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Previous: TESSERACT GROUP INC, SC 13D/A, 1998-03-09 |
Next: JUNDT GROWTH FUND INC, 24F-2NT, 1998-03-09 |
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
FORM 8-K/A
Amendment No. 2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 24, 1997
------------------------------
THE HE-RO GROUP, LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-10860 13-36155898
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
530 Seventh Avenue, New York, New York 10018
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (212) 398-6161
------------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. Financial Statements and Exhibits.
(a) Unaudited Financial Statements of Nah Nah Collections, Inc.
1. Financial Statements for three years ended April 30,
1995, 1996 and 1997.
2. Interim Financial Statements for the period May 1, 1997
to December 23, 1997.
(b) Pro Forma Financial Information.
Pro Forma Combined Condensed Balance Sheet and
Statment of Operations for The He-Ro Group,
Ltd. giving effect to the reverse acquisition.
(c) The following documents are filed herewith as exhibits to
this Form 8-K/A:
2.1 Stock Purchase Agreement dated as of October 16, 1997,
among the Registrant, Nah Nah, Hong J. Han and
Della Rounick (previously filed with the initial
report on Form 8-K).
16.1 Letter from Arthur Andersen (previously filed with
Amendment No.1 to Form 8-K).
99.1 Factoring and Revolving Inventory Loan and Security
Agreement dated as of December 24, 1997, among The
He-Ro Group, Inc., Nah Nah Collections, Inc., HRNL,
Inc., The He-Ro Group, Ltd. and its several
wholly-owned, active U.S. subsidiaries and Heller
Financial, Inc. (previously filed with initial report
on Form 8-K).
-2-
<PAGE> 3
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: March 9, 1998
THE HE-RO GROUP, LTD.
By: /s/ Hong J. Han
------------------------------
Hong J. Han
President and
Chief Executive Officer
-3-
<PAGE> 4
Exhibit Index
*2.1 Stock Purchase Agreement dated as of October 16, 1997,
among the Registrant, Nah Nah, Hong J. Han and Della
Rounick.
*16.1 Letter from Arthur Andersen.
*99.1 Factoring and Revolving Inventory Loan and Security
Agreement dated as of December 24, 1997, among The
He-Ro Group, Inc., Nah Nah Collections, Inc., HRNL,
Inc., The He-Ro Group, Ltd. and its several
wholly-owned, active U.S. subsidiaries and Heller
Financial, Inc.
-------------------------
* Previously filed.
-4-
<PAGE> 5
NAH NAH COLLECTIONS, INC.
BALANCE SHEET
AS AT APRIL 30, 1995
(UNAUDITED)
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash in Bank and on Hand $ 32,588
Due from Factor - (Note 2) 1,176,539
Accounts Receivable - Unassigned 259,986
Merchandise Inventory - (Note 1) 2,268,954
Prepaid Expenses and Miscellaneous Receivables 24,834
----------
Total Current Assets $3,762,901
FIXED AND OTHER ASSETS
Fixed Assets Net (Note 1) 315,498
Security Deposits 86,360
----------
Total Fixed and Other Assets 401,858
----------
TOTAL ASSETS $4,164,759
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable $2,160,671
Loan Payable - Cho Hung Bank 402,090
Accrued Expenses and Sundry Liabilities 52,122
Equipment Lease Payable 17,902
Corporate Taxes Payable 95,354
----------
Total Current Liabilities 2,728,139
SUBORDINATED LOANS (Note 3) 500,000
STOCKHOLDER'S EQUITY
Capital Stock 50,000
Retained Earnings 886,620
----------
Total Stockholder's Equity 936,620
----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,164,759
==========
</TABLE>
<PAGE> 6
NAH NAH COLLECTIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED APRIL 30, 1995
(UNAUDITED)
<TABLE>
<S> <C>
Net Sales $22,454,975
Cost of Goods Sold 17,099,871
-----------
Gross Profit 5,355,104
Operating Expenses 5,030,092
-----------
Net Income Before Provision for Taxes 325,012
Provision for Income Taxes 140,000
-----------
Net Income 185,012
Retained Earnings -- May 1, 1994 710,608
-----------
Retained Earnings -- April 30, 1995 $ 866,620
===========
</TABLE>
<PAGE> 7
NAH NAH COLLECTIONS, INC.
