-----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, EDB8y3GP0pKS62zQtBJReLWqPtve57C5mhEPRZzJ+dDf5p0VCswhB9VdvYXd4y4y Iu7SYbTCat626tSiUGmfog== 0000950144-98-011491.txt : 19981016 0000950144-98-011491.hdr.sgml : 19981016 ACCESSION NUMBER: 0000950144-98-011491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NASD 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: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18926 FILM NUMBER: 98726003 BUSINESS ADDRESS: STREET 1: 27 N MAIN ST CITY: SPRINGFIELD STATE: TN ZIP: 37172 BUSINESS PHONE: 6153840100 MAIL ADDRESS: STREET 1: 27 N MAIN ST CITY: SPRINGFIELD STATE: TN ZIP: 37172 FORMER COMPANY: FORMER CONFORMED NAME: ELORAC CORP DATE OF NAME CHANGE: 19901009 10-Q 1 INNOVO GROUP, INC. FORM 10-Q 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.
CLASS OUTSTANDING AS OF SEPTEMBER 30, 1998 - ----- ------------------------------------- Common stock, par value of $.10 per share 4,475,937
1 2 INNOVO GROUP INC. INDEX
PART 1. FINANCIAL INFORMATION PAGE NO. 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
2 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)
August 31 November 30 1998 1997 -------- ----------- 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 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 INNOVO GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (000's except for share information)
Three months ended Nine months ended ---------------------- --------------------- August 31 August 31 August 31 August 31 1998 1997 1998 1997 ---------------------- --------------------- 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 ====================== =====================
See accompanying notes to condensed consolidated financial statements. 4 5 INNOVO GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000's)
Nine months ended ------------------------- August 31 August 31 1998 1997 --------- ---------- 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 ------- -------
See accompanying notes to condensed consolidated financial statements. 5 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 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:
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) 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) ============================ =========================
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)
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) 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) ======================== =========================
Note 3: INVENTORIES Inventory consisted of the following:
August 31, 1998 November 30, 1997 --------------- ----------------- (000's) Finished goods $ 583 $ 680 Work-in-process 151 246 Raw materials 659 692 Inventory reserve (36) (36) ------- ------- Total $ 1,357 $ 1,582
NOTE 4: NOTES PAYABLE AND LONG-TERM DEBT (a) Notes Payable 7 8
August 31, 1998 November 30, 1997 --------------- ----------------- (000's) 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
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 9
Additional Promissory paid-in Note Treasury Stock Shares Amount capital Officer Shares Amount ------ ------ ------- ------- ------ ------ (000's) (000's) (000's) 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)
9 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 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 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 US DOLLARS 3-MOS NOV-30-1998 DEC-01-1997 AUG-31-1998 1 706 0 2,034 63 1,357 4,375 6,628 2,009 9,096 5,489 0 0 0 449 1,058 9,096 5,822 5,822 3,542 3,065 0 0 324 (992) 0 (992) 1,440 0 0 (2,432) (.54) 0
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