SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10860
THE HE-RO GROUP, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3615898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Seventh Avenue 10018
New York, NY
(Address of principal (Zip Code)
executive offices)
(212) 840-6047
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock January 13,1997
--------------------- ---------------
$.01 par value 6,717,333
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
November 30, 1996 and May 31, 1996........................ 3
Consolidated Statements of Income
Three and Six months Ended November 30, 1996 and 1995..... 4
Consolidated Statements of Changes in Stockholders' Equity
Six months Ended November 30, 1996 and 1995............... 5
Consolidated Statements of Cash Flows
Six months Ended November 30, 1996 and 1995............... 6
Condensed Notes to Consolidated Financial Statements...... 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 14 - 18
PART II. OTHER INFORMATION........................................ 19 - 20
<PAGE>
THE HE-RO GROUP,LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
November 30, May 31,
1996 1996
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash......................................... $ 727 $ 405
Accounts receivable:
Trade, net of allowances for doubtful
accounts of $300 (November), $300 (May).. 2,878 1,648
Suppliers and other.......................... 3,536 2,991
----- -----
6,414 4,839
Inventory.................................... 12,713 15,029
Other current assets......................... 853 493
--- ---
Total current assets.................. 20,707 20,566
------ ------
FIXED ASSETS - at cost, net of accumulated
depreciation and amortization................ 2,033 2,424
OTHER ASSETS..................................... 1,475 1,633
----- -----
$24,215 $24,623
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans................................... $ 6,234 $ 5,977
Current maturities of long-term debt......... 2,750 2,600
Accounts payable............................. 6,535 5,981
Accrued expenses and other current
liabilities.............................. 1,792 1,888
----- -----
Total current liabilities............. 17,311 16,446
------ ------
Subordinated Notes and Obligations Payable -
stockholder.................................. 5,296 5,296
----- -----
Long-term debt, net of current maturities........ - 150
----- ---
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000
authorized shares; no shares outstanding. - -
Common stock, $.01 par value; 25,000,000
authorized shares; issued and outstanding
6,717,333 shares......................... 67 67
Additional paid-in capital................... 40,166 40,166
Retained earnings (deficiency)............... (38,625) (37,502)
------- -------
Total stockholders' equity............ 1,608 2,731
----- -----
$24,215 $24,623
======= =======
The accompanying condensed notes are an integral part of these consolidated
statements.
3
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six months Ended
November 30, November 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................ $13,904 $14,845 $25,481 $28,549
Cost of sales........................ 8,664 9,388 15,599 17,320
----- ----- ------ ------
Gross profit...................... 5,240 5,457 9,882 11,229
Operating Expenses...................
Selling, general and
administrative expenses........... 4,764 5,416 9,839 10,663
Operating income .................... 476 41 43 566
Interest expense..................... 605 682 1,166 1,296
--- --- ----- -----
Income (loss) before income taxes (129) (641) (1,123) (730)
Provision for income taxes........... - - - -
--- --- --- ---
Net income (loss)................. $(129) $(641) $(1,123) $ (730)
===== ===== ======= ======
Net income (loss) common share....... $(0.02) $(0.10) $ (0.17) $(0.11)
====== ====== ======= ======
Weighted average shares outstanding.. 6,717 6,717 6,717 6,717
===== ===== ===== =====
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
statements.
4
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
No. of Paid-in Earnings Stockholders'
Shares Amount Capital (Deficiency) Equity
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1995 6,717 $67 $40,166 $(33,574) $ 6,659
Net loss (730) (730)
----- --- ------ ---- ----
Balance, November 30, 1995 6,717 $67 $40,166 $(34,304) $ 5,929
===== === ======= ======== =======
Balance, May 31, 1996 6,717 $67 $40,166 $(37,502) $ 2,731
Net loss (1,123) (1,123)
----- --- ------- ------ ------
Balance, November 30, 1996 6,717 $67 $40,166 $(38,625) $ 1,608
===== === ======= ======== =======
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
statements.
5
<PAGE>
THE HE-RO GROUP, LTD., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Six months Ended
November 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (1,123) $ (730)
-------- --------
Adjustments to reconcile pro forma net
income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............. 473 545
Loss on disposition of fixed assets........ - 69
Amortization of deferred finance costs..... 159 109
(Increase) decrease in assets:
Trade receivables.............................. (1,230) (1,125)
Other receivables.............................. (545) (577)
Inventories.................................... 2,316 1,456
Other current assets........................... (360) 99
Increase (decrease) in liabilities:
Accounts payable............................... 554 (678)
Accrued expenses and other current liabilities. (96) (274)
--- ----
Total adjustments.............................. 1,271 (376)
----- ----
Net cash provided by (used in)
operating activities....................... 148 (1,106)
--- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets.................... (82) (69)
(Increase)Decrease in other assets............. 39 26
-- --
Net cash provided by (used in)
investing activities....................... (43) (43)
--- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank loans.............. 257 1,077
Deferred finance costs......................... (40) (90)
--- ---
Net cash provided by (used in)
financing activities.................... 217 987
--- ---
NET INCREASE (DECREASE) IN CASH.................... 322 (162)
CASH, beginning of period.......................... 405 809
--- ---
CASH, end of period................................ $ 727 $ 647
======= ========
The accompanying condensed notes are an integral part of these consolidated
statements.
6
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
Condensed Notes To Consolidated Financial Statements
(UNAUDITED)
November 30, 1996
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
HE-RO Group, Ltd. and its subsidiaries (the "Company"). The consolidated
financial statements are presented in accordance with the requirements
of the quarterly report on Form 10-Q and consequently do not include all
of the disclosures normally made in an annual report on 10-K filing.
Accordingly, the consolidated financial statements included herein
should be reviewed in conjunction with the consolidated financial
statements and the notes included therein with the Company's Annual
report on Form 10-K.
