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 29, 2000
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 Identification No.)
incorporation or organization)
1808 North Cherry Street, Knoxville, Tennessee 37917
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (865) 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 14, 2000, 7,314,801 shares of common stock were outstanding.
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of February 29, 2000 and
November 30, 1999
Condensed Consolidated Statements of Operations for the three months
ended February 29, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the three months
ended February 29, 2000 and 1999
Notes to Consolidated Financial Statements
INNOVO GROUP INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(000's except for share data)
2/29/00 11/30/99
------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ --
Accounts receivable net of allowance 1,249 1,161
Inventories 1,885 1,968
Prepaid expenses & other current assets 22 3
------- -------
TOTAL CURRENT ASSETS 3,156 3,132
PROPERTY, PLANT and EQUIPMENT, net 3,065 3,042
OTHER ASSETS 31 48
------- -------
TOTAL ASSETS $ 6,252 $ 6,222
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,257 $ 959
Current maturities of long-term debt 75 75
Accounts payable 718 623
Accrued expenses 837 856
------- -------
TOTAL CURRENT LIABILITIES 2,887 2,513
------- -------
LONG-TERM DEBT, less current maturities 1,958 1,979
------- -------
TOTAL LIABILITIES 4,845 4,492
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.10 par - shares
Authorized 15,000,000
Issued 6,822,761 in 2000, 6,299,032 in 1999 681 629
Additional paid-in capital 32,088 31,540
Promissory note - officer (703) (703)
Receivable from stockholder (100) ---
Deficit (28,133) (27,310)
Treasury stock (2,426) (2,426)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 1,407 1,730
-------- --------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 6,252 $ 6,222
-------- --------
-------- --------
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
2/29/00 2/28/99
------- -------
NET SALES $ 812 $ 1,065
COST OF GOODS SOLD 526 739
------- -------
Gross profit 286 326
OPERATING EXPENSES
Selling, general and administrative 923 798
Depreciation and amortization 79 63
------- -------
1,002 861
LOSS FROM OPERATIONS (716) (535)
INTEREST EXPENSE (82) (91)
OTHER INCOME (EXPENSE), net (25) 34
------- -------
LOSS BEFORE INCOME TAXES (823) (592)
INCOME TAXES (BENEFIT) - -
------- -------
LOSS FROM CONTINUING
OPERATIONS (823) (592)
DISCONTINUED OPERATIONS
Results from Thimble Square operations - (40)
------- -------
NET LOSS (823) (632)
------- -------
------- -------
LOSS PER SHARE:
Continuing operations $(0.13) $ (0.11)
Discontinued operations $(0.00) $ (0.01)
Net loss $(0.13) $ (0.12)
WEIGHTED AVERAGE SHARES OUTSTANDING 6,310 5,431
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)
2/28/00 2/28/99
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Operating Activities of Discontinued Operations $ -- $ (20)
Operating Activities of Continuing Operations (675) (1,036)
------- -------
Cash Used by Operating Activities (675) (1,056)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Dispositions of Property, Plant & Equipment -- 170
Capital Expenditures (102) (60)
------- -------
Cash Provided (Used) by Investing Activities (102) 110
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to Notes Payable 798 --
Repayments on Notes Payable -- (83)
Repayments of Long -Term Debt (21) (198)
Proceeds from Issuance of Common Stock -- 300
------- -------
Cash Provided by Financing Activities 777 19
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS -- (927)
CASH AND CASH EQUIVALENTS, at beginning of period -- 1,078
------- -------
CASH AND CASH EQUIVALENTS, at end of period $ -- $ 151
------- -------
------- -------
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, 1999.
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 29, November 30,
2000 1999
---- ----
(000's) (000's)
Finished goods $ 1,404 $ 1,510
Work-in-process 28 28
Raw materials 557 534
-------- -------
1,989 2,072
Less inventory reserve (104) (104)
-------- -------
1,885 1,968
-------- -------
-------- -------
NOTE 3 - NOTES PAYABLE
Notes payable consisted of the following:
February 29, November 30,
2000 1999
---- ----
(000's) (000's)
Accounts receivable factoring facility $ 544 $ 510
Bank credit facility 349 349
Other 364 100
-------- --------
$ 1,257 $ 959
-------- --------
-------- --------
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following:
February 28, November 30,
2000 1999
---- ----
(000's) (000's)
First mortgage loan $ 704 $ 714
Non-recourse first mortgage on
Florida property 679 690
Bank promissory note secured by receivable
from an officer of the Company 650 650
-------- --------
Total long-term debt 2,033 2,054
Less current maturities (75) (75)
-------- --------
1,958 1,979
-------- --------
-------- --------
NOTE 5 - STOCKHOLDERS' EQUITY
On February 28, 2000, the Company issued 423,729 shares of Common Stock
to Sam Furrow as payment for $500,000 in notes payable to Mr. Furrow that was
set to expire on June 30, 2000. As stated in the sale agreement, Mr. Furrow
has the right to demand that the securities be registered with the Securities
and Exchange Commission.
