<PAGE>
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 February 29, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period 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 April 1, 1996
----- -------------------------------
Common stock, par
value of $.01 per share 9,622,480 shares
-1-
<PAGE>
INNOVO GROUP INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- -------
<S> <C> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets as of February 29, 1996
and October 31, 1995................................................... 3
Condensed consolidated statements of operations for the three months
ended February 29, 1996 and January 31, 1995 and for the one month
ended November 30, 1995................................................ 4
Condensed consolidated statements of cash flows for the three months
ended February 29, 1996 and January 31, 1995 and for the one month
ended November 30, 1995................................................ 5
Notes to condensed consolidated financial statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 14
Signature Page.................................................................. 15
</TABLE>
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<PAGE>
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>
February 29, October 31,
ASSETS 1996 1995
- ------ ------------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 38 $ 6
Accounts receivable 1,354 1,524
Inventories 1,242 1,229
Prepaid expenses 482 406
------- ------
TOTAL CURRENT ASSETS 3,116 3,165
PROPERTY AND EQUIPMENT, net 3,556 2,126
OTHER ASSETS 830 376
------- ------
$ 7,502 $ 5,667
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES
Notes payable $ 1,410 $ 993
Subordinated notes payable 185 235
Current maturities of long-term debt 168 143
Accounts payable 853 1,942
Accrued expenses 1,258 735
------- ------
TOTAL CURRENT LIABILITIES 3,874 4,048
LONG-TERM DEBT, less current
maturities 2,154 1,422
OTHER - 153
------- ------
TOTAL LIABILITIES 6,028 5,623
------- ------
CLASS 3 TRUST 236 274
------- ------
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
30,000,000; issued 8,451,551 shares in
1996 and 3,050,062 shares in 1995 85 30
Stock subscription 118 350
Additional paid-in capital 21,174 19,137
Deficit (17,713) (17,358)
Treasury stock, 119,691 and 53,072 shares (2,426) (2,389)
------- ------
TOTAL STOCKHOLDERS' EQUITY 1,238 (230)
------- ------
$ 7,502 $ 5,667
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000's except per share information)
<TABLE>
<CAPTION>
Three months ended Transition Period
February 29, October 31, November 1-30,
1996 1995 1995 (Note 1)
--------------- -------------- ---------------
<S> <C> <C> <C>
NET SALES $ 1,319 $ 1,115 $ 281
COST OF SALES 732 518 166
------ ------ ------
Gross profit 587 597 115
OPERATING EXPENSES
Selling, general and administrative 652 588 233
Depreciation and amortization 90 113 31
------ ------ ------
Income (loss) from operations (155) (104) (149)
INTEREST EXPENSE (121) (104) (33)
OTHER INCOME (EXPENSE) - Net 115 (103) (12)
------ ------- ------
Income (loss) before income taxes (benefit) (161) (311) (194)
INCOME TAXES (BENEFIT): - - -
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (161) (311) (194)
DISCONTINUED OPERATIONS:
Results of discontinued NASCO
Products operations - (187) -
------- ------- -------
NET INCOME (LOSS) $ (161) $ (498) $ (194)
====== ====== ======
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.02) $ (.15) $ (.05)
Discontinued operation - (.08) -
-------- ------ --------
Net income (loss) $ (.02) $ (.23) (.05)
====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 6,716 2,134 3,846
====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's)
<TABLE>
<CAPTION>
Three Months Ended Transition period
February 29, January 31, November 1-30,
1996 1995 1995 (Note 1)
----------- ---------- ---------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (659) $ 555 $ (314)
------- ------ -------
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures (36) - (19)
------ ------ ------
Net cash provided by (used in)
investing activities (36) - (19)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 450 - 240
Repayments of long-term debt (31) (7) (12)
Net borrowings (repayments) on notes payable 312 (550) 105
------ ------ ------
Net cash provided by (used in)
financing activities 731 (557) 333
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 36 (2) -
CASH AND EQUIVALENTS, (beginning of period) 2 4 2
------ ------ ------
CASH AND EQUIVALENTS, (end of period) $ 38 $ 2 $ 2
====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
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 are separately presented herein.
NOTE 2: 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.
-6-
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 2: DISCONTINUED OPERATIONS (concluded)
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 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 reinstated within twelve months.
