SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANG ACT OF 1934
For the fiscal year ended May 31, 1997
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 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 number)
550 Seventh Avenue, New York, New York 10018
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212 840-6047
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
Common Stock $.01 par value OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing sale price on the OTC Bulletin Board on August 22,
1997, the aggregate market value of the registrant's Common Stock, $.01
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par value per share, held by non-affiliates of the registrant on such date
was approximately $571,521.
Number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of August 22, 1997: 6,717,333 shares.
Documents Incorporated by Reference: None of the information required by Parts I
and II is incorporated by reference. The information required by Items 11, 12
and 13 of Part III is incorporated by reference to Registrant's definitive
information statement filed under Regulation 14C in connection with the annual
meeting of Registrant's stockholders to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this report.
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PART I
ITEM 1. BUSINESS
Overview
The He-Ro Group, Ltd. (the "Company") designs, manufactures and markets an
extensive range of women's evening and special occasion wear. The Company's
products are sold under the licensed designer label Black Tie by Oleg Cassini,
as well as under labels owned by the Company, including Niteline. The Company's
products are sold primarily in the United States to department and specialty
stores, including off-price specialty stores. To better manage its inventory and
in conjunction with the changing distribution pattern of women's retail apparel,
the Company sells end-of-season and surplus merchandise through its own chain of
25 retail outlet stores, as well as to off-price specialty and discount stores.
Evening and special occasion wear, retailing at "designer," "bridge" and
"better" prices, account for most of the Company's net sales. See "Business -
Divisions and Products" for the definitions of these price levels. These
products are purchased by women who are interested in wearing glamorous evening
apparel, typically for a special occasion such as a wedding, prom or other
formal event. Because production of the Company's higher quality hand beaded and
sequined evening and special occasion wear is labor intensive, the Company has
developed sourcing alliances with overseas manufacturers located primarily in
The Peoples Republic of China ("China"), India and Korea. Foreign manufacturing
has allowed the Company to provide retailers with beaded evening and special
occasion wear at lower prices which, in turn, has broadened consumer demand for
these products.
The Company's products are manufactured at independent manufacturers, a majority
of which are located abroad, primarily in China. Many of the Company's
eveningwear products include intricate bead, sequin and embroidery patterns
which require skilled hand application and can be economically performed only in
countries where labor is plentiful and inexpensive. Approximately 90% of the
Company's products are manufactured abroad and imported into the United States,
principally from China. The loss of "most-favored nation" trade status for China
would have and the imposition of retaliatory trade sanctions against Chinese
products imported by the Company could have a material adverse effect on the
Company's business. See "Business - Import and Import Restrictions -- Chinese
Imports" and Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
As used herein the term "Company" consists of The He-Ro Group, Ltd. ("HeRo")
which was organized under the corporate laws of the state of Delaware in April
1991 and He-Ro's 28 direct and indirect subsidiaries. The Company's principal
executive offices are located at 550 Seventh Avenue, New York, New York and its
telephone number is (212) 840-6047.
Divisions and Products
The Company has three divisions, each of which is operated in many respects as
independent and distinct businesses under the separate direction of management
motivated by entrepreneurial incentives. Day-to-day management decisions, as
well as product design, in the case of certain apparel
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divisions, marketing and other operational decisions are made at the divisional
level, subject to review by senior corporate officers. Each division's
operations conform to the Company's overall marketing policies, which are
determined at the corporate level and monitored principally through budgetary
and financial controls.
Apparel is generally divided into six price levels: "budget," "moderate,"
"better," "bridge," "designer" and "couture." "Couture" and "designer"
merchandise is characterized by high fashion styling, with "couture" being the
most expensive product classification. "Couture" priced eveningwear products
range in price at wholesale from $600 to $2,000. "Designer" priced eveningwear
products range in price at wholesale from $300 to $600. Apparel in the "bridge"
classification generally carries designer labels but is less expensive than
"couture" or "designer" apparel. "Bridge" priced eveningwear products range in
price at wholesale from $109 to $300. "Better" products typically carry a brand
name and are less expensive than "bridge" products. "Better" priced eveningwear
products range in price at wholesale from $59 to $109. Merchandise in the
"moderate" classification is also generally brand name but is in the less
expensive range than "better" products. "Moderate" priced eveningwear products
range in price at wholesale from $39 to $59.
Set forth below is a description of the Company's products; the order in which
the products appear is not indicative of their contribution to the Company's net
sales for the year ended May 31, 1997.
Black Tie by Oleg Cassini Products
The Black Tie by Oleg Cassini products currently offered by the Company consist
of bridge priced evening and special occasion wear which include dresses and
separates marketed under the Black Tie by Oleg Cassini label, substantially all
of which involve extensive beading, sequins and embroidery. The target customers
for these eveningwear products are women who are interested in wearing glamorous
evening apparel typically for special occasions, such as weddings, proms, or
other formal events. Currently, the Company offers two Black Tie by Oleg Cassini
eveningwear collections per year, each of which is comprised of approximately
250 styles. Net sales of this product line accounted for approximately 19.9%,
22.0% and 25.3%, respectively, of the Company's net sales for the fiscal years
ended May 31, 1995, 1996 and 1997, respectively. Oleg Cassini is a world
renowned designer.
Niteline Products
Products offered by the Company under its proprietary Niteline label consist of
better to bridge priced evening and special occasion wear dresses and separates
which are designed to appeal to women interested in wearing glamorous evening
and special occasion wear at less expensive prices than other eveningwear
products offered by the Company.
Niteline eveningwear was developed in response to retailers' requests for lower
priced fashionable eveningwear. Currently, the Company offers two collections of
Niteline eveningwear per year, each of which consists of approximately 200
styles. Net sales of this product line accounted for
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approximately 40.9%, 39.3% and 33.3%, respectively, of the Company's net sales
for the fiscal years ended May 31, 1995, 1996 and 1997, respectively.
Retail Stores
The Company opened its first store in August 1988 and currently operates 25
retail stores under the name "He-RO Group Outlet". These stores are located in
outlet centers throughout the United States and sell surplus and end of season
merchandise. These stores primarily sell the Company's products, which are
offered at prices ranging from 30% to 70% off suggested retail prices. The
Company's stores range in size from approximately 1,500 to 5,500 square feet,
average approximately 3,500 square feet and are stocked with approximately 1,500
to 7,000 apparel pieces. Net sales of the Company's retail stores accounted for
38.1%, 38.8% and 41.4% of the Company's net sales for the fiscal years ended May
31, 1995, 1996 and 1997, respectively. Certain of the Company's outlet stores
may compete directly with some of the Company's retailing customers, although
the Company generally does not advertise its stores in the media. Site selection
for the Company's outlet stores is influenced primarily by competitor locations,
demographics and lease arrangements.
Sales and Marketing
The Company's products are sold primarily in the United States to department and
specialty stores including off-price specialty stores. To better manage its
inventory and in conjunction with the changing distribution pattern of women's
retail apparel, the Company sells surplus and end-of-season merchandise through
its own chain of 25 retail stores as well as to off-price specialty stores.
The Company's customers include such stores as Saks Fifth Avenue, Cache,
Nordstrom Inc., Neiman Marcus & Co., Lillie Rubin Fashions, Gantos Stores Inc.,
Dayton's-Marshall Field's-Hudson's, Lord & Taylor, Bloomingdales and the
Company's own "He-Ro Group Outlet" stores. Almost all of the Company's sales to
date have been made in the United States, although the Company
sells some products in Canada and Europe.
During the year ended May 31, 1996 and the year ended May 31, 1997,
respectively, the Company's 10 largest customers accounted for 26.7% and 28.9%
of net sales and its 100 largest customers accounted for 46.2% and 44.7% of net
sales.
The Company's products are sold under licensed designer and other trade names
and proprietary brand name labels which, on occasion, are advertised by the
Company. In addition, the Company also benefits from designer name advertising
by its licensor and its other licensees for their respective products in
national magazines and trade publications.
The Company's products are sold through its own salaried sales staff as well as
through independent commissioned sales representatives, some of whom also
represent competitors of the Company. The Company's products are exhibited in
separate showrooms in New York City and at five annual apparel shows held at
trade marts in Los Angeles, Atlanta and Dallas.
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Product Design
The Company has in-house designers who are primarily responsible for the design
of certain of the Company's products. The design staff for a specific product
line meets regularly with the sales and merchandising staffs for the product
line to review market trends and sales results as well as the Company's fabric
department to review the latest ideas in fabrics, trim and color.
Representatives of each product line regularly attend trade and fashion shows
and shop at fashion forward stores in the United States, Europe and the Far East
and present sample items to the applicable apparel division along with their
evaluation of the styles expected to be in demand by the applicable product
line's target customers and consumers. Each division also seeks input from
selected customers with respect to product design.
Production, Manufacturing and Raw Materials
For each of the years ended May 31, 1996 and 1997, substantially all of the
Company's products were manufactured abroad and imported into the United States
principally from China. Currently, the Company's products are manufactured in
accordance with the Company's design specifications and production schedules by
16 independent manufacturers, most of which are located abroad, primarily in
China with the remainder in India. While most of the Company's products are
manufactured in China, the Company has developed relationships with
manufacturers in other countries such as Hong Kong, the United States, India and
Korea. See "Business - Import and Import Restrictions" for a discussion of
certain risks associated with manufacturing abroad and importing products into
the United States.
The Company's Hong Kong office is responsible for sourcing a majority of the
Company's merchandise, preparing samples for certain apparel divisions,
coordinating the purchase and delivery of fabrics and trim and manufacturing or
arranging for the manufacture of the Company's products in the Far East. In
allocating production among independent manufacturers, a number of criteria are
considered, including availability of production, quality, pricing, reliability,
ability to meet changing production requirements on relatively short notice and
available quota. The Company is unable to predict the impact on its operations
of the recent British withdrawal from Hong Kong in July 1997. See "Business -
Import and Import Restrictions."
The intricate bead, sequin and embroidery patterns, which are an integral part
of substantially all of the Company's eveningwear products, require skilled hand
application and can be economically performed only in countries where labor is
inexpensive. The Company has historically had good, long standing relationships
with the independent contractors with which it does business. The Company
monitors production at each facility where its products are manufactured to
ensure quality control, compliance with applicable specifications and timely
delivery of finished goods to the distribution location specified by the
Company.
The average lead time from the commitment of piece goods through the production
and shipment of goods ranges from two to four months for domestic products and
four to six months for imported products. These lead times impose substantial
time constraints on the Company requiring
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manufacturing decisions and piece good commitments for certain products and
product lines, particularly beaded eveningwear, to be made well before the
Company receives customer orders for these products. For other products and
product lines, customer orders are obtained before the Company is obliged to
make manufacturing decisions. For those products requiring manufacturing
decisions in advance of customer orders, the Company may be faced with a
substantial amount of unsold finished goods if it misjudges the market for a
particular product or product group. For all products, the Company may be faced
with a substantial amount of unsold finished goods inventory if the Company
receives finished goods after the scheduled receipt dates.
Although the Company, like many apparel companies, has from time to time in the
past experienced delays in deliveries in the ordinary course of its business,
such delays have not had a material effect on the Company's business. The
Company believes that the production capacity of the independent manufacturers
with which it has developed or is developing relationships is adequate to meet
the Company's production requirements for the foreseeable future. The Company
believes that while alternative foreign and domestic manufacturers are readily
available for its non-beaded products, inability to have its evening and special
occasion wear beaded or embroidered in China would have a material adverse
effect on the Company's operations. See "Business - Import and Import
Restrictions."
The raw materials used to produce the Company's products consist of piece goods,
approximately half of which is silk, and trim, primarily beads and sequins. The
Company generally purchases and then supplies the raw materials to both the
foreign and domestic manufacturers of its products. Otherwise raw materials are
purchased directly by the manufacturer in accordance with the Company's
specifications. Raw materials, substantially all of which are made or colored
especially for the Company, are purchased by the Company from a number of
foreign and domestic textile mills and converters. The Company does not have
long-term, formal arrangements with any raw materials suppliers and has
experienced little difficulty in satisfying its raw material requirements and
considers its sources of supply adequate. All substantial purchase orders for
piece goods are approved at the Company's New York headquarters.
Distribution
The Company utilizes an independent third party facility located in New Jersey
for substantially all its product distribution and warehousing of inventory.
Upon arrival at this facility, as appropriate, goods are inspected, pressed and
hung for reshipment to the Company's customers. The goods are delivered to the
Company and its customers by independent shippers. Most of the goods produced by
the Company abroad are sent by air to the New Jersey facility and the balance
are shipped by boat. Goods produced domestically by the Company are trucked to
the New Jersey facility. The Company ships merchandise from the distribution
facility to its customers in the manner specified by the customer.
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Import and Import Restrictions
Bilateral and Multilateral Textile Agreements
The Company imports substantially all of its products from abroad. Such
importations have historically been subject to the restrictions imposed by
bilateral textile agreements between the United States and the major exporting
countries which impose quotas and/or visa requirements that limit or otherwise
control the quantities of certain types of goods that may be imported into the
United States from these countries. Such agreements also allow the United States
to impose, under certain conditions, restraints on the importation of categories
of merchandise that under the terms of the agreements are not otherwise subject
to specified limits.
Approximately half of the apparel imported by the Company is made from silk.
Historically, bilateral textile agreements have not imposed quotas on the
importation of silk or silk products; however, a bilateral agreement between the
United States and China, announced in February 1997, subjects to quota
limitations China's exports of apparel containing 70% or more by weight of silk.
This agreement is effective with respect to goods manufactured in China and is
exported therefrom during the period January 1, 1997 through December 31, 1997
and replaces a substantially similar agreement which was in effect from April 1,
1994 through December 31, 1996. In addition, retaliatory trade sanctions,
including punitive tariffs on various products including certain silk imported
from China, were proposed by the Office of United States Trade Representative in
1996, although such sanctions were not imposed. The imposition of the quota and
visa restrictions on silk apparel has not had a significant adverse effect on
the Company; however, imposition of punitive tariffs or other trade sanctions
could have a material adverse effect on the Company. The Company regularly
monitors duty, tariff and quota-related developments to minimize its potential
exposure to import risks. See "Chinese Imports" below.
The multilateral trade negotiations (known as the "Uruguay Round"), were
conducted under the auspices of the General Agreement on Tariffs and Trade (the
"GATT"), and completed at the end of 1994. The Uruguay Round Agreement on
Textiles and Clothing (the "ATC") concluded thereunder generally requires World
Trade Organization (the "WTO") member countries to phase-out existing
restrictions on textile and apparel categories in three stages over a ten year
period, commencing January 1, 1995, with such trade to be integrated into the
trading rules of the WTO (which succeeded the GATT). In addition, the ATC
regulates trade in non-integrated textile and apparel categories during the
transition period. However, even with respect to integrated textile and apparel
categories, the United States remains free to establish numerical restraints in
response to a particular product being imported in such increased quantities as
to cause (or threaten) serious damage to the relevant domestic industry. Any
such restrictions are subject to review by the WTO.
Based on the schedule of the phase-out of restrictions announced by the United
States, it is not expected that the Company will realize significant benefits
therefrom until the end of the ten year phase-out period. China has not yet
become a member of the WTO; therefore, importations of goods from China are not
presently subject to the phase-out of restrictions on textile and apparel
categories provided by the ATC. The remaining exporting countries from which the
Company purchases its products have
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become members of the WTO and, thus, are subject to the phase-out of
restrictions on textile and apparel categories provided by the ATC.
Legislation implementing the Uruguay Round of the GATT was signed by President
Clinton in late 1994. Among other provisions, it contained a section which
amended the rules of origin applicable to textiles 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 are
currently in effect. 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 has 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.
Chinese Imports
For the year ended May 31, 1997, approximately 80% of the Company's products
were manufactured in China. In each year since 1980, China has been granted
"most-favored-nation" trade status by the United States which has meant that
goods which are the product of China are not subject to the highest duty rates
imposed by the United States. Annual renewal of "most-favored-nation" trade
status for China depends upon the President's recommendation that such status be
continued for a twelve month period. Congress may, by means of a joint
resolution, disapprove of such treatment, however, such a resolution is subject
to a Presidential veto and Congressional override procedures. In addition,
Congress may enact legislation that would deny or condition
"most-favored-nation" trade status for China.
In May 1997, President Clinton issued a Presidential Determination recommending
the renewal of "most-favored-nation" trade status for China for the twelve
months ending July 2, 1998. Although resolutions disapproving such renewal were
introduced 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 three
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. However, bills have been introduced into Congress which, if enacted,
would ban all entries or importations of Chinese origin articles which are the
product, growth or manufacture of forced labor and which would deny
most-favored-nation rates of duty to goods produced by the People's Liberation
Army. "Most-favored-nation" trade status was effective in July 1997 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, 1998 or thereafter, or that Congress will not enact legislation denying
or conditioning the grant of "most-favored-nation"
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trade status to China in the future or otherwise restricting the importation of
goods from China.
In February 1997, the United States and China entered into a four year bilateral
textile agreement, covering certain cotton, wool, man-made fiber, silk blend and
other vegetable fiber textiles and textile products, expiring December 31, 2000.
Among other things, the agreement reduces China's export quotas with respect to
fourteen (14) apparel and fabric categories 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. In addition, a
separate agreement between the United States and China subjects to quota
limitations China's exports of apparel containing 70% or more by weight of silk.
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. This includes punitive
duties, fees or restrictions on certain Chinese products, including products
manufactured by the Company in China.
