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 28, 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 April 1, 1997
_________________________ _______________________________
Common stock, par
value of $.01 per share 28,736,990 shares
<PAGE>
INNOVO GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed consolidated balance sheets as of
February 28, 1997 and November 30, 1996 3
Condensed consolidated statements of operations
for the three months ended February 28, 1997
and February 29, 1996 4
Condensed consolidated statements of cash flows
for the three months ended February 28, 1997
and February 29, 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 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
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>
February 28, November 30,
ASSETS 1997 1996
CURRENT ASSETS
</CAPTION>
<S> <C> <C>
Cash and cash equivalents $ 26 $ 31
Accounts receivable 1,219 1,238
Inventories 1,669 1,749
Prepaid expenses 349 332
_______ _______
TOTAL CURRENT ASSETS 3,263 3,350
PROPERTY AND EQUIPMENT, net 5,145 5,188
OTHER ASSETS 868 895
_______ _______
$ 9,276 $ 9,433
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,233 $ 921
Current maturities of long-term debt 205 224
Accounts payable 1,719 1,861
Accrued expenses 1,020 954
_______ _______
TOTAL CURRENT LIABILITIES
4,177 3,960
LONG-TERM DEBT, less current
maturities 2,814 3,079
OTHER 123 119
_______ _______
TOTAL LIABILITIES 7,114 7,158
_______ _______
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
70,000,000; issued 28,856,311 shares in
1997 and 26,530,577 shares in 1996 288 265
Additional paid-in capital 25,397 25,076
Deficit (21,097) (20,640)
Treasury stock, 119,691 shares (2,426) (2,426)
_______ _______
TOTAL STOCKHOLDERS' EQUITY 2,162 2,275
_______ _______
$ 9,276 $ 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
_____________________________
February 28, February 29,
1997 1996
___________ ___________
</CAPTION>
<S> <C> <C>
NET SALES $ 2,220 $ 1,319
COST OF SALES 1,458 732
______ ______
Gross Profit 762 587
OPERATING EXPENSES
Selling, general and
administrative 1,058 652
Depreciation and amortization 111 90
______ ______
Income (loss) from operations (407) (155)
INTEREST EXPENSE (184) (121)
OTHER INCOME (EXPENSE) - Net 134 115
______ ______
Income (loss) before income
taxes (benefit) (457) (161)
INCOME TAXES (BENEFIT): - -
______ ______
NET INCOME (LOSS) $ (457) $ (161)
______ ______
EARNINGS (LOSS) PER SHARE: $ (.02) $ (.02)
______ ______
WEIGHTED AVERAGE SHARES OUTSTANDING 28,363 6,716
______ ______
</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>
Three months ended
_____________________________
February 28, February 29,
1997 1996
___________ ___________
CASH PROVIDED BY (USED IN)
</CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES $ (483) $ (659)
_______ _______
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures - (36)
_______ _______
Net cash provided by (used in)
investing activities - (36)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock - 450
Additions to notes payable 446 354
Repayments of notes payable (7) (42)
Additions to long-term debt 95 -
Repayments of long-term debt (56) (31)
_______ _______
Net cash provided by (used in)
financing activities 478 731
_______ _______
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (5) 36
CASH AND EQUIVALENTS, (beginning
of period) 31 2
_______ _______
CASH AND EQUIVALENTS, (end of period) $ 26 $ 38
_______ _______
</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 shares data is not expected to have a
material effect on the previously reported data.