On February 29, 2000, the Company sold 100,000 shares of Common Stock in
a private placement to an individual investor for total consideration of
$100,000. These shares have not been registered with the Securities and
Exchange Commission and therefore have restrictions as to their ability to be
sold. Under the terms of the sale agreement, this investor has the rights to
demand that these securities be registered with the Securities and Exchange
Commission.
NOTE 6 - SUBSEQUENT EVENTS
During March 2000, the Company sold 350,000 shares of Common stock in a
private placement to four individual investors. The proceeds from this sale
were $350,000. These shares have not been registered with the Securities and
Exchange Commission and therefore have restrictions as to their ability to be
sold. As stated in the sale agreement, each investor has the right to demand
that the securities be registered with the Securities and Exchange Commission.
On March 14, 2000, the Company sold 40,000 shares of Common Stock to a
member of the Board of Directors for consideration of $50,000. As stated in
the sale agreement, this investor has the right to demand that the securities
be registered with the Securities and Exchange Commission.
During March 2000, the Company signed a binding letter of intent with
Slauson Limited Partnership, Azteca Production International, Inc and Apparel
Distribution Services, LLC, collectively, the Investor Group. Under the terms
of the agreement, the Investor Group will purchase equity securities of Innovo
Group as well as provide certain distribution and manufacturing services to
Innovo Group.
On April 5, 2000, the Company sold 102,040 shares to an outside investor for
$0.98 per share. As stated in the sale agreement, this investor has the right
to demand that the securities be registered with the Securities and Exchange
Commission.
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
2/29/00 2/28/99
------- -------
Net Sales $ 812 $ 1,065
Costs of Goods Sold 526 739
------- -------
Gross Profit 286 326
Selling, General & Administrative 923 798
Depreciation & Amortization 79 63
------- -------
Income (Loss) from Operations (716) (535)
Interest Expense (82) (91)
Other Income (Expense) (25) (34)
------- -------
Income (Loss) Before Income Taxes (823) (592)
Income Taxes -- --
Income (Loss) from Continuing Operations (823) (592)
------- -------
Discontinued Operations -- (40)
Net Loss (823) (632)
Net Sales for the quarter ended February 29 decreased $253,000 or 23.7%
from $1,065,000 in 1999 to $812,000 in 2000. This decrease is primarily the
result of a decrease in sales for the Company's international subsidiary, Nasco
Products International ("NPII"). NPII's sales have decreased due to a
reduction in the popularity of American pro licensed sports. The Company
anticipates that NPII's sales will remain depressed for the remainder of the
year.
The gross margin percentage increased 4.6 percentage points from 30.6% in
1999 to 35.2% in 2000 due primarily to a large closeout order that was shipped
during the first quarter of 1999. This order caused the overall gross profit
during the first quarter of 1999 to decrease.
Selling, General and Administrative costs increased $125,000 or 15.7% from
1999 to 2000 due to an increase in salary expense, travel expenses, hiring
expenses and contract labor. The increased focus on marketing activities and
the increase in the headcount of the corporate office were the main causes for
the greater expense levels.
Depreciation expenses increased $16,000 or 25.4% from the first quarter of
1999 to the first quarter of 2000 due to depreciation of new computer equipment
and software that the Company purchased as part of its year 2000 computer
conversion.
Interest expense for the three months ended February 29, 2000 decreased
to $82,000 from $91,000 for the three months ended February 28, 1999 due to
the extinguisment of long term debt through the end of 1999.
Other income (expense) decreased from income of $34,000 to an expense of
$25,000 due primarily to the reduction in the income generated from the
Accessory Network note receivable.
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 $675,000 for the three months
ended February 29, 2000. The primary reasons were net losses of $823,000,
increases in accounts payable of $95,000, increases in accounts receivable of
$88,000, and decreases in inventory of $83,000.
The Company anticipates continuing improvement in financial performance for
fiscal year 2000 due to additional product lines and an improved marketing
effort.