The Company has taken various steps that it believes will mitigate the impact on
the Company's business if "most-favored nation" trade status for China is lost
or if retaliatory sanctions against Chinese goods are imposed. One of these
steps included the development of a contingency plan in 1992 to shift certain
significant manufacturing operations to countries other than China so that the
resulting products will constitute, under applicable United States customs laws
and regulations, products of a country other than China. The Company has
developed relationships with manufacturers in countries and territories such as
Hong Kong, the United States, India and South Korea, some of which are currently
manufacturing certain of the Company's products. The Company would anticipate
increasing its business with these manufacturers to lessen its dependence on
China if "most-favored nation" trade status for China is lost or if retaliatory
tariffs are imposed on Chinese goods. Notwithstanding the Company's plans and
efforts, to date, there can be no assurance that the Company will be able to
lessen its dependence on China in an economic manner. Furthermore, as the
Company shifts certain of its operations to countries other than China, it
continues to conduct a substantial portion of these operations in countries
other than the United States. Accordingly, these operations continue to be
subject to import restrictions and possible trade sanctions and the various
risks associated with foreign manufacturing. See "Business - Production,
Manufacturing and Raw Materials."
On July 1, 1997, the British Crown Colony of Hong Kong reverted to the People's
Republic of China. The United States has announced its agreement with China on
the separate treatment of textile quotas for Hong Kong after the reversion of
such territory. Should the United States in the future 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 which are premised
on the shifting of production or assembly of
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the products from China to Hong Kong.
Additional Restrictions
Substantially all of the Company's imported products and raw materials are
subject to United States Customs duties ranging from approximately 3% to 34% of
imported value based upon the type and composition of the garments, and the
rates applicable to the countries from which the Company currently imports. Such
rates are subject to future modest reductions pursuant to agreements concluded
under the Uruguay Round negotiations. In the ordinary course of its business,
the Company is, from time to time, subject to claims by the United States
Customs Service for additional duties and other charges. Similarly, from time to
time, the Company is entitled to refunds from the United States Customs Service
due to the overpayment of duties.
The United States and other countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, including trade sanctions, or adversely adjust presently
prevailing quotas or duty rates, which could adversely affect the Company's
operations and its ability to continue to import products at current or
increased levels. The Company cannot currently predict the likelihood or
frequency of any such events occurring.
Due to alleged fraudulent transshipments of certain textile and apparel products
through other countries, the United States assessed charges against certain 1996
quota levels for certain imports from China which have had the effect of causing
the affected categories of goods to fill more rapidly. United States Customs is
continuing its investigation of transshipped textile and apparel from these and
other countries which could result in further quota charges. The Company cannot
predict whether any additional quota charges will be assessed and if assessed,
whether such charges would have a material impact on the Company's ability to
obtain goods from China.
The Company's ability to import products is also subject to the cost and
availability of transportation into the United States, the demand for production
capacity abroad by other manufacturers, political instability resulting in the
disruption of trade from exporting countries, any significant fluctuation in the
value of the dollar against foreign currencies and restrictions on the transfer
of funds. Any significant disruption of the Company's relationships with
independent foreign manufacturers or owners of foreign manufacturing facilities
could adversely affect the Company's operations.
The Company's operations have not been materially affected by any of the
foregoing factors to date, despite the fact that a significant portion of
the Company's merchandise is produced abroad. See "Business - Production,
Manufacturing and Raw Materials."
Licensing
The Company's only license agreement is with Oleg Cassini. Assuming all renewal
options are exercised, the unexpired term of this agreement is 15 years. Among
other things, the Company's license agreement requires the
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Company to make minimum annual royalty payments and advertising expenditures,
provide for maintenance of quality control and requires retail distribution
commensurate with the licensor's image. The license agreement permits the
licensor to approve products offered by the Company using its trade name and
terminate the license if the Company does not satisfy its contractual
obligations in any material respect. In addition, the licensor may terminate the
license as to specified categories of licensed products if the Company does not
promote and sell a representative line for such category of licensed products.
The Company's license agreement requires the Company to pay royalties ranging
from 1% - 4% of net sales on full-price merchandise and other merchandise. Under
this license agreement, minimum annual royalty payments increase for each
successive renewal term. Subject to the Company's compliance with the terms of
the agreement, the decision to exercise rights for license renewal terms is at
the discretion of the Company.
Net wholesale sales of products bearing trade names or trademarks not owned by
the Company for the year ended May 31, 1996 and the year ended May 31, 1997 were
approximately $11.7 million and $11.8 million, respectively. There can be no
assurance that the Company's future net wholesale sales of these products will
equal or exceed these amounts.
Trademarks
The designer trademark, Oleg Cassini, used by the Company in connection with
certain apparel is a registered trademark in the United States and certain other
countries and is owned by the licensor with which the Company has the agreement.
The Company has proprietary rights in the United States to use the names
Niteline and Black Tie. The Company considers its trademark and license
agreement to have significant value in the marketing of its products.
Backlog
At August 22, 1997, the Company had unfilled orders for the Fall 1997 season for
its wholesale divisions of approximately $5.9 million, compared to approximately
$8.9 million of such orders at the comparable date in 1996. These amounts
include both confirmed orders and unconfirmed orders, which the Company
believes, based on industry practice and its past experience, will be confirmed,
and are therefore considered to be firm. The amount of unfilled orders at a
particular time is affected by a number of factors, including the scheduling of
the manufacture and shipping of the product which, in some instances, depends on
the desires of the customer. The Company believes that a comparison of unfilled
orders from period to period is not necessarily meaningful and may not be
indicative of eventual actual shipments. Shipment of Spring orders normally
commences in the early part of January with the major portion of Spring
merchandise shipped in March and April. Shipment of Fall orders normally
commences in late June with the major portion of Fall merchandise shipped in
August, September and October.
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Competition
The apparel business is competitive and consists of numerous manufacturers,
importers and distributors, none of which accounts for a significant percentage
of total industry sales, but some of which are significantly larger and have
substantially greater resources than the Company. The Company competes with
distributors that import apparel from abroad, domestic companies that have
established foreign manufacturing relationships, and companies that produce
apparel domestically. In addition, in recent years, department stores, including
some of the Company's major customers, have increased the amount of goods
manufactured specifically for them and sold under their own private labels.
The Company's business depends upon its ability to anticipate, evaluate and
respond to changing consumer demands and tastes and to remain competitive in the
areas of style, quality (both in material and production) and price while
operating within the significant foreign and domestic production and delivery
constraints of the industry. The Company believes that consumer and customer
acceptance and support of its products depends, in part, on its well-recognized
designer brand name and proprietary label. The Company believes that its
continued success will depend upon its ability to remain competitive in these
areas as well as in its ability to maintain its existing relationships with
foreign manufacturers and to develop new ones. The Company believes that the
quality and value of its products and its ability to market its products through
a variety of retail distribution channels are important to its ability to
compete.
Credit and Collection
The Company manages all of its customer credit functions through its Credit
Department operated from its New Jersey facility. Generally, the Company's
standard terms of sale include an 8% discount. Despite several bankruptcies of
large retailers in recent years, the Company, which carefully selects and
screens potential and existing customers, has not experienced a significant
increase in its bad debts as a result of such bankruptcies. For the years ended
May 31, 1995, 1996 and 1997, the Company's bad debts as a percentage of net
sales were 0.3%, 0.7% and 0.3%, respectively. There can be no assurance that the
Company will not experience an increase in bad debts in the future.
Management Information Systems
To coordinate and monitor the numerous components of its business and provide
the Company's management with the information it needs to make informed
decisions, the Company has developed a management information system using an
on-line data base which is accessible to both the Company's New York and Hong
Kong offices. This management information system was designed to provide, among
other things, comprehensive order processing, production, accounting and
management information for the marketing, manufacturing, importing and
distribution functions of the Company's business. All of the Company's outlet
stores have a management information system that enables the Company to track
inventory from store receipt to final sale.
The Company does not believe that it will be substantially affected by the date
change in the year 2000, and believes its computer systems are Year
13
<PAGE>
2000 compliant. To ensure that its computer systems are Year 2000 compliant, the
Company will be performing an internal study of these systems. As the study has
not yet been completed, any programming changes, if any, required to address any
possible issues and the related costs are not yet known. The cost associated
with this work will be expensed as incurred.
Employees
At May 31, 1997, the Company employed approximately 279 employees, of whom
approximately 222 were employed domestically and approximately 57 were employed
in Hong Kong. Of the Company's domestic employees, approximately 9 occupy
executive or managerial positions, approximately 12 hold design, production,
quality control or distribution positions and the balance occupy sales, clerical
and office positions. Of the Company's overseas employees, approximately 6
occupy executive or managerial positions, approximately 34 hold design,
production, quality control or distribution positions and the balance hold
clerical and office positions. None of the Company's employees are currently
covered by a collective bargaining agreement. The Company considers its
relations with its employees to be good and has not experienced any interruption
of operations due to labor disputes.
ITEM 2. PROPERTIES
The Company's principal domestic offices are located in two leased facilities in
New York City. These facilities, which encompass approximately 20,000 square
feet in total, house the Company's executive offices, sales, merchandising,
production, and design staff, as well as its showrooms space.
Prior to May 1997, the Company's primary domestic warehouse and distribution
center, and administrative offices were located in a single leased facility in
Secaucus, New Jersey. The facility is approximately 132,000 square feet in size
and has an annual rent of approximately $953,000. The lease for this facility
expires in 2002 and may be renewed for two additional five year periods. Because
the Company has downsized its operation to its core eveningwear business as a
result of the structuring plan adopted by the Board in October 1993, the
Company's current operations no longer justify the use of the more expansive
facilities located in Secaucus, New Jersey. Accordingly, the Company has
relocated its retail store to a smaller leased space in Secaucus, and is
utilizing an independent third party for distribution and warehousing inventory.
Effective May 15, 1997, the Company subleased the entire facility for an annual
rent of approximately $891,000, expiring in the year 2000. The Company is
subleasing approximately 10,000 square feet in this facility as administrative
office space for an annual rental of approximately $80,000.
The Company's Hong Kong operations are in leased facilities, consisting of
sample rooms and administrative offices aggregating 21,460 square feet. The
leases for these facilities provide for an aggregate annual rental of H.K. $1.6
million (approximately U.S. $210,000), and will expire November 1997.
14
<PAGE>
At present, the Company has entered into leases for 25 outlet stores covering an
aggregate of approximately 96,000 square feet of space in various outlet malls
and centers throughout the United States. The average rental expense per store
is approximately $16 per square foot and the average remaining lease term,
assuming all renewal options are exercised, is approximately 8 years.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED MATTERS
Market Information
The Company's common stock trades on the OTC Bulletin Board under the symbol
HRGR. The Company's common stock was traded on The New York Stock Exchange
("NYSE") under the symbol HRG until July 21, 1997, when it was delisted by the
NYSE. The table below sets forth the high and low closing sale prices of the
common stock for the quarterly periods in the Company's fiscal years ended May
31, 1997 and May 31, 1996, as reported by The Wall Street Journal.
Fiscal 1997 High Low
1st Quarter 1 5/8 1
2nd Quarter 1 1/8 5/8
3rd Quarter 1 5/8 11/16
4th Quarter 1 3/8 7/8
Fiscal 1996 High Low
1st Quarter 1 1/8 5/8
2nd Quarter 15/16 7/16
3rd Quarter 9/16 11/32
4th Quarter 2 7/16
On August 18, 1997, the closing sale price of the Company's stock on the OTC
Bulletin was $.25. At August 18, 1997, the Company had 69 shareholders of
record, many of which represent nominees such as brokerage firms or commercial
depositories as record holders for a number of individuals.
Dividends
The Company has not paid any cash dividends since its initial public offering in
September 1991, other than dividends representing a portion
15
<PAGE>
of the previously earned and distributed earnings of the former "S" corporation
subsidiaries. The Company's revolving credit and term loan agreements prohibit
the Company from paying dividends or making distributions (see Note 6 of the
Notes to Consolidated Financial Statements). The Company intends to reinvest
future earnings to provide funds for the operation of its business.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for and as of the end
of each of the years in the five year period ended May 31, 1997 are derived from
the consolidated financial statements of the Company. The selected consolidated
financial data presented below should be read in conjunction with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto. See
Consolidated Financial Statements.
<TABLE>
<CAPTION>
In thousands, except per share data
Year Ended May 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales .......................................... $170,469 $ 86,971 $ 57,224 $ 53,361 $ 46,654
Cost of sales
Cost of sales from operations .................... 122,689 62,860 35,235 33,646 28,527
Other charges .................................... -- -- -- -- 2,400
-------- -------- -------- -------- --------
122,689 62,860 35,235 33,646 30,927
-------- -------- -------- -------- --------
Gross profit ..................................... 47,780 24,111 21,989 19,715 15,727
Operating expenses
Selling, general and
administrative ................................... 49,464 29,481 23,237 21,104 19,321
Restructuring and other charges .................. -- 19,800 1,000 -- 2,779
-------- -------- -------- -------- --------
49,464 49,281 24,237 21,104 22,100
-------- -------- -------- -------- --------
Operating loss ................................... (1,684) (25,170) (2,248) (1,389) (6,373)
Interest expense ................................... 2,607 3,118 2,262 2,539 2,316
-------- -------- -------- -------- --------
Loss before income taxes ......................... (4,291) (28,288) (4,510) (3,928) (8,689)
Income taxes ....................................... (1,954) 2,268 (159) -- --
-------- -------- -------- -------- --------
Net loss ......................................... $ (2,337) $(30,556) $ (4,351) $ (3,928) $ (8,689)
======== ======== ======== ======== ========
Net loss per common share .......................... $ (0.35) $ (4.55) $ (0.65) $ (0.58) $ (1.29)
======== ======== ======== ======== ========
Weighted average common shares
outstanding ........................................ 6,717 6,717 6,717 6,717 6,717
======== ======== ======== ======== ========
May 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital .................................... $34,187 $ 9,125 $ 8,701 $ 4,120 $ (2,208)
Total assets ....................................... 89,398 42,771 30,711 24,623 17,806
Short-term debt .................................... 27,500 16,195 7,452 8,577 7,782
Long-term debt ..................................... -- -- 1,950 150 --
Subordinated notes payable-stockholder ............. 2,796 4,296 5,296 5,296 5,296
Stockholders' equity (deficit) ..................... 41,566 11,010 6,659 2,731 (5,958)
</TABLE>
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion provides information and analysis for the Company's
results of operations from June 1, 1994 through May 31, 1997. The following
discussion and analysis should be read in conjunction with the information set
forth under "Selected Consolidated Financial Data" and the Consolidated
Financial Statements and notes thereto herein.
In May 1997, President Clinton issued a Presidential Determination recommending
the renewal of "most-favored-nation" trade status for China for the twelve
months ending July 2, 1998. Although resolutions disapproving such renewal were
introduced 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 three
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. However, bills have been introduced into Congress which, if enacted,
would ban all entries or importations of Chinese origin articles which are the
product, growth or manufacture of forced labor and which would deny
most-favored-nation rates of duty to goods produced by the People's Liberation
Army. "Most-favored-nation" trade status was renewed effective July 1997 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, 1998 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 or otherwise restricting the importation of goods from China.
In February 1997, the United States and China entered into a four year bilateral
textile agreement, covering certain cotton, wool, man-made fiber, silk blend and
other vegetable fiber textiles and textile products, expiring December 31, 2000.
Among other things, the agreement reduces China's export quotas with respect to
fourteen (14) apparel and fabric categories 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. In addition, a
separate agreement between the United States and China was reached subjects to
quota limitations, China's exports of apparel containing 70% or more by weight
of silk. This agreement is effective with respect to goods produced in or
manufactured in China and exported to the United States during the period
January 1, 1997 through December 31, 1997 and replaces a substantially similar
agreement which was in effect from April 1, 1994 through December 31, 1996.
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
17
<PAGE>
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. This includes
punitive duties, fees or restrictions on certain Chinese products, including
products manufactured by the Company in China.
The Company has taken various steps that it believes will mitigate the impact on
the Company's business if "most-favored nation" trade status for China is lost
or if retaliatory sanctions against Chinese goods are imposed. One of these
steps included the development of a contingency plan in 1992 to shift certain
significant manufacturing operations to countries other than China so that the
resulting products will constitute, under applicable United States customs laws
and regulations, products of a country other than China. The Company has
developed relationships with manufacturers in countries and territories such as
Hong Kong, the United States, India and South Korea, some of which are currently
manufacturing certain of the Company's products. The Company would anticipate
increasing its business with these manufacturers to lessen its dependence on
China if "most-favored nation" trade status for China is lost or if retaliatory
tariffs are imposed on Chinese goods. Notwithstanding the Company's plans and
efforts, to date, there can be no assurance that the Company will be able to
lessen its dependence on China in an economic manner. Furthermore, as the
Company shifts certain of its operations to countries other than China, it
continues to conduct a substantial portion of these operations in countries
other than the United States. Accordingly, these operations continue to be
subject to import restrictions and possible trade sanctions and the various
risks associated with foreign manufacturing. See "Business - Production,
Manufacturing and Raw Materials."
On July 1, 1997, the British Crown Colony of Hong Kong reverted to the People's
Republic of China. The United States has announced its agreement with China on
the separate treatment of textile quotas for Hong Kong after the reversion of
such territory. Should the United States in the future 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 which are premised
on the shifting of production or assembly of the products from China to Hong
Kong.
Legislation implementing the Uruguay Round of the GATT 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 July 1, 1996. Regulations implementing these changes are currently in
effect. 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 has been determined, which, in
general was based on where the components were cut. The Company cannot now
predict to what extent the new roles concerning country of origin will change
import trade patterns or how it will impact upon quota usage from exporting
countries.
The Company sells its merchandise to major retailers, some of which have engaged
in leveraged buy-outs or transactions in which such retailers have incurred
significant amounts of debt and others of which are experiencing or have
experienced financial difficulties. Despite several bankruptcies of large
retailers in the past several years, some of which were customers
18
<PAGE>
of the Company, the Company, which carefully selects, screens and monitors
potential and existing customers, has not experienced a significant increase in
its bad debts as a result of such bankruptcies. Notwithstanding the foregoing,
because the Company sells its product to highly leveraged retailers and
retailers which are currently experiencing financial difficulties, any
significant deterioration in these customers financial circumstances could have
an adverse effect on the Company's financial position or results of operations.