NOTE 3: INVENTORIES
Inventory consisted of the following:
February 29, October 31,
1996 1995
(000's)
Finished goods $ 468 $ 601
Work-in-process 220 177
Raw materials 588 469
Inventory reserve (34) (18)
------ ------
Total $ 1,242 $ 1,229
====== ======
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT
(a) Notes Payable
Notes payable consisted of the following:
February 29, October 31,
1996 1995
(000's)
Innovo factoring facility $ 410 $ 356
Bank credit facility 205 202
Working capital loan 407 407
NPI International loan 300 -
Other 88 28
------ ------
$ 1,410 $ 993
====== ======
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.
(b) Long-Term Debt
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 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.
-7-
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 5: 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 4) - - - 700 - -
------------- ----- ---------- -------- ---------- ----------
Balance, November 30, 1995 3,878,855 39 292 20,138 (53,072) (2,389)
Issuances of common stock
Cash 3,106,730 31 - 469 - -
Subscription agreement 185,336 2 (174) 172 - -
Spirco reorganization 80,630 1 - 57 - -
Manufacturing agreement 1,200,000 12 - 388 - -
Debt settlement - - - - (66,619) (37)
Issuance costs - - - (50) - -
------------ ----- ----------- -------- ---------- ----------
Balance, February 29, 1996 8,451,551 $ 85 $ 118 $ 21,174 (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 subscription agreement the
Company is issuing shares over a six month period ending May, 1996 that have 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 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.
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).
-8-
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (concluded)
(Unaudited)
NOTE 6: 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, 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 amount in installments with interest at 7% through
November, 1999. On the basis of the sales by the Class 3 Trust through March 31,
1996, the market price of the Company's common stock on that date, and the
estimated amount of disputed claims that will be allowed, the Company would be
required to satisfy approximately $180,000 of remaining Class 3 claims in
installments, through November, 1999, after the Class 3 Trust completes the sale
of its shares.
The Internal Revenue Service ("IRS") is currently conducting an
examination of Spirco's 1991 income tax return. The IRS has issued an audit
report with respect to such return which proposes to reclassify certain capital
losses, which would have the effect of increasing the taxes by $250,000. Such an
assessment, if sustained, would become a Class 3 claim under Spirco's plan of
reorganization, and would be subject to satisfaction (i) from the Class 3 Trust
or (ii) by the Company in installments through November, 1999 as described
above. The Company is contesting the audit findings. The outcome of this matter
is not presently determinable and accordingly no provision for any possible
assessment has been recorded in the consolidated financial statements.
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 affect the Company's
consolidated financial position or results of operations.
-9-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Acquisition of Thimble Square, Inc.
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, without interest, on August 31, 1996 (with certain prepayments required
in the event of certain refinancings or asset sales by Thimble Square). The
purchase prices are subject to downward adjustment based on the results of an
audit of Thimble Square's December 31, 1995 financial statements, and the
appraisal of its property and equipment, which are to be completed by May 15,
1996.
A total of 2,745,098 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 common stock as a result
of the January, 1996 manufacturing agreement between the companies (see Note 5
of Notes to Condensed Consolidated Financial Statements). 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
1,665,098 shares.
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 "sew-only" 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. 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. At Thimble
Square's present level of sales, it is anticipated that its operations will not
have a material affect on the Company's fiscal 1996 results of operations or
cash flows.
The following sets forth preliminary unaudited pro forma
information that illustrates the effect of the acquisition on Innovo Group's
consolidated financial position as of February 29, 1996 as if the acquisition
had been consummated on that date. The following pro forma financial information
has been prepared using Thimble Square's unaudited balance sheet as of December
31, 1995, and reflects management's current estimate of the allocation of the
purchase price, the actual allocation of which may differ based on the results
of the audit and appraisals discussed above. The following unaudited pro forma
financial information may not be indicative of the actual results of the
acquisition.
