-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOIf8Dfj20jC6FVHUrHYKRbQA8IZRTiuUTxb7uQX4uKFap7Y74FHnV8d0HfTwZpi ivZB4pXgP22k7x7//er0aA== 0000844143-02-000006.txt : 20020417 0000844143-02-000006.hdr.sgml : 20020417 ACCESSION NUMBER: 0000844143-02-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020302 FILED AS OF DATE: 20020417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVO GROUP INC CENTRAL INDEX KEY: 0000844143 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 112928178 STATE OF INCORPORATION: TN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18926 FILM NUMBER: 02613729 BUSINESS ADDRESS: STREET 1: 2633 KINGSTON PIKE STE 100 CITY: KNOXVILLE STATE: TN ZIP: 37917 BUSINESS PHONE: 8655461110 MAIL ADDRESS: STREET 1: 2633 KINGSTON PIKE STE 100 CITY: KNOXVILLE STATE: TN ZIP: 37917 FORMER COMPANY: FORMER CONFORMED NAME: ELORAC CORP DATE OF NAME CHANGE: 19901009 10-Q 1 inno10q1_02.txt 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 March 2, 2002 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) 2633 Kingston Pike, Suite 100, Knoxville, Tennessee 37919 (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 17, 2002, 14,921,264 shares of common stock were outstanding. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INNOVO GROUP INC AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (000's except for share data) (unaudited) 3/2/02 12/01/01 ------ -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ -- $ 292 Accounts receivable, and due from factorer net of allowance for uncollectible accounts of $127 (2002) and $164 (2001) 1,809 1,466 Inventories 2,559 2,410 Prepaid expenses & other current assets 173 180 ------ -------- TOTAL CURRENT ASSETS 4,541 4,348 PROPERTY, PLANT and EQUIPMENT, net 1,178 973 INTANGIBLE ASSETS, NET 4,884 4,926 TOTAL ASSETS $10,603 $10.247 ------ ------ ------ ------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Due to Related Parties $ 1,545 $ 806 Current maturities of long-term debt 975 845 Accounts payable and accrued expenses 827 697 ------ ------ TOTAL CURRENT LIABILITIES 3,347 2,348 LONG-TERM DEBT, less current maturities 3,232 3,380 ------ ------ TOTAL LIABILITIES 6,579 5,728 ------ ------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $0.10 par - shares Authorized 40,000,000 Issued and outstanding 14,921,264 (2002), 14,921,264 (2001) 1,491 1,491 Additional paid-in capital 40,299 40,277 Deficit note (34,575) (34,079) Promissory note-officer (703) (703) Treasury stock (2,488) (2,467) ------ ------ TOTAL STOCKHOLDERS' EQUITY 4,024 4,519 TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $10,603 $10,247 ------ ------ ------ ------ See accompanying notes to consolidated condensed financial statements INNOVO GROUP INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (000's except share and per share data) (unaudited) Three Months Ended 3/2/02 3/3/01 ------ ------ NET SALES $ 3,201 $ 1,153 COST OF GOODS SOLD 2,289 654 ------ ------ Gross profit 912 499 OPERATING EXPENSES Selling, general and administrative 1,250 544 Depreciation and amortization 46 11 ------ ------ 1,296 555 LOSS FROM OPERATIONS (384) (56) INTEREST EXPENSE (97) (73) OTHER INCOME (EXPENSE), net 6 26 ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (475) (103) INCOME TAXES (BENEFIT) 21 -- ------ ------ NET INCOME (LOSS) $ (496) $ (103) ------ ------ ------ ------ NET INCOME (LOSS) PER SHARE: Basic and diluted $ (0.03) $ (0.01) WEIGHTED AVERAGE SHARES OUTSTANDING 14,921 13,855 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) (unaudited) Three Months Ended 3/2/02 3/3/01 ------ ------ CASH FLOWS USED IN OPERATING ACTIVITIES $ (32) $ (288) CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures (221) -- ----- ----- Cash Used in investing activities (221) -- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Treasury Stock Acquisitions (21) -- Repayments on Notes Payable -- (412) Repayments of Long -Term Debt (18) (19) Other -- (34) ----- ----- Cash Used in financing activities (39) (465) ----- ----- NET (USED IN) IN CASH AND CASH EQUIVALENTS (292) (753) CASH AND CASH EQUIVALENTS, at beginning of period 292 1,179 ----- ----- CASH AND CASH EQUIVALENTS, at end of period $ -- $ 426 ----- ----- ----- ----- 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 December 1, 2001. 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. March 2, December 1, 2002 2001 ---- ---- (000's) (000's) Finished goods $ 2,606 $ 2,535 Less allowance for obsolescence and slow moving inventory (47) (125) ----- ----- $ 2,559 $ 2,410 ----- ----- ----- ----- NOTE 3 - LONG-TERM DEBT Long-term debt consisted of the following: March 2, December 1, 2002 2001 ---- ---- (000's) (000's) First mortgage loan $ 607 $ 625 Promissory note to Azteca 1,000 1,000 Promissory note to Azteca 2,600 2,600 ----- ----- Total long-term debt 4,207 4,225 Less current maturities (975) (845) _____ _____ $ 3,232 $ 3,380 ----- ----- ----- ----- Included in the current maturities at March 2, 2002, are 12 payments on the promissory notes to Azteca scheduled to be made through February 28, 2003 as well as 6 payments with scheduled monthly due dates prior to March 2, 2002. NOTE 4 - SUBSEQUENT EVENTS On April 5, 2002, the Company through its real estate subsidiary Innovo Realty, Inc. ("Innovo Realty"), closed on a transaction pursuant to which Innovo Realty invested as a limited partner in a real estate transaction for the purchase of approximately 4,000 apartment units ("Properties") located nationwide. The Company has issued up to 200,000 