UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES 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 (IRS Employer
incorporation or organization) Identification No.)
1808 North Cherry Street, Knoxville, Tennessee 37917
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (423) 546-1110
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.10 par value per share
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 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 subject to such filing requirements
for the past 90 days. Yes X No ___
As of April 2, 1999, 5,909,113 shares of common stock were
outstanding.
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of February 28, 1999 and
November 30, 1998 3
Condensed Consolidated Statements of Operations for the three months
ended February 28, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three months
ended February 28, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
INNOVO GROUP INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(000's except for share data)
2/28/99 11/30/98
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 151 $ 1,078
Accounts receivable net of allowance 968 708
Inventories 1,092 1,101
Prepaid expenses 303 267
TOTAL CURRENT ASSETS 2,514 3,154
PROPERTY, PLANT and EQUIPMENT, net 3,883 4,037
OTHER ASSETS 20 41
TOTAL ASSETS $6,417 $ 7,232
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 831 $ 914
Current maturities of long-term debt 90 270
Accounts payable 934 1,139
Accrued expenses 864 906
TOTAL CURRENT LIABILITIES 2,719 3,229
LONG-TERM DEBT, less current maturities 2,216 2,234
OTHER -- 47
TOTAL LIABILITIES 4,935 5,510
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.10 par; shares
Authorized 7,000,000
Issued 5,582,113 in 1999, 5,387,113 in 1998 558 538
Additional paid-in capital 30,654 30,282
Promissory note officer (703) (703)
Deficit (26,601) (25,969)
Treasury stock (2,426) (2,426)
TOTAL STOCKHOLDERS' EQUITY 1,482 1,722
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 6,417 $ 7,232
See accompanying notes to consolidated condensed financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(000's except per share data)
Three Months Ended
2/28/99 2/28/98
NET SALES $1,065 $1,960
COST OF GOODS SOLD 739 1,190
Gross profit 326 770
OPERATING EXPENSES
Selling, general and administrative 798 925
Depreciation and amortization 63 86
861 1,011
LOSS FROM OPERATIONS (535) (241)
INTEREST EXPENSE 91 84
OTHER INCOME (EXPENSE), net 34 11
LOSS BEFORE INCOME TAXES (592) (314)
INCOME TAXES (BENEFIT) - -
LOSS FROM CONTINUING OPERATIONS (592) (314)
DISCONTINUED OPERATIONS
Results from Thimble Square operations (40) (101)
NET LOSS (632) (415)
LOSS PER SHARE:
Continuing operations $(0.11) $(0.07)
Discontinued operations $(0.01) $(0.02)
Net loss $(0.12) $(0.09)
WEIGHTED AVERAGE SHARES OUTSTANDING 5,431 4,456
See accompanying notes to consolidated condensed financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(000's except per share data)
2/28/99 2/28/98
CASH FLOWS FROM OPERATING ACTIVITIES
Operating Activities of Discontinued Operations $ (20) $ (72)
Operating Activities of Continuing Operations (1,036) (311)
Cash Used by Operating Activities (1.056) (383)
CASH FLOWS FROM INVESTING ACTIVITIES
Dispositions of Property, Plant & Equipment 170 --
Capital Expenditures (60) (1)
Cash Provided (Used) by Investing Activities 110 (1)
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to Notes Payable -- 1,023
Repayments on Notes Payable (83) (520)
Repayments of Long -Term Debt (198) (16)
Proceeds from Issuance of Common Stock 300 --
Cash Provided by Financing Activities 19 487
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (927) 103
CASH AND CASH EQUIVALENTS, at beginning of period 1,078 469
CASH AND CASH EQUIVALENTS, at end of period $ 151 $ 572
See accompanying notes to consolidated condensed financial statements
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
The accompanying condensed consolidated financial statements include the
accounts of Innovo Group Inc. ("Innovo Group") and its wholly owned
subsidiaries (collectively the "Company"). All significant intercompany
transactions and balances have been eliminated. 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, 1998.
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 the 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
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market.