Results of Operations
The following table sets forth for the period indicated (i) certain items in the
Company's consolidated statements of operations expressed as a percentage of net
sales and (ii) the percentage change in dollar amount of such items as compared
to the indicated prior period for the periods indicated below.
<TABLE>
<CAPTION>
( i ) ( ii )
Period to Period
Percentage Increase
(Decrease)
Percentage of Net Sales Year Ended
Year Ended May 31, May 31,
1995 1996 1997 1995-96 1996-97
---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Net sales .......................................... 100.0% 100.0% 100.0 (6.8)% (12.6)%
Cost of sales
Cost of sales from operations .................... 61.6 63.1 61.2 (4.5) (15.2)
Other charges .................................... -- -- 5.1 -- --
---- ---- ----- ---- -----
61.6 63.1 66.3 (4.5) (8.1)
Gross profit ..................................... 38.4 36.9 33.7 (10.3) (20.2)
Operating expenses
Selling, general and
administrative ................................... 40.6 39.5 41.4 (9.2) (8.4)
Restructuring and other charges .................. 1.8 -- 6.0 (100.0) --
---- ---- ----- ---- -----
42.4 39.5 47.4 (12.9) 4.7
---- ---- ----- ---- -----
Operating loss ................................... (3.9) (2.6) (13.7) (38.2) 358.8
Interest expense ................................... 4.0 4.8 5.0 12.2 (8.8)
Loss before income taxes ......................... (7.9) (7.4) (18.6) (12.9) 121.2
Income taxes ....................................... (0.3) -- -- (100.0) --
---- ---- ----- ---- -----
Net loss ......................................... (7.6)% (7.4)% (18.6)% (9.7)% 121.2%
==== ==== ===== ==== =====
</TABLE>
19
<PAGE>
1997 Compared to 1996
Net sales of $46.7 million for the year ended May 31, 1997 decreased by $6.7
million (12.6%) from net sales of $53.4 million for the year ended May 31, 1996.
This decrease is primarily attributable to reduced sales for the Niteline
division due to increased competition and the disrupted business including loss
of personnel resulting from transaction negotiations for the contemplated sale
of the Company in addition to the closing and downsizing of several of its
outlet stores.
Cost of sales for the year ended May 31, 1997 was $30.9 million, or 66.3% of net
sales compared to $33.7 million, or 63.1% of net sales for the year ended May
31, 1996. The increase in cost of sales as a percentage of net sales was due to
a loss on sale of raw materials inventory of $2.4 million which resulted from
the Company's ongoing cost cutting efforts, including occupancy costs, and the
Company's increasing demand for working capital and cash (see Note 3 in the
notes to the Consolidated Financial Statements).
Gross profit for the year ended May 31, 1997 was $15.7 million, or 33.7% of net
sales, compared to $19.7 million or 36.9% of net sales for the year ended May
31, 1996. The decrease in gross profit dollars was primarily attributable to a
decrease in sales volume described above and the loss on the sale of raw
materials described above.
Selling, general and administrative ("SG&A") expenses were $19.3 million or
41.4% of net sales for the year ended May 31, 1997 compared to $21.1 million, or
39.5% of net sales for the year ended May 31, 1996. The lower selling, general
and administrative expenses for the year ended May 31, 1997 are primarily
attributable to planned reductions in salary expenses, rent and occupancy,
professional fees and insurance.
Restructuring and other charges were $2.8 million, or 6.0% of net sales, for the
year ended May 31, 1997.(See Note 2 in the Notes to the Consolidated Financial
Statements).
Operating loss was $(6.4) million or (13.7)% of net sales for the year ended May
31, 1997 compared to operating loss of $(1.4) million or (2.6)% of net sales for
the year ended May 31, 1996. The increase in operating loss was attributable to
the increase in restructuring and other charges in cost of sales and SG&A
described above.
Interest expense was $2.3 million or 5.0% of net sales for the year ended May
31, 1997 compared to $2.5 million, or 4.8% of net sales for the year ended May
31, 1996.
As a result of the factors described above, the Company's net loss increased to
$(8.7) million (or $(1.29) per share) for the year ended May 31, 1997 compared
to a net loss of $(3.9) million (or $(0.58) per share) for the year ended May
31, 1996.
1996 Compared to 1995
Net sales of $53.4 million for the year ended May 31, 1996 decreased by $3.8
million (6.8%) from net sales of $57.2 million for the year ended May 31, 1995.
This decrease is primarily attributable to reduced sales for
20
<PAGE>
evening wear products due to the soft economy in the apparel industry in
addition to the closing and downsizing of several of its outlet stores.
Cost of sales for the year ended May 31, 1996 was $33.7 million, or 63.1% of net
sales compared to $35.2 million, or 61.6% of net sales for the year ended May
31, 1995. The increase in cost of sales as a percentage of net sales was due to
an inventory write-down of $.7 million resulting from a build-up of raw
materials after management revised its design philosophy based primarily upon
the projected use of fewer beads and sequins in current lines and from remaining
excess quantities of non-current fabric. See Note 3 in the Notes to the
consolidated financial statements.
Gross profit for the year ended May 31, 1996 was $19.7 million, or 36.9% of net
sales, compared to $21.9 million or 38.4% of net sales for the year ended May
31, 1995. The decrease in gross profit dollars was primarily attributable to the
decrease in sales volume described above. Gross margins remained relatively
consistent based upon the results of the Company's business. However, the margin
decline was attributable to the inventory write-down described above.
Selling, general and administrative ("SG&A") expenses were $21.1 million or
39.5% of net sales for the year ended May 31, 1996 compared to $23.2 million, or
40.6% of net sales for the year ended May 31, 1995. The lower selling, general
and administrative expenses for the year ended May 31, 1996 are primarily
attributable to planned reductions in salary expenses, rent and occupancy,
professional fees and insurance.
Operating loss was $(1.4) million or (2.6)% of net sales for the year ended May
31, 1996 compared to operating loss of $(2.2) million or (3.9)% of net sales for
the year ended May 31, 1995. The decrease in operating loss was primarily
attributable to the decrease in restructuring charges and SG&A expenses
described above.
Interest expense was $2.5 million or 4.8% of net sales for the year ended May
31, 1996 compared to $2.3 million, or 4.0% of net sales for the year ended May
31, 1995.
As a result of the factors described above, the Company's net loss before income
taxes decreased to $(3.9) million (or $(0.58) per share) for the year ended May
31, 1996 compared to a net loss of $(4.4) million (or $(0.65) per share) for the
year ended May 31, 1995.
Liquidity and Capital Resources
At May 31, 1997, the Company had an increase in cash flows from operating
activities of $.7 million. This increase resulted from a net decrease in
inventories of $4.3 million, depreciation and amortization of $1.1 million, the
loss on disposition of fixed assets of $1.2 million, and an increase in accounts
payable and accrued expenses of $2.8 million offset by a net loss of $8.7
million. The decrease in inventory levels reflects the planned reduction based
on the Company's strategic plan. 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 fiscal year
21
<PAGE>
ending May 31, 1997, the Company spent approximately $.1 million on capital
improvements and replacement expenditures. For the fiscal year ending May 31,
1998, capital improvements and replacement expenditures are expected to
approximate $.2 million.
Cash flows from financing activities decreased by $1.0 million resulting
primarily from a reduction in bank borrowings under the Company's revolving
credit facilities.
Because the Company has been incurring losses from operations, 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, the Company is projecting losses from
operations for the year ending May 31, 1998, which would result in its continued
non-compliance with the financial covenants under its credit agreement with
Foothill during this fiscal year. The combination of these factors raises
substantial doubt about the Company's ability to generate sufficient cash to
support its operations during the twelve month period following May 31, 1997.
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 13 of Notes to Consolidated Financial Statements. In
the absence of the preceding events, there is 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. The Company believes that successful closure of any of the
contemplated transactions as discussed in Note 13, as well as funds generated by
operations (i.e. management's ability to reduce the significant operating
losses), the availability of credit under the revised credit facilities 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 6 in the Notes to the consolidated financial
statements for further discussion of the revised credit facilities.)
Inflation
The moderate rate of inflation over the past four years has not had a
significant impact on the Company's sales and profitability.
Seasonality of Business
Historically, the Company has achieved its highest net sales and gross profit
levels in its second fiscal quarter, followed in declining order by the first,
fourth and third quarters. This pattern results primarily from the timing of
shipments for each season; however, the timing of seasonal shipments can vary
from quarter to quarter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is included following the "Index to
Consolidated Financial Statements and Schedule" appearing at the end of this
Form 10-K.
22
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the Directors and Executive Officers of the Company is set
forth below:
Name Age Office
- ---- --- ------
Della Rounick . . . . . . . . . . 51 Chairman of the Board and
Chief Executive Officer
Sam D. Kaplan . . . . . . . . . . 41 Chief Financial Officer and
Secretary
Martin R. Bring . . . . . . . . . 54 Director
Each director holds office until the next annual meeting of stockholders or
until his successor shall have been elected and qualified. Officers serve at the
discretion of the Board of Directors.
Della Rounick was appointed Co-Chairman of the Board and Chief Executive Officer
in July 1995, after being appointed Vice-Chairman of the Board and Chief
Executive Officer in June 1995 and has become Chairman of the Board after the
death of her Co-Chairman William J. Carone in June 1997. She was appointed to
the Company's Board of Directors in January 1994. Mrs. Rounick beneficially owns
4,430,748 shares of He-Ro Group common stock, representing approximately 66% of
the common stock outstanding. Prior to being appointed Chief Executive Officer,
Mrs. Rounick served as Vice President and Director of Design Coordination for
the Company since April 1994. Prior to April 1994, Mrs. Rounick was a designer
for the Niteline division and for the Company's D'Ore line, which has been
discontinued as a result of He-Ro's restructuring in 1993. Mrs. Rounick also
served as a fashion advisor to her late husband, the Company's founder, for
eight years, and sold her own line of clothing in Greece under the Della label.
Sam D. Kaplan was appointed Chief Financial Officer and Secretary of the He-Ro
Group in March 1994. Prior to that he served as the Corporate Controller since
joining the Company in November 1991. From 1988 to 1991, Mr. Kaplan, a certified
public accountant, was an audit manager for the accounting firm of Ferro, Berdon
& Company.
Martin R. Bring assumed a position on the Company's Board of Directors in
September 1991. Mr. Bring is and since 1978 has been a principal of the
New York law firm Lowenthal, Landau, Fischer, & Bring, P.C. Mr. Bring is
also a director of Sloans Supermarkets, Inc., a supermarket chain.
23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Registrant will file with the Securities and Exchange Commission, by
September 30, 1997, a definitive information statement, pursuant to Regulation
14C under the Securities and Exchange Act of 1934 relating to its 1997 Annual
Meeting Act of Stockholders at which directors will be elected. The information
statement will include the information required by Item 402 of Regulation S-K.
The information statement, when filed, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The registrant will file with the Securities and Exchange Commission, by
September 30, 1997, a definitive information statement, pursuant to Regulation
14C under the Securities and Exchange Act of 1934 relating to its 1997 Annual
Meeting of Stockholders at which directors will be elected. The information
statement will include the information required by Item 403 of Regulation S-K.
The information statement, when filed, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant will file with the Securities and Exchange Commission, by
September 30, 1997, a definitive information statement, pursuant to Regulation
14C under the Securities and Exchange Act of 1934 relating to its 1997 Annual
Meeting of Stockholders at which directors will be elected. The information
statement will include the information required by Item 404 of Regulation S-K.
The information statement, when filed, is incorporated herein by reference.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Financial Statements and Financial Schedule: Page Number
Report of Independent Public Accountants ............................ F-2
Financial Statements:
Consolidated Balance Sheets as of .............................. F-3
May 31, 1996 and May 31, 1997
Consolidated Statements of Operations for ...................... F-4
the Three Years Ended May 31, 1997
Consolidated Statements of Changes ............................. F-5
in Stockholders' Equity (Deficit)for the
Three Years Ended May 31, 1997
Consolidated Statements of Cash Flows .......................... F-6
for the Three Years Ended May 31, 1997
Notes to Consolidated Financial Statements .......................... F-7 - F-19
Unaudited Quarterly Results ......................................... F-20
(b) Exhibits:
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 March 6, 1997 between The He-Ro Group, Inc. (as
sublessor) and Harve Benard (as sublessee) relating to the premises
located at One American Way, Secaucus, New Jersey.
10.3 Lease dated September 21, 1994, between The Louis Adler Realty Company
and H.R.I., Inc. relating to the premises located at
25
<PAGE>
550 Seventh Avenue, New York, New York. Incorporated by
reference to Exhibit 10.3 of Registrant's 1995 10-K.
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. ("Cassini License"). 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 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.
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, as amended. 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
26
<PAGE>
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.
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.
(c) Reports on Form 8-K
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on August
27, 1997.
THE HE-RO GROUP, LTD.
By /s/ SAM D. KAPLAN
--------------------
Sam D. Kaplan
Chief Financial Officer
and Secretary
(principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities indicated, on August , 1997.
Signature Title
/s/ DELLA ROUNICK Chairman of the Board and
- ------------------------ Chief Executive Officer
Della Rounick
/s/ MARTIN R. BRING Director
- ------------------------
Martin R. Bring
28
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Number
------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................ F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
May 31, 1996 and May 31, 1997 ........................ F-3
Consolidated Statements of Operations for the
Three Years Ended May 31, 1997 ....................... F-4
Consolidated Statements of Changes In
Stockholders' Equity (Deficit) for the
Three Years Ended May 31, 1997 ....................... F-5
Consolidated Statements of Cash Flows
for the Three Years Ended May 31, 1997 ............... F-6
Notes to Consolidated Financial Statements ........... F-7 - F-19
UNAUDITED QUARTERLY RESULTS ............................. F-20
NOTE: Supplemental schedules have been omitted as inapplicable or not required
under the instructions contained in Regulation S-X or the information is
included elsewhere in the financial statements or the notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of The He-Ro Group, Ltd.:
We have audited the accompanying consolidated balance sheets of The He-Ro Group,
Ltd. (a Delaware corporation) and subsidiaries as of May 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the three fiscal years in the period
ended May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The He-Ro Group, Ltd. and
subsidiaries as of May 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended May
31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, because the Company has been incurring losses from
operations, the Company was in default of certain financial covenants with its
senior lender, Foothill Capital Corporation, which have been waived by the
lender through the fiscal quarter ending on August 31, 1997. As discussed in
Note 13 to the financial statements, there has been insufficient liquidity, as
required by its credit agreement with Foothill Capital Corporation to allow the
Company to pay required monthly installments of principal to its group of four
banks that rank junior to Foothill Capital Corporation. In addition, the Company
is projecting further losses from operations for the year ending May 31, 1998.
The combination of these factors raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 13. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
New York, New York
August 18, 1997 (except
with respect to the credit
agreement amendment and
financial covenant waiver
discussed in Note 6, as to
which date is August 27, 1997)
F-2
<PAGE>
<TABLE>
<CAPTION>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
May 31
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ...................................................................... $ 405 $ 354
----------- -----------
Accounts receivable:
Trade, net of allowances for doubtful
accounts of $300 (1996) and $400 (1997) ............................. 1,648 1,016
Suppliers and other ................................................... 2,991 3,311
----------- -----------
4,639 4,327
Inventory, net ............................................................ 15,029 10,751
Other current assets ...................................................... 493 828
----------- -----------
Total current assets .................................................. 20,566 6,260
----------- -----------
FIXED ASSETS - at cost, net of accumulated
depreciation and amortization ............................................. 2,424 515
----------- -----------
OTHER ASSETS:
Deposits and other assets ................................................. 835 233
Investment - foreign affiliates ........................................... 798 798
----------- -----------
Total other assets .................................................... 1,633 1,031
----------- -----------
$ 24,623 $ 17,806
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank loans ................................................................ $ 5,977 5,032
Current maturities of long-term debt ...................................... 2,600 2,750
Accounts payable .......................................................... 5,981 7,604
Accrued expenses and other current
liabilities ............................................................... 1,888 3,082
----------- -----------
Total current liabilities ............................................. 16,446 18,468
----------- -----------
Subordinated notes payable -
stockholder ............................................................... 5,296 5,296
Long-term debt, net of current maturities ...................................... 150 --
----------- -----------
Total liabilities ..................................................... 21,892 23,764
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
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
Accumulated Deficit ....................................................... (37,502) (46,191)
----------- -----------
Total stockholders' equity (deficit) .................................. 2,731 (5,958)
----------- -----------
$ 24,623 $ 17,806
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended May 31
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales ...................................... $57,224 $53,361 $46,654
Cost of sales
Cost of sales from operations ............... 35,235 33,646 28,527
Other charges ............................... -- -- 2,400
--------- --------- ---------
35,235 33,646 30,927
--------- --------- ---------
Gross profit ................................. 21,989 19,715 15,727
--------- --------- ---------
Operating expenses
Selling, general and administrative .......... 23,237 21,104 19,321
Restructuring and other charges .............. 1,000 -- 2,779
--------- --------- ---------
24,237 21,104 22,100
--------- --------- ---------
Operating loss ............................... (2,248) (1,389) (6,373)
Interest expense ............................... 2,262 2,539 2,316
--------- --------- ---------
Loss before income taxes ..................... (4,510) (3,928) (8,689)
Benefit for income taxes ....................... (159) -- --
--------- --------- ---------
Net loss ..................................... $ (4,351) $ (3,928) $ (8,689)
========= ========= =========
Net loss per common share ..................... $ (0.65) $ (0.58) $ (1.29)
========= ========= =========
Weighted average shares outstanding ............ 6,717 6,717 6,717
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Common Stock
------------------- Additional
No. of Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994............. 6,717 $67 $40,166 $(29,223) $11,010
Net loss.......................... - - - (4,351) (4,351)
------ --- ------- ------- -------
Balance, May 31, 1995............. 6,717 $67 $40,166 $(33,574) $ 6,659
Net loss.......................... - - - (3,928) (3,928)
------ --- ------- ------- -------
Balance, May 31, 1996............. 6,717 $67 $40,166 $(37,502) $ 2,731
Net loss.......................... - - - (8,689) (8,689)
------ --- ------- ------- -------
Balance, May 31, 1997............. 6,717 $67 $40,166 $(46,191) $(5,958)
====== === ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended May 31
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(4,351) $(3,928) $(8,689)
------- ------- -------
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization......................... 1,422 1,054 826
Loss on disposition of fixed assets................... 91 46 1,171
Deferred income taxes................................. (215) - -
Amortization of deferred finance costs................ 9 276 309
(Increase) decrease in assets:
Trade receivables.................................... 611 536 632
Suppliers and other receivables...................... 3,092 (341) (320)
Inventories, net..................................... 2,317 4,054 4,278
Other current assets................................. 201 288 (335)
Increase (decrease) in liabilities:
Accounts payable..................................... 112 (1,013) 1,623
Accrued expenses and other current liabilities....... (273) (472) 1,194
------- ------- ------
Total net adjustments................................ 7,367 4,428 9,378
------- ------- -------
Net cash provided by operating activities........ 3,016 500 689
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets.............................. (511) (76) (88)
Investment - foreign affiliates.......................... 292 - -
Decrease in other assets................................. 156 74 333
------- ------- -------
Net cash (used in)/provided by
investing activities............................. (63) (2) 245
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in subordinated notes payable -
stockholder.............................................. 1,000 - -
Deferred finance costs................................... (327) (227) (40)
(Decrease) in bank loans................................. (6,793) (675) (945)
------- ------- -------
Net cash (used in) financing
activities....................................... (6,120) (902) (985)
------- ------- -------
NET (DECREASE) IN CASH......................................... (3,167) (404) (51)
CASH, beginning of year........................................ 3,976 809 405
------- ------- -------
CASH, end of year.............................................. $ 809 $ 405 $ 354
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of The He-Ro Group,
Ltd. and its subsidiaries (the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which principles assume
that assets will be realized and liabilities discharged in the normal course of
business.