non-recourse, non-convertible of Series A Preferred Stock ("Preferred Shares"), valued at $100 per share, to Innovo Realty which in turn contributed the necessary shares, representing approximately 14% of the $98,000,000 purchase price, toward the purchase of the Properties. The remaining purchase price was funded through third party investors and third party financing. The third party investors include entities controlled by stockholders of the Company. The Preferred Shares shall have an 8% coupon that will be funded entirely and solely through partnership distributions from cash flows generated by the operation and sale of the Properties. In the event the cash flows from the Properties are insufficient to cover the 8% coupon, the Company will have no obligation to cover any shortcomings. The Preferred Shares have a mandatory redemption feature, and are redeemable from cash proceeds received by the Company from the operation and sale of the Properties. All partnership distributions, that are in excess of current and accrued 8% coupon dividends, must be used by the Company to redeem the Preferred Shares. In addition, the Innovo Realty shall be entitled to receive fees equal to 1% of the gross annual revenues from the Properties,plus an additional 1% of such gross annual revenues less administrative and filing fees, so long as the properties are owned by the partnership. These fees are to be paid quarterly and there is no requirement that they be used toward the payment of the 8% coupon or the redemption of Preferred Shares. In addition, Innovo Realty will be entitled to 30% of the excess cash flow (as defined) generated by the operation and sale of the Properties after complete redemption of the Preferred Shares and the payment of lien holders and preferred distributions and returns to investors and others. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains some forward-looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 which involve substantial risks and uncertainties including, without limitation, continued acceptance of the Company's product, product demand, competition, capital adequacy and the potential inability to raise additional capital if required. These forward-looking statement s can generally be identified by the use of forward-looking words like "may," "will," "except," "anticipate," "intend," "estimate," "continue," "believe" or other similar words. Similarly, statements that describe our future expectations, objectives and goals or contain projections of our future results of operations or financial condition are also forward-looking statements. Our future results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements. Results of Operations Comparison of the Three Months Ended March 2, 2002 to the Three Months Ended March 3, 2001 Net Sales for the quarter ended March 2, 2002 increased 178% from $1,153 in 2001 to $3,201 in 2002. This increase is primarily t he result of an increase in revenues from the Company's Innovo, Inc. and Joe's Jeans, Inc. subsidiaries and the impact of the sales generated from the Company's Innovo Azteca Apparel division which was formed in the third quarter of 2001 to market general apparel products to the private label and retail markets. For the period, Innovo, Inc's and Joe's Jean's revenues increased by 55% and 362% respectively with Innovo Azteca Apparel accounting for the remaining increase in revenues. Innovo, Inc. enjoyed greater demand for its craft products, its Bongo product line and for its private label fashion products with Joe's Jeans' improvements coming as a result of the growing demand for its products both domestically and internationally in the fashion markets. For the first three months of fiscal 2002, the Company's gross margin percentage decreased 14.3 percentage points from 43.3% in 2001 to 29.0% in 2002. During the period, Innovo, Inc. in an effort to satisfactorily service a major new private label customer, incurred significant air freight expenses associated with meeting the short shipping window requested by the customer, thus significantly reducing the margins associated with the product. Additionally,Innovo, Inc.'s gross margins were negatively affected as a result of management's decision to maximize the opportunity to sell slow moving inventory, however, at a reduced price. The Company's gross margin was also impacted by a lower gross margin from the Company's Joe's Jeans division as a result of the liquidation of slow moving inventory during the period and the historically and naturally lower gross margins associated with the products sold by the Company's Innovo Azteca Apparel division. The Company anticipates that its gross margins will return to higher levels in future periods. Selling, General and Administrative costs increased $706,000 or 130% for the same period as a result of an increase in the Company's marketing and product development efforts. With the Company's anticipated growth during the remainder of the fiscal year, the Company has incurred greater expenses associated with the development of, and the investment in, the products and the marketing efforts required to generate and sustain such growth. Additionally, the increase is a product of the growth in personnel associated with the Company's developing Innovo, Inc and Joe's Jeans businesses and the addition of Innovo Azteca Apparel. The Company also incurred an increase in the expenses associated with the professional and investor relations functions of the Innovo Group Inc. public holding company. Depreciation and amortization expenses increased to $46,000 in 2002 from $11,000 in the same period of 2001 largely as a result of the deprecation and amortization associated with assets purchased pursuant to the knit division acquisition in 2001. Interest expense for the three months ended March 3, 2002 increased to $97,000 from $73,000. The increase is associated with purchase notes entered into for the acquisition of the knit division in 2001. Other income for the comparable period decreased from income of $26,000 to income of $6,000 due primarily from a reduction in the income generated from tenants who are leasing portions of the Company's former manufacturing facility located in Springfield, TN. Liquidity and Capital Resources Innovo Group Inc. 