-10-
<PAGE>
Pro Forma Condensed Consolidated
Balance Sheet
(unaudited)
(000's)
<TABLE>
<CAPTION>
Innovo Thimble Pro Forma Pro
Group Square Adjustments Forma
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 38 $ - $ 38
Accounts receivable 1,354 27 1,381
Inventories 1,242 420 1,662
Prepaid expenses 482 40 (40) [B] 482
------ ------ ------
Total current assets 3,116 487 3,563
Property and equipment, net 3,556 515 1,385 [B] 5,456
Other Assets 830 424 (400) [A] 774
471 [B]
------ ------ ------
(551) [C]
$ 7,502 $ 1,426 $ 9,793
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 1,410 $ 94 200 [B] $ 1,704
Subordinated notes payable 185 - 185
Current maturities of long-term debt 168 65 233
Accounts payable 853 175 1,028
Accrued expenses 1,258 138 135 [B] 1,531
Deferred revenue - 400 (400) [A] -
-------- ------ --------
Total current liabilities 3,874 872 4,681
Long-term debt 2,154 571 2,725
Other - 64 64
-------- ------ ------
Total liabilities 6,028 1,507 7,470
------ ------ ------
Class 3 Trust 236 - 236
------ ------- ------
Stockholders' equity
Common stock 85 - 27 [B] 101
(11) [C]
Stock subscription 118 - 118
Additional paid in capital 21,174 - 1,373 [B] 22,007
(540) [C]
Deficit (17,713) - (17,713)
Treasury stock (2,426) - (2,426)
Net assets of Thimble Square - (81) 81 [B] -
-------- ------ -------
Total stockholders' equity 1,238 (81) 2,087
------ ------ ------
$ 7,502 $ 1,426 $ 9,793
====== ====== ======
</TABLE>
Notes to Pro Forma Condensed
Consolidated Balance Sheet
Note 1 - Thimble Square Historical Financial Statements
The Thimble Square balance sheet as of December 31, 1995 includes the
effect of adjustments recorded to reflect (i) Thimble Square's January, 1996
receipt of 1.2 million shares of Innovo Group common stock upon the execution of
a manufacturing agreement between the companies and (ii) the settlement,
subsequent to December 31, 1995, of certain amounts due from stockholders.
Note 2 - Pro Forma Adjustments
The pro forma adjustments to the condensed consolidated balance sheet
are as follows:
[A] To eliminate the intercompany balances (a prepaid
asset of Innovo Group, and deferred revenue of Thimble
Square) resulting from the January, 1996 manufacturing
agreement.
[B] To reflect the acquisition of Thimble Square and the
allocation of the purchase price on the basis of the
fair values of the assets acquired and the liabilities
assumed. The components of the purchase price and its
allocation to the assets and liabilities of Thimble
Square are as follows:
-11-
<PAGE>
Components of purchase price
Innovo Group common stock $ 1,400
Thimble Square notes payable 200
Acquisition costs 135
------
$ 1,735
======
Allocation of purchase price
Net assets of Thimble Square $ (81)
Decrease prepaid expenses to fair value (40)
Increase in property and equipment to
fair value 1,385
Increase (decrease) in other assets to
fair value
Innovo Group common stock 227
Other assets (40)
Goodwill 284
----
471 471
---
$ 1,735
======
[C] To reflect the Innovo Group common stock owned by
Thimble Square as a reduction of consolidated
stockholders' equity (reflected as a reduction of
common stock and paid in capital because the shares
will be transferred to Innovo Group and retired).
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 are separately
presented in the condensed consolidated financial statements included herein.
Results of Continuing Operations
Three months ended February 29, 1996 compared to three months ended January 31,
1995
Sales for the first quarter of fiscal 1996 increased by $204,000,
or 18.3%, to $1,319,000, from $1,115,000 for the three months ended January 31,
1995. The first quarter of fiscal 1996 includes the month of February due to the
change in fiscal year. Sales for the month of February, 1995 were $414,000.
During fiscal 1995 the Company developed new products for its fashion, utility
and craft lines, seeking to lessen its dependence on sports licensed products.
Sales for the first quarter increased due to the Company's new craft products,
and its recapture of certain craft accounts from import suppliers, and from
sales of the Company's U.S. Olympic Team products. The Company's order book as
of February 29, 1996 was approximately 70% higher than at February 28, 1995
principally as the result of increased craft and utility product orders. The
Company will begin to actively market its fashion line during the second quarter
of fiscal 1996.