The Company is primarily engaged in the merchandising and distribution of
imported designer women's apparel at the wholesale and retail levels. The
principal market for the Company's products is the United States.
Investment - foreign affiliates is accounted for on the equity method (see Note
5 for further discussion).
The years ending May 31, 1995, 1996 and 1997 are defined as "fiscal 1995",
"fiscal 1996" and "fiscal 1997", respectively.
Uses of Estimates
Generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Inventory, net
Inventory is stated at lower of cost (first-in, first-out method) or market.
Fixed Assets
Machinery and equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives of 5-7 years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the term of the lease or the estimated useful life of the asset.
Deferred Charges
Costs incurred with respect to the Company's debt financing are amortized on a
straight-line basis over the term of the loan.
F-7
<PAGE>
Foreign Currency Translation
The accounts of the Company's foreign operations are translated into U.S.
dollars in accordance with FASB Statement No. 52, "Foreign Currency
Translation." Balance sheet accounts are translated at the current exchange rate
and income statement items are translated at the average exchange rate for the
year. Exchange gains and losses are included in the determination of the current
year's results of operations and are not significant for any year presented.
Income Taxes
Certain items of income and expense are not reported in both the tax returns and
financial statements in the same year. The resulting tax differences are
reported as deferred income taxes.
Revenue Recognition
Sales are recognized upon shipment of products or, in the case of retail sales,
when payment is received. Allowances for estimated returns and discounts are
provided for based on historical experience when sales are recorded.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." This statement is effective for the Company beginning in
the third quarter of fiscal year ending May 31, 1998. Adoption of SFAS No. 128
will require the Company to replace the presentation of primary earnings per
share ("EPS") with a presentation of basic EPS. The Company will be required to
restate all prior-period EPS data presented. The Company does not expect there
to be any differences between the presented EPS and restated EPS.
2) RESTRUCTURING CHARGES
In October 1993, the Board adopted a restructuring plan pursuant to which during
the fiscal year ending May 31, 1994 and thereafter, the Company would refocus
substantially all of its resources on its core evening and special occasion wear
business, primarily its Black Tie by Oleg Cassini and Niteline product lines,
and its retail outlet stores. At the same time, the Company determined it should
discontinue producing moderate dresses and sportswear and bridge dresses and
suits, and close the divisions responsible for the discontinued product lines.
In connection with these actions, the Company recorded pre-tax restructuring
charges of $1.0 million for the year ended May 31, 1995 that primarily reflects
the continued downsizing of the Company's Hong Kong production office, in
addition to lease and other settlements and legal fees relating to the
discontinued business, offset by a $.4 million reversal of a previously
established accrual for a legal action based on legal counsel's opinion that
such legal action is unlikely to result in the Company being required to pay any
such amount.
During fiscal 1995, the Company made payments of approximately $1.4 million
F-8
<PAGE>
related to fiscal 1994 and 1995 restructuring charges consisting of $.1 million
in severance, $.2 million in legal fees, $.5 million in lease and licensing
payments, and $.6 million relating to other settlements. During fiscal 1996, the
Company made payments of approximately $.4 million related to fiscal 1994 and
1995 restructuring charges consisting of $.3 million in lease payments and $.1
million in severance and other settlements.
In February 1997, at a Special Meeting of the Company's Board of Directors, as
part of its ongoing cost cutting efforts, the Board adopted a restructuring plan
in connection with the subletting of the Company's domestic warehouse and
distribution center, administrative offices and retail store which are currently
located in a single leased facility in Secaucus, New Jersey, and in March 1997
the Company entered into a sublease with Harve Benard with respect to such
facility. Because the Company has downsized its operation to its core
eveningwear business as a result of the structuring plan adopted by the Board in
October 1993, the Company's current operations no longer justify the use of the
more expansive facilities located in Secaucus, New Jersey. Accordingly, the
Company has relocated its administrative offices and retail store to smaller
leased space in Secaucus, and is utilizing an independent third party for the
distribution and warehousing of inventory.
In May 1997, at a Special Meeting of the Company's Board of Directors, the Board
expanded upon the restructuring plan, which was adopted by the Board in February
1997, to further cut costs and streamline operations. The Board elected to
further restructure the Company's Hong Kong operations again downsizing and
consolidating the production office and moving the sample making operations from
Hong Kong to China. Additionally, as part of this restructuring, the Company
will close certain unprofitable retail stores so it can focus its resources on
developing the profitable store operations.
As a result of the foregoing fiscal 1997 restructuring, the restructuring charge
for the year ended May 31, 1997 is $1.7 million, of which $0.8 million reflects
losses due to the abandonment of certain fixed assets and leasehold
improvements, $0.5 million of costs related to the loss incurred by the Company
due to the lower rent payable by the subleassee and other expenses related to
the sublet, $0.2 million to downsize the Company's Hong Kong operations which
includes costs to close down the Hong Kong sample facility, severance costs and
other related expenses, and $0.2 million of costs related to closing certain of
the Company's retail stores.
Included on the accompanying consolidated balance sheets in accrued expenses and
other current liabilities related to the restructuring charges is an accrual of
$0.1 million and $.7 million as of May 31, 1996 and 1997, respectively.
F-9
<PAGE>
3) INVENTORY, NET
Inventory, net consists of the following:
May 31
-------------
1996 1997
------- ------
(In thousands)
Finished goods............................... $10,647 $ 9,012
Raw materials................................ 4,382 1,739
------- ------
$15,029 $10,751
======= =======
During fiscal 1996, the Company recorded a $0.7 million inventory write-down.
The increase in the inventory reserve resulted from a build-up of raw materials
after management revised its design philosophy based primarily upon the
projected use of fewer beads and sequins in current lines and from the remaining
excess quantities of non-current fabric.
During fiscal 1997, the Company recorded a $2.4 million loss on sale of raw
materials inventory. The loss related to the bulk sale of raw materials that the
Company had previously intended to use in future inventory designs. However, in
connection with the Company's ongoing cost cutting efforts, including occupancy
costs, and the Company's increasing demand for working capital and cash, the
Company decided to sell the raw materials.
4) FIXED ASSETS
Fixed assets consist of the following:
May 31
-------------
1996 1997
------- ------
(In thousands)
Machinery and equipment..................... $ 3,115 $ 1,943
Furniture and fixtures...................... 2,979 2,526
Leasehold improvements...................... 3,647 1,894
------- ------
9,741 6,363
Less - Accumulated depreciation
and amortization......................... 7,317 5,848
------- ------
$ 2,424 $ 515
======= =======
Depreciation and amortization expense was $1,422,000, $1,054,000 and $826,000
for the years ended May 31, 1995, 1996 and 1997, respectively.
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." This statement requires the
recognition of an impairment loss for an asset held for use when the estimate of
undiscounted future cash flows expected to be generated by the asset is less
than the carrying value of the asset. Generally, fair value will be determined
using valuation techniques such as the present value of expected cash flows.
As a result of implementing SFAS 121, the Company recorded charges of $0.5
million to write down to fair value the assets of certain retail stores.
The $0.5 million impairment charge is included in restructuring and other
F-10
<PAGE>
charges in the consolidated statement of operations for the year ended May
31, 1997.
5) RELATED PARTY TRANSACTIONS
Investment-foreign affiliates as presented on the Consolidated Balance Sheets as
of May 31, 1996 and 1997 represents the Company's $798,000 investment 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 on the accompanying consolidated
balance sheet is $2,151,000 due to the foreign affiliate at May 31, 1996 and
1997. The Company does not expect any material impact on its results of
operations due to the liquidation of GPL.
Della Rounick, the beneficial principal stockholder, is employed as the Chairman
of the Board and Chief Executive Officer by the Company, and has held the title
of Co-Chairman and Chief Executive Officer since the beginning of fiscal 1996,
for which she is being paid an annual salary of $220,000. Prior to that, Della
Rounick had been the Director of Design for the Company, for which she was paid
approximately $75,000 during the year ended May 31, 1995. See Note 8.
6) BANK LOANS AND LONG TERM DEBT
On May 12, 1995, the Company signed a 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. As a result of an
Amendment dated August 27, 1997, the term of the Foothill Credit Agreement has
been extended through November 30, 1997. 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 (8.50% at May 31, 1997)
plus 3 1/2% per annum. At May 31, 1997, the direct debt outstanding under the
Foothill Credit Agreement was $5,032,000 and the Company was contingently liable
for outstanding letters of credit of approximately $500,000. 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 May 31, 1997, the outstanding indebtedness of the Company to the
Bank Group was $2,750,000 in the aggregate under the Company's fourth amended
and restated credit agreement with its Bank Group, 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
F-11
<PAGE>
month in which the Company's inventory in Hong Kong and China decrease below
certain minimum thresholds. This loan is due and 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 July 1997, because these liquidity
standards were not met, the Company was not permitted to pay the monthly
installments of principal to the Bank Group, and accordingly, was not in
compliance with its credit agreement with the Bank Group. As a result of the
foregoing and in connection with the current transaction negotiations as
discussed in Note 13, the Company is negotiating with its lenders to revise its
credit facilities.
The Bank Group holds warrants to purchase up to an aggregate of 250,000 shares
of the Company's common stock at a price of $2.00 per share expiring on
September 17, 1999.
The Company's credit agreements with Foothill and the Bank Group require 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 May 31, 1997, the Company was not in compliance with the majority of the
financial covenants under the Foothill Credit Agreement. The Company has
received a waiver from Foothill relating to the foregoing non-compliance as at
the fiscal year ended May 31, 1997 and the first quarter of fiscal 1998.
See Note 13 for a discussion relating to the Company's projections and the
affect on its compliance with these financial covenants for the year ending May
31, 1998.
F-12
<PAGE>
7) INCOME TAXES
Foreign and domestic (loss) before income taxes is as follows:
Year Ended May 31
----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Domestic.................... $(4,510) $(3,928) $(8,689)
Foreign..................... - - -
------ ------ -----
$(4,510) $(3,928) $(8,689)
======= ======= =======
The following summarizes the (benefit) for income taxes:
Year Ended May 31
----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Federal.................... $(156) $ - $ -
State and local............ (3) - -
----- ------ ------
$(159) $ - $ -
===== ====== ======
The provision for income taxes differs from the amounts computed by applying
Federal statutory rates due to the following:
Year Ended May 31
----------------------
1995 1996 1997
---- ---- ----
(In thousands)
Provision computed at the
Federal statutory
rate of 34%................. $(1,533) $(1,336) $(2,954)
State and foreign income
taxes, net of
Federal income tax benefit.. 3 - -
Valuation allowance for
deferred tax assets
not recognized.............. 1,371 1,336 2,954
------ ------- -------
Income taxes.................. $ (159) $ - $ -
====== ======= =======
Deferred income taxes are the result of provisions of the tax law that either
require or permit certain items of income or expense to be reported for tax
purposes in different periods than for financial reporting. The nature of the
differences and their effect on income tax expense is as follows:
Year Ended May 31
------------------------------------
1995 1996 1997
---- ---- ----
Depreciation methods,
net of valuation allowance ... $ (155) - -
Provision for bad debts ........ (60) - -
------ ------ ------
$ (215) $ - $ -
====== ====== ======
F-13
<PAGE>
A summary of deferred tax assets (liabilities) is as follows:
May 31
-------------
1996 1997
---- ----
(In thousands)
Deferred Tax Assets - Current
- -----------------------------
Provision for bad debts ................ $ 143 $ 143
Accrued shareholder interest ........... 234 431
Loss carryforwards ..................... 12,078 14,835
------ -------
12,455 15,409
Valuation allowance .................... (12,312) (15,266)
------- -------
$ 143 $ 143
====== =======
Deferred Tax Liabilities - Long-term
- ------------------------------------
Undistributed Earnings of
foreign affiliate .................... $ (325) $ (325)
Depreciation methods ................... 392 392
------ -------
67 67
Valuation allowance .................... (67) (67)
$ - $ -
====== =======
The current deferred tax assets are included in other current assets on the
accompanying consolidated balance sheets. The current deferred tax assets
arising from loss carryforwards and timing differences are significantly
reserved with valuation allowances because of the uncertainty of realizing their
benefit of future offsets against taxable income.
At May 31, 1997, the Company has approximately $38,000,000 of net operating loss
carryforwards for U.S. tax reporting purposes which begin to expire in 2009.
8) SUBORDINATED NOTES PAYABLE - STOCKHOLDER
Notes and obligations payable to the beneficial principal stockholder in the
aggregate principal amount of $5,296,000 are subordinated to the Company's
indebtedness to Foothill and the Bank Group and bear interest varying from 8% to
12% per annum. Included in obligations to the beneficial principal stockholder,
which have also been subordinated to the Company's indebtedness to Foothill and
the Bank Group (see Note 6), is $1,500,000 of accrued death benefits and
$1,000,000 representing an amount which the beneficial principal stockholder
loaned to the Company on January 24, 1995 and concurrently was released on a
guarantee of the credit facility with the Bank Group. Interest expense paid or
accrued to the beneficial principal stockholder was $432,000, $492,000 and
$492,000 for the years ended May 31, 1995, 1996 and 1997, respectively. Accrued
expenses and other current liabilities on the accompanying consolidated balance
sheets includes $.6 million and $1.1 million in accrued interest payable to the
beneficial principal stockholder as of May 31, 1996 and May 31, 1997,
respectively. All of the foregoing obligations are due upon demand but because
these obligations are subordinated to the Company's indebtedness to Foothill and
the Bank Group, the liability relating thereto has been classified as long-term.
See Note 13.
F-14
<PAGE>
9) SUPPLEMENTAL CASH FLOW INFORMATION
Payments of income taxes were $83,000, $10,000 and $41,000 for the years ended
May 31, 1995, 1996 and 1997, respectively. Payments of interest during the
corresponding years were $2,123,000, $2,266,000 and $1,829,000 respectively.
10) COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
License Agreements
Effective June 1, 1996, the Company was obligated to pay minimum annual
royalties of $350,000 to its licensor for the next three years. If all the
renewal privileges are exercised, the agreement will expire in 2011. The license
agreement contains royalty percentages on sales ranging from 1% to 4%.
Total royalty expense approximated $474,000, $442,000 and $417,000 for the years
ended May 31, 1995, 1996 and 1997, respectively.
Leases
At May 31, 1997, the Company was obligated to pay minimum annual rentals
expiring at various dates through the year 2002 which include increases in real
estate taxes and other operating assessments. Minimum annual rentals exclusive
of increases in real estate taxes and other operating assessments are as
follows:
Year Ending
May 31
(In thousands)
1998............................... $ 2,970
1999............................... 2,224
2000............................... 1,881
2001............................... 1,526
2002............................... 978
Thereafter......................... 26
-------
$ 9,605
The minimum payments shown above have not been reduced by minimum sublease
payments of $891,000 due in the future under the sublease expiring January 2002.
Total rent expense approximated $3,517,000, $3,300,000 and $2,975,000 for the
years ended May 31, 1995, 1996 and 1997, respectively.
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 affect on the
Company, resulting from significantly higher rates of duty and other trade
sanctions imposed on goods originating in China.
F-15
<PAGE>
In May 1997, President Clinton issued a Presidential Determination recommending
the renewal of "most-favored-nation" trade status for China for the twelve
months ending July 2, 1998. Although resolutions disapproving such renewal were
introduced 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 three
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. However, bills have been introduced into Congress which, if enacted,
would ban all entries or importations of Chinese origin articles which are the
product, growth or manufacture of forced labor and which would deny
most-favored-nation rates of duty to goods produced by the People's Liberation
Army. "Most-favored-nation" trade status was renewed in July 1997 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, 1998 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 or otherwise restricting the importation of goods from China.
In February 1997, the United States and China entered into a four year bilateral
textile agreement, covering certain cotton, wool, man-made fiber, silk blend and
other vegetable fiber textiles and textile products, expiring December 31, 2000.