STATEMENT OF CASH FLOW
FOR THE YEAR ENDED APRIL 30,1995
--------------------------------
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 185,012
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provided By Operating Activities:
Depreciation and Amortization $ 49,433
Decrease in Due From Factor 141,212
Increase in Accounts Receivable (39,374)
Increase in Merchandise Inventory (368,848)
Decrease in Prepaid Expenses 30,903
Decrease in Deterred Interest 10,706
Decrease in Accounts Payable (67,743)
Increase in Accrued Expenses 46,546
Increase in Corporate Income Taxes Payable 48,130
---------
Total Adjustments (149,035)
---------
Net Cash Provided by Operating Activities 35,977
CASH FLOW (USED) FOR INVESTING ACTIVITIES:
Capital Expenditures (219,665)
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Loan Payable - Cho Hung Bank 214,514
Reduction of Long Term Debt (18,731)
---------
Net Cash Provided by Financing Activities 195,783
---------
Increase in Cash 12,095
Cash-- At May 1,1994 20,493
---------
Cash-- At April 30,1995 $ 32,588
=========
<PAGE> 8
NAH NAH COLLECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
NOTE 1 - PRINCIPLES OF ACCOUNTING
MERCHANDISE INVENTORY
Inventory has been submitted by management and is valued at the
lower of cost or market on a first-in, first-out basis. Merchandise
inventory at April 30,1995 is summarized as follows:
Piece Goods $ 580,384
Work in Process 380,179
Finished Goods 1,308,391
---------
$ 2,268,954
=========
DEPRECIATION
Fixed assets are being depreciated over applicable useful lives
using straight line and accelerated methods. Depreciation and amortization
for the year ended April 30,1995 amounted to $49,433.
DESCRIPTION
-----------
Furniture and Fixtures $ 211,866
Computer Equipment 193,572
Leasehold Improvements 57,701
-------
463,139
Less: Accumulated Depreciation
and Amortization 147,641
$ 315,498
=======
NOTE 2 - DUE FROM FACTOR
The company sells its trade accounts receivable to Heller Financial,
Inc. without recourse, up to maximum limits established by the factor for
each individual customer. Receivables in excess of such limitations are
subject to recourse in the event of nonpayment by the customer. At April
30, 1995, no material amounts were subject to recourse.
<PAGE> 9
NAH NAH COLLECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
NOTE 3 - SUBORDINATED LOANS
Subordinated loans totalling $500,000 are filed with Solo Credit
Service Corp.; $250,000 to expire December 31,1995 and $250,000 until
revocation.
NOTE 4 - CONTINGENT LIABILITIES
The company leases office, selling and shipping facilities. There
are provisions for increases based on real estate taxes and expenses.
At April 30,1995, the minimum annual rental commitments for
noncancelable leases are:
YEAR AMOUNT
---- ------
1996 $444,000
1997 $396,000
1998 $232,000
1999 $188,000
2000 $109,000
The Company is contingently liable for open letters of credit in the
amount of $73,853.