Inventories consisted of the following:
February 28, November 30,
1999 1998
(000's) (000's)
Finished goods $ 685 $ 766
Work-in-process 18 18
Raw materials 425 353
-------- --------
1,128 1,137
Less inventory reserve (36) (36)
$1,092 $ 1,101
NOTE 3 - NOTES PAYABLE
Notes payable consisted of the following:
February 28, November 30,
1999 1998
(000's) (000's)
Accounts receivable factoring facility $ 482 $ 439
Bank credit facility 349 349
Other -- 126
______ ______
$ 831 $ 914
As of November 30, 1998, Thimble Square had a note payable to a bank
secured by the Pembroke, Georgia facility. This loan bore interest at the rate
of 2.75 points over the prime rate per annum. The loan balance of approximately
$126,000 was paid off when the Pembroke facility was sold in December 1998.
During February 1999, the Company obtained an extension on the credit
facility with First Independent Bank of Gallatin. This facility expires in
February 2000 and bears interest at the rate of 11.75% per annum.
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following:
February 28, November 30,
1999 1998
(000's) (000's)
First mortgage loan $ 746 $ 754
Non-recourse first mortgage on
Florida property 724 727
Thimble Square SBA loan -- 179
Capital lease obligation 186 194
Bank promissory note secured by receivable
from an officer of the Company 650 650
______ ______
Total long-term debt 2,306 2,504
Less current maturities (90) (270)
______ ______
$ 2,216 $ 2,234
The Thimble Square SBA loan was repaid in conjunction with the December
1998 sale of a manufacturing facility in Pembroke, Georgia.
NOTE 5 - STOCKHOLDERS' EQUITY
On December 14, 1998, the Company registered and issued 45,000 shares on an
S-8 filing as payment for current and future legal consulting services. This
stock was issued for approximately $92,000.
During February of 1999, the Company issued 150,000 shares to certain
officers of the company in consideration of $300,000.
NOTE 6 - SUBSEQUENT EVENTS
During the second quarter of 1999, the Company sold an additional 327,000
shares of Common Stock for consideration of $490,250.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the Statement of Operations for the three
months ended February 28, 1999 and 1998.
Three Months Ended
2/28/99 2/28/98
Net Sales $1,065 $1,960
Costs of Goods Sold 739 1,190
Gross Profit ______ ______
326 770
Selling, General & Administrative 798 925
Depreciation & Amortization 63 86
Income (Loss) from Operations (535) (241)
Interest Expense 91 84
Other Income (Expense) 34 11
Income (Loss) Before Income Taxes (592) (314)
Income Taxes -- --
Income (Loss) from Continuing
Operations (592) (314)
Discontinued Operations (40) (101)
Net Loss (632) (415)
Net Sales for the quarter ended February 28 decreased $895,000 or 45.7%
from $1,960,000 in 1998 to $1,065,000 in 1999. This decrease is primarily the
result of a large order for Nasco Products International, Inc. during the first
quarter of 1998. This order was not duplicated in 1999 due to a change in the
Company's German distributor.
The gross margin percentage decreased eight percentage points from 39.3% in
1998 to 30.6% in 1999 due primarily to a large close-out order that was placed
during the first quarter of 1999. This order did allow the Company reduce the
amount of slow moving and excess inventory on hand. The Company anticipates an
increase in gross margins through the remainder of 1999 due to a reduction in
material costs from favorable pricing on imported items and domestic goods that
have resulted from improved vendor selection and cost reduction strategies.
Selling, General and Administrative costs decreased $127,000 or 13.7% from
1998 to 1999 due to decreased royalties from the reduced sales to Nasco Products
International Inc. and cost reductions resulting from the move of the corporate
office and the Innovo, Inc. manufacturing facility to Knoxville, Tennessee
during December 1999.
Depreciation and Amortization expenses decreased $23,000 or 26.7% from the
first quarter of 1998 to the first quarter of 1999 due to the lack of
significant purchases of fixed assets during 1998 and 1999. Depreciation
expense should slowly decrease over time as the Company's equipment continues to
age.
Interest expense for the three months ended February 28, 1998 and 1999 was
essentially unchanged due to the lack of significant changes in financing from
1998 to 1999.
Liquidity and Capital Resources
Innovo Group is a holding company and its principal assets are the common
stock of the operating subsidiaries. As a result, to satisfy its obligations
Innovo Group is dependent on cash obtained from the operating subsidiaries,
either as loans, repayments of loans made by Innovo Group to the subsidiary, or
distributions, or on the proceeds from the issuance of debt or equity securities
by Innovo Group.