NOTE 2: ACQUISITIONS
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 net 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.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 2: ACQUISITION (concluded)
Three months
ended
February 29, 1996
_________________
(000's except per share amounts)
<TABLE>
<S> <C>
Sales $ 1,686
Net income (284)
Earnings per share (.04)
</TABLE>
NOTE 3: INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
February 28, November 30,
1997 1996
____________ ____________
(000's)
</CAPTION>
<S> <C> <C>
Finished goods $ 365 $ 440
Work-in-process 662 719
Raw materials 678 663
Inventory reserve (36) (73)
______ ______
Total $ 1,669 $ 1,749
______ ______
</TABLE>
NOTE 4: NOTES PAYABLE ANG LONG-TERM DEBT
(a) Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
February 28, November 30,
1997 1996
___________ ___________
(000's)
Accounts receivable
</CAPTION>
<S> <C> <C>
factoring facility $ 604 $ 468
Working capital loan 139 213
NPI International loan 235 100
10% unsecured convertible
note 117 -
Other 138 140
______ ______
$ 1,233 $ 921
______ ______
</TABLE>
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 is convertible, commencing May 1,
1997, into an aggregate of 1.5 million shares of common stock.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT (concluded)
The Series I Convertible Note is due January 6, 1998, and in certain
circumstances, provides 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 (see Note 5).
(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.
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 are convertible
into an aggregate of 600,000 shares of common stock. The notes are due
January 6, 1998, and provide 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 are
included in long-term debt because of the Company's intent and ability to
repay the notes through the issuance of equity securities.
NOTE 5: STOCKHOLDERS' EQUITY
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, if
any, of the $205,000 of 8% Convertible Debentures, originally issued in
fiscal 1996, 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.
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 are exercisable through January 6, 1998 at a price of $.34375
per share, except that the exercise price shall be the lesser of $.125
per share or the then market price if the Class J Warrants are exercised
concurrently with the conversion of the Series I 10% Unsecured
Convertible Promissory Notes. 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
is being amortized as an additional interest cost over the period from
the issuance of the notes to their earliest convertability.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 5: STOCKHOLDERS' EQUITY (concluded)
On February 12, 1997, the board of directors awarded to the
Company's president and chief executive officer a stock purchase right
(the "Purchase Right") entitling 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 per share price of $.28125 per share ("the Exercise
Price"). Under the Purchase Right the officer may pay for any shares
purchased by the delivery of (i) cash, or (ii) a non-recourse promissory
note, bearing no interest, due April 30, 2002. The note, if delivered,
would be 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 payment, 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. The Purchase Right is fully vested, and is
exercisable, until April 30, 2002, so long as the officer remains
employed by the Company. The termination of the officer's employment
would not, however, affect her rights to any shares already purchased
pursuant to the Purchase Right, including any shares collateralizing any
unpaid notes, except that 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.
The changes in common stock, additional paid-in capital, and
treasury stock during the first quarter of fiscal 1997 were as follows:
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Treasury Stock
Shares Amount capital Shares Amount
______ ______ __________ ______________ ______
(000's) (000's) (000's)
</CAPTION>
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1996 26,530,577 $ 265 $25,076 (119,691) $(2,426)
Issuances of common stock
Conversion of debentures 2,325,734 23 198 - -
Issuance of convertible
notes - - 123 - -
__________ ____ ______ ________ ______
Balance, February 28, 1997 28,856,311 $ 288 $25,397 (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
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 6: CONTINGENCIES (concluded)
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 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.
NOTE 7: SUBSEQUENT EVENT
On April 1, 1997, the Company entered into an agreement for the sale
of the property in Florida being developed as an indoor retail outlet for
$1.8 million. The buyer will also receive common stock purchase
warrants for the purchase of 500,000 shares of common stock, exercisable
for a period of two years at prices ranging from $.20 to $1.00 per share. The
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (concluded)
(Unaudited)
NOTE 7: SUBSEQUENT EVENT (concluded)
agreement, which provides for an April 30, 1997 closing, provides for the
payment of the $1.8 million through a cash payment at closing of
$400,000, the buyer's assumption of the first lien mortgage on the
property of $773,000, and the issuance to the Company of a $627,000 note
by the buyer, bearing interest at 8% and collateralized by a second lien
on the property and a first lien on the warrants, any shares purchased
upon the exercise of the warrants, and the proceeds from any sale of the
warrants or the shares. The Company will also retain the right to
occupy certain space in the facility at a fixed rental equal to the
interest due it on the note from the buyer. The sale of the property, on
the terms contained in the April 1, 1997 agreement, will result in a loss
of approximately $300,000, which will be recognized in the second quarter
of fiscal 1997.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - three months ended February 28, 1997 compared to
three months ended February 29, 1996
Sales for the first quarter of fiscal 1997 increased by $901,000, or
68.3%, to $2,220,000, from $1,319,000 for the three months ended February
29, 1996. Higher sales by Innovo and NP International accounted for
$427,000 of the increase, representing a 32.4% increase in their sales,
while $474,000 of the increase resulted from the inclusion of Thimble
Square, which the Company acquired in the second quarter of fiscal 1996.