<PAGE> 10
NAH NAH COLLECTIONS, INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
April 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Current assets:
Accounts receivable (Note 2) $ 349,960 $ 292,484
Due from factor (Note 2) 407,983 2,016,539
Inventories (Notes 1, 2 and 3) 4,295,756 3,820,048
Prepaid expenses and other current assets 8,427 8,275
---------- ----------
Total current assets 5,062,126 6,137,346
Property and equipment, at cost, less accumulated
depreciation and amortization (Notes 1 and 4) 394,193 348,428
Security deposits 75,387 87,533
---------- ----------
Total assets $5,531,706 $6,573,307
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Cash overdraft $ 166,650 $ 515,287
Note payable - bank (Note 6) 1,385,000 2,255,000
Accounts payable 2,006,821 2,002,647
Current portion of capital lease obligation (Note 7) 20,084 17,352
Accrued expenses and other miscellaneous liabilities 122,978 131,764
Income taxes payable 66,810 15,687
---------- ----------
Total current liabilities 3,768,343 4,937,737
---------- ----------
Notes payable - stockholder - subordinated (Note 5) 250,000 250,000
Long-term portion of capital lease obligation (Note 7) 60,172 79,437
---------- ----------
310,172 329,437
---------- ----------
Commitments (Note 8)
Stockholder's equity:
Common stock - no par value, authorized, issued
and outstanding 200 shares 50,000 50,000
Additional paid-in capital (Note 5) 250,000 250,000
Retained earnings 1,153,191 1,006,133
---------- ----------
Total stockholder's equity 1,453,191 1,306,133
---------- ----------
Total liabilities and stockholder's equity $5,531,706 $6,573,307
========== ==========
</TABLE>
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS)
<PAGE> 11
NAH NAH COLLECTIONS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Years Ended
April 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Net sales (Note 9) $21,328,798 $23,158,020
Cost of goods sold 16,262,235 17,682,964
----------- -----------
Gross profit 5,066,563 5,475,056
----------- -----------
Expenses:
Selling and shipping 1,917,312 2,086,812
General and administrative 2,496,169 2,931,941
Interest expense 451,597 316,660
----------- -----------
4,865,078 5,335,413
----------- -----------
Income before provision for income taxes 201,485 139,643
Provision for income taxes 54,427 20,130
----------- -----------
Net income 147,058 119,513
Retained earnings - beginning 1,006,133 886,620
----------- -----------
Retained earnings - end $ 1,153,191 $ 1,006,133
=========== ===========
</TABLE>
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS)
<PAGE> 12
NAH NAH COLLECTIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Years Ended
April 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 147,058 $ 119,513
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 134,456 141,929
Increase (decrease) in cash attributable to changes
in operating assets and liabilities:
Accounts receivable (57,476) (32,498)
Due from factor 1,608,556 (840,000)
Inventories (475,708) (1,551,094)
Prepaid expenses and other current assets (152) 16,559
Security deposits 12,146 (1,173)
Accounts payable 4,174 (1,408,147)
Accrued expenses and miscellaneous liabilities (8,786) 1,329,765
Income taxes payable 51,123 (79,667)
----------- ------------
Net cash provided by (used in) operating activities 1,415,391 (2,304,813)
----------- ------------
Cash flows from investing activities:
Acquisition of property and equipment (180,221) (71,359)
----------- ------------
Net cash used in investing activities (180,221) (71,359)
----------- ------------
Cash flows from financing activities:
Net (repayments) proceeds of cash overdraft (348,637) 515,287
Net (repayments) proceeds of bank loan (870,000) 1,852,910
Repayment of equipment lease (16,533) (24,613)
----------- ------------
Net cash (used in) provided by financing activities (1,235,170) 2,343,584
----------- ------------
Net decrease in cash -0- (32,588)
Cash at beginning of year -0- 32,588
----------- ------------
Cash at end of year $ -0- $ -0-
=========== ============
</TABLE>
(CONTINUED)
<PAGE> 13
NAH NAH COLLECTIONS, INC.
STATEMENTS OF CASH FLOWS
(CONCLUDED)
(UNAUDITED)
<TABLE>
<CAPTION>
For The Years Ended
April 30,
-------------------------
1997 1996
---- ----
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
<S> <C> <C>
Assets acquired under capital leases $103,500
========
Conversion of subordinated long-term debt
to additional paid-in capital $250,000
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $451,597 $291,660
Income taxes $6,475 64,376
</TABLE>
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS)
<PAGE> 14
NAH NAH COLLECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Line of Business:
The Company is a manufacturer of party and mother of the bride dresses
selling primarily to major department stores throughout the United States.
