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 August 31, 1997.
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 September 30, 1997
_____ ______________________________
Common stock, par
value of $.01 per share 44,521,133 shares
<PAGE>
INNOVO GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed consolidated balance sheets as of
August 31, 1997 and November 30, 1996 3
Condensed consolidated statements of operations for the
three and nine months ended August 31, 1997 and 1996 4
Condensed consolidated statements of cash flows for the
nine months ended August 31, 1997 and 1996 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
<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>
August 31, November 30,
1997 1996
________ ___________
ASSETS
CURRENT ASSETS
</CAPTION>
<S> <C> <C>
Cash and cash equivalents $ 663 $ 31
Accounts receivable 1,933 1,238
Inventories 1,982 1,749
Prepaid expenses 327 332
_______ ______
TOTAL CURRENT ASSETS 4,905 3,350
PROPERTY AND EQUIPMENT, net 5,159 5,188
OTHER ASSETS 807 895
_______ ______
$10,871 $ 9,433
_______ ______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,584 $ 921
Current maturities of long-term debt 271 224
Accounts payable 2,368 1,861
Accrued expenses 1,287 954
_______ ______
TOTAL CURRENT LIABILITIES 5,510 3,960
LONG-TERM DEBT, less current
maturities 2,098 3,079
OTHER 274 119
_______ ______
TOTAL LIABILITIES 7,882 7,158
_______ ______
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
70,000,000; issued 44,256,133 shares in
1997 and 26,530,577 shares in 1996 442 265
Additional paid-in capital 28,087 25,076
Promissory note - Officer (1,125) -
Deficit (21,989) (20,640)
Treasury stock, 119,691 shares (2,426) (2,426)
_______ ______
TOTAL STOCKHOLDERS' EQUITY 2,989 2,275
_______ ______
$10,871 $ 9,433
_______ ______
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000's except per share information)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
___________________ ____________________
August 31,August 31, August 31, August 31,
1997 1996 1997 1996
_________ ________ _________ _________
</CAPTION>
<S> <C> <C> <C> <C>
NET SALES $ 2,898 $ 2,304 $ 7,230 $ 5,704
COST OF SALES 1,688 1,548 4,530 3,551
_______ ______ ______ ______
Gross profit 1,210 756 2,700 2,153
OPERATING EXPENSES
Selling, general and administrative 1,113 1,117 3,263 2,725
Depreciation and amortization 117 205 344 473
_______ ______ ______ ______
Income (loss) from operations (20) (566) (907) (1,045)
INTEREST EXPENSE (303) (231) (678) (515)
OTHER INCOME (EXPENSE) - Net 70 (93) 236 73
_______ ______ ______ ______
Income (loss) before income taxes (benefit) (253) (890) (1,349) (1,487)
INCOME TAXES (BENEFIT): - - - -
_______ ______ ______ ______
NET INCOME (LOSS) $ (253) $ (890) $(1,349) $(1,487)
_______ ______ ______ ______
EARNINGS (LOSS) PER SHARE: $ (.01) $ (.05) $ (.04) $ (.13)
_______ ______ ______ ______
WEIGHTED AVERAGE SHARES OUTSTANDING 35,807 16,750 31,046 11,199
_______ ______ ______ ______
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's)
<TABLE>
<CAPTION>
Nine Months ended
________________________
August 31, August 31,
1997 1996
_________ _________
CASH PROVIDED BY (USED IN)
</CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES $ (907) $(2,137)
_______ _______
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures (223) (213)
Proceeds from sale of
discontinued operations - 199
_______ _______
Net cash provided by (used in)
investing activities (223) (14)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 79 2,054
Proceeds from issuance of common stock
to investor group 1,300 -
Repurchase of stock warrants (150) -
Additions to notes payable 727 312
Repayments on notes payable (64) (56)
Additions to long-term debt 96 1,675
Debt issue costs - (285)
Repayments of long-term debt (226) (85)
_______ _______
Net cash provided by (used in)
financing activities 1,762 3,615
_______ ______
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 632 1,464
CASH AND EQUIVALENTS, beginning of period 31 2
_______ ______
CASH AND EQUIVALENTS, end of period $ 663 $ 1,466
_______ ______
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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 November 30, 1996.