Cash flows from operations were a negative $1,056,000 for the three months
ended February 28, 1999. The primary reasons were a net loss from continuing
operations of $592,000, a reduction in accounts payable and accrued expenses of
$211,000 and an increase in accounts receivable of $260,000.
The Company anticipates improved financial performance for fiscal year 1999
due to additional product lines and an improved marketing effort. The
anticipated improved financial performance should allow the Company to generate
positive cash flows from operations for the year ended November 30, 1999.
The Company's principal credit facility for working capital is its December
1997 factoring agreement with First American National Bank ("First American").
Under this facility, First American advances up to 90% of approved invoices.
There is no established limit on the facility. First American charges Innovo 1%
for the first 15 days an invoice is outstanding and .05% per day thereafter
until paid, up to a maximum of 6%. The facility is secured by a first position
on accounts receivable and inventory and personal guarantees of certain members
of the Board of Directors and management. Prior to the agreement with First
American, the Company factored its receivables with another lender. The
facility can be terminated upon thirty day written notice by either party.
The Company has taken a number of steps to improve its liquidity in 1999,
as more fully discussed below, including
Obtaining a trade credit facility of up to $500,000 from a key vendor;
Paying off in December 1998 a $126,000 short term note and a $179,000
long-term note from the proceeds of the sale of the Pembroke facility
as it completed its disposal of the Thimble Square operations;
Obtaining in February 1999 an extension to February 2000 on a $350,000
line of credit that had expired in December 1998;
Obtaining in February 1999 $300,000 in cash from the proceeds of a sale
of common stock to two officers, who also committed to provide an
aggregate of $100,000 in additional credit.
Obtaining in the second quarter of 1999 $490,250 in cash from the
proceeds of sales of common stock from private placements.
As a result of recent efforts with vendors, the Company believes it has
made progress in reestablishing normalized trade relationships. In 1998, the
Company entered into an arrangement with Sunwaki Industrial Company, Ltd. of
Hong Kong to produce the Company's licensed products for both domestic and
international distribution. Sunwaki has the capability to meet a substantial
portion of the Company's needs for such products. In connection with this
arrangement, Sunwaki agreed to extend up to $500,000 of trade credit to Innovo
for fiscal year 1999. Management expects the arrangement to lower the cost of
goods sold and other related costs for 1999.
In connection with the Company's discontinuance of its apparel
manufacturing operations it disposed of its former Thimble Square operations and
its assets. On December 10, 1998, the Company completed the sale of Thimble
Square's Pembroke facility from which it realized net proceeds of approximately
$122,000 which together with available cash was used to pay a $179,000 long-term
mortgage and a $126,000 short term note.
In December 1997, the Company had negotiated a line of credit at First
Independent Bank for $350,000 collateralized by the equipment of Innovo and
Leasall and the guarantees of certain officers. A total of $349,000 had been
drawn under this facility which matured on December 30, 1998. In February 1999,
the bank renewed the facility extending its due date to February 27, 2000.
During February 1999, the Company issued $300,000 in Common Stock to Sam
Furrow, the Company's CEO, and Dan Page, the Company's COO. In addition to the
placement of the stock, the officers made available to the Company separate
lines of credit in the amount of $50,000 each. The lines will remain available
until June, 1999, a time of year during which the Company would normally
experience greater cash flow and liquidity due to the seasonal nature of the
Company's business.
During March and April 1999, the Company received $490,250 for the issuance
of 327,000 shares of Common Stock.
In addition to these steps, the Company has entered into negotiation for an
inventory-based credit facility to supplement its current receivable factoring
facility. The Company believes that the lending base represented by these
assets has not been effectively leveraged in the recent past and that the steps
taken to restore the Company's credit capacity will facilitate these traditional
borrowing sources.
Based on the foregoing, the Company believes that working capital will be
sufficient to fund operations and required debt reductions during fiscal 1999.
However, due to the seasonality of the Company's business and likely negative
cash flow during the first half of the year, the Company may be required to
obtain additional capital through debt or equity financing. The Company
believes that any additional capital, to the extend needed, could be obtained
from the sale of equity securities or short-term working capital loans.
