SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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 June 30, 1997
_____ ______________________________
Common stock, par
value of $.01 per share 33,311,442 shares
<PAGE>
INNOVO GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed consolidated balance sheets as of
May 31, 1997 and November 30, 1996 3
Condensed consolidated statements of operations for the
three and six months ended May 31, 1997 and 1996 4
Condensed consolidated statements of cash flows for the
six months ended May 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 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
<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>
May 31, November 30,
1997 1996
________ ___________
ASSETS
CURRENT ASSETS
</CAPTION>
<S> <C> <C>
Cash and cash equivalents $ 5 $ 31
Accounts receivable 1,602 1,238
Inventories 1,822 1,749
Prepaid expenses 367 332
_______ ______
TOTAL CURRENT ASSETS 3,796 3,350
PROPERTY AND EQUIPMENT, net 5,170 5,188
OTHER ASSETS 814 895
_______ ______
$ 9,780 $ 9,433
_______ ______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,355 $ 921
Current maturities of long-term debt 328 224
Accounts payable 2,183 1,861
Accrued expenses 1,401 954
_______ ______
TOTAL CURRENT LIABILITIES 5,267 3,960
LONG-TERM DEBT, less current
maturities 2,307 3,079
OTHER 160 119
_______ ______
TOTAL LIABILITIES 7,734 7,158
_______ ______
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
70,000,000; issued 33,258,508 shares in
1997 and 26,530,577 shares in 1996 332 265
Additional paid-in capital 25,876 25,076
Deficit (21,736) (20,640)
Treasury stock, 119,691 shares (2,426) (2,426)
_______ ______
TOTAL STOCKHOLDERS' EQUITY 2,046 2,275
_______ ______
$ 9,780 $ 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 Six Months ended
___________________ ____________________
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
_______ _______ ______ _________
</CAPTION>
<S> <C> <C> <C> <C>
NET SALES $ 2,112 $ 2,081 $ 4,332 $ 3,400
COST OF SALES 1,384 1,271 2,842 $ 2,003
_______ ______ ______ ______
Gross profit 728 810 1,490 1,397
OPERATING EXPENSES
Selling, general and administrative 1,092 956 2,150 1,608
Depreciation and amortization 116 178 227 268
_______ ______ ______ ______
Income (loss) from operations (480) (324) (887) (479)
INTEREST EXPENSE (191) (163) (375) (284)
OTHER INCOME (EXPENSE) - Net 32 51 166 166
_______ ______ ______ ______
Income (loss) before income taxes (benefit) (639) (436) (1,096) (597)
INCOME TAXES (BENEFIT): - - - -
_______ ______ ______ ______
NET INCOME (LOSS) $ (639) $ (436) $(1,096) $ (597)
_______ ______ ______ ______
EARNINGS (LOSS) PER SHARE: $ (.02) $ (.04) $ (.04) $ (.06)
_______ ______ ______ ______
WEIGHTED AVERAGE SHARES OUTSTANDING 28,894 11,919 28,639 9,318
_______ ______ ______ ______
</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>
Six Months ended
________________________
May 31, May 31,
1997 1996
_______ _________
CASH PROVIDED BY (USED IN)
</CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES $ (662) $(1,311)
_______ _______
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures (54) (115)
_______ _______
Net cash provided by (used in)
investing activities (54) (115)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 63 1,284
Additions to notes payable 727 312
Repayments on notes payable (49) (22)
Additions to long-term debt 96 -
Repayments of long-term debt (147) (56)
_______ _______
Net cash provided by (used in)
financing activities 690 1,518
_______ ______
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (26) 92
CASH AND EQUIVALENTS, beginning of period 31 2
_______ ______
CASH AND EQUIVALENTS, end of period $ 5 $ 94
_______ ______
</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)
<TABLE>
<CAPTION>
Six months ended
___________________
May 31,
1996
_______
(000's except per share amounts)
</CAPTION>
<S> <C>
Sales $ 3,833
Income (loss) from continuing
operations (809)
Income (loss) per share from
continuing operations (.08)
</TABLE>
NOTE 3: INVENTORIES
Inventory consisted of the following:
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
_______ ___________
(000's)
</CAPTION>
<S> <C> <C>
Finished goods $ 593 $ 440
Work-in-process 642 719
Raw materials 623 663
Inventory reserve (36) (73)
______ ______
Total $1,822 $ 1,749
______ ______
</TABLE>
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT
(a) Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
_______ ___________
(000's)
</CAPTION>
Accounts receivable
<S> <C> <C>
factoring facility $ 886 $ 468
Working capital loan 85 213
NPI International loan 249 100
10% unsecured convertible
note - -
Other 135 140
______ ______
$ 1,355 $ 921
______ ______
</TABLE>
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 is convertible,
commencing May 1, 1997, into an aggregate of 1.5 million shares of common
stock. 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. 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 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 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 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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: STOCKHOLDERS' EQUITY (concluded)
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. The Class J Warrants were exercised in May,
1997 concurrently with the conversion of the Series I Convertible Note.