Thimble Square's sales of $474,000 were 60.7% 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. A small portion of
the increase was from certain initial shipments of Warner Bros. license
products. The development of the Walt Disney and Warner products will be
completed in the second quarter of fiscal 1997, and the initial Walt Disney
products are expected to continue in the second quarter and, for the Walt Disney
products, start in the third quarter of fiscal 1997. The Company's recent
discussions with customers have indicated that the volume of back-to-school
business in fiscal 1997 may be adversely affected by the timing of the product
introductions, as a result of which the 1997 holiday buying season may be the
first market season for which the Company receives the full benefit of these new
products. The effects of the Warner Bros. and Walt Disney licenses are
expected to be more material in the second half, and more particulalry in the
fourth quarter, of fiscal 1997.
Gross profit as a percentage of sales was 34.3% for the three months
ended February 28, 1997 compared to 44.5% for the first quarter of fiscal
1996. The gross profit for Innovo and NP International was 37.1%, as
compared to their gross profit percentage for the full year of fiscal
1996 of 33.9% The gross profit for these operations of 44.5% in the
first quarter of fiscal 1996 was the result of a sales mix which in that
period included a high proportion of international licensed products
sales, which generally will generate a higher gross profit percentage
than domestic sales, and especially domestic craft products, which were
a significant portion of the sales mix in the first quarter of fiscal
1997 and which generally carry lower gross profit percentages. The gross
profit for Thimble Square for the first quarter of fiscal 1997 was 24.1%, which
was lower than its 33.6% gross profit margin for the full year fiscal 1996
consistent with the seasonality of Thimble Square's business.
Selling, general and administrative ("SG&A") expenses were
$1,058,000 for the first quarter of fiscal 1997, an increase of $406,000
from SG&A expenses of $652,000 for the three months ended February 29,
1996. The inclusion of Thimble Square's operations in fiscal 1997
accounted for $99,000 of the increase in SG&A expenses. Additionally,
the continuation of the product development for the Warner Bros. and Walt
Disney license product lines caused $51,000 of 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 $91,000 increase in those costs.
Commissions and royalties were essentially unchanged from the first quarter of
fiscal 1996 as the increase in sales was offset by the change in the licensed/
non-licensed product mix. SG&A expenses decreased to 47.7% of sales for the
first quarter of fiscal 1997 from 49.4% of sales for the three months
ended February 29, 1996. 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.
The loss from operations was $407,000 for the first quarter of
fiscal 1997 as compared to $155,000 for the three months ended February
29, 1996. The effect of the increase in sales in the first quarter of
fiscal 1997 which increased gross profits by $175,000, was offset by
increases in operating expenses. Operating losses in the first fiscal
quarter 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.
Interest expense increased by $63,000 for the three months ended
February 28, 1997, principally as the result of higher borrowings, which
resulted from higher accounts receivable balances generated by increased
sales, and the inclusion of Thimble Square's operations, which included
interest expense of $21,000.
Liquidity and Capital Resources
Operating cash flows were a negative $483,000 for the first quarter
of fiscal 1997 principally as the result of the net loss. The net loss
was financed principally from $135,000 of additional working capital
obtained from renewed and increased borrowings under NP International's
loan, and $97,000 from the issuance of Series II 10% Unsecured
Convertible Promissory Notes. The Company also obtained $175,000 for the
further development of its Florida property from the issuance of Series
I 10% Unsecured Convertible Promissory Notes.