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.
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". SFAS No. 128, which is effective for periods
ending after December 15, 1997, revises the manner in which earnings per
share is calculated and requires the restatement, when first applied, of
prior period earnings per shares data. The Company will initially apply
SFAS No. 128 in the first quarter of fiscal 1998. The restatement, at
that time, of prior period earnings per share data is not expected to
have a material effect on the previously reported data.
NOTE 2: ACQUISITION
On April 12, 1996 the Company acquired 100% of the outstanding
common stock of Thimble Square, Inc. ("Thimble Square"). In a concurrent
transaction, Thimble Square acquired from its stockholders a plant it had
previously leased from them. 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 new sales, net income, and
earnings per share would have been had the acquisition of Thimble Square
been completed on December 1, 1995. 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.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2: ACQUISITION (concluded)
Nine months ended
___________________
August 31,
1996
_________
(000's except per share amounts)
Sales $ 6,137
Income (loss) from continuing
operations (1,699)
Income (loss) per share from
continuing operations (.16)
NOTE 3: INVENTORIES
Inventory consisted of the following:
<TABLE>
<CAPTION>
August 31, November 30,
1997 1996
_________ ___________
(000's)
</CAPTION>
<S> <C> <C>
Finished goods $ 472 $ 440
Work-in-process 662 719
Raw materials 884 663
Inventory reserve (36) (73)
______ ______
Total $1,982 $ 1,749
______ ______
</TABLE>
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT
(a) Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
August 31, November 30,
1997 1996
_________ ___________
(000's)
Accounts receivable
</CAPTION>
<S> <C> <C>
factoring facility $ 1,187 $ 468
Working capital loan - 213
NPI International loan 251 100
Other 146 140
______ ______
$ 1,584 $ 921
______ ______
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT (concluded)
In January, 1997 the Company borrowed $175,000 by issuing a
Series I 10% Unsecured Convertible Promissory Note (the "Series I
Convertible Note"). The Series I Convertible Note was convertible,
commencing May 1, 1997, into an aggregate of 1.5 million shares of common
stock. The Series I Convertible Note was due January 6, 1998, and in
certain circumstances, provided the Company with the right to pay, or
prepay, the note by the delivery of the shares of common stock issuable
upon conversion. As a result of the terms of the conversion feature, the
Series I Convertible Note was initially recorded at a discount from its
face amount of $106,000. The Series I Convertible Note was converted
into shares of common stock in May, 1997.
In January, 1997 the Company borrowed $97,000 through the
issuance of Series II 10% Unsecured Convertible Promissory Notes (the
"Series II Convertible Notes"). The Series II Convertible Notes were
convertible into an aggregate of 600,000 shares of common stock. The
notes were due January 6, 1998, and provided the Company with the right
to pay, or prepay, the notes by the delivery of the shares of common
stock issuable upon conversion. As the result of the terms of the
conversion features the Series II Convertible Notes were initially
recorded at a discount from their face amounts of $17,000. The Series II
Convertible Notes were converted into shares of common stock in May,
1997.
(b) Long-Term Debt
During the first quarter of fiscal 1997 $265,000 of 8%
Convertible Subordinated Debentures were converted, resulting in the
issuance of 2,325,734 shares of common stock. The remaining $205,000 of
8% Convertible Subordinated Debentures were converted into 1,802,197 in
the second quarter of fiscal 1997.
NOTE 5: STOCKHOLDERS' EQUITY
On August 13, 1997, the Company issued 6,750,000 shares of common
stock to a group of investors ("the Smith Group") for $1,350,000 pursuant
to a stock agreement also dated August 13, 1997 between members of the
Smith group, the Company and Patricia Anderson-Lasko. Concurrent with
the execution of the stock agreement and in conjunction with employment
agreements with key executives, the Company granted 2,925,000 in non-
qualified stock options to those executives. Subject to vesting
provisions, the options remain exercisable until August, 2002 at a price
of $.3315 per shares.
