 1, 1995 and
April 30, 1996 shares of common stock that had an aggregate value of
approximately $350,000, on the basis of 75 percent of the market prices
at the times the shares are issued, subject to a maximum of 375,000
shares.
In January, 1996, the Company entered into an agreement to
obtain contract manufacturing services, and issued to the contractor
(Thimble Square) 1,200,000 shares of its common stock as prepayment for
$400,000 (approximately 57,000 hours) of manufacturing operations which
the Company may use on an as needed basis through July 31, 1997.
Thimble Square owned 1,080,000 of such shares at the time of its
acquisition by the Company (see Note 2), as the result of which the
agreement was
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6: STOCKHOLDERS' EQUITY (concluded)
cancelled and the Company reacquired, and retired, such 1,080,000
shares.
During the first quarter of fiscal 1996 the Company settled an
outstanding obligation held by a creditor who had previously received
66,619 shares of common stock as a partial payment. As a part of the
settlement the creditor returned the shares to the Company. The
returned shares were recorded as treasury stock at their market value.
In connection with the private placement of shares of its
common stock, for cash during the first quarter of fiscal 1996, the
Company issued warrants for the issuance of 2,272,730 shares of its
common stock, exercisable through January, 1998 at a per share price
equal to 50% of
the exercise date market price of the Company's common stock (25% for
any exercises occurring at a time when the Company's common stock is
not trading on the NASDAQ). The warrants were exercised in April and
May, 1996.
NOTE 7: CONTINGENCIES
In December 1991, a former employee filed suit against the
Company and others alleging breach of his employment agreement and
conversion of his interest in certain property rights of the Company.
The complaint, as amended, sought compensation damages of at least
$13.5 million. In August, 1994 the trial court granted the Company's
motion for partial summary judgement and directed verdicts with respect
to certain of the former employee's claims, including those concerning
his ownership of an interest in the "E.A.R.T.H." trademark, or the
existence of a partnership with the Company to jointly own the
trademark, and the state court jury returned findings in favor of the
Company on the remainder of the plaintiff's claim concerning the
trademark as well as his claims for wrongful termination of employment.
However, the jury awarded to plaintiff approximately $700,000, of which
$50,000 was assessed against Innovo Group and $650,000 was assessed
against Innovo, including pre-judgement interest and attorney's fees,
-12-
on the theory that he was entitled to have received certain employment
benefits, including employee stock awards, during, and after, the term
of his employment. The Company has appealed the jury's award, and in
connection therewith has pledged as an appeal bond 200,000 shares of
its unissued common stock. The Company believes that the ultimate
resolution of the case is unlikely to result in a material loss.
Under the plan of reorganization of Spirco, Inc. ("Spirco")
certain claims were contributed to a trust ("the Class 3 Trust") to
which Innovo Group issued shares of its common stock. The Class 3
Trust, which is administered by an independent trustee, is selling the
shares of common stock and distributing the net proceeds therefrom to
the Class 3 claimants. If the proceeds from the sale of the shares of
common stock issued to the Class 3 Trust are not sufficient to pay the
allowed Class 3 claims, plus interest accruing at the rate of 7% per
annum from November 7, 1994, then Innovo Group will be required to pay
the remaining
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7: CONTINGENCIES (concluded)
amount in installments with interest at 7% through November, 1999. On
the basis of the sales by the Class 3 Trust through June 30, 1996, the
market price of the Company's common stock on that date, and the
estimated amount of disputed claims that will be allowed (including the
IRS assessment described below), the proceeds from the sale of shares
by the Class 3 Trust will be sufficient to satisfy all Class 3 claims.
The Internal Revenue Service ("IRS") is currently conducting an
examination of Spirco's 1991 income tax return. In March, 1996 the IRS
issued an audit report with respect to such returns which proposed to
reclassify certain capital losses, which would have had the effect of
increasing the taxes by $250,000. In June, 1996, after considering
additional information provided by the Company, the IRS revised its
audit report. On the basis of the revised report, the taxes due on
account of the examination will not exceed the amount that the Company
has provided in its consolidated financial statements. Any taxes
payable would become a Class 3 claim under Spirco's plan of
reorganization, and would be subject to satisfaction (1) from the Class
3 Trust, or (ii) by the Company in installments through November, 1999
as described above.
In April, 1996, the Company received notice that a foreign
manufacturer that had supplied imported products to NASCO Products
asserts that it is owed approximately $300,000 in excess of the amount
recorded by NASCO Products. NASCO Products and the supplier had
previously reached an agreement on the balance owed (which is the
balance recorded), as well as an arrangement under which the schedule
for the Company's payments reducing that balance would be based on
future purchases from that supplier of products distributed
internationally by NPI International. The Company disputes the
supplier's claim, and believes that it has affirmative defenses,
including the supplier's subsequent refusal to accept and fill NPI
International orders on terms contained in the agreement. NASCO
Products sold its operations in July, 1995 and that company currently
-13-
has no operations or unencumbered assets (see Note 2).