The Company relied on four primary sources to fund operations in 1999
and the first quarter of 2000:
1. An accounts receivable factoring agreement with First American
National Bank ("First American")
2. Trade credit with its domestic and international suppliers
3. Borrowings from management and shareholders
4. Equity financing through private placements
The Company anticipates continued reliance on the accounts receivable
factoring agreement to generate the majority of its working capital needs.
Under this facility, First American advances between 70% and 90% of approved
invoices. 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.
The facility can be terminated upon thirty day written notice by either party.
During 1999, the Company was successful in negotiating extended trade
credit with its largest vendors. In 1998, the Company entered into an
agreement 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
need for such products. In 1999, Sunwaki extended trade credit to Innovo in
excess of $1 million. The Company anticipates that it will be able to
negotiate a similar credit limit with Sunwaki in 2000
During 1999, the Company utilized commitments from certain members of
management to provide working capital funding. During the first quarter of
2000, the Company received $712,000 in financing from the Chairman and CEO.
Effective March 1, 2000, the Company's Chairman and CEO has committed to provide
additional cash funding, as may be required from time to time, of up to
$500,000. These funds will be available to the Company through
November 30, 2000 to satisfy any short-term working capital needs. Any funds
borrowed under this arrangement will be secured with a promissory not, will be
interest bearing and typically mature within nine months from issuance.
During February and March, 2000, the Company sold 490,000 shares of Common
Stock in private placement transactions for $500,000. The Company also
converted $500,000 of notes payable to the Chairman and CEO to 429,729 shares
of Common Stock. The Company anticipates that it can sell additional equity
securities in an effort to provided working capital funding throughout 2000.
During April, 2000, the Company sold 102,040 shares of Common Stock in a
private placement transaction for $100,000.
Based on the foregoing, the Company believes that working capital will be
sufficient to fund operations and required debt reductions during fiscal 2000.
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 extent 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.
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 28, 2000, the Company issued 423,729 shares of Common Stock
to Sam Furrow as payment for $500,000 in notes payable to Mr. Furrow that was
set to expire on June 30, 2000. As stated in the sale agreement, Mr. Furrow
has the right to demand that the securities be registered with the Securities
and Exchange Commission.
On February 29, 2000, the Company sold 100,000 shares of Common Stock in
a private placement to an individual investor for total consideration of
$100,000. These shares have not been registered with the Securities and
Exchange Commission and therefore have restrictions as to their ability to be
sold. Under the terms of the sale agreement, this investor has the rights to
demand that these securities be registered with the Securities and Exchange
Commission.
During March 2000, the Company sold 350,000 shares of Common stock in a
private placement to four individual investors. The proceeds from this sale
were $350,000. These shares have not been registered with the Securities and
Exchange Commission and therefore have restrictions as to their ability to be
sold. As stated in the sale agreement, each investor has the right to demand
that the securities be registered with the Securities and Exchange Commission.
On March 14, 2000, the Company sold 40,000 shares of Common Stock to a
member of the Board of Directors for consideration of $50,000. As stated in
the sale agreement, this investor has the right to demand that the securities
be registered with the Securities and Exchange Commission.
On April 5, 2000, the Company sold 102,040 shares to an outside investor for
$0.98 per share. As stated in the sale agreement, this investor has the right
to demand that the securities be registered with the Securities and Exchange
Commission.
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 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, 2000
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, 2000
- - --------------------
Samuel J. Furrow
Chairman of the Board,
Chief Executive Officer
and Director
/s/ Bradely T. White Chief Financial Officer April 14, 2000
- - --------------------
Bradley T. White
Treasurer
EX-27
[ARTICLE] 5
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] NOV-30-2000
[PERIOD-END] FEB-29-2000
[CASH] 0
[SECURITIES] 0
[RECEIVABLES] 1409000
[ALLOWANCES] (161000)
[INVENTORY] 1885000
[CURRENT-ASSETS] 3156000
[PP&E] 5424000
[DEPRECIATION] (2359000)
[TOTAL-ASSETS] 6252000
[CURRENT-LIABILITIES] 2887000
[BONDS] 1958000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 681000
[OTHER-SE] 28859000
[TOTAL-LIABILITIES-AND-EQUITY] 6252000
[SALES] 812000
[TOTAL-REVENUES] 812000
[CGS] 526000
[TOTAL-COSTS] 526000
[OTHER-EXPENSES] 1002000
[LOSS-PROVISION] 8000
[INTEREST-EXPENSE] 82000
[INCOME-PRETAX] (823000)
[INCOME-TAX] 0
[INCOME-CONTINUING] (823000)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[NET-INCOME] (823000)
[EPS-BASIC] 0.13
[EPS-DILUTED] 0.13
