<PAGE> 1
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, 1998.
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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF SEPTEMBER 30, 1998
- ----- -------------------------------------
<S> <C>
Common stock, par
value of $.10 per share 4,475,937
</TABLE>
1
<PAGE> 2
INNOVO GROUP INC.
INDEX
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1 Financial Statements
Condensed consolidated balance sheet as of 4
August 31, 1998 and November 30, 1997.
Condensed Consolidated statements of
operations for the three and nine months ended
August 31, 1998 and 1997.
Condensed consolidated statements of cash 5
flows for the nine months ended August 31,
1998 and 1997
Notes to condensed consolidated financial 6
statements
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
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
</TABLE>
2
<PAGE> 3
PART 1. 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
1998 1997
-------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 706 $ 469
Accounts receivable 1,971 895
Inventories 1,357 1,582
Prepaid expenses 341 398
-------- --------
TOTAL CURRENT ASSETS 4,375 3,344
PROPERTY AND EQUIPMENT, net 4,683 5,071
OTHER ASSETS 38 753
-------- --------
$ 9,096 $ 9,168
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable 2,531 $ 1,131
Current maturities of long-term debt 426 211
Accounts payable 1,266 1,412
Accrued expenses 1,266 769
-------- --------
TOTAL CURRENT LIABILITIES 5,489 3,523
LONG-TERM DEBT, less current
maturities 2,100 1,854
-------- --------
TOTAL LIABILITIES 7,589 5,377
STOCKHOLDERS' EQUITY
Common stock $.10 par; shares authorized
7,000,000; issued 4,488,113 shares in
1998 and 4,459,613 shares in 1997 449 446
Additional paid-in capital 28,574 28,429
Promissory Note - Officer (703) (703)
Deficit (24,387) (21,955)
Treasury stock, 11,969 shares (2,426) (2,426)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 1,507 3,791
-------- --------
$ 9,096 $ 9,168
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except for share information)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------- ---------------------
August 31 August 31 August 31 August 31
1998 1997 1998 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
NET SALES $ 2,294 $ 2,585 $ 5,822 $ 6,095
COST OF SALES 1,346 1,433 3,542 3,641
---------------------- ---------------------
Gross Profit 948 1,152 2,280 2,454
OPERATING EXPENSES
Selling, general and administrative 1,019 1,037 2,857 2,983
Depreciation and amortization 66 66 208 193
---------------------- ---------------------
Income (loss) from operations (137) 49 (785) (722)
INTEREST EXPENSE (139) (270) (324) (595)
OTHER INCOME (EXPENSE) - Net 94 70 117 236
---------------------- ---------------------
Income (loss) before income taxes (benefit) (182) (151) (992) (1,081)
INCOME TAXES (BENEFIT): 0 0 0 0
---------------------- ---------------------
NET INCOME (LOSS) ($ 182) ($ 151) ($ 992) ($1,081)
---------------------- ---------------------
DISCONTINUED OPERATIONS, NET OF TAXES
(Note 2.):
Results of discontinued Thimble Square
operations (133) (102) (318) (268)
Loss on disposal Thimble Square operations (1,122) (1,122)
---------------------- ---------------------
NET INCOME (LOSS) ($1,437) ($ 253) ($2,432) ($1,349)
====================== =====================
EARNINGS (LOSS) PER SHARE:
Continuing operations ($ 0.04) ($ 0.04) ($ 0.22) ($ 0.35)
Discontinued operation (0.28) (0.03) (0.32) (0.08)
Net Income (loss) ($ 0.32) ($ 0.07) ($ 0.54) ($ 0.43)
====================== =====================
WEIGHTED AVERAGE SHARES OUTSTANDING 4,476 3,581 4,470 3,105
====================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
INNOVO GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000's)
<TABLE>
<CAPTION>
Nine months ended
-------------------------
August 31 August 31
1998 1997
--------- ----------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $(1,582) $ (907)
------- -------
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures (52) (223)
Proceeds from sale of
discontinued operations
Net cash provided by (used in)
investing activities (52) (223)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 10 79
Proceeds from issuance of common stock
to investor group 1,300
Repurchase of stock warrants (150)
Additions to notes payable 2,285 727
Repayments on notes payable (885) (64)
Additions to long-term debt 650 96
Debt issue costs 0
Repayments of long-term debt (189) (226)
------- -------
Net cash provided by (used in)
financing activities 1,871 1,762
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 237 632
CASH AND EQUIVALENTS, beginning of period 469 31
------- -------
CASH AND EQUIVALENTS, end of period $ 706 $ 663
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PART I, ITEM I
NOTE I: 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, 1997.