Inventories:
Inventories are stated at the lower of cost or market, cost generally
being determined on a first-in, first-out basis.
Depreciation and Amortization:
Depreciation and amortization is provided by both straight-line and
accelerated methods over the estimated useful lives of the related assets
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture and fixtures 5-7 years
Machinery and equipment 5-7 years
Leasehold improvements Term of lease
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications:
Certain reclassifications have been made to the April 30, 1996 financial
statements to conform with the April 30, 1997 presentation.
<PAGE> 15
-2-
2. DUE FROM FACTOR:
The Company has a factoring agreement, wherein the factor purchases
substantially all of the trade accounts receivable and assumes
substantially all credit risks with respect to such accounts. To the
extent that the Company draws on funds prior to the average maturity date
of accounts receivable sold to the factor, the Company pays interest on
such funds at 1% above the prime lending rate per annum. The Company has
pledged accounts receivable and inventory acquired under letters of
credit, if any, to collateralize such indebtedness to the factor. The
Company is contingently liable to the factor for merchandise disputes,
customers claims, etc. on receivables sold to the factor.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
April 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Raw materials $1,088,186 $ 779,598
Work-in-process 865,373 785,031
Finished goods 2,342,197 2,255,419
---------- ----------
$4,295,756 $3,820,048
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
April 30,
------------------------
1997 1996
---- ----
<S> <C> <C>
Furniture and fixtures $182,207 $178,325
Machinery and equipment 399,130 394,805
Leasehold improvements 236,882 64,868
-------- --------
818,219 637,998
Less: Accumulated depreciation 424,026 289,570
-------- --------
$394,193 $348,428
======== ========
</TABLE>
Machinery and equipment include the following amounts held under capital
leases:
<TABLE>
<CAPTION>
April 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Machinery and equipment $103,500 $103,500
Less accumulated depreciation 53,820 17,250
-------- --------
$ 49,680 $ 86,250
======== ========
</TABLE>
<PAGE> 16
-3-
5. NOTE PAYABLE - STOCKHOLDER - SUBORDINATED:
At April 30, 1997, the Company is obligated on a note payable to the
stockholder of the Company, in the amount of $250,000 which is due January
1, 1999. The note is subordinated to the general creditors. During the
year ended April 30, 1996, $250,000 of subordinated long-term debt was
converted to paid in capital.
6. NOTE PAYABLE - BANK:
At April 30, 1997, the Company has $1,385,000 outstanding under a
revolving credit grid note, wherein the Company can borrow up to
$3,500,000. The loan bears interest at 1% over the bank's prime rate and
is due August 31, 1997. On April 30, 1997, the interest rate was 9.5% per
annum.
7. CAPITAL LEASE OBLIGATION:
The Company entered into a capital lease agreement for office equipment
expiring in 2001, with monthly payments of approximately $2,200. The
obligation is collateralized by the respective equipment.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of April 30, 1997:
<TABLE>
<CAPTION>
For the Fiscal Year
Ending April 30, Amount
---------------- ------
<S> <C> <C>
1998 $26,695
1999 26,695
2000 26,695
2001 15,572
-------
Net minimum lease payments 95,657
Less amount representing interest 15,401
-------
Present value of net minimum lease payments 80,256
Less current portion 20,084
-------
$60,172
=======
</TABLE>
<PAGE> 17
-4-
8. COMMITMENTS:
Lease Commitments:
The Company leases showroom, administrative and warehouse space under
noncancelable long-term leases expiring in November 2000. Approximate
minimum annual future rentals (exclusive of real estate taxes, maintenance
etc.) for the next five years and in the aggregate, are as follows:
<TABLE>
<CAPTION>
Years Ending
April 30, Amount
--------- ------
<S> <C> <C>
1998 $502,000
1999 185,000
2000 110,000
--------
$797,000
========
</TABLE>
Rental expense charged to operations was approximately $454,000 and
$562,000 for the years ended April 30, 1997 and 1996.