Also in August, 1997, the Company paid $150,000 to repurchase and
cancel its outstanding Class I common stock purchase warrants. The
warrants were exercisable through August, 2001 for the purchase of
1,220,588 shares of common stock at a price of $.17 per share.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: STOCKHOLDERS' EQUITY (continued)
On April 4, 1997 the Company's stockholders approved the increase
in the number of authorized shares of common stock to 70 million. As a
result thereof, the Company then reserved from its authorized but
unissued common stock, 1,802,198 shares issuable upon the conversion of
the $205,000 of 8% Convertible Debentures which remained outstanding at
February 28, 1997, and 1,933,031 shares issuable upon the exercise, if
any, of the Class H and Class I common stock purchase warrants issued in
fiscal 1996. The 8% Convertible Debentures were converted in May, 1997.
In connection with the issuance of the 10% Convertible Notes
during the first quarter of fiscal 1997, the Company issued 500,000 Class
J common stock purchase warrants (the "Class J Warrants"). The Class J
Warrants were exercisable through January 6, 1998 at a price of $.34375
per share, except that the exercise price would be the lesser of $.125
per share or the then market price if the Class J Warrants were exercised
concurrently with the conversion of the Series I Convertible Note. The
Series I and Series II Convertible Notes were initially recorded at
discounts, aggregating $123,000, from their face amounts, to account for
the conversion terms. That discount was amortized as an additional
interest cost over the period from the issuance of the notes to their
earliest convertability. The Class J Warrants were exercised in May,
1997 concurrently with the conversion of the Series I Convertible Note.
On August 4, 1997, the Company's president exercised a stock
purchase right (the "Purchase Right") awarded her by the board of
directors on February 12, 1997. The Purchase Right entitled her to
purchase up to 4 million shares of the Company's common stock during the
period April 30, 1997 to April 30, 2002 at a price of $.28125 per share.
The officer paid for the shares by the delivery of a non-recourse
promissory note, bearing no interest, due April 30, 2002. The note is
collateralized by the shares purchased therewith, which shares would be
forfeited to the extent the note is not paid on or before maturity, and
would be payable (including prepayable), in whole or in part, by the
delivery to the Company of (i) cash, or (ii) other shares of the
Company's common stock that the officer has owned for a period of at
least six months, which shares would be credited against the note on the
basis of the closing bid price for the Company's common stock on the date
of delivery. Any dividends or distributions made with respect to shares
collateralizing any unpaid note will be held in the escrow to be
established for such shares and note until such time, if any, as the
related note is paid.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: STOCKHOLDERS' EQUITY (concluded)
The changes in common stock, additional paid-in capital, and
treasury stock during the first half of fiscal 1997 were as follows:
<TABLE>
<CAPTION>
Additional Promissory
Common Stock paid-in note Treasury Stock
Shares Amount capital Officer Shares Amount
______ ______ __________ __________ ______ ______
(000's) (000's) (000's)
</CAPTION>
<S> <C> <C> <C> <S> <C> <C>
Balance, November 30, 1996 26,530,577 $ 265 $25,076 - (119,691) $(2,426)
Issuances of common stock
Conversion of debentures 4,127,931 41 359 - - -
Exercise of stock purchase
right 4,000,000 40 1,085 (1,125) - -
Smith group purchase 6,750,000 68 1,232 - - -
Conversion of convertible
notes 2,100,000 21 260 - - -
Exercise of warrants 500,000 5 58 - - -
Other 247,625 2 44 - - -
Issuance of convertible
notes - - 123 - - -
Warrant repurchase - - (150) - - -
__________ ____ ______ ________ ________ _______
Balance, August 31, 1997 44,256,133 $ 442 $28,087 (1,125) (119,691) $(2,426)
</TABLE>
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 the 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 appealed the jury's award, and in August, 1996 (as revised in
an amended October, 1996 opinion), the appeals court reversed
approximately $350,000 of the initial judgement as not supported by the
evidence or improper as a matter of law. As a result, the judgement,
including post-judgement interest through August, 1996, has been reduced
to $420,000. In addition, the appeals court ruled that the trial court
erred in not submitting to the jury the question of the Company's
counterclaim of breach of fiduciary duty by Tedesco, ruling that the
trial record indicated that there was evidence of such breach and damages
therefrom. The appeals court remanded the case to the trial court for
trial on, and submission to a jury of, the Company's claim of breach of
fiduciary duty by Tedesco. The Company is filing motions with the trial
court for the scheduling of the ordered trial on its claims against
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6: CONTINGENCIES (concluded)
Tedesco and would be entitled to offset any damages it is awarded against
the Tedesco award. In connection with its appeals the Company has
pledged as an appeal bond 200,000 shares of its unissued common stock.