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.
On September 14, 1998 the Company entered into an agreement to
lease the operating assets of Thimble Square, Inc. to an unaffiliated company.
The products manufactured and sold at Thimble Square represented a separate
class of products, and the results of those operations are reported as a
component of discontinued operations (see Note 2), prior period financial
statements have been reclassified.
On August 31, 1998 the Board of Directors declared a 1 for 10
reverse stock split, effective September 11, 1998. All share and per share data
have been restated to reflect the effect of the reverse split.
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share".
6
<PAGE> 7
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: DISCONTINUED OPERATIONS
Income (loss) from discontinued operations is as follows:
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
August 31 August 31 August 31 August 31
--------- --------- --------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(000's)
<S> <C> <C> <C> <C>
Results of discontinued
Thimble Square operations ($133) ($102) ($318) ($268)
Loss on disposal of Thimble Square operations (1,122) (1,122)
---------------------------- -------------------------
($1,255) ($102) ($1,440) ($268)
============================ =========================
</TABLE>
Note 2: DISCONTINUED OPERATIONS
On September 14, 1998 the Company entered into an asset lease agreement
that includes a purchase option with Confident Colors, LLC. For the operating
assets of Thimble Square, Inc. that are located in Baxley, Georgia.
The agreement is for a period of two years and provides for lease
payments of $4,500 per month for the first year and $5,000 per month for the
second year, plus 2% of any revenues greater than $5,000,000 annually.
The agreement also grants Confident Colors a purchase option for the
leased assets of $480,000. This option can be exercised at any time during the
lease and Confident Colors can apply 33% of base lease payments and 50% of
purchase lease payments to the purchase price.
The remaining assets of Thimble Square, Inc. have been adjusted to
estimated net realizable value. Property and equipment include $450,000 of
assets held for sale relating to Thimble Square, Inc. Pembroke facility.
NOTE 2: DISCONTINUED OPERATIONS (concluded)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
August 31 August 31 August 31 August 31
--------- --------- -------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(000's)
<S> <C> <C> <C> <C>
Net Sales $361 $313 $992 $1,136
Cost of goods sold (212) (256) (663) (890)
Selling, general and
administrative expense (270) (126) (594) (431)
Interest Expense (12) (33) (53) (83)
------------------------ -------------------------
Income (loss) from operations ($133) ($102) ($318) ($268)
======================== =========================
</TABLE>
Note 3: INVENTORIES
Inventory consisted of the following:
<TABLE>
<CAPTION>
August 31, 1998 November 30, 1997
--------------- -----------------
(000's)
<S> <C> <C>
Finished goods $ 583 $ 680
Work-in-process 151 246
Raw materials 659 692
Inventory reserve (36) (36)
------- -------
Total $ 1,357 $ 1,582
</TABLE>
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT
(a) Notes Payable
7
<PAGE> 8
<TABLE>
<CAPTION>
August 31, 1998 November 30, 1997
--------------- -----------------
(000's)
<S> <C> <C>
Accounts receivable
factoring facility $1,042 $ 504
Working capital loan 1,111 273
NPI International loan 251 251
Other 127 103
------ ------
Total $2,531 $1,131
</TABLE>
NOTE 5: STOCKHOLDERS' EQUITY
In January 1998, the Company issued 10,000 shares of common stock in
payment of a consulting contract for marketing services. The services will be
rendered through November 1999.
In February 1998, the Company issued 15,000 shares of its common stock
to two employees, one of which was a former director of the Company, as payment
of $54,000 of indebtedness due the employees and as full payment for the
remaining terms of their employment contracts which continue through April 1999.
In March 1998, the directors awarded to a member of the Corporation's
Board, Mr. Samuel J. Furrow, a non-qualified share option to purchase 100,000
shares of the Company's Common Stock as an equity incentive to become and remain
as a member of the Board of Directors. The grant of these options is at a
purchase price of 4.75 per share until March 31, 2003. The option becomes
exercisable by Furrow with respect to 2,083 shares during each of the first 48
calendar months which Furrow continues to serve as a Board member up to a
maximum of 100,000 shares.