The financial information as of and for the six months ended
November 30, 1996 and November 30, 1995 has been prepared in accordance
with the Company's customary accounting practices and has not been
audited. In the opinion of management, the information presented
reflects all adjustments necessary for a fair statement of interim
results. All such adjustments are of a normal and recurring nature. The
foregoing interim results are not necessarily indicative of the results
of operations for the full year ending May 31, 1997 ("Fiscal 1997").
2. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market:
(In Thousands)
November 30, May 31,
1996 1996
---- ----
(UNAUDITED)
Finished goods....................... $ 9,040 $10,647
Raw materials........................ 3,673 4,382
----- -----
$12,713 $15,029
======= =======
3. FIXED ASSETS
Fixed assets consist of the following:
(In Thousands)
November 30, May 31,
1996 1996
---- ----
(UNAUDITED)
Machinery and equipment............... $ 3,117 $ 3,115
Furniture and fixtures................ 2,998 2,979
Leasehold improvements................ 3,708 3,647
----- -----
9,823 9,741
Less - Accumulated depreciation and
amortization.......................... 7,790 7,317
----- -----
$ 2,033 $ 2,424
======= =======
7
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
The Company has an investment of $798,000 in Great Projects Limited
("GPL"), a Hong Kong corporation. Fifty percent of GPL is owned by a
subsidiary of the Company, and 25% is owned by each of two Hong Kong
companies that are unaffiliated with the Company or its officers or
directors. As of October 31, 1993, the partners agreed to discontinue
the operations of GPL. In January 1996, liquidation proceedings in Hong
Kong were commenced to wind up GPL. Included in accounts payable is
$2,151,000 due to the foreign affiliate at November 30, 1996 and May 31,
1996. The Company does not expect any material impact on its results of
operations due to the liquidation of GPL.
Notes and obligations payable to the beneficial principal stockholder
in the aggregate principal amount of $5,296,000 are subordinated to bank
borrowing and bear interest varying from 8% to 12% per annum. These
obligations are due upon demand but because these obligations are
subordinated to the bank borrowing, the liability relating thereto has
been classified as long-term.
5. BANK LOANS AND LONG TERM DEBT
On May 12, 1995, the Company signed a financing credit agreement (the
"Foothill Credit Agreement") with Foothill Capital Corporation
("Foothill") for a two year term expiring June 2, 1997, to enable the
Company to borrow, assuming that borrowing base thresholds are met (for
direct loans and letters of credit), amounts not exceeding $15,000,000
during the term of the credit agreement. The indebtedness incurred under
the Foothill Credit Agreement is secured by a first lien on the
Company's domestic inventory and accounts receivable, among other
collateral.
Interest on direct debt is payable at the prime rate (8.25% at
November 30, 1996) plus 2 1/2% per annum. At November 30, 1996, the
direct debt outstanding under the Foothill Credit Agreement was
$6,234,000 and the Company was contingently liable for outstanding
letters of credit of approximately $200,000.
The Company's credit line with Foothill refinanced a substantial
portion of the indebtedness previously outstanding from the Company to a
group of four banks (the "Bank Group"). At November 30, 1996, the
outstanding indebtedness of the Company to the Bank Group was $2,750,000
in the aggregate, evidenced by a term note to each bank with interest at
2% above the prime rate. The Company's indebtedness to the Bank Group is
(i) subordinated to the Company's indebtedness to Foothill (ii) secured
by a second lien on the domestic inventory and accounts receivable,
among other collateral, and a first lien on the inventory located in
Hong Kong and China, and (iii) subject to a mandatory prepayment of
$100,000 for any month in which the Company's inventory in Hong Kong and
China decrease below certain minimum thresholds. This loan is due and
8
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
payable in monthly installments of principal ranging from $50,000 to
$150,000 beginning August 1995, plus monthly interest payments, with the
final payment due in June 1997. These payments are permitted under the
Foothill Credit Agreement if certain liquidity standards are met. For
the months ended December 1995 through December 1996, because these
liquidity standards were not met, the Company was not permitted to pay
the monthly installment of principal to the Bank Group, and accordingly
is not in compliance with its credit agreement with the Bank Group. As a
result of the foregoing and in connection with the contemplated
transaction with a potential purchaser of the Company as discussed in
Note 8, the Company will be seeking to refinance or revise its credit
facilities.
As partial consideration for entering into the amended and restated
credit agreement with the Bank Group, warrants previously granted to the
Bank Group to purchase up to an aggregate of 250,000 shares of the
Company's common stock at a price of $2.00 per share were extended for a
one year term to September 17, 1999.
The Company's credit agreements with Foothill and the Bank Group
requires Della Rounick and the estate of Herbert Rounick, collectively,
to own or control at least 51% of the Company's outstanding common
stock. In addition, the more significant restrictive covenants as
defined in the Foothill Credit Agreement are as follows:
- The minimum current ratio must equal: 1.0 to 1
- The maximum liabilities to net worth must equal: 38.0 to 1
- The minimum net worth required: $400,000
- The minimum working capital required : $3,500,000
- Capital expenditures may not exceed $500,000 in one year.
- The Company is prohibited from paying dividends throughout the term
of the agreement.
- The net income on a cumulative basis and measured at the end of each
fiscal quarter may not fall below negative $4,500,000 from June 1,
1995.
As of November 30, 1996, the Company was not in compliance with
certain financial covenants under the Foothill Credit Agreement. The
Company has received a waiver from Foothill relating to the foregoing
non-compliance (see Note 8 for further discussion).
9
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Payments of income taxes were $37,000 and $9,000 for the six months
ended November 30, 1996 and November 30, 1995, respectively. Payments of
interest during the corresponding periods were $914,000 and $1,243,000
respectively.