The Company is also a defendant in certain other legal actions
arising from normal business activities or the bankruptcy proceedings
of Spirco. Management believes that those actions are without merit or
that the ultimate liability, if any, resulting therefrom will not
materially effect the Company's consolidated financial position or
results of operations.
-14-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Acquisition of Thimble Square, Inc.
As discussed in Note 2 of Notes to Condensed Consolidated
Financial Statements, on April 12, 1996 the Company acquired Thimble
Square, Inc. ("Thimble Square"). Thimble Square's operating results
are included in the consolidated results of operations from April 12,
1996.
Thimble Square manufactures and markets ladies' ready-to-wear
at-home, sleep and lounge wear from plants in Pembroke and Baxley,
Georgia. Its products are sold to retailers and through mail order
distribution. Thimble Square also provides sub-contract manufacturing
for other distributors of private-label sleep and lounge wear; in those
instances, the customer provides the raw materials, and Thimble Square
manufactures the products to the distributor's specifications. Thimble
Square's sales for its fiscal year ended December 31, 1995 were
approximately $3 million. Thimble Square operated profitably for many
years, but during fiscal 1994 and 1995 (years ended December 31)
incurred losses, due principally to lower levels of sales. That lower
level of sales has continued through May, 1996. Innovo Group intends
to attempt to increase Thimble Square's sales by marketing its products
to major mass merchants and other retailers with whom Innovo Group
already has relationships, and to which Thimble Square has not had
material sales. The Company also plans to utilize Thimble Square's
mail order distribution to market Innovo's products. However, such
steps will take a period of time to implement, and until such time the
inclusion of Thimble Square's operating results could have an adverse
effect on the Company's consolidated results of operations.
Change in Fiscal Year
Effective November 1, 1995 the Company changed its fiscal year
to end on November 30. Previously, the Company's fiscal year ended on
October 31. As a result, the results of operations for the first
quarter of fiscal 1996 (December, 1995 through February, 1996) may, in
some respects, lack comparability to the results of operations for the
first quarter of fiscal 1995 (November, 1994 to January, 1995). The
results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 were separately presented in the
Company's Quarterly Report on Form 10-Q for the quarter ended February
29, 1996.
Results of Continuing Operations
Sales for the first half of fiscal 1996 increased by
$1,036,000, or 43.8%, to $3,400,000, from $2,364,000 for the six months
ended April 30, 1995. The inclusion of Thimble Square's operations for
April and May, 1996, contributed $230,000 of the increase. The
remaining $806,000 increase was due to sales of the Company's new craft
products, the recapture of certain craft accounts from import
suppliers, and approximately $650,000 of sales of the Company's U.S.
-15-
Olympic Team products. Additionally, sales for the first half of fiscal
1996 do not include any sales from the Anheuser-Busch or Warner Bros.
(Europe) licenses recently obtained by the Company. Sales of products
marketed under these licenses are anticipated to begin in the fourth
quarter of fiscal 1996.
Sales for the second quarter of fiscal 1996 were $2,081,000,
representing a $832,000 or 66.6% increase over sales of $1,249,000 for
the three months ended April 30, 1995. Of such increase, $230,000 is
attributable to the inclusion of Thimble Square's operations for April
and May, 1996, while the remaining $602,000 increase is due to the
factors discussed above.
Gross profit as a percentage of sales was 38.9% and 41.1%,
respectively, for the three and six months ended May 31, 1996, as
compared to 50.7% and 52.0%, respectively, for the second quarter and
first half of fiscal 1995. The gross margins for 1996 are lower than
those for the comparable fiscal 1995 periods in part due to a change in
fiscal 1996 in the method used to allocate fixed manufacturing costs to
interim periods. Prior to fiscal 1996 the Company utilized all
projected sales to project production in each quarter and allocate
fixed manufacturing costs between interim periods. Beginning in fiscal
1996, the allocation of fixed manufacturing costs between interim
periods is being based on production projections that reflect only
confirmed or customer planned orders. The Company anticipates that as
a result quarterly gross profit percentages will vary less than in
fiscal 1995, when the gross profit percentages for the first half of
the year were significantly higher than those for the second half of the
year.
The gross profit percentage in the second quarter and first
half of fiscal 1996 were also adversely affected by the Company's lack
of working capital for the purchase of raw materials, and a shortage of
labor at its Tennessee manufacturing facility. These factors caused
production inefficiencies and higher freight costs. The Company has
taken steps to reduce these adverse factors; in April, 1996, the
Company purchased Thimble Square, and since mid-May has been using
available manufacturing capacity at Thimble Square to offset a portion
of the labor shortage in Tennessee. In April and May the Company
raised additional working capital which was used to increase its raw
materials inventories to more desirable levels and improve credit terms
with raw materials suppliers. However, these steps took place late in
the second quarter, and as a result the principal benefits will not be
realized until the second half of fiscal 1996. The Company will
continue to examine steps to address labor shortages, which may continue
to effect operations in the second half until Innovo and Thimble Square
are able to attain full capacity.