9. SALES TO MAJOR CUSTOMERS:
Sales activity with one major customer accounted for approximately
$3,674,000 and $4,861,500 or 17% and 21% of net sales for the years ended
April 30, 1997 and 1996.
<PAGE> 18
NAH NAH COLLECTIONS, INC.
BALANCE SHEET
DECEMBER 23, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Accounts receivable (Note 2) $ 389,439
Due from factor (Note 2) 462,325
Inventories (Notes 1, 2 and 3) 4,799,048
Due from affiliate (Note 4) 157,010
Prepaid expenses and other current assets 253,089
Prepaid income taxes 16,969
----------
Total current assets 6,077,880
Property and equipment, at cost, less accumulated
depreciation and amortization (Notes 1 and 5) 345,897
Security deposits 95,726
----------
Total assets $6,519,503
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Cash overdraft $ 577,333
Note payable - bank (Note 7) 2,949,414
Accounts payable 1,170,117
Current portion of capital lease obligation (Note 8) 11,818
Accrued expenses and other miscellaneous liabilities 170,721
----------
Total current liabilities 4,879,403
----------
Notes payable - stockholder - subordinated (Note 6) 250,000
Long-term portion of capital lease obligation (Note 8) 60,172
----------
310,172
----------
Commitments (Note 9)
Stockholder's equity:
Common stock - no par value, authorized, issued
and outstanding 200 shares 50,000
Additional paid-in capital 250,000
Retained earnings 1,029,928
----------
Total stockholder's equity 1,329,928
----------
Total liabilities and stockholder's equity $6,519,503
==========
</TABLE>
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS)
<PAGE> 19
NAH NAH COLLECTIONS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD MAY 1, 1997 TO DECEMBER 23, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Net sales (Note 10) $ 12,871,875
Cost of goods sold 9,765,821
------------
Gross profit 3,106,054
------------
Expenses:
Selling and shipping 1,328,956
General and administrative 1,744,695
Interest expense 249,572
------------
3,323,223
------------
Loss before credit for income taxes (217,169)
Credit for income taxes (93,906)
------------
Net loss (123,263)
Retained earnings - beginning 1,153,191
------------
Retained earnings - end $ 1,029,928
============
</TABLE>
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS)
<PAGE> 20
NAH NAH COLLECTIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD MAY 1, 1997 TO DECEMBER 23, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $ (123,263)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 101,888
Increase (decrease) in cash attributable to changes
in operating assets and liabilities:
Accounts receivable (39,479)
Due from factor (54,342)
Inventories (503,292)
Due from affiliate (157,010)
Prepaid expenses and other current assets (244,662)
Prepaid income taxes (16,969)
Security deposits (20,339)
Accounts payable (836,704)
Accrued expenses and other miscellaneous liabilities 47,743
Income taxes payable (66,810)
------------
Net cash used in operating activities (1,913,239)
------------
Cash flows from investing activities:
Acquisition of property and equipment (53,592)
------------
Net cash used in investing activities (53,592)
------------
Cash flows from financing activities:
Net proceeds of cash overdraft 410,683
Net proceeds of bank loan 1,564,414
Repayment of equipment lease (8,266)
------------
Net cash provided by financing activities 1,966,831
------------
Cash at beginning and end of period $ -0-
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $274,572
Income taxes 14,214
</TABLE>
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS)
<PAGE> 21
NAH NAH COLLECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Subsequent Acquisition:
On December 24, 1997, He-Ro Group, Ltd. ("He-Ro") acquired all the
outstanding capital stock of Nah Nah Collections, Inc. (the "Company")
from Hong J. Han, president of Nah Nah, in exchange for the issuance by
He-Ro to Mr. Han of 5,277,905 shares of He-Ro common stock (equivalent to
44% of the combined entities' issued and outstanding capital stock),
pursuant to a Stock Purchase Agreement dated October 16, 1997 (the "Stock
Purchase Agreement"), among the Company, He-Ro, Mr. Han and the former
principal shareholder of He-Ro. In addition, the former principal
shareholder of He-Ro granted to Mr. Han, or his designee, an irrevocable
proxy to vote the 4,430,748 shares of He-Ro common stock owned by her,
giving Mr. Han voting control over a total of approximately 81% of He-Ro's
issued and outstanding stock. This transaction will be accounted for as a
reverse acquisition.