Gross profit as a percentage of sales was 44.5% for the first
quarter of fiscal 1996 compared to 53.5% for the three months ended January 31,
1995. Because of the seasonality of the Company's business, certain fixed
manufacturing costs must be allocated between interim periods on the basis of
projected sales. For fiscal 1996 the Company has revised the method used to make
such allocations, and 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.
-12-
<PAGE>
Selling, general and administrative expenses decreased to 49.4%
of sales for the three months ended February 29, 1996 from 52.7% for the first
quarter of fiscal 1995. The majority of the Company's SG&A expenses are fixed,
and accordingly the Company anticipates that SG&A expenses as a percentage of
sales will decrease additionally with any additional increases in sales. In late
July and early August, 1995, concurrent with the sale of NASCO Products'
domestic operations to ANG, the Company made or scheduled personnel reductions
that are estimated to reduce payroll costs by $300,000 annually. The management
and administrative structure retained after these reductions represents a level
of costs that the Company has chosen to continue in anticipation of, and to
generate, increased sales. The Company recognizes that its fiscal 1995 level of
sales would not allow it to operate profitably without additional significant
expense reductions, and if sales increases are not achieved, it will further
restructure to accomplish those cost reductions.
The loss from operations was $155,000 for the three months ended
February 29, 1996 as compared to $104,000 for the first quarter of fiscal 1995.
The effect of the increase in sales in the first quarter of fiscal 1996 was
offset by the decline in the gross profit percentage, which was lower in the
current period for the reasons discussed above.
Interest expense increased by $17,000 for the three months ended
February 29, 1996, principally as the result of higher interest rates. Other
income of $115,000 was recognized during the first quarter of fiscal 1996; in
the three months ended January 31, 1995, other expense was $103,000. As a result
of the forgoing, the loss form continuing operations for the three months ended
February 29, 1996 was $161,000, or $.02 per share, compared to $311,000, or $.15
per share, for the first quarter of fiscal 1995.
Liquidity and Capital Resources
Operating cash flows were a negative $659,000 for the first
quarter of fiscal 1996 principally as the result of an approximate $566,000
reduction in accounts payable and accrued expenses. The Company financed the
reduction in accounts payable and accrued expenses with $450,000 obtained from
the sale of shares of its common stock, and new notes payable borrowings of
$300,000. The Company undertook these financings, to reduce trade debt, in order
to improve its ability to obtain the trade credit from its suppliers in
anticipation of increases in sales and resulting increases in raw materials
requirements. The restricted liquidity that the Company experienced throughout
fiscal 1995 continued during the first quarter of fiscal 1996.
The Company believes that on an overall basis cash will be
sufficient to fund planned operations for fiscal 1996. However, the Company
anticipates that the cash flows from operations may not be sufficient during the
second quarter of 1996 due to the seasonality of its sales and business, the
need to purchase materials for second and third quarter orders, and the need to
devote NASCO Products' cash flows to the NBD and working capital loans. As a
result, the Company may need to continue to supplement its operating cash flows
during that period through borrowings or the issuance of equity securities. An
inability to obtain such interim working capital, as well as a failure of the
retail environment to improve in the manner projected by the Company, could
force the Company to further constrict operations.
-13-
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 18, 1995 the Company held its annual meeting of
stockholders. The following individuals, representing the entire
slate nominated and all of whom were current directors of the
Company, were elected to the board of directors:
Votes Authority
For Withheld
Patricia Anderson-Lasko 2,167,348 59,137
Alexander K. Miller 2,172,831 53,654
Felix Lee 2,172,085 54,400
Reino C. Lanto, Jr. 2,174,589 51,896
Marvin Williamson 2,173,957 52,528
The stockholders also approved a proposal to increase the number
of authorized shares of common stock from 5 million to 30
million. Votes for the proposal were 2,099,450, against were
118,349, abstaining were 8,656 and not voting were 683,014.
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 January 29, 1996 the Company filed a current Report on Form
8-K reporting the execution of the manufacturing services
agreement with Thimble Square, Inc. and certain other
transactions affecting stockholders' equity.
-14-
<PAGE>
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: April 12, 1996 By/s/Patricia Anderson-Lasko
-----------------------------
Patricia Anderson-Lasko,
President, Chairman and
Chief Executive Officer
Dated: April 12, 1996 By/s/Terrance J. Bond
----------------------
Terrance J. Bond, Controller
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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