7. CONTINGENCIES
Because a substantial amount of the Company's products are
manufactured in The People's Republic of China ("China"), the loss of
"most-favored-nation" ("MFN") trading status for China would have, and
the conditional granting of MFN trading status for China or the
imposition of retaliatory trade sanctions against China involving the
Company's products could have a material adverse effect on the Company,
resulting from significantly higher rates of duty and other trade
sanctions imposed on goods originating in China.
In May 1996, President Clinton issued a Presidential Determination
recommending the renewal of "most-favored-nation" trade status for China
for the twelve months ending July 2, 1997. Although resolutions
disapproving such renewal were introduced in June 1996 into both the
U.S. Senate and the House of Representatives, the House resolution was
voted on and failed to pass. As has occurred in the last two years, in a
break with previous years, the Presidential Determination did not
recommend subjecting any future renewal of "most-favored-nation" trade
status for China to various conditions, such as China's compliance with
the 1992 bilateral agreement with the United States concerning prison
labor and overall progress with respect to human rights, release and
accounting of Chinese citizens imprisoned or detained for their
political and religious beliefs, humane treatment of prisoners,
protecting Tibet's religious and cultural heritage and permitting
international radio and television broadcasts into China.
"Most-favored-nation" trade status was renewed in July 1996 for an
additional year. There is no assurance that the President will recommend
the renewal of "most-favored-nation" trade status for China for the year
commencing July 3, 1997 or thereafter or that Congress will not enact
legislation denying or conditioning the grant of "most-favored-nation"
trade status to China in the future.
In January 1994, the United States and China entered into a three
year bilateral textile agreement expiring December 31, 1996. Among other
things, the agreement reduced by 13% China's market access for certain
cotton, wool, man-made fiber, silk blend and other vegetable fiber
textiles and textile products exported to the United States and permits
the United States to impose significant penalties for transshipment
10
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
violations. Such penalties include the assessment of "transshipment
charges" against the restraint levels of affected categories which could
result in such levels filling more rapidly or becoming fully utilized
with little or no advance notice. Pursuant to the bilateral textile
agreement, such transshipment charges have, on occasion, been applied by
the United States. In addition, a separate agreement between the United
States and China was reached which, for the first time, subjected to
quota limitations, China's exports of apparel containing 70% or more by
weight of silk. This agreement was effective with respect to goods
produced or manufactured in China and exported to the United States
during the period from April 1, 1994 through December 31, 1996.
Previously, these products had not been subject to quota limitations.
Negotiations with respect to these expiring agreements are underway. The
Company cannot predict the terms of any renewal of such agreements.
On July 1, 1997, the British Crown Colony of Hong Kong reverts to the
People's Republic of China. As negotiations relating to a new bilateral
textile agreement with China, effective January 1, 1997, have not been
concluded, it is uncertain how Hong Kong textile quota will be viewed in
relation to Chinese textile quota. If the United States should determine
that goods produced in Hong Kong would be subjected to Chinese quota,
such a determination would adversely affect any contingency plans of the
Company to lessen the impact of punitive measures taken by the U.S. with
respect to Chinese quota, to the extent that such contingency plans are
premised on the shifting of production or assembly of the products from
China to Hong Kong.
In addition, over the past several years (including 1996), the Office
of the United States Trade Representative has conducted and may in the
future conduct investigations relating to China's trade policies and
practices. While previous investigations were resolved without resort to
retaliatory trade sanctions against China by the United States, an
unfavorable resolution of any future investigation could result in the
imposition of retaliatory trade sanctions against China and on products
imported from China, including punitive duties, fees or restrictions on
certain Chinese products, including products manufactured by the Company
in China.
Legislation implementing the Uruguay Round of the General Agreement
on Tariffs and Trade was signed by President Clinton in late 1994. Among
other provisions, it contained a section which amended the rules of
origin applicable to textile and textile products, effective with
respect to goods entered or withdrawn from warehouse for consumption on
or after July 1, 1996. Regulations implementing these changes took
effect on that date. In general, and with specified exceptions, the
statute and regulations provide that most textile apparel articles will
be considered to originate in the country in which they are wholly
assembled. In many cases, this represents a change from the manner in
11
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
which country of origin had been determined, which in many instances,
was based on where the components were cut. The Company cannot now
predict to what extent the new rules concerning country of origin will
change import trade patterns or how it will impact upon quota usage from
exporting countries.
The Company is a party to various claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
the Company's management, all such matters are without merit or involve
such amounts in which an unfavorable disposition would not have a
material effect on the consolidated financial statements of the Company.
8. SUBSEQUENT EVENT
Because the Company had incurred losses from operations and has been
incurring net losses, there has been insufficient liquidity, as required
by its credit agreement with its senior lender, Foothill Capital
Corporation ("Foothill"), to allow the Company to pay required monthly
installments of principal to its group of four banks that rank junior to
Foothill. In addition, as of November 30, 1996, the Company was not in
compliance with certain financial covenants under the Foothill Credit
Agreement for which the Company has received a waiver from Foothill (see
Note 5 for discussion). The Company is projecting losses from operations
for the remainder of fiscal 1997, which would result in its
non-compliance with the financial covenants under its credit agreement
with Foothill. The combination of these factors raises substantial doubt
about the Company's ability to continue as a going concern. The
Company's independent public accountants had issued a going concern
opinion for the year ended May 31, 1996. As described above, the
conditions leading to that opinion continue to exist. In response to
these conditions, in the fourth quarter of fiscal 1996 the Company
engaged Arthur Andersen Worldwide - Corporate Finance as its financial
advisor to explore options including alliances with other companies, an
infusion of capital into the Company, the sale or merger of the Company,
or any combination of the foregoing.