On December 24, 1997, He-Ro entered into a new factoring and revolving
inventory loan and security agreement with Heller Financial, Inc. The
factoring advances, inventory and letter of credit facility under the
agreement may not exceed $20,000,000 in the aggregate. The Company granted
to Heller continuing security interest in substantially all of their
assets. The obligations to Heller are further collateralized by a guaranty
by He-Ro and its subsidiaries, and the obligations of such guarantors are
collateralized by liens on substantially all of the assets of the
guarantors. (See Note 2.)
Line of Business:
The Company is a manufacturer of party and mother of the bride dresses
selling primarily to major department stores throughout the United States.
Inventories:
Inventories are stated at the lower of cost or market, cost generally
being determined on a first-in, first-out basis.
Depreciation and Amortization:
Depreciation and amortization is provided by both straight-line and
accelerated methods over the estimated useful lives of the related assets
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture and fixtures 5-7 years
Machinery and equipment 5-7 years
Leasehold improvements Term of lease
</TABLE>
<PAGE> 22
-2-
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. DUE FROM FACTOR:
On December 24, 1997, in connection with the Stock Purchase Agreement,
the Company's then existing factoring agreement was replaced with a new
factoring agreement, whose terms are substantially the same as the prior
agreement (see Note 1), wherein the factor purchases substantially all of
the trade accounts receivable and assumes substantially all credit risks
with respect to such accounts. To the extent that the Company draws on
funds prior to the average maturity date of accounts receivable sold to
the factor, the Company pays interest on such funds at 1% above the prime
lending rate per annum. The Company has pledged accounts receivable and
inventory acquired under letters of credit, if any, to collateralize such
indebtedness to the factor. The Company is contingently liable to the
factor for merchandise disputes, customers claims, etc. on receivables
sold to the factor.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Raw materials $ 757,426
Work-in-process 827,616
Finished goods 3,214,006
------------
$ 4,799,048
============
</TABLE>
4. DUE FROM AFFILIATE:
Due from affiliate, a corporation owned 100% by the Company's stockholder,
represents non-interest bearing advances for operating purposes.
<PAGE> 23
-3-
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture and fixtures $182,207
Machinery and equipment 442,378
Leasehold improvements 247,226
--------
871,811
Less accumulated depreciation 525,914
--------
$345,897
========
</TABLE>
Machinery and equipment include the following amounts held under capital
leases:
<TABLE>
<CAPTION>
<S> <C> <C>
Machinery and equipment $103,500
Less accumulated depreciation 73,692
--------
$ 29,808
========
</TABLE>
6. NOTE PAYABLE - STOCKHOLDER - SUBORDINATED:
At December 23, 1997, the Company is obligated on a note payable to the
stockholder of the Company, in the amount of $250,000 which is due on
January 1, 1999. The note is subordinated to the general creditors.
7. NOTE PAYABLE - BANK:
At December 23, 1997, the Company had $2,949,414 outstanding under a
revolving credit grid note, wherein the Company can borrow up to
$3,500,000. The loan bears interest at 1% over the bank's prime rate, the
interest rate was 9.5% per annum on December 23, 1997. In connection with
the Stock Purchase Agreement on December 24, 1997, $1,975,000 was paid and
a promissory note for the balance in the amount of $999,115 due and
payable March 31, 1998 was executed.
8. CAPITAL LEASE OBLIGATION:
The Company entered into a capital lease agreement for office equipment
expiring in 2001, with monthly payments of approximately $2,200. The
obligation is collateralized by the respective equipment.