As discussed in Note 7 to the Condensed Consolidated Financial
Statements, the Company has entered into an agreement for the April 30,
1997 sale of the Florida property it has been developing as a retail
outlet. The sale would provide the Company with immediate cash proceeds
of $400,000, which the Company would use to finance the projected negative
operating cash flows expected during the second quarter as a result of
projected losses reflecting the Company's seasonality. The Company
decided to accept the buyer's offer for the property in order to obtain
the $400,000 of additional working capital without incurring new debt or issuing
new equity securities, and to eliminate the demand on the Company's working
capital that would result from the Company's continued development of the
property. Additionally, the Company's principal reason for its purchase and
development of the property was the desire to obtain an outlet for the
sale of certain of its products; the Company will continue to be able to
achieve this objective, without being exposed to the risks of developing
or owning the property, since the agreement provides for the Company's
occupancy of the needed retail space at favorable terms.
The Company believes that working capital provided by operations
will be sufficient to fund operations and required debt reductions in
fiscal 1997. However, due to the seasonality of the Company's business,
operating cash flows may be negative during the first half of the year.
The sale of the Florida property, as discussed above, will fund a portion
of those negative cash flows; however, the Company may nonetheless be
required to obtain additional working capital through debt or equity
financing. The Company believes that additional capital, to the extent
needed, can be obtained from the refinancing of Thimble Square's plants
and equipment, the leveraging of the remaining payments due from ANG, or the
issuance of equity securities. However, there can be no assurance that
this or other financing will be available if needed. The inability of
the Company to be able to fulfill any interim working capital
requirements would force the Company to have to constrict its 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 year ended November 30, 1996, which
is incorporated herein by reference.
Item 2. CHANGES IN SECURITIES
During the first quarter of fiscal 1997 the Company issued an
aggregate of 2,325,734 shares of common stock upon the
conversion of outstanding 8% convertible debentures. The
shares were issued to ten unaffiliated institutional investors
that were the holders of the 8% convertible debentures. No
commissions or other discounts were paid. The shares were
issued in reliance upon the exemption under Section 3(A)(9) of,
and Rules 901 through 903 promulgated under, the Securities Act
of 1933 ("the Act").
During the first quarter of fiscal 1997 the Company issued an
aggregate of $272,000 of Series I or Series II 10% Unsecured
Convertible Promissory Notes and 500,000 Class J common stock
purchase warrants (see notes 4 and 5 of Notes to Condensed
Consolidated Financial Statements). The notes and warrants
were issued to an aggregate of three individual investors, all
of who are unaffiliated with the Company. The notes and
warrants were issued in reliance upon the exemption under
Section 4(2) of the Act and Rules 501 through 506 promulgated
under the Act.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 4, 1997 the Company held its annual meeting of
stockholders. The following individuals were elected to the
board of directors:
<TABLE>
<CAPTION>
Votes Authority
For Withheld
</CAPTION>
<S> <C> <C>
Patricia Anderson-Lasko 25,301,044 483,918
Alexander K. Miller 25,255,727 529,235
Scott Parliament 25,309,929 475,033
Eleanor Schwartz 25,329,352 455,610
Marvin Williamson 25,279,237 505,725
</TABLE>
The stockholders approved a proposal to increase the number of
authorized shares of common stock from 30 million to 70
million. Votes for the proposal were 23,128,188, against were
2,395,125, abstaining were 150,582 and not voting were
3,090,095.
Proposals to (i) adopt a new stock option plan and (ii)
authorize the creation of a class of preferred stock did not
receive the required affirmative vote of in excess of one-half
of the shares eligible to vote and were therefore not approved.
The votes were as follows:
<TABLE>
<CAPTION>
Stock Option Preferred
Plan Stock
</CAPTION>
<S> <C> <C>
For 7,882,624 7,482,937
Against 2,063,796 2,477,622
Abstain 228,760 214,621
Not voted 18,588,810 18,588,810
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits.
Exhibit 3.1 Form of Amended and Restated Certificate of
Incorporation.
Exhibit 27. Financial Data Schedule (included only in the
electronically filed version of this report.