On September 25, 1996, the Company signed a purchase agreement (the
"Purchase Agreement") with an affiliate of Sun Capital Partners, Inc.
("Sun Capital"), a merchant banking and investment banking firm located
in West Palm Beach, Florida. On November 18, 1996, Sun Capital and the
Company entered into an amendment to the Purchase Agreement that, among
other things, amended the no-shop provisions of the Purchase Agreement
to allow the Company to negotiate with other potential investors and
purchasers without incurring a break-up fee. Effective January 14, 1997,
the Company and Sun Capital terminated the Purchase Agreement. The
Company is currently conducting negotiations with respect to a
transaction with another potential purchaser. There can be no assurance
that the Company will consummate the transaction currently being
negotiated or any transaction for the sale of, or investment of capital
into, the Company.
12
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In the absence of the preceding transaction or similar events that
would provide plans to restructure debt, to reduce or delay
expenditures, or to increase ownership equity, there could be a
substantial doubt as to the Company's success of future operations. The
result includes a possible discontinuance of operations in which there
is a commencement of dissolution or bankruptcy, or there could be an
externally forced revision of its present operating structure.
13
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion provides information and analysis of the
Company's results of operations for the six month period ended November 30,
1996, and its liquidity and capital resources. The following discussion and
analysis should be read in conjunction with the Unaudited Consolidated Financial
Statements included elsewhere herein.
Because a substantial amount of the Company's products are manufactured
in The People's Republic of China ("China"), the loss of "most-favored-nation"
("MFN") trading status for China would have, and the conditional granting of MFN
trading status for China or the imposition of retaliatory trade sanctions
against China involving the Company's products could have a material adverse
effect on the Company, resulting from significantly higher rates of duty and
other trade sanctions imposed on goods originating in China.
In May 1996, President Clinton issued a Presidential Determination
recommending the renewal of "most-favored-nation" trade status for China for the
twelve months ending July 2, 1997. Although resolutions disapproving such
renewal were introduced in June 1996 into both the U.S. Senate and the House of
Representatives, the House resolution was voted on and failed to pass. As has
occurred in the last two years, in a break with previous years, the Presidential
Determination did not recommend subjecting any future renewal of
"most-favored-nation" trade status for China to various conditions, such as
China's compliance with the 1992 bilateral agreement with the United States
concerning prison labor and overall progress with respect to human rights,
release and accounting of Chinese citizens imprisoned or detained for their
political and religious beliefs, humane treatment of prisoners, protecting
Tibet's religious and cultural heritage and permitting international radio and
television broadcasts into China. "Most-favored- nation" trade status was
renewed in July 1996 for an additional year. There is no assurance that the
President will recommend the renewal of "most-favored-nation" trade status for
China for the year commencing July 3, 1997 or thereafter or that Congress will
not enact legislation denying or conditioning the grant of "most-favored-nation"
trade status to China in the future.
In January 1994, the United States and China entered into a three year
bilateral textile agreement expiring December 31, 1996. Among other things, the
agreement reduced by 13% China's market access for certain cotton, wool,
man-made fiber, silk blend and other vegetable fiber textiles and textile
products exported to the United States and permits the United States to impose
significant penalties for transshipment violations. Such penalties include the
assessment of "transshipment charges" against the restraint levels of affected
categories which could result in such levels filling more rapidly or becoming
fully utilized with little or no advance notice. Pursuant to the bilateral
textile agreement, such transshipment charges have, on occasion, been applied by
the United States. In addition, a separate agreement between the United States
and China was reached which, for the first time, subjected to quota limitations,
14
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
China's exports of apparel containing 70% or more by weight of silk. This
agreement was effective with respect to goods produced or manufactured in China
and exported to the United States during the period from April 1, 1994 through
December 31, 1996. Previously, these products had not been subjected to quota
limitations. Negotiations with respect to these expiring agreements are
underway. The Company cannot predict the terms of any renewal of such
agreements.
On July 1, 1997, the British Crown Colony of Hong Kong reverts to the
People's Republic of China. As negotiations relating to a new bilateral textile
agreement with China, effective January 1, 1997, have not been concluded, it is
uncertain how Hong Kong textile quota will be viewed in relation to Chinese
textile quota. If the United States should determine that goods produced in Hong
Kong would be subjected to Chinese quota, such a determination would adversely
affect any contingency plans of the Company to lessen the impact of punitive
measures taken by the U.S. with respect to Chinese quota, to the extent that
such contingency plans are premised on the shifting of production or assembly of
the products from China to Hong Kong.
In addition, over the past several years (including 1996), the Office of
the United States Trade Representative has conducted and may in the future
conduct investigations relating to China's trade policies and practices. While
previous investigations were resolved without resort to retaliatory trade
sanctions against China by the United States, an unfavorable resolution of any
future investigation could result in the imposition of retaliatory trade
sanctions against China and on products imported from China, including punitive
duties, fees or restrictions on certain Chinese products, including products
manufactured by the Company in China.
Legislation implementing the Uruguay Round of the General Agreement on
Tariffs and Trade was signed by President Clinton in late 1994. Among other
provisions, it contained a section which amended the rules of origin applicable
to textile and textile products, effective with respect to goods entered or
withdrawn from warehouse for consumption on or after July 1, 1996. Regulations
implementing these changes took effect on that date. In general, and with
specified exceptions, the statute and regulations provide that most textile
apparel articles will be considered to originate in the country in which they
are wholly assembled. In many cases, this represents a change from the manner in
which country of origin had been determined, which in many instances, was based
on where the components were cut. The Company cannot now predict to what extent
the new rules concerning country of origin will change import trade patterns or
how it will impact upon quota usage from exporting countries.