<PAGE> 24
-4-
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of April 30, 1997 (substantially the same as of December
23, 1997):
<TABLE>
<CAPTION>
For the Fiscal Year
Ending April 30, Amount
---------------- ------
<S> <C> <C>
1998 $26,695
1999 26,695
2000 26,695
2001 2,214
-------
Net minimum lease payments 82,299
Less amount representing interest 10,309
-------
Present value of net minimum lease payments 71,990
Less current portion 11,818
-------
$60,172
=======
</TABLE>
9. COMMITMENTS:
Lease Commitments:
The Company leases showroom, administrative and warehouse space under
noncancelable long-term leases expiring in November 2000. Approximate
minimum annual future rentals (exclusive of real estate taxes, maintenance
etc.) as of April 30, 1997 (substantially the same as of December 23,
1997) are as follows:
<TABLE>
<CAPTION>
For the Fiscal Year Ending
April 30, Amount
--------- ------
<S> <C> <C>
1998 $502,000
1999 185,000
2000 110,000
--------
$797,000
========
</TABLE>
Rental expense charged to operations was approximately $291,000 for the
period from May 1, 1997 to December 23, 1997.
10. SALES TO MAJOR CUSTOMERS:
Sales activity with one major customer accounted for approximately
$2,356,000 or 18% of net sales for the period from May 1, 1997 to December
23, 1997.
<PAGE> 25
THE HE-RO GROUP, LTD
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
-----------------------------------------------
The He-Ro Group, Ltd.
11/30/97 Nah Nah Collections, Inc.
Per 10 Q 12/23/97 Pro Forma
(Unaudited) (Unaudited) Adjustments Total
----------- ----------- ----------- -----
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 575 $ 575
Due to factor $ 462 462
Accounts receivable 5,263 389 5,652
Inventories 9,671 4,799 14,470
Other current assets 564 427 991
-------- ------- -------
Total current assets 16,073 6,077 22,150
Property and equipment 387 346 733
Goodwill (1) $ 8,553 8,553
Other assets 964 96 1,060
-------- ------- ------- -------
Total assets $ 17,424 $ 6,519 $ 8,553 $32,496
======== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Loans to financial institutions $ 8,135 $ 2,949 (4) $(2,750) $ 8,334
Accounts payable 8,529 1,170 9,699
Accrued expenses and
miscellaneous liabilities 3,040 760 (4) (1,365) 2,435
-------- ------- ------- -------
Total current liabilities 19,704 4,879 (4,115) 20,468
-------- ------- ------- -------
Long-term portion of capital
lease obligation 60 60
-------- ---------
Long-term debt - stockholders -
subordinated 5,296 250 (4) 4,115 9,661
-------- -------- ------- ---------
Stockholders' equity (deficit):
Common stock 67 50 (2) 3 120
Additional paid in capital 40,166 250 (2) (39,259) 1,157
Retained earnings (deficit) (47,809) 1,030 (2) 47,809 1,030
-------- -------- ------- ---------
(7,576) 1,330 8,553 2,307
-------- -------- ------- ---------
Total liabilities and
stockholders' equity $ 17,424 $ 6,519 $ 8,553 $32,496
======== ======= ======= =======
</TABLE>
(SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION)
<PAGE> 26
THE HE-RO GROUP, LTD
PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------
The He-Ro Group, Ltd. Nah Nah Collections, Inc.
For The Year Ended For The Year Ended
5/31/97 4/30/97 Pro Forma
Per 10-K (Unaudited) Adjustments Total
-------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Revenues $46,654 $21,329 $67,983
Cost of goods sold 30,927 16,262 47,189
------ ------ ------
Gross profit 15,727 5,067 20,794
Operating expenses 19,321 4,413 (3) $1,026 24,760
Restructuring and other charges 2,779 2,779
------- ------- ------ -------
Operating income (loss) (6,373) 654 1,026 (6,745)
Interest expense 2,316 452 2,768
------- ------- ------ -------
Income (loss) before provision
for income taxes (8,689) 202 1,026 (9,513)
Provision for income taxes 54 54
------- ------- ------ -------
Net (loss) income $(8,689) $ 148 $1,026 $(9,567)
======= ======= ====== =======
Weighted average shares outstanding 11,995
Basic loss per share $(.80)
</TABLE>
(SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION)
<PAGE> 27
THE HE-RO GROUP, LTD
PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
----------------------------------------------------
The He-Ro Group, Ltd.