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 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 half 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 4,127,931 41 359 - -
Conversion of convertible
notes 2,100,000 21 260 - -
Exercise of warrants 500,000 5 58 - -
Issuance of convertible
notes - - 123 - -
__________ ____ ______ ________ ______
Balance, May 31, 1997 33,258,508 $ 332 $25,876 (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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6: CONTINGENCIES (concluded)
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
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the first half of fiscal 1997 increased by $932,000, or
27.4%, to $4,332,000, from $3,400,000 for the six months ended May 31,
1996. Higher sales by Innovo and NP International accounted for $335,000
of the increase, representing a 10.6% increase in their sales, while
$593,000 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 $823,000 for
the six months ended May 31, 1997 were 24.1% higher than its sales for
the comparable period a year ago.
Sales for the second quarter of fiscal 1997 were $2,112,000
compared to sales of $2,081,000 for the three months ended May 31, 1996.
Sales for Innovo and NP International were $1,763,000 for the second
quarter of fiscal 1997, compared to $1,853,000 for the second quarter of
fiscal 1996. However, the fiscal 1996 amount includes $721,000 from the
sale of U.S. Olympic Team products. Innovo and NP International replaced
$631,000 of those sales with increased sales of other products, which
represented a 55.7% increase in the second quarter sale of those
products. Thimble Square's sales increased from $230,000 to $318,000
because the second quarter of fiscal 1997 includes three months of that
company's operations, compared to only two months (April 1, 1996 to May
31, 1996) in fiscal 1996.
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 was
completed in the second quarter of fiscal 1997, and the initial shipments
of the Warner product are expected to continue and, for the Walt Disney
products start, in the third quarter of fiscal 1997. The Company's
recent discussions with international 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 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 particularly in the fourth quarter,
of fiscal 1997.
Gross profit as a percentage of sales was 34.4%% for the six
months ended May 31, 1997 compared to 41.1% for the first half of fiscal
1996. The gross profit for Innovo and NP International was 37.0%, as
compared to their gross profit percentage of the full year of fiscal 1996
of 33.9%. The gross profit for these operations of 40.7% in the first
half of fiscal 1996 was in part due to the effect of the presence of U.S.
Olympic Team products in the 1996 sales mix, which generally carried a
higher gross margin to offset the higher U.S.O.C. royalty rate.
Additionally, Innovo's sales for the first half of fiscal 1997 were more
heavily weighted towards craft products, which generally carry a lower
gross margin than licensed products. However, the gross profit margin at
Innovo in fiscal 1997 has been lower than originally projected due to production
inefficiencies caused by the absence of additional anticipated working capital
and higher than anticipated costs and lower than anticipated sales prices on
certain new or revised products. The Company had anticipated obtaining working
capital in the second quarter of fiscal 1997 from the sale of the Florida
property and from the issuance of debt or equity securities. That working
capital was not obtained, as a result of which the Company was not able to
maintain raw materials at levels needed for efficient production. The higher
costs result principally from packaging requirements imposed by certain major
customers, and Innovo utilized introductory sales prices to gain volume orders
on certain new or revised products in certain departments, such as the back to
school departments, where Innovo was moving into new departments within existing
major customers. The gross profit for Thimble Square for the first half of
fiscal 1997 was 23.1% which was lower than its 36.3% gross profit margin for the
full year fiscal 1996 consistent with the seasonality of Thimble Square's
business.
Gross profit as a percentage of sales was 34.3% for the second
quarter of fiscal 1997 compared to 38.9% for the three months ended May
31, 1996. Innovo and NP International had a gross profit of 36.5% for
the second quarter of fiscal 1997, compared to 37.9% for the three months
ended May 31, 1996. Thimble Square's gross profit was 21.6% for the
second quarter of fiscal 1997.
Selling, general and administrative ("SG&A") expenses were
$2,150,000 for the first half of fiscal 1997, an increase of $542,000
from SG&A expenses of $1,608,000 for the six months ended May 30, 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.