The Company is a party to various claims, legal actions, and complaints
arising in the ordinary course of business. In the opinion of the Company's
management, all such matters are without merit or involve such amounts in which
an unfavorable disposition would not have a material effect on the consolidated
financial statements of the Company.
15
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Second Quarter Fiscal 1996 Compared to Second Quarter Fiscal 1995
Net sales of $13.9 million for the three months ended November 30, 1996
decreased by $.9 million (6.3%) compared to net sales of $14.8 million for the
three months ended November 30, 1995. This decrease is primarily attributable to
reduced sales for evening wear products due to the soft economy in the apparel
industry.
Cost of sales for the three months ended November 30, 1996 was $8.7
million, or 62.3% of net sales compared to $9.4 million, or 63.2% of net sales
for the three months ended November 30, 1995. Gross profit for the three months
ended November 30, 1996 was $5.2 million, or 37.7% of net sales, compared to
$5.5 million, or 36.8% of net sales for three months ended November 30, 1995.
The decrease in gross profit dollars was primarily due to the decrease in sales
volume described above.
Selling, general and administrative expenses were $4.8 million, or 34.3%
of net sales for the three months ended November 30, 1996, compared to $5.4
million, or 36.5% of net sales for the three months ended November 30, 1995. The
lower selling, general and administrative expenses for the three months ended
November 30, 1996 are primarily attributable to decreases in salary expenses,
advertising, rent and occupancy.
Operating income was $.5 million or 3.4% of net sales for the three
months ended November 30, 1996 compared to $.1 million or .3% of net sales for
the three months ended November 30, 1995. This increase in operating income was
primarily attributable to the reduced selling, general, and administrative
expenses described above.
Interest expense for the three months ended November 30, 1996 was $.6
million, or 4.4% of net sales compared to $.7 million, or 4.6% of net sales for
the three months ended November 30, 1995.
As a result of the factors described above, the Company had a loss
before income taxes of $(.1) million, or (1.0)% of net sales during the three
months ended November 30, 1996, compared to a loss before income taxes of $(.6)
million, or (4.3)% of net sales for the three months ended November 30, 1995.
As a result of the factors described above, the Company had a net loss
of $(.1) million ($.02 per share) for the three months ended November 30, 1996
compared to a net loss of $(.6) million (or $.10 per share) for the three months
ended November 30, 1995.
16
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Six months Ended November 30, 1996 Compared to Six months Ended November 30,
1995
Net sales of $25.4 million for the six months ended November 30, 1996
decreased by $3.1 million (10.7%) below net sales of $28.5 million for the six
months ended November 30, 1995. This decrease is primarily attributable to
reduced sales for evening wear products due to the soft economy in the apparel
industry.
Cost of sales for the six months ended November 30, 1996 was $15.6
million, or 61.2% of net sales compared to $17.3 million, or 60.7% of net sales
for the six months ended November 30, 1995. Gross profit for the six months
ended November 30, 1996 was $9.9 million, or 38.8% of net sales, compared to
$11.2 million or 39.3% of net sales for the six months ended November 30, 1995.
The decrease in gross profit dollars was primarily due to the decrease in sales
volume described above.
Selling, general and administrative expenses of $ 9.8 million or 38.6%
of net sales for the six months ended November 30, 1996 compared to $10.7
million, or 37.3% for the six months ended November 30, 1995. The lower selling,
general and administrative expenses for the six months ended November 30, 1996
are primarily attributable to decreases in salary expenses, advertising, rent
and occupancy.
Operating income of $.1 million or .2% of net sales for the six months
ended November 30, 1996 compared to $.6 million or 2.0% of net sales for the six
months ended November 30, 1995. This decrease in operating income was primarily
attributable to the reduced sales and gross profit dollars described above.
Interest expense of $1.2 million or 4.6% of net sales for the six months
ended November 30, 1996 compared to $ 1.3 million, or 4.5% of net sales for the
six months ended November 30, 1995.
As a result of the factors described above, the Company had a loss
before income taxes of $(1.1) million, or (4.4)% of net sales during the six
months ended November 30, 1996, compared to a loss before taxes of $(.7)
million, or (2.5)% of net sales for the six months ended November 30, 1995.
As a result of the factors described above, the Company's net loss was
$(1.1) million (or $.17 per share) for the six months ended November 30, 1996
compared to a net loss of $(.7) million (or $.11 per share) for the six months
ended November 30, 1995.
17
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At November 30, 1996, the Company had an increase in cash flows from
operating activities of $.1 million. This increase resulted primarily from a net
loss of $1.1 million for the six months then ended and a net increase in
receivables of $1.2 million, offset by a net decrease in Inventory of $2.3
million for the six months then ended. The Company's level of cash flows from
operating activities varies from quarter to quarter due to the seasonality of
its business.
In regard to cash flows from investing activities, during the first six
months of fiscal 1996 and 1995, the Company spent approximately $.1 million on
capital improvements and replacement expenditures in each period. Capital
improvements and replacements for the full fiscal 1997 year are expected to
approximate $.3 million.
Cash flows from financing activities increased by $.2 million resulting
primarily from increased borrowings under the Company's revolving credit
facilities.
Because the Company had incurred losses from operations and has been
incurring net losses, there has been insufficient liquidity, as required by its
credit agreement with its senior lender, Foothill Capital Corporation
("Foothill"), to allow the Company to pay required monthly installments of
principal to its group of four banks that rank junior to Foothill. In addition,
as of November 30, 1996, the Company was not in compliance with certain
financial covenants under the Foothill Credit Agreement for which the Company
has received a waiver from Foothill (see Note 5 for discussion). The Company is
projecting losses from operations for the remainder of fiscal 1997, which would
result in its non-compliance with the financial covenants under its credit
agreement with Foothill. The combination of these factors raises substantial
doubt about its ability to generate sufficient cash to support its operations.