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 Inc. is dependent on cash obtained from the operating subsidiaries, either as loans, repayments of loans made by Innovo Group Inc. to the subsidiary, or distributions, or on the proceeds from the issuance of debt or equity securities by Innovo Group Inc.. The subsidiaries primary sources of liquidity are cash flows from operations, including credit from vendors and borrowings. Cash flows were a negative $292,000 for the three months ended March 2, 2002. The negative cash flow is a result of a net loss of $496,000 as well as cash used to decrease accrued expenses, accounts payable and notes payable. Additionally, the Company's cash flow was effected by amounts due from related parties, prepaid expenses, other assets and accounts receivables. For the first three months of 2002, the Company relied primarily on trade credit with customersworking captial advances through extended credit terms from related parties and cash on hand to fund operations. The Company's principal credit facility for working capital has historically been is its accounts receivable factoring arrangements. During the first thee months of 2002, the Company increased the number of invoices it presented for factoring due to the need to fund the growth experienced during the period and the projected growth anticipated in future periods. The Companies subsidiaries' Joe's Jeans, Inc., Innovo, Inc. and Innovo Azteca Apparel Inc. have factoring agreements with CIT Group, Inc. ("CIT"). According to the terms of the agreements, the subsidiaries have the option to factor their receivables with CIT on a non-recourse basis. The agreements all for a 0.8% factoring fee on invoices factored with CIT and a per annum rate equal to the prime rate plus 0.25% on funds borrowed against the factored receivables. The Company believes that its current cash on hand and cash received pursuant to factored receivables under the factoring arrangements with CIT should provide sufficient working capital to fund operations and required debt reductions during fiscal 2002. However, due to the seasonality of the Company's business and negative cash flow during the first three months 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. 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. Seasonality The Company's business is seasonal. The majority of the marketing and sales activities take place from late fall to early spring. The greatest volume of shipments and sales are generally made from late spring through the summer, which coincides with the Company's second and third fiscal quarters and the Company's cash flow is strongest in its third and fourth fiscal quarters. Due to the seasonality of the business, the third quarter results are not necessarily indicative of the results for the fourth quarter. 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 December 2, 2001, which is incorporated herein by reference. Levi's Strauss & Co. filed a trademark infringement suit against Joe's Jeans, Inc. and Innovo Group Inc.. Levi's alleged that the stitching and pocket design on Joe's Jeans jeans was in violation of the Levi's trademarked stitching design. While the Company believed that it had meritous defenses to Levi's claims, the Company concluded that it was not financially advantageous to defend against Levi's claims. As such, the Company, through its counsel, approached Levi's with the proposed modifications to the stitching on the Joe's Jeans jean's pockets and other terms and conditions under which the Company would be willing to settle the claims. The two parties have settled the claim pursuant to which Joe's Jeans has the right to sell its remaining inventory and shall make certain adjustments to the to stitching on the pockets of its products. Joe's Jeans was not required to pay any financial amages to Levi's, however,the Company did incur legal expenses associated with settling the matter. The Company does not believe that the accepted modifications will have a material impact on the Company's marketing efforts or on the Joe's Jeans brand. ITEM 2. CHANGES IN SECURITIES None 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 None (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. April 17, 2001 By:/s/ Samuel Joseph Furrow, Jr ---------------------------- Samuel Joseph Furrow, Jr. President 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/ Pat Anderson Chief Executive Officer April 17, 2001 - ---------------- Pat Anderson Chief Executive Officer and Director /s/ Samuel Joseph Furrow, Jr. Acting Chief Financial Officer April 17, 2001 - ----------------------------- Samuel Joseph Furrow, Jr. President -----END PRIVACY-ENHANCED MESSAGE-----