The Company continues to believe that the ultimate resolution of the case
is unlikely to result in a material loss. An adverse outcome of the
Company's claims against Tedesco, could result in a loss of up to
$400,000.
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently 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
NASCO Products' payments reducing the balance would be based on future
purchases from that supplier of products distributed internationally by
NP International. The Company has denied the supplier's claims, and has
asserted affirmative defenses, including the supplier's late shipment of
the original products, and the supplier's refusal to accept and fill NP
International orders on terms contained in the agreement. NASCO Products
sold its operations in July, 1995, and that company currently has no
operations or unencumbered assets. No provisions for the additional
amount sought has been recorded in the consolidated financial statements.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the third quarter of fiscal 1997 were $2,898,000
compared to sales of $2,304,000 for the three months ended August 31,
1996. Sales for Innovo and NP International were $2,586,000 for the
third quarter of fiscal 1997, compared to $1,866,000 for the same quarter
of fiscal 1996, representing a 38.6% increase in their sales. Thimble
Square's sales in the third quarter decreased from $438,000 in fiscal
1996 to $312,000 in fiscal 1997 primarily because of a change in
manufacturing focus from goods manufactured and distributed directly to
retailers to "cut and sew only" services for other distributors of
similar products.
Sales for the first nine months of fiscal 1997 increased by
$1,526,000, or 26.7%, to $7,230,000, from $5,704,000 for the nine months
ended August 31, 1996. Higher sales by Innovo and NP International
accounted for $1,072,000 of the increase, representing a 21.2% increase
in their sales, while $454,000 of the increase resulted from the
inclusion of a full six months of operations for Thimble Square, which
the Company acquired in the second quarter of fiscal 1996. Thimble
Square's sales of $1,135,000 for the nine months ended August 31, 1997
were 3.1% higher than its sales for the comparable period a year ago.
The increase in Innovo's and NP International's sales resulted
principally from increased craft product shipments and domestic sports
licensed products. A small portion of the increase was from certain
initial shipments of Warner Bros. licensed products in the second
quarter. The development of the Walt Disney and Warner products was
completed in the second quarter of fiscal 1997. The Company's recent
discussions with international customers have indicated that the volume
of back-to-school and holiday business in fiscal 1997 has been adversely
affected by the timing of the product introductions and fiscal 1997 sales
will not be as significant as originally anticipated. As a result, the
effects of the Warner Bros. and Walt Disney licenses are expected to be
more significant in fiscal 1998.
Gross profit as a percentage of sales was 41.8% for the third
quarter of fiscal 1997 compared to 32.8% for the three months ended
August 31, 1996. The increase in gross profit was due largely to the
increase in sales of imported licensed product that has a higher gross
margin than most other product lines and operating efficiencies created
from greater availability of raw materials, consolidation of the
operating facilities at both Innovo and Thimble Square and redesign of
the manufacturing process at Innovo in the third quarter. Due to
increased production efficiencies at the main production facilities and
import mix, the Company idled satellite plants for both Innovo and
Thimble Square. However, both facilities are still available to offset
production or labor shortages should they occur. Innovo and NP
International had a gross profit of 44.6.% for the third quarter of
fiscal 1997, compared to 38.2.% for the three months ended August 31,
1996. Thimble Square's gross profit was 18.2% for the third quarter of
fiscal 1997 compared to 9.8% for the same period last year.