Among other things, the agreement reduces China's export quotas with respect to
fourteen (14) apparel and fabric categories 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. In addition, a
separate agreement between the United States and China was reached which
subjects to quota limitations, China's exports of apparel containing 70% or more
by weight of silk. This agreement is effective with respect to goods produced in
or manufactured in China and exported to the United States during the period
January 1, 1997 through December 31, 1997 and replaces a substantially similar
agreement which was in effect from April 1, 1994 through December 31, 1996.
The United States has announced its agreement with China on the separate
treatment of textile quotas for Hong Kong after the reversion of such territory.
Should the United States in the future determine that goods produced in Hong
Kong would be subjected to Chinese quota, such a determination would adversely
effect any contingency plans of the Company which 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
F-16
<PAGE>
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. This includes
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 textiles
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 were promulgated. 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
has 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.
11) STOCK OPTIONS
In May 1991, the stockholders of the Company approved the adoption of the 1991
Stock Option Plan (the "Option Plan"). The Option Plan is designed to provide
long-term incentive benefits to key employees, consultants and directors of the
Company or any of its subsidiaries as determined by the Board of Directors,
which group constitutes approximately fifteen (15%) percent of the Company's
employees, or approximately 42 persons at the present time. In October 1992, the
Board of Directors and stockholders approved an amendment to the Option Plan to
increase the maximum aggregate number of shares of common stock authorized for
issuance thereunder from 250,000 shares to 500,000 shares.
The Option Plan authorizes the issuance of incentive stock options (an "ISO"),
as defined in section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and stock options that do not conform to the requirements of the Code
section (a "Non-ISO"). Consultants and directors who are not also an employee of
the Company may only be granted Non-ISOs. The exercise price of each ISO may not
be less than 100% of the fair market value of the common stock at the time of
grant, except that in the case of a grant to an employee who owns (within the
meaning of the Code) 10% or more of the outstanding stock of the Company or any
subsidiary ("10% Stockholder"), the exercise price shall not be less than 110%
of such fair market value. The exercise price of each Non-ISO may not be less
than 85% of the fair market value of the common stock at the time of grant
thereof.
F-17
<PAGE>
<TABLE>
<CAPTION>
Changes in common shares under option for the years ended May 31, 1997, 1996 and
1995, are as follows:
1997 1996 1995
---------------------- ------------------------- -------------------------
PRICE RANGE PRICE RANGE PRICE RANGE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
BEGINNING OF YEAR 472,400 $1.00-$17.00 637,400 $2.00-$17.00 651,700 $2.00-$17.00
GRANTED 50,000 $1.00 107,000 $1.00 - -
EXERCISED - - - - - -
CANCELLED (53,800) $1.00-$17.00 (272,000) $2.00 (14,300) $2.00-$17.00
END OF YEAR 468,600 $1.00-$17.00 472,400 $1.00-$17.00 637,400 $2.00-$17.00
======= ============ ======= ============ ======= ============
</TABLE>
In March 1994, the stockholders of the Company approved the adoption of the
1992, 1993 and 1994 Outside Directors Stock Option Plans (together, the
"Directors Option Plans"). Pursuant to the Directors Option Plans, 185,000
shares are reserved for issuance upon the exercise of stock options granted
under the individual Directors Option Plans. Both the 1992 and 1993 Outside
Directors Stock Option Plans provide that all options are to be granted at an
exercise price equal to the last sale price reported on the date of the grant.
On October 11, 1995, the Board of Directors amended the 1994 Outside Directors
Stock Option Plan in which the Company granted options to purchase 50,000 shares
of common stock to each 1994 outside director at an exercise price equal to the
greater of $1.00 per share or the last sale price reported on the grant date.
Each outside director previously held options to purchase 100,000 shares of
common stock at an exercise price equal to the greater of $2.00 per share or the
last sale price reported on the grant date.
Statement of Financial Accounting Standards No.123 ("SFAS 123"), "Accounting for
Stock Based Compensation," is effective for the Company's fiscal year ended May
31, 1997. As permitted by SFAS 123, the Company intends to continue to apply the
accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and to make annual disclosures of the effect of adopting the fair
value method of accounting for employee stock and similar instruments.
As a result of the fact that the strike price of the Company's stock options
exceeds the current market value of the stock (closing price as of August 18,
1997 of $.25 per share), management's assessment is that the options have a
negligible or zero value.
12) 401(K) PLAN
The Company adopted a 401(K) plan effective January 1, 1995. The plan covers all
eligible U.S. employees who are 21 years of age with six months or more years of
service. The plan pays benefits based on an employee's account balance.
Participants may contribute from 1% to 15% of their salary on a before-tax
basis. The Company matches 10% of participant contributions. Participant and
employer contributions are fully and immediately vested. The Company's fiscal
1997 and 1996 contributions to the plan were not material to the consolidated
financial statements.
F-18
<PAGE>
13) GOING CONCERN CONSIDERATION
Because the Company has been incurring losses from operations, 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, the Company is projecting losses from
operations for the year ending May 31, 1998, which will result in its
non-compliance with the financial covenants under its credit agreement with
Foothill in fiscal 1998. In addition, the Company's credit agreement with
Foothill currently expires on November 30, 1997. The combination of these
factors raises substantial doubt about the Company's ability to continue as a
going concern. In the fourth quarter of fiscal 1996, the Company began to
explore its options relative to alleviating its financial instability including
strategic alliances with other companies, an infusion of capital into the
Company, the sale or merger of the Company, or any combination of the foregoing.
The Company is currently negotiating with several potential investors with
regard to certain proposed transactions. Costs associated with transaction
investigations that have not reached fruition amounted to $.6 million and have
been expensed. These costs appear as part of the restructuring and other charges
in the consolidated statement of operations. Costs related to ongoing
negotiations are capitalized.
In the absence of the consummation of any of the contemplated transactions or
similar events that would provide plans to re-finance or restructure debt, to
reduce or delay expenditures, or to increase ownership equity, there is 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 operations structure.
F-19
<PAGE>
<TABLE>
<CAPTION>
THE HE-RO GROUP, LTD. AND SUBSIDIARIES
UNAUDITED QUARTERLY RESULTS
(In thousands, except per share data)
Unaudited quarterly financial information for fiscal years 1997 and 1996 is set
forth in the table below:
August November February May
-------------- -------------- -------------- --------------
1996 1995 1996 1995 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales ......................... $11,577 $13,704 $13,904 $14,845 $ 9,648 $12,278 $11,525 $12,534
Gross Profit ...................... 4,642 5,772 5,240 5,457 3,615 4,643 2,230 3,843
Net loss .......................... (994) (89) (129) (641) (2,964) (967) (4,602) (2,231)
Net loss per common share ......... $ (0.15) $ (0.01) $ (0.02) $( 0.10) $ (0.44) $ (0.14) $ (0.68) $ (0.33)
</TABLE>
F-20
SUBLEASE
between
THE HE-RO GROUP, INC.,
as Sublessor,
and
HARVE BENARD, LTD.,
as Subtenant.
Dated: March 6, 1997
Premises: One American Way
Secaucus, New Jersey
<PAGE>
TABLE OF CONTENTS
1. DEMISE, TERM AND OCCUPANCY.......................................... 1
2. SUBORDINATE TO MAIN LEASE........................................... 2
3. INCORPORATION BY REFERENCE............................................3
4. PERFORMANCE BY SUBLESSOR............................................ 4
5. NO BREACH OF MAIN LEASE............................................. 5
6. NO PRIVITY OF ESTATE................................................ 5
7. INDEMNITY........................................................... 5
8. RELEASES............................................................ 6
9. RENT; RENT ABATEMENT AND NET SUBLEASE............................... 6
10. ADDITIONAL RENT..................................................... 8
11. LATE CHARGES, CHECK CHARGES AND NOTICE CHARGES...................... 8
12. UTILITIES........................................................... 9
13. USE................................................................. 9
14. CONDITION OF SUBLEASED PREMISES..................................... 9
15. CONSENTS AND APPROVALS.............................................. 9
16. NOTICES............................................................. 10
17. TERMINATION OF MAIN LEASE........................................... 10
18. ASSIGNMENT AND SUBLETTING........................................... 10
19. INSURANCE........................................................... 12
20. ESTOPPEL CERTIFICATES............................................... 12
<PAGE>
21. ALTERATIONS...................................................... 13
22. RIGHT TO CURE SUBTENANT'S DEFAULTS.................................. 13
23. SECURITY............................................................ 13
24. BROKERAGE........................................................... 14
25. WAIVER OF JURY TRIAL AND RIGHT TO COUNTERCLAIM...................... 14
26. NO WAIVER........................................................... 14
27. COMPLETE AGREEMENT.................................................. 15
28. SUCCESSORS AND ASSIGNS.............................................. 15
29. INTERPRETATION...................................................... 15
30. DIRECT LEASE........................................................ 15
31. CONSENT OF LANDLORD UNDER MAIN LEASE AND SECURITY................... 16
32. LEASEBACK SPACE..................................................... 17
33. SUBLESSOR'S MACHINERY AND EQUIPMENT................................. 20
34. SUBLESSOR'S WAREHOUSE SALE.......................................... 20
35. REPRESENTATIONS .................................................... 21
<PAGE>
SUBLEASE
THIS SUBLEASE, dated the day of March, 1997 between THE HE-RO
GROUP, INC., a New York corporation having its principal office at One American
Way, Secaucus, New Jersey 07094 ("Sublessor"), and HARVE BENARD LTD., a New York
corporation having an office at 225 Meadowland Parkway, Secaucus, New Jersey
07094-2399 ("Subtenant").
W I T N E S S E T H :
1. DEMISE, TERM AND OCCUPANCY.
(a) Sublessor hereby leases to Subtenant, and Subtenant hereby hires from
Sublessor, those certain premises constituting the entire building (the
"Building") known as One American Way (formerly known as 35 Enterprise Way),
Secaucus, New Jersey 07094 (the "Subleased Premises") and being all of the
premises which were leased to Sublessor under the Main Lease (hereinafter
defined) subject, however, to Subtenant leasing back to Sublessor the "Leaseback
Space" upon the terms and conditions hereinafter described in Paragraph 32 of
this Sublease.
(b) The term of this Sublease shall: (i) commence on the later of (A) the
date hereof and (B) the receipt by Sublessor of the Consent of Overlandlord (as
each such term is hereinafter defined) and the satisfaction or waiver of any
conditions precedent with respect to such consent (such later date being the
"Commencement Date") and (ii) end at 11:59 p.m. on January 31, 2002), unless
sooner terminated as herein provided (the "Sublease Expiration Date"). Sublessor
shall not be subject to any liability, the validity of this Sublease shall not
be impaired and the term of this Sublease shall not be extended by any delay in
the delivery of possession of the Subleased Premises to Subtenant.
(c) Sublessor shall employ its diligent efforts to deliver the Subleased
Premises to Subtenant in accordance with the following schedule (provided,
however, that nothing herein shall be construed as preventing Sublessor from
delivering all or any portion of the Subleased Premises to Subtenant prior to
the scheduled dates hereinafter set forth and Subtenant shall be obligated to
accept such delivery when made):
(i) Warehouse/distribution portion of the Subleased Premises:
(A) At least fifty percent (50%) of the first floor and mezzanine
warehouse/distribution space (including the entire second floor
"gravity" and mezzanine) not later than March 24, 1997;
<PAGE>
(B) At least seventy percent (70%) of the first floor and
mezzanine warehouse/distribution space not later than May 1, 1997; and
(C) One Hundred percent (100%) of the first floor and mezzanine
warehouse/distribution space not later than June 15, 1997.
(ii) The balance of the Subleased Premises shall be delivered to
Subtenant by not later than June 15, 1997.
(iii) Upon request of either Sublessor or Subtenant, Sublessor and
Subtenant shall promptly execute an instrument confirming the delivery of
all or any portion of the Subleased Premises to Subtenant and/or the
satisfaction of the provisions of all or any of this Paragraph 1(c).
(d) So long as Sublessor shall continue to occupy any part of the Subleased
Premises, access to the receiving/shipping overhead doors and staging areas and
loading docks shall be shared by Sublessor and Subtenant and such shared access
by Sublessor shall constitute part of the Leaseback and Leaseback Space pursuant
to Paragraph 32 hereof.
(e) Upon the delivery of each portion of the Subleased Premises to
Subtenant, Sublessor and Subtenant shall each execute a letter agreement in the
form of Exhibit A attached hereto confirming the portion of the Subleased
Premises so delivered.
2. SUBORDINATE TO MAIN LEASE. This Sublease is and shall be subject and
subordinate to the lease dated December 20, 1990 (the "Original Main Lease"), as
amended by a Lease Modification Agreement dated August 27, 1991 (the "Main Lease
Modification" and, together with the Original Main Lease, collectively, the
"Main Lease") between Hartz Mountain Industries, Inc. ("Overlandlord"), as
landlord, and Sublessor, as tenant, and to the matters to which the Main Lease
is or shall be subject and subordinate. Subtenant represents that a copy of the
Main Lease (from which certain economic terms have been redacted) has been
delivered to and examined by Subtenant. This Sublease shall also automatically
be subject and subordinate to any amendments to the Main Lease (and same shall
for the purpose of this Sublease automatically be deemed to be included in the
definition of the Main Lease) made after the date hereof if such amendments do
not: (a) prevent or adversely affect the use and enjoyment of the Subleased
Premises by Subtenant in accordance with this Sublease, (b) shorten the term or
increase the rent required to be paid by Subtenant under this Subleases, or (c)
increase the obligations of Subtenant or decrease the rights of Subtenant under
this Sublease.
3. INCORPORATION BY REFERENCE. (a) The terms, covenants and conditions of
the Main Lease are incorporated herein by reference so that, except to the
extent that they are inapplicable or are modified by the provisions of this
Sublease, for the purpose of incorporation by reference each and every term,
covenant and condition of the Main Lease binding or inuring to the benefit of
the landlord thereunder shall, in respect of this Sublease,
2
<PAGE>
bind or inure to the benefit of Sublessor, and each and every term, covenant and
condition of the Main Lease binding or inuring to the benefit of the tenant
thereunder shall, in respect of this Sublease, bind or inure to the benefit of
Subtenant, with the same force and effect as if such terms, covenants and
conditions were completely set forth in this Sublease, and as if the words
"Lessor" and "Lessee," or words of similar import, wherever the same appear in
the Main Lease, were construed to mean, respectively, "Sublessor" and
"Subtenant" in this Sublease, and as if the words "Demised Premises," or words
of similar import, wherever the same appear in the Main Lease, were construed to
mean "Subleased Premises" in this Sublease, and as if the word "Lease," or words
of similar import, wherever the same appear in the Main Lease, were construed to
mean this "Sublease."
(b) Notwithstanding anything to the contrary contained in this Sublease,
the following are not incorporated in this Sublease: (i) the provisions of
Subsections C, D, I, K, L, N, Q, X, BB, II and JJ of Section 1.01; Article 2;
Article 5; Article 7; Section 12.01; Article 30; Article 31; and Article 32 of
the Original Main Lease; (ii) the provisions of the introductory paragraph of
Paragraph R2 and Paragraphs R2.1 through R2.6 of the Rider to the Original Main
Lease; (iii) the provisions of Exhibits C (Work Letter) and E (Letter of Credit)
annexed to the Original Main Lease; and (iv) the provisions of the Main Lease
Modification.
(c) The provisions of Section 34.01 of the Main Lease, as incorporated by
reference in this Sublease, are hereby modified to provide that neither this
Sublease nor a notice or memorandum of this Sublease shall be recorded.
(d) The provisions of Section 7.2 of the Rider to the Original Main Lease,
as incorporated by reference in this Sublease, is hereby modified to provide the
references to the "Commencement Date" contained therein shall be deemed to refer
to the Commencement Date (as defined in this Sublease).
(e) The time limits contained in the Main Lease for the giving of notices,
making of demands or performing of any act, condition or covenant on the part of
the tenant thereunder, or for the exercise by the tenant thereunder of any
right, remedy or option, are changed for the purposes of incorporation herein by
reference by shortening the same in each instance by five (5) days, so that in
each instance Subtenant shall have five (5) days less time to give notice, make
demand, observe or perform any act or covenant or execute any right, remedy or
option hereunder than is accorded Sublessor as the tenant under the Main Lease,
unless any such time limit is five (5) days or less, in which event such time
limit shall be shortened by only one (1) day.
(f) If any of the express provisions of this Sublease shall conflict with
any of the provisions incorporated by reference, such conflict shall be resolved
in every instance in favor of the express provisions of this Sublease. If
Subtenant receives any notice or demand from the landlord under the Main Lease,
Subtenant shall promptly, and in any event, by the following business day, give
a copy thereof to Sublessor.
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4. PERFORMANCE BY SUBLESSOR. (a) Any obligation of Sublessor which is
contained in this Sublease by the incorporation by reference of the provisions
of the Main Lease and which is the obligation of the Overlandlord thereunder,
may, upon Subtenant's request and at Subtenant's sole cost and expense, be
observed or performed by Sublessor using reasonable efforts to cause
Overlandlord to observe and/or perform the same; provided, however, that
Subtenant shall pay on demand any cost or expense (including, without
limitation, reasonable attorney's fees) incurred by Sublessor in causing
Overlandlord to observe and/or perform the same, and Sublessor shall have a
reasonable time to enforce its rights to cause such observance or performance.
Sublessor shall not be required to furnish, supply or install anything required
to be furnished, supplied or installed by Overlandlord under any article of the
Main Lease. Subtenant shall not in any event have any rights in respect of the
Subleased Premises greater than Sublessor's rights under the Main Lease.
Notwithstanding any provision to the contrary, as to obligations incorporated in
this Sublease by reference to the provisions of the Main Lease, Sublessor shall
not be required to make any payment or perform any obligation, and Sublessor
shall have no liability to Subtenant for any matter whatsoever, except for
Sublessor's obligation to pay the rent and additional rent due under the Main
Lease and for Sublessor's obligation to use reasonable efforts, upon request of
Subtenant, but at the sole cost and expense of Subtenant as provided above, to
cause the Overlandlord to observe and/or perform its obligations under the Main
Lease.