Selling, general and administrative ("SG&A") expenses increased
from $1,099,000 for the first half of fiscal 1995 to $1,608,000 for the
six months ended May 31, 1996. The $509,000 increase was principally
due to the inclusion of Thimble Square's operations for April and May,
1996 ($53,000), an increase in commissions and royalties of $186,000 as
the result of higher sales, and $250,000 in costs related to additional
personnel. The personnel additions were principally for functions
-16-
related to the development of new products, and products for the
Company's newly obtained licenses, including the Warner Bros. and
Anheuser-Busch licenses. These factors were also the principal reason for
the $445,000 increase in SG&A expenses for the second quarter, from
$511,000 in fiscal 1995 to $956,000 for fiscal 1996. As a percentage
of sales SG&A expenses were 47.3% for the first half of fiscal 1996
compared to 46.5% for the six months ended April 30, 1995. Depreciation
and amortization expense increased in the fiscal 1996 periods principally
due to the inclusion of the depreciation and amortization of Thimble
Square, including goodwill amortization of $13,000. The management
and administrative structure currently in place represents a level of
costs that the Company has chosen to continue in anticipation of, and
to generate, increased sales. The Company recognizes that absent such
an increase in sales it will not operate profitably without additional
significant expense reductions. If sales increases are not achieved, it
will attempt to further restructure to accomplish those cost reductions.
The loss from operations was $479,000 for the six months ended
May 31, 1996, compared to $82,000 for the first half of fiscal 1995, a
difference of $397,000. That difference is caused principally by the
lower gross margin percentage and increase in SG&A expenses discussed
above, and is the principal cause of the difference of $346,000 between
the loss from operations of $324,000 for the second quarter of fiscal
1996 and operating income of $22,000 for the second quarter of fiscal
1995.
Interest expense did not change significantly between the
fiscal 1996 and fiscal 1995 periods. The interest expense of Thimble
Square was offset by lower interest expense, due to lower borrowings,
for Innovo and Innovo Group.
In March, 1995 the Company recognized other income of $1.9
million for the net proceeds it received upon the settlement of its
lawsuit against the former auditors of NASCO. The absence of such a
gain from fiscal 1996 is the principal cause in the decline in other
income between the current and prior year periods, and also for $1.9
million of the change in the results of continuing operations.
Liquidity and Capital Resources
Operating cash flows were a negative $1,311,000 for the first
half of fiscal 1996 principally as the result of $1.5 million increase
in accounts receivable and inventories. The increase in accounts
receivable results from the increase in sales; at May 31, 1996,
accounts receivable equals approximately 78 days of sales, as compared
to 108 days at October 31, 1995. The accounts receivable and inventory
increases were financed with an aggregate of $1.6 million obtained from
the sale of shares of the Company's common stock, or the exercise of
outstanding common stock purchase warrants, and new notes payable
borrowings (net of repayments on those notes). That capital was used
during the second quarter to reduce trade debt, which improved the
Company's trade credit with its suppliers and allowed it to finance the
increases in accounts receivables and inventories, required to support
the increases in sales, through new trade credit. The private
placements of shares of common stock, which the Company undertook to
obtain the working capital needed to support the increase in sales, were
-17-
undertaken in February, April and May, 1996, at times when the
Company's common stock was trading at prices of between $.25 and $.63
per share.
During the second quarter of fiscal 1996 the Company reduced
the borrowings outstanding under its NBD credit facility by $96,000, to
$102,000, with payments received from ANG (see Note 3 of Notes to
Condensed Consolidated Financial Statements). The Company anticipates
that the repayment of the NBD borrowings will be completed in July
or August, 1996, with additional payments from ANG, after which payments
received from ANG will be used to repay the Company's July, 1994 working
capital loan.
The Company believes that on an overall basis cash will be
sufficient to fund planned operations for fiscal 1996. However, a
failure of the retail environment to improve in the manner projected by
the Company or continued labor shortages, would adversely effect sales
and could force the Company to further constrict operations.
-18-
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is hereby made to Part I, Item 3 of Company's Annual
Report on Form 10-K for the period ended October 31, 1995,
which is incorporated herein by reference.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule (included only in the
electronically filed version of this report.
(b) Reports on Form 8-K.
On April 29, 1996 the Company filed a current Report on Form 8-
K reporting the acquisition of Thimble Square, Inc.
-19-
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.
Dated: July 16, 1996 By/s/Patricia Anderson-Lasko
Patricia Anderson-Lasko,
President, Chairman and
Chief Executive Officer
Dated: July 16, 1996 By/s/Terrance J. Bond
Terrance J. Bond,
Controller
-20-
INNOVO GROUP INC.
Exhibit 27 - Financial Data Schedule
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED
IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-
Q FOR THE QUARTER ENDED MAY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Nov-30-1996
<PERIOD-START> Dec-01-1995
<PERIOD-END> May-31-1996
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0
0
<OTHER-SE> 2,811
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<INCOME-PRETAX> (597)
<INCOME-TAX> 0
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