Gross profit as a percentage of sales was 37.3% for the nine
months ended August 31, 1997 compared to 37.7% for same period of fiscal
1996. The gross profit for Innovo and NP International was 40.2%, as
compared to their gross profit percentage of 39.6% for the nine months
ended August 31, 1997 and 1996 respectively. The gross profit margins
have been less than anticipated because sales for the first half of
fiscal 1997 have been heavily weighted towards craft products which
generally carry a lower gross margin than licensed products, production
inefficiencies caused by the lack of anticipated working capital up to
the third quarter and higher than anticipated costs on some items
resulting principally from packaging requirements imposed by certain
major customers. Gross profit margin was also affected by the full nine
months of Thimble Square's sales which, traditionally carry a higher cost
of goods sold than Innovo's mix. The Company had anticipated obtaining
working capital in the second quarter from the issue of debt or equity
securities or the sale of the Florida property. Because management has
elected to operate the Florida property and equity securities were not
sold until the third quarter, that working capital was not available
through the first half of the fiscal year, and the Company was not able
to maintain raw materials at levels needed for efficient production in
the first two quarters. The gross profit for Thimble Square for the
first nine months of fiscal 1997 was 21.8% compared to 23.1% for the same
period last year. The gross profit was lower than its 36.3% gross profit
margin for the full fiscal year of 1996 due to its change in
manufacturing focus discussed earlier and the lower gross margins are
also consistent with the seasonality of Thimble Square's business.
Selling, general and administrative ("SG&A") expenses for the
third quarter of fiscal 1997 were $1,113,000, or 38.4% of sales, compared
to $1,117,000 or 48.5% of sales for the three months ended August 31,
1996. SG&A expenses were $3,263,000 for the first nine months of fiscal
1997, an increase of $538,000 from SG&A expenses of $2,725,000 for the
nine months ended August 31, 1996. Although, as a percentage of sales,
SG&A expenses decreased to 45.1% of sales for the first three quarters of
fiscal 1997 from 47.8% of sales for the nine months ended August 31,
1996. The inclusion of Thimble Square's operations in fiscal 1997
accounted for $124,000 of the increase in SG&A expenses. Additionally,
the product development for the Warner Bros. and Walt Disney license
product lines caused $54,000 of increased product development expenses,
and legal and professional fees relating to the Company's litigation with
certain former employees, debt restructurings, and the Company's year-end
reporting and annual meeting, caused a $176,000 increase in those costs.
Also,commissions and royalties were $54,000 higher in 1997 than 1996 due
to increased sales.
The loss from operations for the third quarter of fiscal 1997 was
$20,000, and $907,000 for the first nine months, as compared to $566,000
and $1,045,000 for the three and nine months ended August 31, 1996,
respectively. Operating losses in the first and second fiscal quarters
are consistent with the seasonality of the Company's business, in which
the majority of sales take place in the second half of the fiscal year
while the majority of product development and marketing efforts, and
related costs, are incurred in the first half of the year. In fiscal
1996, 54.0% of the Company's sales were generated in the second half of
the year and it is anticipated that a similar concentration of sales will
occur in 1997.
Interest expense increased by $72,000 and $163,000 for the three
and nine months ended August 31, 1997, respectively, as the result of
higher borrowings, which primarily resulted from higher accounts
receivable balances generated by increased sales, the inclusion of
Thimble Square's December 1, 1996 to March 31, 1997 operations, which
included interest expense of $30,000, and interest expense (including the
amortization of debt issue costs) of $35,000 for the nine months ended
August 31, 1997 relating to the 8% Convertible Debentures and the Series
I 10% Unsecured Convertible Promissory Notes, which were not outstanding
during the first half of fiscal 1996. Those debts were converted into
common stock in May, 1997.