For The Six Months Nah Nah Collections, Inc.
Ended For The Period 5/1/97
11/30/97 To
Per 10-Q 12/23/97 Pro Forma
(Unaudited) (Unaudited) Adjustments Total
----------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Revenues $20,820 $12,872 $33,692
Cost of goods sold 13,437 9,766 23,203
------- ------- -------
Gross profit 7,383 3,106 10,489
Operating expenses 7,826 3,074 (3) $684 11,584
------- ------- ---- -------
Operating income (loss) (443) 32 684 (1,095)
Interest expense 1,175 250 1,425
------- ------- ---- -------
Loss before provision
for income taxes (1,618) (218) 684 (2,520)
Credit for income taxes (94) (94)
------- ------- ---- -------
Net loss $(1,618) $ (124) $684 $(2,426)
======= ======= ==== =======
Weighted average shares outstanding 11,995
Basic loss per share $(.20)
</TABLE>
(SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION)
<PAGE> 28
Notes to Pro Forma Financial Information:
Accounting for the Reverse Acquisition:
On December 24, 1997, The He-Ro Group, Ltd. ("He-Ro") acquired from Hong J. Han
all of the outstanding common stock of Nah Nah Collections, Inc. ("Nah Nah"), in
exchange for the issuance by He-Ro to Mr. Han of 5,277,905 shares of Common
Stock of He-Ro (equivalent to 44% of He- Ro's issued and outstanding capital
stock). In addition, the former principal shareholder of He-Ro granted to Mr.
Han, or his designee, an irrevocable proxy to vote 4,430,748 shares of He-Ro
common stock owned by her, giving Mr. Han voting control over a total of
approximately 81% of He-Ro's issued and outstanding stock. For accounting
purposes, the acquisition has been treated as the acquisition of He-Ro by Nah
Nah with Nah Nah as the accounting acquiror (reverse acquisition). The
accompanying unaudited pro forma combined financial information gives effect to
the acquisition as if such transaction occurred for balance sheet purposes, on
December 23, 1997 with respect to Nah Nah and November 30, 1997 with respect to
He-Ro and, for statement of operations purposes, on May 1, 1996 with respect to
Nah Nah and June 1, 1996 with respect to He-Ro.
Goodwill has been recognized to the extent the aggregate fair value of He-Ro's
outstanding stock exceeds the fair value of the net assets of He-Ro as of
December 24, 1997. The market quoted price per share of He-Ro's outstanding
shares was $.40 on December 24, 1997.
Basis (loss) Per Share:
Pro forma loss per share has been determined based on the amount of pro forma
net loss divided by the sum of the weighted average number of shares of He-Ro
outstanding during the periods plus the 5,277,905 shares issued by He-Ro in the
acquisition.
Pro Forma Adjustments:
1. To record the goodwill arising from this reverse acquisition.
2. To adjust the equity accounts for the effects of this transaction.
3. To record amortization expense related to the goodwill recorded in
connection with this transaction. Although for the purpose of this pro
forma financial information goodwill has assumed to have been amortized
over 10 years, the Company intends to subject such amount to an
impairment review at the end of the first full financial year following
the acquisition (May 31, 1999).
4. To reflect junior bank group debt acquired by Mr. Han and reclassified as
long-term subordinated debt on the acquisition date. Although the debt is
payable on demand, it is subordinated to the Company's indebtedness to
financial institutions and Mr. Han has agreed not to demand payment prior
to May 31, 1999.
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