Commissions and royalties decreased by $55,000 as the result of a
decrease in the percentage of licensed products in the overall sales mix.
SG&A expenses increased to 49.6% of sales for the first half of fiscal
1997 from 47.3% of sales for the six months ended May 31, 1996. SG&A
expenses for the second quarter of fiscal 1997 were $1,092,000, or 51.8%
of sales, compared to $956,000 or 45.9% of sales for the three months
ended May 31, 1996.
The loss from operations was $887,000 for the first half, and
$480,000 for the second quarter of fiscal 1997 as compared to $479,000
and $324,000 for the six and three months ended May 31, 1996,
respectively. The effect of the increase in sales in fiscal 1997 was
offset in the second quarter by declines in the gross profit percentage,
and in both the first and second quarters by increases in operating
expenses. 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.
Interest expense increased by $91,000 and $28,000 for the six and
three months ended May 31, 1997, respectively, as the result of higher
borrowings, which 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 and $15,000 for the six and three months ended May 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, as a result of which those interest costs will not
affect the second half of fiscal 1997.
Liquidity and Capital Resources
Operating cash flows were a negative $662,000 for the first half
of fiscal 1997, principally as the result of the net loss 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 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. $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 now
determined to retain and operate the property. The certificate of
occupancy was obtained in June, 1997, and the Company currently expects
that retail tenants will begin to move into the property in August, 1997
and that the property would open on Labor Day. The completion of the
improvements to the property means that, beginning in July, 1997, the
Company will begin 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. The
Company estimates that the depreciation expense will be $62,000 annually,
and that the interest expense will be $37,000 for the remainder of fiscal
1997.
As previously discussed, the Company had anticipated obtaining additional
working capital during the second quarter to offset the negative cash flows
caused by its seasonality. The additional working capital was not obtained,
as a result of which the seasonal negative cash flows have caused an increase
in the Company's accounts payable and accrued liabilities. The Company will
seek, during the third quarter of fiscal 1997, to raise approximately $600,000
through one or both of new inventory and accounts receivable based credit
facilities or the issuance of equity securities. The Company believes that the
working capital needed to reduce its accounts payable and accrued liabilities
to proper levels can be obtained from those sources. However, there can be no
assurance that this or other financing will be available. The inability
of the Company to be able to fulfill 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 period ended November 30, 1996, which
is incorporated herein by reference.
Item 2. CHANGES IN SECURITIES
During the second quarter of fiscal 1997 the Company issued an
aggregate of 1,802,197 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 second quarter of fiscal 1997 the Company issued
2,100,000 shares of common stock upon the conversion of the
aggregate of $281,000 of principal and accrued interest of Series
I and Series II 10% Unsecured Convertible Promissory Notes. The
shares were issued to an aggregate of three individual investors,
all of whom are unaffiliated with the Company. The shares were
issued in reliance upon the exemption under Section 4(2) of the
Act and Rules 501 through 506 promulgated under the Act.
During the second quarter of fiscal 1997 the Company issued
500,000 shares of common stock upon the exercise of the Class J
common stock purchase warrants. The Company received cash
proceeds of $63,000 from the exercise of the warrants. The
shares were issued to the holder of the Class J Warrants, who was
in individual investor not affiliated with the Company. The
shares were issued in reliance upon the exemption under Section
4(2) of the Act and Rules 501 through 506 promulgated under the
Act.
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 March 14, 1997 the Company filed a Form 8-K that contained a
press release discussing a conference between the Company and
brokers and analysts.<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: July 18, 1997 By/s/Patricia Anderson-Lasko
Patricia Anderson-Lasko,
President, Chairman and
Chief Executive Officer
Dated: July 18, 1997 By/s/Terrance J. Bond
Terrance J. Bond,
Controller
<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 MAY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 1,684
<ALLOWANCES> 82
<INVENTORY> 1,822
<CURRENT-ASSETS> 3,796
<PP&E> 6,750
<DEPRECIATION> 1,580
<TOTAL-ASSETS> 9,780
<CURRENT-LIABILITIES> 5,267
<BONDS> 0
0
0
<COMMON> 332
<OTHER-SE> 1,714
<TOTAL-LIABILITY-AND-EQUITY> 9,780
<SALES> 4,332
<TOTAL-REVENUES> 4,332
<CGS> 2,842
<TOTAL-COSTS> 2,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> (1,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,096)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