In June 1998 the Company issued 3,500 shares of its common stock upon
the exercise of its Class G warrants.
The Company has adopted the provisions of SFAS No. 128, Earnings Per
Share, which is effective for fiscal years ending after December 15, 1997. Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of common stock equivalents. Diluted earnings per share has not
been presented because the impact of the assumed exercise of the Company's stock
options and warrants would have been anti-dilutive. The assumed exercise of the
Company's options and warrants may have a dilutive effect in the future.
The changes in common stock, additional paid-in capital, and treasury
stock during the first three quarters of fiscal 1998 were as follows:
8
<PAGE> 9
<TABLE>
<CAPTION>
Additional Promissory
paid-in Note Treasury Stock
Shares Amount capital Officer Shares Amount
------ ------ ------- ------- ------ ------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1997 4,459,613 $446 $28,429 ($703) (11,969) ($2,426)
Issuance of common stock
Extinguishment of debt
and related fees 25,000 2 152
Exercise of options 3,500 1 9
Listing Fees (16)
Balance, September 30, 1998 4,488,113 $449 $28,574 ($703) (11,969) ($2,426)
</TABLE>
9
<PAGE> 10
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 judgment 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, 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-judgment 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 judgment as not supported by the
evidence or improper as a matter of law.
As a result, the judgment, including post-judgment interest through
August, 1996, has been reduced to $420,000 against Innovo, Inc. only. 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 the Company's claim of breach of fiduciary duty by
Tedesco. The trial was completed in April 1998 and the jury found Tedesco did
knowingly breach his fiduciary duty and awarded in favor of the Company
$125,000. The Company will be entitled to offset these damages awarded against
the amended appeals decision. In connection, the Company had pledged 20,000
shares of its unissued common stock which has been issued to Tedesco as partial
payment against the total award. The final amount of loss to the Company,
including interest and attorney fees as of August 31, 1998, is approximately
$185,000 which has been provided for in the financial statements.
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products, Inc. filed suit against NASCO Products,
Inc. asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products, Inc. NASCO Products, Inc. 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 NASCO Products, Inc.
The Company has denied the supplier's claims, and has asserted affirmative
defenses, including the supplier's claims, and has asserted affirmative
defenses, including the supplier's late
10
<PAGE> 11
shipment of the original products, and the supplier's refusal to accept and fill
NASCO Products, Inc. orders on terms contained in the agreement. NASCO Products,
Inc. 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.
11
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Continuing Operations
Sales for the continuing operations of the Company were $2,294,000 for the third
quarter of fiscal 1998, compared to $2,585,000 for the same quarter of fiscal
1997, representing a 11.26% decrease in their sales. Sales for the first nine
months of fiscal 1998 decreased by $273,000, or 4.48%, to $5,822,000, from
$6,095,000 for the nine months ended August 31, 1997. The decrease in Innovo's
sales resulted principally from decreased craft product shipments and
domestic sports licensed products. Innovo's sales ending the first nine months
of 1998 were $4,394,000 compared to $5,067,000 for the same period in 1997. The
decrease resulted primarily from the exclusion of an initial stocking order of
$500,000 which occurred in 1997. Sales for NP International for the nine months
ending August 31, 1998 were $1,430,000 compared to $1,081,000 for the same
period in 1997. The increase of $349,000, or 32.3%, was the result of improved
timing for the sales, manufacturing and distribution of licensed product in the
international markets. The Company's recent discussions with international
customers have indicated that the volume of back-to-school and holiday business
in fiscal 1998 was positively affected by the timing of the product
introductions and fiscal 1998 sales have increased significantly through the
first nine months of 1998.
Gross profit for the Company as a percentage of sales was 41.3% for the third
quarter of fiscal 1998 compared to 44.6% for the three months ended August 31,
1997. The gross profit for Innovo and NP International was 39%, as compared to
their gross profit percentage of 40% for the nine months ended August 31, 1998
and 1997 respectively. The gross profit margins have been less than anticipated
because sales for the first nine months of fiscal 1998 have been heavily
weighted towards craft products which generally carry a lower gross margin than
licensed products.
