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, 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.
Class Outstanding as of April 1, 1998
_________________________ _______________________________
Common stock, par
value of $.01 per share 44,726,442 shares
<PAGE>
INNOVO GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed consolidated balance sheets as of
February 28, 1998 and November 30, 1997 3
Condensed consolidated statements of operations
for the three months ended February 28, 1998
and February 28, 1997 4
Condensed consolidated statements of cash flows
for the three months ended February 28, 1998
and February 28, 1997 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
<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 1998 1997
CURRENT ASSETS
</CAPTION>
<S> <C> <C>
Cash and cash equivalents $ 572 $ 469
Accounts receivable 1,421 895
Inventories 1,586 1,582
Prepaid expenses 204 398
_______ _______
TOTAL CURRENT ASSETS 3,783 3,344
PROPERTY AND EQUIPMENT, net 4,977 5,071
OTHER ASSETS 724 753
_______ _______
$ 9,484 $ 9,168
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,581 $ 1,131
Current maturities of long-term debt 205 211
Accounts payable 1,283 1,412
Accrued expenses 1,041 769
_______ _______
TOTAL CURRENT LIABILITIES 4,110 3,523
LONG-TERM DEBT, less current
maturities 1,844 1,854
_______ _______
TOTAL LIABILITIES 5,954 5,377
_______ _______
STOCKHOLDERS' EQUITY
Common stock $.01 par; shares authorized
70,000,000; issued 44,846,133 shares in
1998 and 44,596,133 shares in 1997 448 446
Additional paid-in capital 28,581 28,429
Promissory Note - Officer (703) (703)
Deficit (22,370) (21,955)
Treasury stock, 119,691 shares (2,426) (2,426)
_______ _______
TOTAL STOCKHOLDERS' EQUITY 3,530 3,791
_______ _______
$ 9,484 $ 9,168
_______ _______
</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 28,
1998 1997
___________ ___________
</CAPTION>
<S> <C> <C>
NET SALES $ 2,243 $ 2,220
COST OF SALES 1,375 1,458
______ ______
Gross Profit 868 762
OPERATING EXPENSES
Selling, general and
administrative 1,075 1,058
Depreciation and amortization 116 111
______ ______
Income (loss) from operations (323) (407)
INTEREST EXPENSE (103) (184)
OTHER INCOME - Net 11 134
______ ______
Income (loss) before income
taxes (benefit) (415) (457)
INCOME TAXES (BENEFIT): - -
______ ______
NET INCOME (LOSS) $ (415) $ (457)
______ ______
EARNINGS (LOSS) PER SHARE: $ (.01) $ (.02)
______ ______
WEIGHTED AVERAGE SHARES OUTSTANDING 44,564 28,363
______ ______
</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 28,
1998 1997
___________ ___________
CASH PROVIDED BY (USED IN)
</CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES $ (383) $ (483)
_______ _______
CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES:
Capital expenditures (1) -
_______ _______
Net cash provided by (used in)
investing activities (1) -
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to notes payable 1,023 446
Repayments of notes payable (520) (7)
Additions to long-term debt - 95
Repayments of long-term debt (16) (56)
_______ _______
Net cash provided by (used in)
financing activities 487 478
_______ _______
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 103 (5)
CASH AND EQUIVALENTS, (beginning
of period) 469 31
_______ _______
CASH AND EQUIVALENTS, (end of period) $ 572 $ 26
_______ _______
</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, 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.
NOTE 2: INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
February 28, November 30,
1998 1997
____________ ____________
(000's)
</CAPTION>
<S> <C> <C>
Finished goods $ 728 $ 680
Work-in-process 245 246
Raw materials 649 692
Inventory reserve (36) (36)
______ ______
Total $ 1,586 $ 1,582
______ ______
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 3: NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
February 28, November 30,
1998 1997
___________ ___________
(000's)
Accounts receivable
</CAPTION>
<S> <C> <C>
factoring facility $ 332 $ 504
Bank credit facilities 965 273
NPI International loan 251 251
Other 33 103
______ ______
$ 1,581 $ 1,131
______ ______
</TABLE>
During April 1998 the Company entered into a term loan agreement for
$650,000 with Commerce Capital Corp. The loan is secured by an assignment of a
shareholder note. The origination fee for the loan included 100,000 warrants
exercisable at $.01 with a final maturity of April 1, 2003. The maturity of the
loan is March 31, 2002 at a rate of 13.5%.