The Company's independent public accountants had issued a going concern opinion
for the year ended May 31, 1996. As described above, the conditions leading to
that opinion continue to exist. The Company's ability to continue as a going
concern is dependent upon plans to restructure debt, to reduce or delay
expenditures, or to increase ownership equity as discussed in Note 8 of Notes to
Consolidated Financial Statements. The Company believes that the contemplated
transaction with a potential purchaser of the Company as discussed in Note 8, as
well as funds generated by operations (i.e. management's ability to reduce the
net losses), the availability of credit under the revised credit facility
coupled with reduced inventory levels will contribute to meeting the Company's
working capital, letter of credit and capital expenditure requirements for the
foreseeable future. (See Note 5 for further discussion of the revised credit
facility.) There can be no assurance that the Company will consummate a
transaction with an investor or purchaser.
18
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.20 Amendment to Note and Common Stock Purchase
Agreement, dated November 18, 1996, by and
among Registrant, The He-Ro Group, Inc.,
Vasiliki Della Pasvantidou Rounick,
individually and as the Executrix of the Estate
of Herbert Rounick, and Sun Investment
Partnership I, Ltd.
27. Financial Data Schedule.
(b) Reports on Form 8-K:
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, The He-Ro Group, Ltd. has duly caused this Quarterly Report on Form 10-Q
to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 13, 1997 THE HE-RO GROUP, LTD.
(Registrant)
By: /s/ DELLA ROUNICK
-----------------
Della Rounick
Co-Chairman of the Board
of Directors and Chief
Executive Officer
Date: January 13, 1997
/s/ SAM D. KAPLAN
-----------------
Sam D. Kaplan
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
20
<PAGE>
INDEX TO EXHIBITS
TO
THE QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 1996
OF
THE HE-RO GROUP, LTD.
Exhibit Sequentially
No. Description Numbered Page
- ------- ----------- -------------
3.1 Restated Certificate of Incorporation of
Registrant. Incorporated by reference to
Exhibit 3.1 of Registrant's Annual Report on
Form 10-K for the year ended May 31, 1995
("Registrant's 1995 10-K").
3.2 Bylaws of Registrant, as amended. Incorporated
by reference to Exhibit 3.2 of Registrant's
1995 10-K.
3.3 Specimen Certificate for Common Stock of
Registrant. Incorporated by reference to
Exhibit 3.3 of Registrant's 1995 10-K.
10.1 Lease dated December 20, 1990, between Hartz
Mountain Industries, Inc. and The He-Ro Group,
Inc. relating to the premises located at 35
Enterprise Avenue, Secaucus, New Jersey.
Incorporated by reference to Exhibit 10.1 of
Registrant's 1995 10-K.
10.2 Sublease dated May 24, 1994 between The He-Ro
Group, Inc. (as sublessor) and USA Cargo
Distribution Center (as sublessee) relating to
the premises located at One American Way,
Secaucus, New Jersey. Incorporated by
reference to Exhibit 10.2 of the Registrant's
1995 10-K.
10.3 Lease dated September 21, 1994, between The
Louis Adler Realty Company and H.R.I., Inc.
relating to the premises located at 550
Seventh Avenue, New York, New York.
Incorporated by reference to Exhibit 10.3 of
Registrant's 1995 10-K.
<PAGE>
Exhibit Sequentially
No. Description Numbered Page
- ------- ----------- -------------
10.4 Lease dated September 24, 1994, between The
Louis Adler Realty Company and H.R.I., Inc.
relating to the premises located at 550
Seventh Avenue, New York, New York.
Incorporated by reference to Exhibit 10.4 of
Registrant's 1995 10-K.
10.5 Lease dated September 21, 1994, between The
Louis Adler Realty Company and H.R.I., Inc.
relating to the premises located at 550
Seventh Avenue, New York, New York.
Incorporated by reference to Exhibit 10.10 of
Registrant's 1995 10-K.
10.6 Lease dated September 21, 1994, between The
Louis Adler Realty Company and The He-Ro
Group, Inc. relating to the premises located
at 530 Seventh Avenue, New York, New York.
Incorporated by reference to Exhibit 10.6 of
Registrant's 1995 10-K.
10.7 Tenancy Agreement dated December 20, 1994,
between Grandford Development and The He-Ro
Group, Inc. relating to the premises located
at Cosmos Sing Shing Building, 81 Hung To
Road, Kwun Tong, Kowloon, Hong Kong.
Incorporated by reference to Exhibit 10.7 of
Registrant's 1995 10-K.
10.8 License Agreement dated June 1, 1990, between
The He-Ro Group, Inc. and Oleg Cassini, Inc.
Incorporated by reference to Exhibit 10.8 of
Registrant's 1995 10-K.
10.8.1 Letter Agreement dated December 15, 1995, from
Oleg Cassini, Inc. to the He-Ro Group, Inc.,
amending the Cassini License. Incorporated by
reference to Exhibit 10.8.1 of Registrant's
Annual Report on Form 10-K for the year ended
May 31, 1996 ("Registrant's 1996 10-K").
10.9 Fourth Amended and Restated Revolving Credit
Agreement dated as of May 15, 1995, by and
among The He-Ro Group, Inc., and Marine
Midland Bank, N.A., as agent, The Chase
Manhattan Bank, The Hongkong and Shanghai
Banking Corporation Limited and ABN AMRO Bank
N.V. Incorporated by reference to Exhibit
10.9 of Registrant's 1995 10-K.
<PAGE>
Exhibit Sequentially
No. Description Numbered Page
- ------- ----------- -------------
10.10 Loan and Security Agreement dated as
of May 12, 1995, by and between The
He-Ro Group, Ltd. and certain of its
subsidiaries and Foothill Capital
Corporation. Incorporated by
reference to Exhibit 10.10 of
Registrant's 1995 10-K.