On July 7, 1998 the Company entered into a manufacturing alliance with a new
plant in the Orient. This alliance resulted in a lowered product cost and also
resulted in the extension of a $500,000 line of credit through the manufacturer
to fund the cost of material purchases and production for a period of up to 60
days. On July 22, 1998 the Company entered into a sales alliance with The
Coulver Marketing Group, a national sale organization headquartered in Michigan
with additional sales offices in New York City. On August 20, 1998 the Company
entered into a strategic alliance with Fan Fueler(TM), a division of Action
Performance Companies, Inc.(TM) which allows the Company design, manufacturing
and certain distribution rights for new NASCAR product lines featuring lunch
packs, coolers, tote bags, waist packs, cush-n-carrys, and backpacks. The stable
of drivers currently represented by Fan Fueler(TM) includes Dale Earnhardt, Jeff
Gordon, Rusty Wallace, and Dale Jarrett, among others. The Company has completed
NASCAR designs
12
<PAGE> 13
and initiated manufacturing of the new product lines represented by this
strategic alliance. It is the belief of management that manufacturing,
marketing, sales and distribution alliances allow for the Company to focus on
expanding sales with a lower impact on capital than is traditionally experienced
through internal expansion.
During the second quarter of 1998 the Company signed a letter of intent for the
purchase of Wash America, Inc., a custom dye company located in Pulaski,
Tennessee. On August 7, 1998 acquisition discussions with Wash America were
terminated by mutual agreement. Additionally, during the second and third
quarters of 1998 the Company began manufacturing and distributing product
specifically designed for the souvenir market. The Company is adding another
major retailer to its EDI system allowing them to readily order and reorder
merchandise electronically.
Selling, general and administrative ("SG&A") expenses for the third quarter of
fiscal 1998 were $1,019,000, or 44.4% of sales, compared to $1,037,000 or 40.1%
of sales for the three months ended August 31, 1997. SG&A expenses were
$2,857,000 for the first nine months of fiscal 1998, a decrease of $126,000 from
SG&A expenses of $2,983,000 for the nine months ended August 31, 1997. Although,
as a percentage of sales, SG&A expenses remained at 49% of sales for the first
three quarters of fiscal 1998 when compared to 49% of sales for the nine months
ended August 31, 1997. The increase of SG&A during the third quarter is
attributed to the increase in royalty expense which resulted from the increase
in licensed product sales, primarily through NP International, during the third
quarter of 1998.
The loss from continuing operations for the third quarter of fiscal 1998 was
$182,000 as well as a loss of $992,000 for the first nine months, as compared to
a loss of $151,000 and a loss of $1,081,000 for the three and nine months ended
August 31, 1997, respectively. The Company continued to show improved
profitability through the third quarter of 1998 by decreasing the loss by
$89,000, or 8.23%, when compared to the same period in 1997. Interest expense
decreased by $131,000 and $271,000 for the three and nine months ended August
31, 1998, respectively, as a result of improved financing facilities, based on
the personal guaranties of management, while maintaining the historic level of
receivables.
The net loss for the third quarter 1998 for the Company, excluding the
discontinued operation of Thimble Square, was $182,000, or $.04 per share as
compared to a loss of $151,000, or $.04 per share, for the same period a year
ago. Net loss for Innovo, excluding the discontinued operation of Thimble
Square, for the nine months ending August 31, 1998 was $992,000, or $.22 per
share compared to $1,081,000, or $.35 per share, for the same fiscal period in
1997.
Discontinued Operations
Effective September 14, 1998 the Company leased substantially all of the
operative assets of Thimble Square, Inc. to an unaffiliated company as more
fully discussed in Note 2 to the financial statements. This business disposal
has been treated as discontinued operations.
13
<PAGE> 14
Sales for the discontinued Thimble Square's operations in the third quarter of
1998 were $361,000 compared to $313,000 in fiscal 1997. Thimble Square's sales
of $992,000 for the nine months ended August 31, 1998 decreased from $1,136,000
for the same period in 1997.
The operating loss for Thimble Square for the quarter ending August 31, 1998 was
$133,000 compared to a loss of $102,000 for the same period in 1997. The
operating loss for Thimble Square for the nine month period ending August 31,
1998 was $318,000 compared to a loss of $268,000 for the same period in 1997.