NOTE 4: STOCKHOLDERS' EQUITY
In January 1998 the Company issued 100,000 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 150,000 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.
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 quarter of fiscal 1998 were as follows:
<TABLE>
<CAPTION>
Additional Promissory
Common Stock paid-in Note Treasury Stock
Shares Amount capital Officer Shares Amount
______ ______ __________ __________ _____________ ______
(000's) (000's) (000's) (000's)
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1997 44,596,133 $ 446 $28,429 $ (703) (119,691) $(2,426)
Issuance of common stock
Extinguishment of debt
and related fees 250,000 2 152
__________ ____ ______ ______ ________ _______
Balance, February 28, 1998 44,846,133 $ 448 $28,581 $ (703) (119,691) $(2,426)
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
NOTE 5: CONTINGENCIES
In December 1991, a former employee filed suit against the Company
and others alleging breach of his employment agreement and conversion of
his interest in certain property rights of the Company. The complaint,
as amended, sought compensation damages of at least $13.5 million. In
August, 1994 the trial court granted the Company's motion for partial
summary judgement and directed verdicts with respect to certain of the
former employee's claims, including those concerning his ownership of an
interest in the "E.A.R.T.H." trademark, or the existence of a partnership
with the Company to jointly own the trademark, and the state court jury
returned findings in favor of the Company on the remainder of the
plaintiff's claim concerning the trademark as well as his claims for
wrongful termination of employment. However, the jury awarded the
plaintiff approximately $700,000, of which $50,000 was assessed against
Innovo Group and $650,000 was assessed against Innovo, including pre-
judgement interest and attorney's fees, on the theory that he was
entitled to have received certain employment benefits, including employee
stock awards, during, and after, the term of his employment. The Company
appealed the jury's award, and in August, 1996 (as revised in an amended
October, 1996 opinion), the appeals court reversed approximately $350,000
of the initial judgement as not supported by the evidence or improper as
a matter of law. As a result, the judgement, including post-judgement
interest through August, 1996, has been reduced to $420,000. In
addition, the appeals court ruled that the trial court erred in not
submitting to the jury the question of the Company's counterclaim of
breach of fiduciary duty by Tedesco, ruling that the trial record
indicated that there was evidence of such breach and damages therefrom.
The appeals court remanded the case to the trial court for trial on the
Company's claim of breach of fiduciary duty by Tedesco. The trial was
completed in April 1998 and the jury found in favor of the Company.
Based on the most current information made available to the Company an
adverse outcome of the Company's claims against Tedesco, could result in
an estimated loss up to $188,000, compared to $400,000, as previously reported.
The final amount of the award has not yet been determined by the court.
The Company will 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.
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
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (concluded)
(Unaudited)
NOTE 5: CONTINGENCIES (concluded)
International orders on terms contained in the agreement. NASCO Products
sold its operations in July, 1995, and that company currently has no
operations or unencumbered assets. No provisions for the additional
amount sought has been recorded in the consolidated financial statements.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the first quarter of fiscal 1998 were $2,243,000 compared
to sales of $2,220,000 for the three months ended February 28, 1997.
Sales for Innovo and NP International were $1,960,000 for the first
quarter of fiscal 1998, compared to $1,770,000 for the same quarter of
fiscal 1997, representing a 10.7% increase in their sales. Thimble
Square's sales in the first quarter decreased from $312,000 in fiscal
1997 to $283,000 in fiscal 1998 primarily because of a change in
manufacturing focus from goods manufactured and distributed directly to
retailers to "cut and sew only" services for other distributors of
similar products.
The increase in Innovo's and NP International's sales resulted
principally from increased craft product shipments and domestic sports
licensed products. The development of the Walt Disney and Warner
products was completed in the second quarter of fiscal 1997. The
Company's discussion with international customers has indicated that the
volume of back-to-school and holiday business in fiscal 1997 was
adversely affected by the timing of the product introductions. Sales
increases for the first quarter of 1998 were the result of a more timely
market entry. The effects of the Warner Bros. and Walt Disney licenses
are expected to be more significant in fiscal 1998.
Gross profit as a percentage of sales was 38.7% for the first
quarter of fiscal 1998 compared to 34.3% for the three months ended
February 28, 1997. The increase in gross profit was due largely to the
increase in sales of NP International which has a higher gross margin than
most other product lines and operating efficiencies created
from greater availability of raw materials, consolidation of the
operating facilities at both Innovo and Thimble Square and redesign of
the manufacturing process at Innovo in the third quarter of 1997. Due to
increased production efficiencies at the main production facilities and
import mix, the Company idled satellite plants for both Innovo and
Thimble Square. However, both facilities are still available to offset
production or labor shortages should they occur. Innovo and NP
International had a gross profit of 39.3% for the first quarter of fiscal
1998, compared to 36.6% for the three months ended February 28, 1997.