(b) If Sublessor is unable, after making reasonable requests of
Overlandlord, to cause Overlandlord to perform or commence to perform any
obligation of Sublessor which is contained in this Sublease by the incorporation
by reference of the provisions of the Main Lease by making demand upon
Overlandlord, Sublessor shall, upon request by Subtenant, either: (i) commence
and diligently prosecute appropriate litigation or (ii) authorize Subtenant to
commence and diligently prosecute such litigation against Overlandlord provided
that Sublessor shall approve all documents filed and actions taken in connection
with such litigation, which approval of documents or actions shall not be
unreasonably withheld or delayed. Upon request by Sublessor, such litigation
shall be brought in the name of Subtenant, with appropriate subrogation of
Sublessor's rights limited to the matter at issue, unless same is required by
reason of lack of privity to be brought in the name of Sublessor in which event
such litigation brought by Sublessor shall be brought in the name of Sublessor.
Notwithstanding anything to the contrary contained in this Paragraph 4: (A)
Sublessor shall have no obligation to take any action to cause Overlandlord to
observe and/or perform the same or to litigate or to permit Subtenant to
litigate the same if Sublessor in good faith shall believe that Overlandlord is
not required by the Main Lease to observe and/or perform the obligation at issue
or that it would not be commercially reasonable to litigate the same; (B) any
such litigation shall be brought by counsel designated by Sublessor, subject to
the reasonable approval of Subtenant as to any counsel other than Lowenthal,
Landau, Fischer & Bring, P.C. (and Subtenant hereby waives any conflict of
interest arising out of such representation) and any such litigation brought by
Subtenant shall be brought by counsel designated by Subtenant, subject to the
reasonable approval of Sublessor; (C) any actual out-of-pocket cost and/or
expense incurred by Sublessor in seeking to enforce the obligations of
Overlandlord under the Main Lease, including reasonable attorneys' fees and
expenses, shall be paid by Subtenant within five (5) days after demand and,
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upon request by Sublessor, deposits on account thereof shall be paid by
Subtenant; (D) Subtenant shall indemnify, defend and hold Sublessor harmless
from and against any and all loss, liability, damage, cost or expense, including
reasonable counsel fees, incurred by Sublessor in connection with any litigation
commenced by or on behalf of Subtenant in accordance with the terms and
provisions of this Paragraph 4; and (E) Sublessor shall have no obligation to
Subtenant if such litigation, action or proceeding is unsuccessful if Sublessor
has complied with the provisions of this Paragraph 4.
(c) Sublessor shall not be responsible for any failure or interruption, for
any reason whatsoever, of the services or facilities that may be appurtenant to
or supplied at the building of which the Subleased Premises are a part by
Overlandlord or otherwise, including, without limitation, heat, air
conditioning, water, elevator service and cleaning service, if any; and no
failure to furnish, or interruption of, any such services or facilities shall
give rise to any: (i) abatement, diminution or reduction of Subtenant's
obligations under this Sublease; (ii) claim of constructive eviction, in whole
or in part; or (iii) liability on the part of Sublessor.
5. NO BREACH OF MAIN LEASE. Subtenant shall not do or permit to be done any
act or thing which may constitute a breach or violation of any term, covenant or
condition of the Main Lease by the tenant thereunder, whether or not such act or
thing is permitted under the provisions of this Sublease and whether or not the
relevant provision of the Main Lease is incorporated by reference in this
Sublease. The preceding sentence is not intended to vitiate the provisions of
this Sublease as between Sublessor and Subtenant; however, in the event that
stricter or different standards, provisions or conditions exist in the Main
Lease as between Overlandlord, as landlord, and Sublessor, as tenant, or the
performance by Subtenant of any act or thing which may be permitted under this
Sublease might constitute a breach or violation of any provision of the Main
Lease, then, in addition to complying with this Sublease, Subtenant shall either
comply with the relevant provision of the Main Lease, regardless of whether or
not such provision is incorporated by reference in this Sublease, or obtain a
consent to such act or thing or a waiver of such provision from Overlandlord
prior to the performance of such act or thing.
6. NO PRIVITY OF ESTATE. Nothing contained in this Sublease shall be
construed to create privity of estate or of contract between Subtenant and
Overlandlord.
7. INDEMNITY. (a) Subtenant shall indemnify, hold harmless and upon request
defend Sublessor from and against all losses, costs, damages, expenses and
liabilities, including, without limitation, reasonable attorneys' fees, which
Sublessor may incur or pay out by reason of: (i) any accidents, damages or
injuries to persons or property occurring in, on or about the Subleased Premises
(unless the same shall have been caused by Sublessor's gross negligence or
willful misconduct); (ii) any default by Subtenant hereunder, after notice if
required and expiration of any applicable cure period; (iii) any work done in or
to the Subleased Premises by or on behalf of Subtenant (unless the same shall
have been caused by Sublessor's negligence or misconduct); or (iv) any act,
omission or negligence on the part of Subtenant
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and/or its officers, employees, agents, customers and/or invitees, or any person
claiming through or under Subtenant, with respect to the Subleased Premises.
(b) Sublessor shall indemnify, hold harmless and upon request defend
Subtenant from and against all losses, costs, damages, expenses and liabilities,
including, without limitation, reasonable attorneys' fees, which Subtenant may
incur or pay out by reason of: (i) any accidents, damages or injuries to persons
or property occurring in, on or about the Leaseback Space (unless the same shall
have been caused by Subtenant's negligence or misconduct); (ii) any default by
Sublessor under the Leaseback (hereinafter defined) after notice if required and
expiration of any applicable cure period; (iii) any work done in or to the
Leaseback Space by or on behalf of Sublessor (unless the same shall have been
caused by Subtenant's negligence or misconduct) or (iv) any, omission or
negligence on the part of Sublessor and/or its officers, employees, agents,
customers and/or invitees, or any person claiming through or under Subtenant
with respect to the Subleased Premises.
8. RELEASES. Subtenant hereby releases Overlandlord and anyone claiming
through or under Overlandlord by way of subrogation or otherwise to the extent
that Sublessor released Overlandlord and/or Overlandlord was relieved of
liability or responsibility pursuant to the provisions of the Main Lease, and
Subtenant will cause its insurance carriers to include any clauses or
endorsements in favor of Overlandlord and others which Sublessor is required to
provide pursuant to the provisions of the Main Lease.
9. RENT; RENT ABATEMENT AND NET SUBLEASE.
(a) Subtenant shall pay to Sublessor rent (the "Fixed Rent") at the rate of
Eight Hundred Ninety One Thousand ($891,000.00) Dollars per annum payable in
advance in equal monthly installments of Seventy Four Thousand Two Hundred Fifty
($74,250.00) Dollars per month on the twenty-fifth (25th) day of the preceding
month for each month or part thereof during the term of this Sublease. On or
prior to May 1, 1997, Subtenant shall pay Sublessor Fixed Rent and Additional
Rent (hereinafter defined) for the period from May 15, 1997 through and
including June 30, 1997 in the amount of $130,612.81 consisting of: (i) Fixed
Rent of $111,375.00 (based on monthly Fixed Rent of $74,250), (ii)$ $17,272.05
of real estate taxes (based on quarterly real estate taxes of $34,544.09), (iii)
$1,236.14 of operating expenses (based on monthly operating expenses of
$824.09), (iv) $729.63 of property insurance (based on annual property insurance
of $5,837). Such payment shall be subject to adjustment pursuant to Paragraph 32
(b). If the Expiration date is other than the last day of a month then the Fixed
Rent and Additional Rent for the month in which the term of this Sublease
expires shall be prorated. Fixed Rent, Additional Rent (hereinafter defined) and
all other sums due under this Sublease shall be paid promptly when due, without
notice or demand therefor, and without deduction, abatement, counterclaim or
setoff of any amount or for any reason whatsoever. Fixed Rent, Additional Rent
and all other sums due under this Sublease shall be paid to Sublessor by good
unendorsed check of Subtenant at the address of Sublessor set forth in Paragraph
16 of this Sublease or to such other person and/or at such other address as
Sublessor may from time to time designate by notice to Subtenant. No payment by
Subtenant or receipt
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by Sublessor of any lesser amount than the amount stipulated to be paid
hereunder shall be deemed other than on account of the earliest stipulated Fixed
Rent or Additional Rent or other sums due under this Sublease; nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction, and Sublessor may accept any check or payment without prejudice to
Sublessor's right to recover the balance due or to pursue any other remedy
available to Sublessor. Any provision in the Main Lease referring to Fixed Rent
or Additional Rent incorporated herein by reference shall be deemed to refer to
the Fixed Rent and Additional Rent due under this Sublease.
(b) Notwithstanding the delivery to Subtenant of all or any portion of the
Subleased Premises prior to the Rent Commencement Date, Subtenant shall not be
required to pay the Fixed Rent or any Additional Rent due hereunder from the
Commencement Date through the later of (i) May 15, 1997 or (ii) the date on
which Sublessor has complied with Paragraph 1(c)(i)(B) (such later date
constituting the "Rent Commencement Date"). Subtenant's obligation for the
payment of Fixed Rent and Additional Rent shall however, commence on the Rent
Commencement Date regardless of whether all of the Subleased Premises shall have
been delivered to Subtenant or whether Subtenant shall have actually commenced
the use of all or any part of the Subleased Premises except that to the extent
that Sublessor has failed to deliver any of the Subleased Premises (other than
the Leaseback Space) to Subtenant by June 15, 1997 as provided in Paragraph
1(c), then the Fixed Rent shall be reduced by fifty percent (50%) until
possession thereof has been delivered to Subtenant.
(c) Except as expressly otherwise provided herein, it is intended that the
Rent, Additional Rent and other sums payable under this Sublease to Sublessor
shall be absolutely "net" to Sublessor, without deduction, setoff or diminution
of any nature or under any circumstances and that no payments shall be required
to be made by Sublessor hereunder other than (i) the Fixed Rent (as defined in
the Main Lease) to be paid by Sublessor as tenant under the Main Lease and (ii)
the rental and other payments to be made by Sublessor as "sub-subtenant" with
respect to the Leasehold Space to Paragraph 32 of this Sublease.
(d) Subtenant shall make its checks for the Fixed Rent and Additional Rent
payable to Overlandlord but shall deliver such checks to Sublessor and not to
Overlandlord. The provisions of the preceding sentence shall apply if and only:
(i) a corresponding payment for a corresponding type of expense is due and
payable to Overlandlord under a corresponding provision of the Overlease and, if
so, only to the extent that the amount due to Sublessor does not exceed the
amount due to Overlandlord, (ii) such payment is timely made by Subtenant under
this Sublease by delivery of such checks to Sublessor, (iii) Sublessor has not
given Subtenant reasonably satisfactory evidence that the corresponding payment
due to Overlandlord under the Overlease has been paid or is not due and payable
(which evidence may be an affidavit of an officer, partner or principal of
Subtenant with copies of appropriate supporting documentation attached thereto)
and (iv) Overlandlord has agreed in writing in its consent to this Sublease to
accept payments from Subtenant on account of Sublessor's obligations under the
Main Lease.
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10. ADDITIONAL RENT. (a) Subtenant shall be required to pay to Sublessor
any amounts payable by Sublessor to Overlandlord under the Main Lease pursuant
to the provisions thereof as Additional Charges (as defined in the Main Lease),
including, without limitation, all sums due in respect of real estate taxes,
utilities, expenses of operation, escalations or any other matters, and the
entire amount of the costs, if any, imposed on Sublessor pursuant to the Main
Lease (collectively, "Additional Rent"); provided, however, that Sublessor shall
not be required to pay any sums due to Overlandlord under the Main Lease solely
as a result of a default by Sublessor as tenant under the Main Lease when
Subtenant is not similarly in default under this Sublease (e.g., late charges
and attorney's fees due as a result of the late payment of rent under the Main
Lease when Subtenant has timely paid all Fixed Rent and Additional Rent).
(b) There shall be no proration or adjustment of Additional Rent as a
result of the occupancy of any part of the Subleased Premises by Sublessor under
Paragraphs 1(c) or 32. To the extent that Sublessor has prepaid any item
constituting Additional Rent (e.g., real estate taxes) for a period beyond the
Rent Commencement Date, same shall be adjusted as between Sublessor and
Subtenant as of the Rent Commencement Date. All amounts, charges, expenses, pass
throughs and other sums due from Subtenant to Sublessor under this Sublease
(other than Fixed Rent) shall constitute Additional Rent and shall be paid
within five (5) days after demand.
11. LATE CHARGES, CHECK CHARGES AND NOTICE CHARGES
(a) If payment of any Fixed Rent or Additional Rent shall not have been
paid by the eighth (8th) day after the date on which such amount was due and
payable a late charge of four percent (4%) of the amount which is due and unpaid
shall, at Sublessor's option, be payable as liquidated damages for Subtenant's
failure to make prompt payment and Subtenant acknowledges that such amount is
fair and reasonable and does not constitute interest. In addition, in the event
that any Fixed Rent or Additional Rent shall not have been paid by the 30th day
after the date on which such amount was due and payable interest shall be due
and payable as an additional late charge at a rate equal to the "base rate"
announced by Citibank, N.A. from time-to-time at its principal office in New
York City plus four percent (4%) per calendar month or any part thereof on the
amount due or the maximum rate of interest which may lawfully be collected from
the Subtenant, whichever is less, from the date on which such amount was
originally due and payable as liquidated damages for Subtenant's continued
failure to make such payment. The late charges for any month shall be payable on
the first day of the following month, and in default of payment of any late
charges, Sublessor shall have (in addition to all other remedies) the same
rights as provided in this Sublease (including the provisions incorporated by
reference) for non-payment of Fixed Rent. Nothing in this Section contained and
no acceptance of late charges by Sublessor shall be deemed to extend or change
the time for payment of Fixed Rent or Additional Rent.
(b) If any check in payment of any sum due to Sublessor under this Sublease
is not paid promptly upon its initial presentation for payment then an
administrative
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charge of $100 shall, at Sublessor's option, be payable as liquidated damages in
addition to any other sums due to Sublessor under this Paragraph 10 or
otherwise.
12. UTILITIES. From and after the Rent Commencement Date, Subtenant shall
pay for all utilities and any other services contracted for or requested by
Subtenant.
13. USE. Subtenant shall use and occupy the Subleased Premises solely for
the Permitted Uses (as such term is defined in the Main Lease). Subtenant shall
comply with the certificate of occupancy relating to the Subleased Premises and
with all laws, statutes, ordinances, orders, rules, regulations and requirements
of all federal, state and municipal governments and the appropriate agencies,
officers, departments, boards and commissions thereof, and the board of fire
underwriters and/or the fire insurance rating organization or similar
organization performing the same or similar functions, whether now or hereafter
in force, applicable to the Subleased Premises. Sublessor and Subtenant shall
each cooperate with the other in obtaining any Certificates of Occupancy
required for the Subleased Premises and/or the Leaseback Space. Sublessor shall,
as promptly as is reasonably possible after the Commencement Date, obtain at its
sole cost and expense, the initial Certificate of Occupancy for Subtenant for
the Subleased Premises provided that no alterations or improvements are made or
proposed to be made by Subtenant prior to the issuance of such Certificate of
Occupancy.
14. CONDITION OF SUBLEASED PREMISES. Subtenant is leasing the Subleased
Premises "as is" subject to the provisions of this Paragraph 14. In making and
executing this Sublease, Subtenant has relied solely on such investigations,
examinations and inspections as Subtenant has chosen to make or has made.
Subtenant acknowledges receipt of a copy of the current Certificate of Occupancy
for the Subleased Premises and that Sublessor has afforded Subtenant the
opportunity for full and complete investigations, examinations, and inspections.
Sublessor represents that to the best of its knowledge, without independent
inquiry, the plumbing, electrical and heating systems serving the Subleased
Premises are in working order on the date of this Sublease; provided, however
that: (i) this representation shall expire and terminate on July 15, 1997 and
written notice of any claim thereunder must be received by Sublessor on or prior
to such date and suit must be commenced with respect thereto within thirty (30)
days after of such claim has been given, time being of the essence, or such
claim shall be deemed waived and (ii) Sublessor's liability with respect to a
breach of such representation shall be limited solely to the cost to repair such
condition and only to the extent that such cost as to each separate item exceeds
$1,000.
15. CONSENTS AND APPROVALS. In any instance when Sublessor's consent or
approval is required under this Sublease, Sublessor's refusal to consent to or
approve any matter or thing shall be deemed reasonable if, inter alia, such
consent or approval is required by, and has not been obtained from,
Overlandlord; provided, however, Sublessor covenants to use reasonable efforts
(at the sole cost and expense of Subtenant, including reasonable attorney's
fees) to obtain the consent or approval of Overlandlord. Any request by
Subtenant for Sublessor's consent to or approval of any matter or thing shall
specify whether or not, in the opinion of Subtenant, the consent or approval of
Overlandlord is required as to same under the
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Main Lease (including, without limitation, the provisions of the Main Lease
which are not incorporated by reference in this Sublease) and shall reference
the article, section or paragraph numbers of the relevant provisions of this
Sublease and the Main Lease; provided, however, that the opinion of Subtenant as
to any such matter shall not be binding upon Sublessor. In the event that
Subtenant shall seek the approval by or consent of Sublessor and Sublessor shall
fail or refuse to give such consent or approval, Subtenant shall not be entitled
to any damages for any withholding or delay of such approval or consent by
Sublessor, it being intended that Subtenant's sole remedy shall be an action for
injunction or specific performance and that said remedy of an action for
injunction or specific performance shall be available only in those cases where
Sublessor shall have expressly agreed in writing not to unreasonably withhold or
delay its consent.