(b) Reports on Form 8-K.
On March 14, 1997 the Company filed a current Report on Form 8-
K to file a press release that discussed the results of a
conference call between the Company and stock analysts and
brokers.
<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 21, 1997 By/s/Patricia Anderson-Lasko
____________________________
Patricia Anderson-Lasko,
President, Chairman and
Chief Executive Officer
Dated: April 21, 1997 By/s/Terrance J. Bond
____________________________
Terrance J. Bond,
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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 FEBRUARY 28, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-START> Dec-01-1996
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Nov-30-1997
<PERIOD-END> Feb-28-1997
<EXCHANGE-RATE> 1
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 1,303
<ALLOWANCES> 84
<INVENTORY> 1,669
<CURRENT-ASSETS> 3,263
<PP&E> 6,638
<DEPRECIATION> 1,493
<TOTAL-ASSETS> 9,276
<CURRENT-LIABILITIES> 4,177
<BONDS> 0
0
0
<COMMON> 288
<OTHER-SE> 1,874
<TOTAL-LIABILITY-AND-EQUITY> 9,276
<SALES> 2,220
<TOTAL-REVENUES> 2,220
<CGS> 1,458
<TOTAL-COSTS> 1,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184
<INCOME-PRETAX> (457)
<INCOME-TAX> 0
<INCOME-CONTINUING> (457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (457)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
APPENDIX A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INNOVO GROUP INC.
It is hereby certified that:
1. (a) The present name of the corporation is Innovo Group Inc. (the
"Corporation").
(b) The name under the Corporation was originally incorporated is Elorac
Corporation and the date of filing the original Certificate of Incorporation of
the Corporation with the Secretary of State of the State of Delaware is December
18, 1987.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Articles First, Fourth, Sixth, Seventh, Eighth, Ninth and Tenth
thereof and by substituting in lieu thereof new Articles First, Fourth, Sixth,
Seventh, Eighth, Ninth and Tenth, which are set forth in the Amended and
Restated Certificate of Incorporation hereinafter provided for.
3. The provisions of the Certificate of Incorporation of the corporation as
heretofore amended and/or supplemented, and as herein amended, are hereby
restated and integrated into the single instrument which is hereinafter set
forth, and which is entitled Amended and Restated Certificate of Incorporation
of Innovo Group Inc. without any further amendment other than the amendments
herein certified and without any discrepancy between the provisions of the
Certificate of Incorporation as previously amended and supplemented and the
provisions of the said single instrument hereinafter set forth.
4. The amendments and the restatement of the Certificate of Incorporation herein
certified have been duly adopted in writing by the stockholders in accordance
with the provisions of Sections 228, 242 and 245 of the General Corporation Law
of the state of Delaware. Prompt written notice of the adoption of the
amendments and of the restatement of the Certificate of Incorporation herein
certified has been given to those stockholders who have not consented in
writing thereto, as provided in Section 228 of the General Corporation Law of
the state of Delaware.
5. The Certificate of Incorporation of the Corporation, as amended and restated
and restated herein, shall read as follows:
FIRST: The name of the corporation is INNOVO GROUP INC. (the
"Corporation").
SECOND: The address, including street, number, city and county, of the
registered office of the Corporation in the State of Delaware is 32 Lockerman
Square, Suite L-100, Dover, Delaware 19901, County of Kent. The name of the
registered agent of the Corporation at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The maximum number of shares, comprising the total authorized
capital stock of the corporation that the Corporation shall have authority to
issue is:
(a) Ninety million (90,000,000) of Common Stock, par value $.01 per
share, all such hares having unlimited voting rights as a class with each share
entitled to one (1) vote per share, and such class of shares being entitled to
receive the remaining net assets of the Corporation upon dissolution subject
to the rights of holders of any Preferred Stock having a liquidation preference
over the Common Stock which may be issued; and
(b) Ten million (10,000,000) shares of Preferred Stock, which shares
shall be entitled to such preferences in the distribution of dividends and
assets, and shall be divided by the Board of Directors of the Corporation into
such series, as determined by the Board of Directors of the Corporation, with
full authority in the Board of Directors to determine the relative voting
powers, designations, rights and preferences or any other matter that lawfully
may be determined by the Board of Directors with respect to the shares of any
such series.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of Delaware Code order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided:
(a) The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors shall be fixed by, or
in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase
"total number of directors" shall be deemed to have the same meaning, to wit,
the total number of directors which the Corporation would have if there were
no vacancies. No election of directors need by written ballot.