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 constrict its
operations.
Year 2000
The Company uses various types of technology in the operations of its
business. Some of this technology incorporates date identification functions;
however, some of these date identification functions were developed to use only
two digits to identity a year. These date identification functions, if not
corrected, could cause their relating technology to fail or create erroneous
results by or at the year 2000.
The Company has assessed the impact of Year 2000 issues on its information
and non-information technology systems. As part of this process, the Company
retained the services of an independent contractor wit experience in analyzing
and addressing Year 2000 issues, from whom the Company purchased $10,000 of
computer equipment. The Company has also retained an additional independent
consultant to assist in the conversion of the Company's existing operating
system to a Year 2000 compliant platform. The other software used by the
Company, billing, inventory control, job costing and other accounting functions
is currently Year 2000 compliant.
The Company has also developed a plan to address the impact that Year 2000
issues of its vendors and customers may have on the Company's operations. The
Company is currently finalizing its evaluation of the materiality of its vendor
and customer relationships and has initiated communications with certain of its
significant vendors and customers to identity and minimize disruptions to the
Company's operations and to assist in resolving Year 2000 issues. The Company
expects to have substantially completed its evaluation during the second quarter
of fiscal 1999; however, there can be no assurances that the systems and
products of other companies on which the Company relies will not have an adverse
effect on the Company's business, operations or financial condition. In the
event that completion of the Company's Year 2000 evaluation of its vendors and
customers is not assured by the end of 1999, the Company intends to determine
appropriate contingency plans.
As of April 14, 1999 the Company had incurred approximately $10,000 in
costs related to the Year 2000 issue. The Company believes that additional costs
related to the Year 2000 issue, which are not currently expected to exceed
$30,000, will not be material to the Company's business, operations or financial
condition. All other efforts to date with respect to Year 2000 compliance issues
have involved the time of existing personnel with no identifiable additional
cost to the Company. However, estimates of Year 2000 related costs are based on
numerous assumptions and there is no certainty that estimates will be achieved
and actual costs could be materially greater than anticipated. The Company
anticipates that it will fund its additional Year 2000 costs from current
working capital.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is hereby made to Part I, Item 3 of the Company's Annual Report
filed on Form 10-K for the year ended November 30, 1998, which is incorporated
herein by reference.
ITEM 2. CHANGES IN SECURITIES
On February 22, 1999, the Company issued 150,000 shares to certain officers
of the company in consideration of $300,000.
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 FORM 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule (included only in the
electronically filed version of
of this report.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/ SAMUEL J. FURROW
---------------------------------------
Samuel J. Furrow
Chairman of the Board and Chief Executive Officer
April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature and Title Date
/S/ SAMUEL J. FURROW
- ------------------------- Chief Executive Officer April 14, 1999
Samuel J. Furrow
Chairman of the Board,
Chief Executive Officer
and Director
/S/ BRADLEY T. WHITE
- --------------------------Chief Financial Officer April 14, 1999
Bradley T. White
Controller
EXHIBIT 27
[ARTICLE]5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] NOV-30-1999
[PERIOD-END] FEB-28-1999
[CASH] 151
[SECURITIES] 0
[RECEIVABLES] 1061
[ALLOWANCES] 93
[INVENTORY] 1092
[CURRENT-ASSETS] 2514
[PP&E] 6008
[DEPRECIATION] 2126
[TOTAL-ASSETS] 6417
[CURRENT-LIABILITIES] 2719
[BONDS] 2216
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 558
[OTHER-SE] 924
[TOTAL-LIABILITY-AND-EQUITY] 6417
[SALES] 1065
[TOTAL-REVENUES] 1065
[CGS] 739
[TOTAL-COSTS] 739
[OTHER-EXPENSES] 861
[LOSS-PROVISION] 17
[INTEREST-EXPENSE] 91
[INCOME-PRETAX] (592)
[INCOME-TAX] 0
[INCOME-CONTINUING] (592)
[DISCONTINUED] (40)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (632)
[EPS-PRIMARY] (0.12)
[EPS-DILUTED] (0.12)
</TABLE>