16. NOTICES. All notices, consents, approvals, demands and requests which
are required or desired to be given by either party to the other hereunder shall
be in writing and shall be personally delivered, sent by reputable overnight
courier delivery service or sent by United States registered or certified mail
and deposited in a United States post office, return receipt requested and
postage prepaid. Notices, consents, approvals, demands and requests which are
served upon Sublessor or Subtenant in the manner provided herein shall be deemed
to have been given or served for all purposes hereunder on the day personally
delivered, the next business day after sending by overnight courier as aforesaid
or on the fifth (5th) business day after mailing as aforesaid. Prior to the
Commencement Date, all notices, consents, approvals and requests given to
Subtenant shall be addressed to the address given at the beginning of this
Sublease. After the Commencement Date, all notices, consents, approvals, demands
and requests given to Subtenant shall be addressed to Subtenant at the Subleased
Premises. All notices, consents, approvals, demands and requests given to
Sublessor shall be addressed to it at the address set forth at the beginning of
this Sublease to the attention of Mr. Sam Kaplan with a copy at the same time
and in the same manner to Lowenthal, Landau, Fischer & Bring, P.C., 250 Park
Avenue, New York, New York 10177, Attention: Martin R. Bring, Esq. Either party
may from time to time change the names and/or addresses to which notices,
consents, approvals, demands and requests shall be addressed by a notice given
in accordance with the provisions of this Section.
17. TERMINATION OF MAIN LEASE. If for any reason the term of the Main Lease
shall terminate prior to the Sublease Expiration Date, this Sublease shall
thereupon be terminated and Sublessor shall not be liable to Subtenant by reason
thereof unless both: (a) Subtenant shall not then be in default hereunder after
notice if required and expiration of the applicable cure period, if any, and (b)
said termination shall have been effected because of the breach or default of
Sublessor under the Main Lease. Sublessor shall not, except as provided in
Paragraph 30 or after a fire, other casualty or condemnation, surrender or
terminate the Main Lease.
18. ASSIGNMENT AND SUBLETTING. Supplementing the provisions of Article 10
of the Main Lease (the provisions of which have been incorporated herein by
reference), Subtenant shall not, by operation of law or otherwise, assign, sell,
mortgage, pledge
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or in any manner transfer this Sublease or any interest therein, transfer direct
or indirect control of Subtenant, sublet the Subleased Premises or any part or
parts thereof, or grant any concession or license or otherwise permit occupancy
of all or any part of the Subleased Premises by any person, without the prior
written consent of Sublessor and, if required under the Main Lease or the terms
of Overlandlord's consent to this Sublease, of Overlandlord. Sublessor shall not
unreasonably withhold or delay its consent to any assignment of the Main Lease
or any subletting of all or any part of the Subleased Premises to any person or
entity which has a net worth of not less than $10,000,000 subject to the
provisions of Article 10 of the Main Lease as incorporated herein by reference.
Notwithstanding the foregoing, the consent of Sublessor shall not be required as
to any assignment of this lease or a subletting of all or any part of the
Subleased Premises to any entity controlling, controlled by or under common
control with Subtenant provided that Sublessor is given ten (10) days prior
written notice thereof together with copies of such sublease or assignment any
other relevant documents and reasonably satisfactory evidence of such
relationship. Any subsequent change in control of such assignee or subtenant
shall be deemed to be an assignment of this Sublease or subletting, as the case
may be, subject to the provisions of this Paragraph 18 and Article 10 of the
Main Lease. Any sublease shall provide that it is subject and subordinate to
this Sublease and the Main Lease and to the matters to which this Sublease is or
shall be subordinate, shall include the provisions of Paragraph 5 of this
Sublease and shall provide that in the event of termination, re-entry or
dispossess by Sublessor under this Sublease, Sublessor may, at its option, take
over all of the right, title and interest of Sublessor, as sublessor, under such
sublease, and such subtenant shall, at Sublessor's option, attorn to Sublessor
pursuant to the then executory provisions of such sublease, except that
Sublessor shall not be liable for any previous act or omission of Subtenant
under such sublease, be subject to any offset which theretofore accrued to such
subtenant against Subtenant, or be bound by any previous modification of such
sublease or by any previous prepayment of more than one month's rent. Any
assignment of this Sublease shall include an assumption of all obligations
arising under the Sublease from and after the effective date of such assignment.
Neither the consent of Sublessor to an assignment, subletting, concession, or
license, nor the references in this Sublease to assignees, subtenants,
concessionaires or licensees, shall in any way be construed to relieve Subtenant
of the requirement of obtaining the consent of Sublessor to any further
assignment or subletting or to the making of any assignment, subletting,
concession or license for all or any part of the Subleased Premises. In the
event Sublessor consents to any assignment of this Sublease, the assignee shall
execute and deliver to Sublessor an agreement in form and substance satisfactory
to Sublessor whereby the assignee shall assume all of Subtenant's obligations
under this Sublease. Notwithstanding any assignment or subletting, including,
without limitation, any assignment or subletting permitted or consented to, the
original Subtenant named herein and any other person(s) who at any time was or
were Subtenant shall remain fully liable on this Sublease, and if this Sublease
shall be amended, modified, extended or renewed, the original Subtenant named
herein and any other person(s) who at any time was or were Subtenant shall
remain fully liable on this Sublease as so amended, modified, extended or
renewed. Any violation of any provision of this Sublease by any assignee,
subtenant or other occupant shall be deemed a violation by the original
Subtenant named herein, the then Subtenant and any other persons who at any time
was or were Subtenant, it being the intention and meaning that the original
Subtenant named herein, the then Subtenant
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and any other person(s) who at any time was or were Subtenant shall all be
liable to Sublessor for any and all acts and omissions of any and all assignees,
subtenants and other occupants of the Subleased Premises. If this Sublease shall
be assigned or if the Subleased Premises or any part thereof shall be sublet or
occupied by any person or persons other than the original Subtenant named
herein, Sublessor may collect rent from any such assignee and/or any subtenants
or occupants, and apply the net amounts collected to the Fixed Rent and
Additional Rent, but no such assignment, subletting, occupancy or collection
shall be deemed a waiver of any of the provisions of this Section, or the
acceptance of the assignee, subtenant or occupant as Subtenant, or a release of
any person from the further performance by such person of the obligations of
Subtenant under this Sublease.
19. INSURANCE. Subtenant shall maintain throughout the term of this
Sublease the following insurance coverage: (a) comprehensive general public
liability insurance in respect of the Subleased Premises and the conduct and
operation of business therein, with Sublessor, Overlandlord and any other party
required under the Main Lease as additional insured, with limits of not less
than $10,000,000 for bodily injury or death combined single limit, and
$1,000,000 for property damage, including water damage and, if applicable,
sprinkler leakage legal liability; (b) Worker's Compensation Insurance in the
statutory limits; (c) rent insurance in an amount equal to one (1) years Fixed
Rent and Additional Rent (or business interruption insurance with an endorsement
satisfactory to Sublessor providing for the payment of Fixed Rent and Additional
Rent directly to Sublessor); and (d) casualty, fire and extended coverage
insurance in an amount equal to the full replacement value of Subtenant's
personalty and fixtures at the Subleased Premises, and any improvements to the
Subleased Premises. Policies, binders or other evidence of such insurance (but
not certificates of insurance) shall be delivered to Sublessor upon the
execution of this Sublease by Subtenant. Subtenant shall procure and pay for
renewals or replacements of such insurance from time to time before the
expiration thereof, and Subtenant shall deliver to Sublessor such renewal or
replacement policy or binder at least 30 days before the expiration of any
existing policy. All such policies shall be issued by companies licensed to do
business in the State of New Jersey and approved by Sublessor and the forms and
substance thereof shall be approved by Sublessor. All such policies shall
contain a provision whereby the same cannot be cancelled or modified unless
Sublessor and Overlandlord are given at least 30 days' prior written notice by
certified or registered mail of such cancellation or modification. Subtenant
will bear the risk of loss with respect to any damage to its personalty,
fixtures and improvements and the contents of the Subleased Premises which are
owned, controlled or in the custody of Subtenant.
20. ESTOPPEL CERTIFICATES. Each party shall, within ten (10) days after
each and every request by the other party, execute, acknowledge and deliver to
the requesting party a statement in writing: (a) certifying that this Sublease
is unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified, and stating the
modifications); (b) specifying the dates to which the Fixed Rent and Additional
Rent have been paid; (c) stating whether or not, to the best knowledge of the
responding party, Sublessor or Subtenant is in default in performance or
observance of its obligations under this Sublease, and, if so, specifying each
such default; (d) stating whether or not, to the best
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<PAGE>
knowledge of the responding party, any event has occurred which with the giving
of notice or passage of time, or both, would constitute a default by Sublessor
or Subtenant under this Sublease, and, if so, specifying each such event; and
(e) as to any other matters reasonably requested by the requesting party. Any
such statement delivered pursuant to this Section may be relied upon by any
actual or prospective assignee, transferee or mortgagee of the leasehold estate
under the Main Lease.
21. ALTERATIONS. Supplementing the provisions of Article 14 of the Main
Lease (the provisions of which have been incorporated herein by reference),
Subtenant shall not make or cause, suffer or permit the making of any
alteration, addition, change, replacement, installation or addition in or to the
Subleased Premises without obtaining the prior written consent in each instance
of Sublessor and if required under the Main Lease or under the terms of
Overlandlord's consent to this Sublease, of Overlandlord. Sublessor shall not
unreasonably withhold or delay its consent to any non-structural alterations.
Sublessor's approval shall not be required as to the replacement of Sublessor's
signage with Subtenant's signage, the installation of a steam tunnel, automatic
bagging equipment and sealing equipment and the modification of existing racking
to accommodate the flow of merchandise through such new equipment, unless same
requires any structural alterations in which event, Sublessor shall not
unreasonably withhold, condition or delay its approval thereof.
22. RIGHT TO CURE SUBTENANT'S DEFAULTS. If Subtenant shall at any time fail
to make any payment or perform any other obligation of Subtenant hereunder, then
Sublessor shall have the right, but not the obligation, after 5 days' notice to
Subtenant, or without notice to Subtenant in the case of any emergency, and
without waiving or releasing Subtenant from any obligations of Subtenant
hereunder, to make such payment or perform such other obligation of Subtenant in
such manner and to such extent as Sublessor shall deem necessary, and in
exercising any such right, to pay any incidental costs and expenses, employ
attorneys, and incur and pay reasonable attorneys' fees. Subtenant shall pay to
Sublessor upon demand all sums so paid by Sublessor and all incidental costs and
expenses of Sublessor in connection therewith, together with interest thereon at
the rate of two percent (2%) per calendar month or any part thereof or the then
maximum rate of interest which may lawfully be collected from Subtenant,
whichever shall be less, from the date of the making of such expenditures.
23. SECURITY. Subtenant shall deliver a security deposit in the amount of
$320,137.08 to Overlandlord or Sublessor as provided in Paragraph 31(b) hereof
as security for the performance and observance by Subtenant of the obligations
on the part of Subtenant to be performed under this Sublease. If alternative
(ii) under Paragraph 31(b) is in effect then the security deposit shall bear no
interest and may be co-mingled with the general funds of Sublessor. Sublessor
shall have the right, without notice to Subtenant, and regardless of the
exercise of any other remedy Sublessor may have by reason of a default, to apply
any part of said deposit to cure any default of Subtenant after notice, if
required and after the expiration of any applicable cure period, and, if
Sublessor does so, Subtenant shall upon demand deposit with Overlandlord or
Sublessor, as the case may be, the amount so applied so that Overlandlord or
Sublessor, as the case may be, shall have the full amount of the security
deposit plus interest at
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<PAGE>
all times during the term of this Sublease. If Subtenant shall fail to make such
deposit, Sublessor shall have the same remedies for such failure as Sublessor
has for a default in the payment of Fixed Rent. In the event of an assignment or
transfer of the leasehold estate under the Main Lease: (a) Sublessor shall have
the right to transfer Sublessor's interest in the security deposit to the
assignee, (b) Sublessor shall thereupon be automatically released by Subtenant
from all liability for the return of such security deposit and (c) Subtenant
shall look solely to the assignee for the return of said security deposit, and
the foregoing provisions of this sentence shall apply to every transfer made of
the security deposit to a new assignee of Sublessor's interest in the Main
Lease. The security deposited under this Sublease shall not be assigned or
encumbered by Subtenant without the prior consent of Sublessor, and any such
assignment or encumbrance shall be void.
24. BROKERAGE. Subtenant represents to Sublessor that no broker or other
person had any part, or was instrumental in any way, in bringing about this
Sublease other than SBWE, Inc. ("Sublessor's Broker") and Corporate America
Realty and Advisors ("Subtenant's Broker" and together with Sublessor's Broker,
collectively, the "Broker"). Sublessor shall pay any commission earned by
Sublessor's Broker pursuant to a separate agreement. Subtenant shall pay any
commission earned by Subtenant's Broker pursuant to a separate agreement.
Subtenant shall pay, and shall indemnify, defend and hold harmless, Sublessor
from and against, any claims made by any other broker or person other than
Sublessor's Broker for a brokerage commission, finder's fee, or similar
compensation, by reason of or in connection with this Sublease, and any loss,
liability, damage, cost and expense (including, without limitation, reasonable
attorneys' fees) in connection with such claims if such other broker or other
person claims to have had dealings with Subtenant in connection with this
Sublease and/or the Subleased Premises. The provisions of this paragraph shall
survive the expiration or termination of this Sublease.
25. WAIVER OF JURY TRIAL AND RIGHT TO COUNTERCLAIM. Subtenant hereby waives
all right to trial by jury in any summary or other action, proceeding or
counterclaim arising out of or in any way connected with this Sublease, the
relationship of Sublessor and Subtenant, the Subleased Premises and the use and
occupancy thereof, and any claim of injury or damages. Subtenant also hereby
waives all right to assert or interpose a counterclaim in any summary proceeding
or other action or proceeding to recover or obtain possession of the Subleased
Premises.
26. NO WAIVER. The failure of Sublessor to insist in any one or more cases
upon the strict performance or observance of any obligation of Subtenant
hereunder or to exercise any right or option contained herein shall not be
construed as a waiver or relinquishment for the future of any such obligation of
Subtenant or any right or option of Sublessor. Sublessor's receipt and
acceptance of Fixed Rent or Additional Rent, or Sublessor's acceptance of
performance of any other obligation by Subtenant, with knowledge of Subtenant's
breach of any provision of this Sublease, shall not be deemed a waiver of such
breach. No waiver by Sublessor of any term, covenant or condition of this
Sublease shall be deemed to have been made unless expressed in writing and
signed by Sublessor.
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27. COMPLETE AGREEMENT. There are no representations, agreements,
arrangements or understandings, oral or written' between the parties relating to
the subject matter of this Sublease which are not fully expressed in this
Sublease. This Sublease cannot be changed or terminated orally or in any manner
other than by a written agreement executed by both parties.
28. SUCCESSORS AND ASSIGNS. The provisions of this Sublease, except as
herein otherwise specifically provided, shall extend to, bind and inure to the
benefit of the parties hereto and their respective personal representatives,
heirs, successors and permitted assigns. In the event of any assignment or
transfer of the leasehold estate under the Main Lease, the transferor or
assignor, as the case may be, shall be and hereby is entirely relieved and freed
of all obligations under this Sublease.
29. INTERPRETATION. Irrespective of the place of execution or performance,
this Sublease shall be governed by and construed in accordance with the laws of
the State in which the Subleased Premises are located. If any provision of this
Sublease or the application thereof to any person or circumstance shall, for any
reason and to any extent, be invalid or unenforceable, the remainder of this
Sublease and the application of that provision to other persons or circumstances
shall not be affected but rather shall be enforced to the extent permitted by
law. The table of contents, captions, headings and titles, if any, in this
Sublease are solely for convenience of reference and shall not affect its
interpretation. This Sublease shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Sublease to be drafted. If any words or phrases in this Sublease shall have been
stricken out or otherwise eliminated, whether or not any other words or phrases
have been added, this Sublease shall be construed as if the words or phrases so
stricken out or otherwise eliminated were never included in this Sublease and no
implication or inference shall be drawn from the fact that said words or phrases
were so stricken out or otherwise eliminated. Each covenant, agreement,
obligation or other provision of this Sublease shall be deemed and construed as
a separate and independent covenant of the party bound by, undertaking or making
same, not dependent on any other provision of this Sublease unless otherwise
expressly provided. All terms and words used in this Sublease, regardless of the
number or gender in which they are used, shall be deemed to include any other
number and any other gender as the context may require. The word "person" as
used in this Sublease shall mean a natural person or persons, a partnership, a
corporation or any other form of business or legal association or entity.
30. DIRECT LEASE. Subtenant agrees to accept an assignment of the Main
Lease or to terminate this Sublease and execute a new direct lease with
Overlandlord upon request of Sublessor and Subtenant agrees to execute any and
all documents reasonably required by Overlandlord or Sublessor in connection
with such assignment or new lease within thirty (30) days after request,
including, without limitation: (a) an assumption agreement whereby Subtenant
assumes all of the obligations of Sublessor under the Main Lease or such new
lease and (b) upon request of Sublessor, a sublease to Sublessor of all or any
part of the Subleased Premises then occupied by Sublessor under Paragraph 1(c)
and 32 on the same terms and conditions applicable to such occupancy and the
Leaseback; provided, however, that: (i) upon or prior to any such
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<PAGE>
assignment of the Main Lease, the Main Lease shall be amended to provide that
the annual fixed rent and additional rent thereunder is not more than Fixed Rent
and Additional Rent under this Sublease; (ii) the terms thereof are not
materially and adversely different from the terms of this Sublease and the Main
Lease and do not increase the obligations of Subtenant, as tenant thereunder,
except as provided in Paragraph 30(i), or decrease the rights of Subtenant, as
tenant thereunder; (iii) such sublease shall be on the terms of the Leaseback
(hereinafter defined); and (iv) upon any such assignment or new lease, Sublessor
shall be released from all of its obligations under the Main Lease and this
Sublease.