(b) The power to adopt, amend, or repeal the Bylaws of the
Corporation may be exercised by the Board of Directors of the Corporation,
provided, however, that the Board of Directors may not amend the Bylaws to take
any action that is reserved exclusively by the Shareholders pursuant to the
Delaware General Corporation Law.
(c) Whenever the Corporation shall be authorized to issue only one
class of stock, each outstanding share shall entitle the holder thereof to
notice of, and the right to vote at, any meeting of stockholders. Whenever the
Corporation shall be authorized to issue more than one class of stock, no
outstanding share of any class of stock which is denied voting power under the
provisions of this Certificate of Incorporation shall be entitle the holder
thereof to the right to vote at any meeting of stockholders except as the
provisions of paragraph (2) of subsection (b) of Section 242 of the General
Corporation Law of the State of Delaware shall otherwise require; provided,
that no share of any such class which is otherwise denied voting power shall
entitle the holder thereof to vote upon the increase or decrease (but not below
the number of shares thereof outstanding) in the number of authorized shares of
said class.
EIGHTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of the
subsection (b) of Section 102 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented.
NINTH: (a) The Corporation shall, in the manner and to the full
extent permitted by Section 145 of the General Corporation Law of the state of
Delaware, as the same may be amended and supplemented, indemnify any officer
or director (or the estate of any such person) who was or is a party to, or
is threatened, to be made a party to, any threatened, pending or complete
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, partner, trustee or employee of another
corporation, partnership, joint venture, trust or other enterprise (an
"indemnitee"). To the full extent permitted by law, the indemnification and
advances provided for herein shall include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement. Notwithstanding the foregoing,
the Corporation shall not indemnify any such indemnitee (1) in any proceeding
by the Corporation against such indemnitee; (2) in the event the board of
directors determines that indemnification is not available under the
circumstances because the officer or director has not met the standard of
conduct set forth in Section 145 of the Delaware General Corporation Law; or (3)
if a judgment or other final adjudication adverse to the indemnitee establishes
his liability (i) for any breach of the duty of loyalty to the Corporation or
its shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, or (iii) under Section 174
of the Delaware General Corporation Law.
(b) The right to indemnification conferred in Section (a) of this Article
NINTH shall include the right to be paid by the Corporation the expenses
(including attorneys' fees) incurred in defending any such proceeding in advance
of its final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires, and advancement
of expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking,
by or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under this Section (b) or otherwise. The rights to
indemnification and to the advancement of expenses conferred in Sections (a)
and (b) of this Article NINTH shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a director or officer and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
(c) The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH shall not be exclusive of any other right which
any indemnitee may have or hereafter acquire under any statute, the
Corporation's Amended and Restated Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in such indemnitee's official capacity and as to action in another
capacity while holding such office.
(d) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
(e) The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article NINTH with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
TENTH: No amendment to or repeal of Article EIGHT or NINTH of this
Amended and Restated Certificate of Incorporation shall apply to or have any
effect on the rights of any individual referred to in Article EIGHT or NINTH for
or with respect to acts or omissions of such individual occurring prior to
such amendment or repeal.
ELEVENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and
all rights at any time conferred upon the stockholders of the Corporation by
this Certificate of Incorporation are granted subject to the provisions of this
Article ELEVENTH.
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed by its President and attested by its Secretary,
this 4th day of April, 1997.
INNOVO GROUP INC.
By:/s/Patricia Anderson-Lasko
_____________________________
Patricia Anderson-Lasko
President
ATTEST:
/s/Schren L. Head
_________________________
Schren L. Head
Secretary