10.11 Contribution Agreement dated as of
May 20, 1991, between the Registrant
and Herbert Rounick. Incorporated
by reference to Exhibit 10.11 of
Registrant's 1995 10-K.
10.12 1991 Stock Option Plan. Incorporated
by reference to Exhibit 10.12 of
Registrant's 1995 10-K.
10.13 1992 Outside Director Stock Option
Plan. Incorporated by reference to
Exhibit 10.13 of Registrant's 1995
10-K.
10.14 1993 Outside Director Stock Option
Plan. Incorporated by reference to
Exhibit 10.14 of Registrant's 1995
10-K.
10.15 Amended and Restated 1994 Outside
Director Stock Option Plan.
Incorporated by reference to Exhibit
10.15 of Registrant's 1996 10-K.
10.16 Employment Agreement dated May 14,
1993 by and between Allan R. Bogner
and The He-Ro Group, Ltd. (the
"Bogner Employment Agreement").
Incorporated by reference to Exhibit
10.16 of Registrant's 1995 10-K.
10.17 Letter dated June 1, 1994 from the
He-Ro Group, Ltd. to Allan R. Bogner
relating to Bogner Employment
Agreement. Incorporated by
reference to Exhibit 10.17 of
Registrant's 1995 10-K.
<PAGE>
Exhibit Sequentially
No. Description Numbered Page
- ------- ----------- -------------
10.18 Settlement Agreement dated November
30, 1995, between Allan R. Bogner
and the Registrant. Incorporated by
reference to Exhibit 10.18 of
Registrant's Quarterly Report on
Form 10-Q for the quarter ended
February 29, 1996.
10.19 Note and Common Stock Purchase
Agreement dated as of September 25,
1996, by and among Registrant, The
He-Ro Group, Inc., Vasiliki Della
Pasvantidou Rounick, individually
and as the Executrix of the Estate
of Herbert Rounick, and Sun
Investment Partnership I, Ltd.
Incorporated by reference to Exhibit
10.19 of Registrant's Quarterly Report
on Form 10-Q for the quarter ended
August 31, 1996.
*10.20 Amendment to Note and Common Stock
Purchase Agreement, dated November
18, 1996, by and among Registrant,
The He-Ro Group, Inc., Vasiliki
Della Pasvantidou Rounick,
individually and as the Executrix of
the Estate of Herbert Rounick, and
Sun Investment Partnership I, Ltd.
21.1 Subsidiaries of the Registrant.
Incorporated by reference to Exhibit
21.1 of Registrant's 1995 10-K.
*27. Financial Data Schedule
* Filed herewith.
<PAGE>
EXHIBIT 10.20
<PAGE>
Amendment
to
Note and Common Stock Purchase Agreement
Amendment dated November 18, 1996, to that certain Note and Common Stock
Purchase Agreement dated as of September 25, 1996 (the "Purchase Agreement"), by
and among The He-Ro Group, Ltd., The He-Ro Group, Inc., Vasiliki Della
Pasvantidou Rounick ("Rounick") individually and as Executrix of the Estate of
Herbert Rounick (the "Estate"), the Estate and Sun Investment Partnership I,
Ltd. (the "Purchaser").
WHEREAS, the parties hereto have agreed to revise the terms of the Purchase
Agreement to allow the Company to pursue alternative strategic alliances while
the Purchase Agreement is still in effect and to allow the Purchaser during this
period to continue pursuing a Financing Commitment; and
WHEREAS, the parties agree that until the Financing Commitment is obtained,
the requirements of the Company pursuant to the Purchase Agreement to obtain the
Purchaser's approval in connection with certain operations and management of the
Company will be removed; and
WHEREAS, the parties also agree to revise the Purchase Agreement to delete
the imposition of a Termination Fee and all references thereto;
WHEREAS, the Company has agreed to reimburse Sun for its expenses in
accordance with the schedule annexed hereto;
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. All capitalized terms used in this Amendment, unless
expressly defined, shall have the same meanings ascribed to such terms in the
Purchase Agreement.
2. Amendments. Each of the undersigned hereby agrees that the Purchase
Agreement shall be hereby amended as follows:
A. Section 4.13 (Exclusivity) is hereby deleted in its entirety
B. Except for the first sentence of Section 11.3, Section 11.3
(Certain Termination Fees) is hereby deleted in its entirety.
C. All references in the Purchase Agreement to the Termination Fee,
Section 11.3 (other than the first sentence thereof) or Section 4.13 are
hereby deleted.
D. Section 4.17 is hereby amended to delete subclauses (viii), (ix),
(x), (xi), (xiv), (xv) and (xx) therefrom until such time as the Purchaser
obtains a Financing Commitment.
E. Section 11.1 (Termination) is hereby amended as follows:
<PAGE>
Section 11.1 is hereby deleted in its entirety and the following
shall be substituted therefor:
"11.1 Termination. This Agreement may be terminated at any time
upon ten (10) days' written termination notice (the "Termination
Notice") from any of the Company, Rounick or the Purchaser."