31. CONSENT OF LANDLORD UNDER MAIN LEASE AND SECURITY. (a) Sublessor shall
use its reasonable efforts (at no cost or expense to Sublessor) to obtain: (i)
the written consent of Overlandlord to this Sublease in accordance with the
terms and conditions of the Main Lease, (ii) the agreement of Overlandlord in
such consent to accept payments from Subtenant on account of Sublessor's
obligations under the Main Lease (as discussed in Paragraph 9(d)), and (iii) a
subordination, non-disturbance and attornment agreement reasonably acceptable to
Sublessor (if Sublessor is required to execute same), Subtenant and Overlandlord
(collectively, the "Consent"). A consent letter substantially the same as that
executed by Overlandlord, Sublessor and USA Cargo Distribution, Inc. dated June
2, 1994, and modified as provided in Paragraph 31(b) hereof, shall be deemed
acceptable to Sublessor and Subtenant. A subordination, non-disturbance and
attornment agreement substantially the same as that executed by Overlandlord,
Sublessor and USA Cargo Distribution Center, Inc., dated June 7, 1994 shall be
deemed to be acceptable to Sublessor and Subtenant. This Sublease shall have no
effect unless and until Overlandlord shall have delivered the Consent and any
conditions precedent with respect to the Consent shall have been satisfied or
waived. If the Consent shall not have been obtained by March 10, 1997, Subtenant
shall have the right on notice to Sublessor to terminate this Sublease,
whereupon this Sublease shall be deemed null and void and of no effect. If the
Consent shall not have been obtained by March 31, 1997, Sublessor shall have the
right on notice to Subtenant to terminate this Sublease, whereupon this Sublease
shall be deemed null and void and of no effect.
(b) This Sublease is contingent upon Sublessor and Subtenant either: (i)
obtaining the consent of Overlandlord to the release to Sublessor of the
security deposit held by Overlandlord under the Main Lease in the amount of
$320,137.08, plus the undistributed interest, if any, earned thereon
simultaneously with the delivery by Subtenant to Overlandlord of a letter of
credit to be provided by Subtenant in an equivalent amount and otherwise
satisfactory to Overlandlord which shall serve as the security deposit under the
Main Lease and under this Sublease and if such consent is obtained then such
letter of credit shall within three (3) business days thereafter be delivered by
Subtenant to Overlandlord and a copy thereof shall simultaneously be delivered
to Sublessor and its counsel, or (ii) if Overlandlord shall not consent thereto,
then Sublessor obtaining the consent of Overlandlord to the assignment by
Sublessor to Subtenant of Sublessor's right to receive the proceeds of the
security deposit posted by Sublessor under Article 7 of the Main Lease upon the
expiration or termination of the Main Lease to the extent same has not been
applied by Overlandlord in accordance with the Main Lease. If
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<PAGE>
Overlandlord shall consent to such assignment, then upon the delivery of
$320,137.08 representing the security deposit to Sublessor to be held pursuant
to Paragraph 23 of this Sublease, Sublessor shall be deemed to have so assigned
Sublessor's right to receive the proceeds of the security deposit posted by
Sublessor under the Main Lease.
32. LEASEBACK SPACE.
(a) Subtenant hereby leases back to Sublessor, and Sublessor hereby hires
from Subtenant (the "Leaseback") that certain portion of the Subleased Premises
consisting of the entire second floor of the Subleased Premises and the portions
of first floor of the Subleased Premises currently used by Sublessor for its MIS
Department including the computer rooms, the two adjacent MIS Department offices
and the nearby caged area containing computer supplies (collectively, the
"Leaseback Space"). Promptly after the Commencement Date, Sublessor shall
install two (2) doors to separate the common lobbies of the Subleased Premises
from the ground floor office space constituting a part of the Leaseback Space
and Subtenant shall pay one-half of the reasonable cost thereof within ten (10)
days after installation thereof and delivery of an invoice therefor to
Subtenant.
(b) The Leaseback shall be for a term of one (1) year commencing with
Commencement Date and ending on the first anniversary thereof (as the same may
be extended, the "Leaseback Expiration Date"). Sublessor shall pay to Subtenant
rent (the "Leaseback Space Rent") commencing on the Rent Commencement Date of
Eighty Three Thousand Two Hundred Dollars ($83,200.00) per annum payable in
advance in equal monthly installments of Six Thousand Nine Hundred Thirty-Three
Dollars and 33/100 ($6,933.33) payable on the later of: (i) the fifth (5th) day
of the month or (ii) the fifth (5th) day following Sublessor's receipt from
Subtenant of the Fixed Rent and Additional Rent due for such month.
Notwithstanding the foregoing, the Leaseback Space Rent shall be offset against
the Fixed Rent. Subtenant shall not pay any Additional Rent or other sums with
respect to the Leaseback Space. Within one (1) week after Subtenant has
delivered to Sublessor the security deposit under Paragraph 31(b), Sublessor
shall deliver to Subtenant $25,000 or a letter of credit reasonably satisfactory
to Subtenant to be held as a security deposit with respect to Sublessor's
obligations under the Leaseback and Sublessor's obligations to pay Fixed Rent
and Additional Charges to Overlandlord under the Main Lease.
(c) Provided that Sublessor shall not be in default under this Paragraph 32
after notice, if required, and the expiration of any applicable cure period at
the time of the exercise thereof or at any time on or before the effective date
thereof, Sublessor shall have four (4) successive options to extend the term of
the Leaseback for a period of one (1) year each (each a "Renewal Term"), except
that the final Renewal Term shall expire on the Sublease Expiration Date. Each
of such options shall be automatically deemed to have been exercised unless
Sublessor has given a notice to the contrary to Subtenant not less than four (4)
months before the Leaseback Expiration Date as theretofore extended. If
Sublessor shall elect or be deemed to have elected to exercise any such option,
the term of the Leaseback shall be automatically extended for one (1) year
without the execution of an extension or renewal
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agreement after request by Sublessor. Upon the request of either Subtenant or
Sublessor, Subtenant and Sublessor shall execute, acknowledge and deliver to
Sublessor an instrument confirming the effective exercise of any such option and
confirming the extended Leaseback Expiration Date. The terms and conditions
applicable during each Renewal Term shall be the same terms and conditions as
are in effect immediately proceeding the commencement of the Renewal Term.
Notwithstanding anything to the contrary contained in this Paragraph 32(c),
under no circumstances shall the term of the Leaseback extend beyond the
Expiration Date or sooner termination of this Sublease or the Main Lease (other
than pursuant to Paragraph 30 if Sublessor requests the continuation of the
Leaseback as provided therein after an assignment of the Main Lease to Subtenant
or the execution of a new direct lease). Any termination, expiration,
cancellation or surrender of this Sublease or the Leaseback on or prior to the
Expiration Date shall terminate such option. Such option may not be severed from
this Sublease nor separately sold, assigned nor otherwise transferred.
(d) The Leaseback is agreed to: (i) be expressly subject to all of the
covenants, agreements, terms, provisions and conditions of this Sublease and the
Main Lease except such as are irrelevant or inapplicable, and except as
otherwise expressly set forth to the contrary in this Paragraph 32; (ii) give
Sublessor, as the sublessee under the Leaseback, the unqualified and
unrestricted right, without Subtenant's permission, to assign such sublease or
any interest therein and/or to sublet all or any parts of the Leaseback Space to
any person or entity controlling, controlled by or under common control with
Sublessor; (iii) give Sublessor, as the sublessee under the Leaseback, the
unqualified and unrestricted right to make non-structural alterations,
decorations and installations in the Leaseback Space or any part thereof and
shall also provide in substance that any such alterations, decorations and
installations in the Leaseback Space made by any assignee or subtenant of
Sublessor or its designee may be removed, in whole or in part, by such assignee
or subtenant, at its option, prior to or upon the expiration or other
termination of such sublease provided that such assignee or subtenant, at its
expense, shall repair any damage and injury to that portion of the Leaseback
Space caused by such removal; (iv) provide that the parties expressly negate any
intention that any estate created under the Leaseback be merged with any other
estate held by either of said parties, (vi) provide that Subtenant, at
Subtenant's expense, shall and will at all times provide and permit reasonably
appropriate means of ingress to and egress from the Leaseback Space; (v) provide
that at the expiration of the term of the Leaseback, Subtenant will accept the
space covered by the Leaseback in its then existing condition, subject to the
obligations of the Sublessor to make such repairs thereto as may be necessary to
preserve the premises demised by such sublease in good order and condition;
(vii) provide that Sublessor, as the sublessee of the Leaseback Space, shall not
do or permit to be done any act or thing which may constitute a breach or
violation of any term, covenant or condition of this Sublease by Subtenant, as
the subtenant thereunder, whether or not such act or thing is permitted under
the provisions of the Leaseback; (viii) provide that performance by Sublessor
under the Leaseback shall be deemed performance by Subtenant of any similar
obligation under the Sublease as to Leaseback Space and any default under the
Leaseback shall not give rise to a default under a similar obligation contained
in this Sublease as to the Leaseback Space; (ix) provide that Subtenant shall
not be liable for any default under this Sublease or deemed to be in default
hereunder if such default is occasioned by or arises
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from any act or omission of the Sublessor under the Leaseback or is occasioned
by or arises from any act or omission of any occupant holding under or pursuant
to the Leaseback; (x) Subtenant shall have no obligation, at the expiration or
earlier termination of the term of this Sublease, to remove any alteration,
installation or improvement made in the Leaseback Space by Sublessor; and (xi)
Sublessor shall have the right to install signage on, over or near the outside
door to the office lobby, within the office lobby and/or on the door to the
office space subject to Subtenant's approval, which approval shall not be
unreasonably withheld, conditioned or delayed.
(e) Subtenant shall supply all utilities to the Leaseback Space, including
heat, ventilation, air conditioning, electricity and water, at the same time and
in the same manner as the same are supplied to the Subleased Premises and
Sublessor shall pay Subtenant $1,300 per month for such utilities based upon
Sublessor's current use of the Leaseback Space.
(f) Sublessor shall use and occupy the Leaseback Space in accordance with
the "Permitted Uses" set forth in the Main Lease.
(g) Sublessor may at its sole option, cost and expense and in good
workmanlike fashion with a minimum of disruption to Subtenant's use of the
Sublease Premises, install demising walls in the second floor office and first
floor computer portion of the Leaseback Space in compliance with all applicable
laws and after obtaining all permits required in connection therewith.
(h) Sublessor shall maintain throughout the term of this Leaseback the
following insurance: (a) comprehensive general public liability insurance in
respect of the Leasehold Space and the conduct and operation of business
therein, with Subtenant, Overlandlord and any other party required under the
Main Lease as additional insured, with limits of not less than $3,000,000 for
bodily injury or death to any one person and $5,000,000 for bodily injury or
death to any number of persons in any one occurrence, and $500,000 for property
damage, including water damage and, if applicable, sprinkler leakage legal
liability; (b) worker's compensation insurance in the statutory limits; and (c)
casualty, fire and extended coverage insurance in an amount equal to the full
replacement value of Sublessor's personalty and alterations at the Leasehold
Space. Policies or certificates evidencing such insurance shall be delivered to
Subtenant on or prior to the commencement of the Leaseback. Sublessor shall
procure and pay for renewals or replacements of such insurance from time to time
before the expiration thereof, and Subtenant shall deliver to Sublessor such
renewal or replacement policy or binder at least thirty (30) days before the
expiration of any existing policy. All such policies shall be issued by
companies licensed to do business in the State of New Jersey and approved by
Sublessor and the forms and substance thereof shall be approved by Sublessor.
The insurance policies and coverage currently maintained by Sublessor with
respect to the Leaseback Space are hereby approved by Subtenant. All such
policies shall contain a provision whereby the same cannot be cancelled or
modified unless Sublessor and Overlandlord are given at least thirty (30) days'
prior written notice by certified or registered mail of such cancellation or
modification.
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Sublessor shall bear the risk of loss with respect to any damage to its
personalty and the contents of the Leaseback Space owned, controlled or in the
custody of Sublessor.
(i) The terms, covenants and conditions of this Sublease are incorporated
in the Leaseback by reference so that, except to the extent that they are
inapplicable or are modified by the provisions of this Paragraph 32, for the
purpose of incorporation by reference each and every term, covenant and
condition of this Sublease binding or inuring to the benefit of Sublessor
thereunder shall, in respect of the Leaseback, bind or inure to the benefit of
Subtenant, and each and every term, covenant and condition of this Sublease
binding or inuring to the benefit of the Subtenant, as the subtenant thereunder
shall, in respect of the Leaseback, bind or inure to the benefit of Sublessor,
with the same force and effect as if such terms, covenants and conditions were
completely set forth in this Paragraph 32, and as if the words "Sublessor" and
"Subtenant," or words of similar import, wherever the same appear in this
Sublease, were construed to mean, respectively, "Subtenant, as the sublessor
under the Leaseback," and "Sublessor, as the subtenant under the Leaseback,"
under the Leaseback, and as if the words "Subleased Premises," or words of
similar import, wherever the same appear in this Sublease, were construed to
mean the "Leaseback Space" under the Leaseback, and as if the word "Sublease,"
or words of similar import, wherever the same appear in this Sublease, were
construed to mean this "Leaseback."
(j) Notwithstanding anything to the contrary contained in this Paragraph
32, the following provisions of this Sublease are not incorporated in the
Leaseback: Paragraphs 1(a), 1(c), 1(e) 5, 9, 10, 11, 12, the last sentence of
Paragraph 13, the last sentence of Paragraphs 14, 30, 31, 32, 33, 34 and 35.
(k) Notwithstanding anything to the contrary contained in this Paragraph
32, the following provisions of the Main Lease are not incorporated in the
Leaseback: the provisions of Subsections U and Y of Article 1.01, the provisions
of the first sentence of Section 17.01, and Articles 6 and 8.
33. SUBLESSOR'S MACHINERY AND EQUIPMENT. All of Sublessor's machinery and
equipments, including without limitation, the racking system rail, trolley,
steamboiler(s) and conveyor(s), located at the Subleased Premises as of the date
hereof are hereby leased to Subtenant hereunder in "as is" and "where is"
condition without representation or warranty of any nature whatsoever except
that Sublessor represents that such equipment is owned by Sublessor. No portion
of the Fixed Rent or Additional Rent is allocated thereto. Upon the expiration
or earlier termination of this Sublease all such machinery and equipment shall,
upon request of Sublessor, be returned to Sublessor in the same condition and
working order as they are in as of the date hereof, ordinary wear and tear
excepted.
34. SUBLESSOR'S WAREHOUSE SALE. Subtenant acknowledges and agrees that
Sublessor intends to seek approval from the Hackensack Meadowlands Development
Corporation ("HMDC") to conduct a warehouse sale at the Subleased Premises for
up to a three (3) day period during May, 1997. Should HMDC grant its approval,
Sublessor shall use
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reasonable efforts to conduct such sale with a minimum of disruption to
Subtenant's use and occupancy of the Subleased Premises or such portion thereof
as Subtenant shall then occupy pursuant to the provisions of this Sublease.
35. REPRESENTATIONS. Sublessor represents that: (a) it has not received a
written notice of default under the Main Lease which remains uncured and (b) it
has paid all rent and additional rent which was billed by Overlandlord to
Sublessor under the Main Lease through the date hereof.
IN WITNESS WHEREOF, Sublessor and Subtenant have executed this Sublease as
of the day and year first above written.
SUBLESSOR:
THE HE-RO GROUP, INC.
By: /s/ Sam Kaplan
-----------------------------
Name: Sam Kaplan
-----------------------------
Title: Chief Financial Officer
-----------------------------
SUBTENANT:
HARVE BENARD LTD.
By: /s/ Harvey Schutzbank
-----------------------------
Name: Harvey Schutzbank
-----------------------------
Title: Vice President & CEO
-----------------------------
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FORM OF DELIVERY LETTER AGREEMENT
Pursuant to Paragraph 1 of the Sublease between The He-Ro Group, Inc., as
Sublessor (the "Sublessor") and Harve Benard Ltd., as subtenant, (the
"Subtenant"), dated March , 1997 (as amended from time-to-time, the "Sublease"),
Sublessor and Subtenant acknowledge and agreed as follows:
1. The date of this letter agreement is , 1997.
2. On the date hereof, Sublessor has delivered to Subtenant possession of
the portion of the Subleased Premises approximately as shown by cross-hatching
on the floor plan attached hereto as Schedule A (the "Delivered Space").
3. The Delivered Space represents % of the first floor and mezzanine
warehouse/distribution space in the Subleased Premises and, together with
previously delivered space, Sublessor has delivered to Subtenant possession of %
of the first floor and mezzanine warehouse/distribution space in the Subleased
Premises.
SUBLESSOR:
THE HE-RO GROUP, INC.
By:
Name:
Title:
SUBTENANT:
HARVE BENARD LTD.
By:
Name:
Title:
EXHIBIT A
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> May-31-1997
<PERIOD-START> Jun-01-1996
<PERIOD-END> May-31-1997
<CASH> $354,000
<SECURITIES> $0
<RECEIVABLES> $4,727,000
<ALLOWANCES> $400,000
<INVENTORY> $10,751,000
<CURRENT-ASSETS> $16,260,000
<PP&E> $6,363,000
<DEPRECIATION> $5,848,000
<TOTAL-ASSETS> $17,806,000
<CURRENT-LIABILITIES> $18,468,000
<BONDS> 0
0
0
<COMMON> 6,717,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> ($5,958,000)
<SALES> $46,654,000
<TOTAL-REVENUES> $46,654,000
<CGS> $28,527,000
<TOTAL-COSTS> $30,927,000
<OTHER-EXPENSES> $22,100,000
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $2,316,000
<INCOME-PRETAX> ($8,689,000)
<INCOME-TAX> $0
<INCOME-CONTINUING> ($8,689,000)
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> ($8,689,000)
<EPS-PRIMARY> ($1.29)
<EPS-DILUTED> ($1.29)
</TABLE>