Thimble Square's gross profit was 35% for the first quarter of fiscal
1998 compared to 24% for the same period last year.
Selling, general and administrative ("SG&A") expenses for the first
quarter of fiscal 1998 were $1,191,000, or 53% of sales, compared to
$1,170,000 or 52.1% of sales for the three months ended February 28, 1997.
The increase in SG&A for the first quarter of 1998 included an increase in
royalty expense of $96,000 which is consistent with increased sales of licensed
products. Additionally, legal and professional increased $53,000 over the first
quarter of 1997. The total of these categories was $148,000 or 6.6% of sales.
The loss from operations for the first quarter of fiscal 1998 was
$323,000, as compared to $407,000 for the three months ended February 28,
1997. 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 1997, 54.0%
of the Company's sales were generated in the second half of the year and
it is anticipated that a similar concentration of sales will occur in
1998.
Interest expense decreased by $81,000 for the three months ended
February 28, 1998, as the result of improved borrowings, which primarily
resulted from lower interest rates on the Company's factoring facility and
improved cash management.
The net loss for the first quarter 1998 was $415,000 or $.01 per
share as compared to $458,000 or $.02 per share for the same period a
year ago.
Liquidity and Capital Resources
Operating cash flows were a negative $383,000 for the first quarter
of fiscal 1998 principally as the result of the net loss. The net loss
was financed primarily from $692,000 in additional borrowings under bank
credit facilities with First American Bank and First Independent Bank.
$159,000 remains available on those lines at February 28, 1998.
The company's Florida retail property, operated 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. The Good Deal
Mall has approximately 22,000 square feet of rentable space, which can
accommodate up to 135 vendor merchants. The property was initially
opened in August 31, 1997 with approximately 32 spaces, representing
approximately 24% of the space available and monthly rentals of
approximately $16,000, rented to merchants, generally on a monthly basis.
The property had continued to operate at approximately that level of
occupancy through November, 1997. However, in November, 1997, the
Company decided to engage new management for the Good Deal Mall, and in
connection therewith refine the long-term goals for the property. The
Company has determined that the then existing merchant lessees were not
consistent with its revised plans, and has commenced steps to have that
space vacated so that merchants consistent with the revised plans can be
attracted. The Company currently anticipates that these steps will be
completed in the third quarter of fiscal 1998, which is consistent with the
seasonality of the Florida retail market.
The Company believes that working capital from the term loan from
Commerce Capital and those provided by operations will be sufficient to fund
operations and required debt reductions in fiscal 1998. However, due to the
seasonality of the Company's business, operating cash flows may be negative
during the first half of the year and the Company may 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 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, 1997, which
is incorporated herein by reference.
Item 2. CHANGES IN SECURITIES
During the first quarter of fiscal 1998 the Company issued an
aggregate of 250,000 shares of common stock to extinguish
$54,000 in debt and to fund obligations under certain
employment and consulting contracts. 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.
Exhibit 27. Financial Data Schedule (included only in the
electronically filed version of this report.
(b) Reports on Form 8-K.
None
<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 14, 1998 By/s/L. E. Smith
_________________
L. E. Smith,
Chairman and Chief
Executive Officer
Dated: April 14, 1998 By/s/J. Eric Hendrickson
________________________
J. Eric Hendrickson,
Vice President
and Treasurer
<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 FEBRUARY 28, 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> FEB-28-1998
<EXCHANGE-RATE> 1
<CASH> 572
<SECURITIES> 0
<RECEIVABLES> 1,520
<ALLOWANCES> 99
<INVENTORY> 1,586
<CURRENT-ASSETS> 3,783
<PP&E> 6,844
<DEPRECIATION> 1,867
<TOTAL-ASSETS> 9,484
<CURRENT-LIABILITIES> 4,110
<BONDS> 0
0
0
<COMMON> 448
<OTHER-SE> 3,082
<TOTAL-LIABILITY-AND-EQUITY> 9,484
<SALES> 2,243
<TOTAL-REVENUES> 2,243
<CGS> 1,375
<TOTAL-COSTS> 1,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> (415)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