The net loss for the third quarter 1997 was $253,000 or $.01
per share as compared to $890,000 or $.05 per share for the same period
a year ago. Net loss for the nine months ended August 31, 1997 was
$1,349,000 or $.04 per share and was $1,487,000 or $.13 per share for the
same fiscal period in 1996.
Liquidity and Capital Resources
On August 13, 1997 the company issued 6,750,000 shares of common
stock in a private placement to four individual investors ("the Smith
Group"). Proceeds after the payment of related expenses were
approximately $1,300,000 of which $150,000 was utilized to repurchase and
retire the Company's outstanding Class I common stock purchase warrants
and the remainder was used to reduce operating liabilities and increase
working capital. In connection therewith three members of the Smith
Group became executive officers of the Company and all four members of
the Smith Group became members of the Company's board of directors.
Operating cash flows were a negative $907,000 for the first nine
months of fiscal 1997, principally as the result of the net loss and
increases in inventory and accounts receivable and offsetting increases
in accounts payable and accrued expenses. The negative operating cash
flows, and reductions in notes payable and long-term debt, were financed
principally from the private placement indicated above and additional
borrowings under the Company's accounts receivable factoring facility.
The Company also obtained $135,000 of additional working capital from
renewed and increased borrowings under NP International's loan, and
$97,000 from the issuance of Series II 10% Unsecured Convertible
Promissory Notes. An additional $175,000 was obtained for the further
development of its Florida property from the issuance of Series I 10%
Unsecured Convertible Promissory Notes.
In its Quarterly Report on Form 10-Q for the quarter ended
February 29, 1997, the Company announced that it had entered into an
agreement for the sale of its Florida retail mall property, and that the
sale of the property, scheduled for April 30, 1997, on the terms
contained in the agreement, would have resulted in a second quarter loss
of approximately $300,000. The sale of the property did not close due to
the inability of the buyer to obtain financing, and the Company has
determined to retain and operate the property. The certificate of
occupancy was obtained in June, 1997, retail tenants began to move into
the property in August, 1997 and the property opened on Labor Day
weekend. The completion of the improvements to the property meant that,
beginning in July, 1997, the Company began to recognize expense for the
depreciation of the property and the interest on the mortgage loan on the
property, both of which have been capitalized during the construction on
the property. Depreciation and interest expensed on the Florida
property for the third quarter 1997 was $5,000 and $6,000 respectively.
The Company believes that on an overall basis cash will be
sufficient to fund planned operations. However a failure of the retail
environment or failure of the Company to increase its market share as
projected by the Company could adversely effect sales and could force the
Company to constrict operations.
<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 November 30, 1996, which
is incorporated herein by reference.
Item 2. CHANGES IN SECURITIES
During the third quarter of fiscal 1997 the Company issued an
aggregate of 6,750,000 shares of common stock in a private
placement to four individual investors. Gross proceeds from the
placement were $1,350,000. In conjunction with the private
placement the Company granted 2,925,000 in non-qualified stock
options to the four investors. Reference is made hereby to Form
8-K filed by the Company on August 25, 1997 discussing the
transaction further.
During the third quarter of fiscal 1997 the Company paid $150,000
to repurchase and cancel its outstanding Class I common stock
purchase warrants.
During the third quarter of fiscal 1997 the Company's president
exercised a stock purchase right for the purchase of 4 million
shares of common stock at a price of $.28125 per share by
delivery of a note for $1,125,000 to the Company. Reference is
made hereby to Form S-8 filed by the Company on August 4, 1997
discussing the transaction further.
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.
Reference is made hereby to Form 8-K filed by the Company on
August 25, 1997 that contains the details of a private placement
and stock purchase agreement with the Smith Group.
<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: October 15, 1997 By/s/L. E. Smith
L. E. Smith,
Chairman/CEO
Dated: October 15, 41997 By/s/J. Eric Hendrickson
J. Eric Hendrickson,
Vice President and
Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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 AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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