F. Section 11.2 (Effect of Termination) is hereby deleted in its
entirety and the following shall be substituted therefor:
"11.2 Effect of Termination. In the event of termination of this
Agreement as provided above, this Agreement shall forthwith become of
no further effect (except as set forth in Sections 14.5, 14.9 and
14.10 hereof, which shall survive the termination) and as of the date
that such Termination Notice is sent: (a) each of Purchaser, its
officers, directors, stockholders, affiliates, agents, predecessors,
servants, employees, and the heirs, successors, assigns and legal
representatives of each (the "Purchaser-Releasor"), shall hereby
release, remise, quitclaim and give up to Rounick, the Estate, He-Ro
and the Company and its officers, directors, stockholders, affiliates,
agents, servants, employees, and the predecessors, heirs, assigns,
successors and legal representatives of each, and all those is privity
with them, and any other person, firm or corporation legally
responsible (the "Company-Releasee"), of and from any and all rights,
claims, demands, actions or causes of action which Purchaser-Releasor
has or may claim to have from the beginning of time arising out of or
relating to the Purchase Agreement, except that the foregoing Release
expressly does not release the Company from payment of the Expenses
pursuant to the terms provided in this Amendment; and, (b) each of
Rounick, the Estate, He-Ro and the Company, its officers, directors,
stockholders, affiliates, agents, predecessors, servants, employees,
and the heirs, successors, assigns and legal representatives of each
(the "Company-Releasor"), shall hereby release, remise, quitclaim and
give up to Purchaser its officers, directors, stockholders,
affiliates, agents, servants, employees, and the predecessors, heirs,
assigns, successors and legal representatives of each, and all those
is privity with them, and any other person, firm or corporation
legally responsible (the "Purchaser-Releasee"), of and from any and
all rights, claims, demands, actions or causes of action which
Company- Releasor has or may claim to have from the beginning of time
arising out of or relating to the Purchase Agreement. Upon request
therefor, each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions
contemplated hereby, whether obtained before or after the execution
hereof, to the party furnishing same."
3. Expenses. The Company shall reimburse the Purchaser for its remaining
expenses in accordance with the first sentence of Section 11.3 in the amount of
$86,769.11 (the "Expenses") payable by wire transfer as follows: $40,000 upon
execution of this Amendment, $15,000 on or prior to December 6, 1996, $15,000
payable on or prior to December 12, 1996 and the balance ($16,769.11) payable on
or prior to December 19, 1996. Purchaser acknowledges and agrees that such
payment shall be in full satisfaction of all fees and expenses due and owing by
the Company under the Purchase Agreement, and the Company shall not be further
obligated to pay for any additional expenses under the terms of the Purchase
Agreement after the date hereof unless otherwise agreed to by the Company in
writing. The Company acknowledges and agrees that the Purchaser's agreement to
2
<PAGE>
the Amendments set forth in Section 2 hereof is conditioned upon full payment of
the Expenses, and that if the Company does not pay the Expenses as set forth in
this Section 3, the Purchaser shall have the right, unilaterally, to terminate
this Amendment upon five (5) business days' written notice to the Company, and
upon termination, Purchaser and the Company will have all of their rights and
remedies as set forth in the Purchase Agreement, exclusive of this Amendment.
4. Full Force and Effect of Purchase Agreement. Except as set forth in this
Amendment, the Purchase Agreement remains in full force and effect.
5. Effective Date. This Amendment shall be deemed effective as of the date
hereof upon execution of this Amendment by all of the parties hereto.
6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, the undersigned has executed this Amendment on the day
and year first above written.
The He-Ro Group, Ltd.
The He-Ro Group, Inc.
By: /s/ Della Rounick
-------------------------------------------
Name: Della Rounick
Title: Chief Executive Officer
and Co-Chairman of the Board
Sun Investment Partnership I, Ltd.
By: /s/ Marc Leder
-------------------------------------------
Name: Marc Leder
Title: Managing Director
Estate of Herbert Rounick
By: /s/ Vasiliki Della Pasvantidou Rounick
-------------------------------------------
Name: Vasiliki Della Pasvantidou
Rounick
Title: Executrix
/s/ Vasiliki Della Pasvantidou Rounick
-------------------------------------------
Vasiliki Della Pasvantidou Rounick
Individually
3
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the day of November, 1996, before me personally appeared
DELLA ROUNICK, to me known, who being by me duly sworn, did depose and say that
she is the Chief Executive Officer and Co-Chairman of the Board of The He-Ro
Group, Ltd. and The He-Ro Group, Inc., the corporation(s) described in and which
executed the foregoing document, and that she signed her name thereto by order
the Board of Directors of said corporation.
--------------------
Notary Public
STATE OF OF FLORIDA )
: ss.:
COUNTY OF )
On the day of November, 1996, before me personally appeared
MARC LEDER to me known, who being by me duly sworn, did depose and say that he
is the Managing Director of Sun Investment Partnership I, Ltd., the
corporation(s) described in and which executed the foregoing document, and that
he signed his name thereto by order of the Board of Directors of said
corporation.
--------------------
Notary Public
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the day of November, 1996, before me personally appeared
DELLA VASILIKI PASVANTIDOU ROUNICK, individually and as Executrix of the Estate
of Herbert Rounick, to me known, who being by me duly sworn, did depose and say
that she is the person described in and who executed the foregoing document.
--------------------
Notary Public
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> May-31-1997
<PERIOD-START> Jun-01-1996
<PERIOD-END> Nov-30-1996
<CASH> $727,000
<SECURITIES> $0
<RECEIVABLES> $6,714,000
<ALLOWANCES> $300,000
<INVENTORY> $12,713,000
<CURRENT-ASSETS> $20,707,000
<PP&E> $9,823,000
<DEPRECIATION> $7,790,000
<TOTAL-ASSETS> $24,215,000
<CURRENT-LIABILITIES> $17,311,000
<BONDS> 0
0
0
<COMMON> 6,717,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> $24,215,000
<SALES> $25,481,000
<TOTAL-REVENUES> $25,481,000
<CGS> $15,599,000
<TOTAL-COSTS> $15,599,000
<OTHER-EXPENSES> $9,839,000
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $1,166,000
<INCOME-PRETAX> ($1,123,000)
<INCOME-TAX> $0
<INCOME-CONTINUING> ($1,123,000)
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> ($1,123,000)
<EPS-PRIMARY> ($0.17)
<EPS-DILUTED> ($0.17)
</TABLE>