Additionally, there was a one time charge to the earnings of Thimble Square in
the amount of $1,122,000 in the third quarter of 1998 resulting from the
disposal of assets, the write off of goodwill, and inventory adjustments. With
this adjustment included, the result of discontinued operations of Thimble
Square was a loss of $1,155,000, or $.28 per share, for the third quarter of
1998. For the nine months ending August 31, 1998 the loss was $1,440,000, or
$.32 per share.
Liquidity and Capital Resources
On October 8, 1998 the Company issued 899,000 shares of common stock in
a private placement to a company owned by two members of its board of directors.
Net proceeds from the private placement was $1,798,000.
Operating cash flows were a negative $1,582,000 for the first nine
months of fiscal 1998, principally as a result of $1,076,000 increase in
accounts receivable and the net losses. The negative cash flow was financed
primarily from $692,000 in addition borrowings under bank facilities with First
American National Bank and First Independent Bank and a $650,000 long-term note
with Commerce Capital. There was no material availability on those lines at
August 31, 1998.
On October 13, 1998 the Company announced its intent to move
manufacturing and distribution from Springfield, Tennessee to Knoxville,
Tennessee. It is management's belief that payments the Company will receive from
rentals and leases on the Springfield real estate should compensate for the
property's related costs.
The company's Florida retail property, referred to as Good Deal Mall,
was acquired in fiscal 1995, and through August, 1997 the company was engaged
in readying it to operate as an indoor multivendor open space mall in which
retailers operate from permanent booths. After being open three months, in
November, 1997, the company decided to engage new management for the Good Deal
Mall, and refine the long-term goals for the property. Management determined
that the then existing merchant lessees were not consistent with its revised
plans, and vacated the space so that merchants consistent with the revised plans
could be attracted. The Company has previously indicated its intent to reopen
the mall in the third quarter of fiscal 1998, consistent with the seasonality of
the Florida retail market. However, due to changes in the long-term strategic
goals of the Company, management has decided to
14
<PAGE> 15
utilize other options with the property which include the sale or lease of the
facility.
In its Quarterly report on form 10-Q for the quarter ended May 31,
1998, the Company announced its intent to purchase Wash America Cotton & Knits,
Inc. of Pulaski, Tennessee. In August 1998 the Company terminated discussions
with Wash America and did not complete the purchase.
The company believes, that on an overall basis, cash will be sufficient
to fund planned operations. Additional capital, to the extent needed, may be
obtained from the sale of Thimble Square's Pembroke property, The Good Deal Mall
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.
15
<PAGE> 16
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, 1997, which is
incorporated herein by reference.
Item 2. CHANGES IN SECURITIES
During the first three quarters of fiscal 1998 the Company has issued
an aggregate of 25,000 shares of common stock to extinguish $54,000 in
debt and to fund obligations under certain employment and consulting
contracts and has issued 3,500 shares of common stock upon the exercise
of its outstanding class G warrants. See Note 4 of Notes to Condensed
Consolidated Financial Statements.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits.
Exhibits 27. Financial Data Schedule (included only
in the electronically filed version of this
report.)
(b) Reports on Form 8-K.
None
16
<PAGE> 17
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, 1998 By /s/ L. E. Smith
-------------------------------------
L. E. Smith,
Chairman and Chief Executive Officer
Dated: October 15, 1998 By /s/ J. Eric Hendrickson
-------------------------------------
J. Eric Hendrickson,
Vice President and Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANIES QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<CASH> 706
<SECURITIES> 0
<RECEIVABLES> 2,034
<ALLOWANCES> 63
<INVENTORY> 1,357
<CURRENT-ASSETS> 4,375
<PP&E> 6,628
<DEPRECIATION> 2,009
<TOTAL-ASSETS> 9,096
<CURRENT-LIABILITIES> 5,489
<BONDS> 0
0
0
<COMMON> 449
<OTHER-SE> 1,058
<TOTAL-LIABILITY-AND-EQUITY> 9,096
<SALES> 5,822
<TOTAL-REVENUES> 5,822
<CGS> 3,542
<TOTAL-COSTS> 3,065
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324
<INCOME-PRETAX> (992)
<INCOME-TAX> 0
<INCOME-CONTINUING> (992)
<DISCONTINUED> 1,440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,432)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> 0
</TABLE>
