<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10860
THE NAHDREE GROUP, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3615898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 Seventh Avenue 10018
New York, NY
(Address of principal (Zip Code)
executive offices)
(212) 398-6161
(Registrant's telephone number, including area code)
The He-Ro Group, Ltd.
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class of Common Stock April 20, 1998
--------------------- --------------
<S> <C>
$.01 par value 11,995,238
</TABLE>
<PAGE> 2
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
(FORMERLY KNOWN AS THE HE-RO GROUP, LTD.)
Index
PART I. FINANCIAL INFORMATION Page No.
Independent Auditors' Report.............................. 3
Item 1. Financial Statements:
Consolidated Balance Sheet
February 28, 1998.......................................... 4
Consolidated Statements of Operations
Nine months Ended February 28, 1998........................ 5
Consolidated Statements of Changes in Stockholders' Equity
Nine months Ended February 28, 1998........................ 6
Consolidated Statements of Cash Flows Nine months Ended
February 28, 1998.......................................... 7
Notes to Consolidated Financial Statements................. 8-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 20-22
PART II. OTHER INFORMATION.......................................... 22-25
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of The Nahdree Group, Ltd.
(Formerly known as The He-Ro Group, Ltd.)
We have audited the accompanying consolidated balance sheet of The Nahdree
Group, Ltd. (formerly known as The He-Ro Group, Ltd.) (a Delaware Corporation)
and subsidiaries as of February 28, 1998 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the nine
months ended February 28, 1998. 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 audit.
We conducted our audit 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 audit provides 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 Nahdree Group, Ltd.
(formerly known as The He-Ro Group, Ltd.) and subsidiaries as of February 28,
1998, and the results of their operations and their cash flows for the
nine-month period ended February 28, 1998 in conformity with generally accepted
accounting principles.
M.R.Weiser & Co. LLP
New York, NY
June 2, 1998
<PAGE> 4
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
(FORMERLY KNOWN AS THE HE-RO GROUP, LTD.)
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
(In thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 121
--------
Accounts receivable:
Trade, net of allowance for doubtful accounts of $361 926
Suppliers and other 3,229
--------
4,155
Inventory 14,144
Other current assets 282
--------
Total current assets 18,702
Fixed assets - at cost, net of accumulated
depreciation and amortization 1,115
Intangibles 11,218
Other assets 1,055
--------
$ 32,090
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 720
Bank loans 674
Due to factor 5,158
Accounts payable - trade 9,285
Current portion of capital lease obligation 12
Accrued expenses and other current
liabilities 1,478
Due to affiliate 2,151
--------
19,478
--------
Total current liabilities
Long-term debt - stockholders - Subordinated 9,691
Long-term portion of capital lease obligation 57
--------
9,748
--------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
authorized shares; no shares outstanding --
Common stock, $.01 par value; 25,000,000
authorized shares; issued and outstanding
11,995,238 shares 120
Additional paid-in capital 2,867
Accumulated deficit (123)
--------
Total stockholders' equity 2,864
--------
$ 32,090
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE> 5
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
(FORMERLY KNOWN AS THE HE-RO GROUP, LTD.)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands, except per share data)
<TABLE>
<S> <C>
Net sales $ 21,339
Cost of sales 15,767
--------
Gross profit 5,572
Selling, general and administrative expenses 5,324
Amortization of goodwill 190
--------
Operating income 58
Interest expense 642
--------
Loss before income taxes (584)
Provision for income taxes 149
--------
Net loss $ (733)
========
Basic and diluted loss per share $ (0.11)
========
Weighted average shares outstanding 6,926
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE> 6
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
(FORMERLY KNOWN AS THE HE-RO GROUP, LTD.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS/
NO. OF PAID IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1997 Nah Nah
Collection, Inc. $ 50 $ 250 $ 610 $ 910
Increase in Common Stock on
reverse acquisition on December
24, 1997 with The He-Ro Group,
Ltd. and Nah Nah Collection, Inc. 5,278 3 2,617 0 2,620
Common shares acquired on
reverse acquisition from The
He-Ro Group, Ltd. 6,717 67 0 0 67
Net loss for the nine month period
June 1, 1997 through
February 28, 1998 (733) (733)
------- ------- ------- ------- -------
Balance at February 28, 1998 11,995 $ 120 $ 2,867 $ (123) $ 2,864
======= ======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE> 7
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
(FORMERLY KNOWN AS THE HE-RO GROUP, LTD.)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (733)
---------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 164
Amortization 190
Deferred income taxes 143
Increase (decrease) in cash attributable to changes
in operating assets
and liabilities:
Trade receivables 2,710
Other receivables (145)
Due to factor 6,380
Inventories (1,407)
Other current assets 17
Accounts payable 1,779
Accrued expenses and other current liabilities (338)
---------
Total adjustments 9,493
---------
Net cash provided by operating activities 8,760
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (538)
Net acquisition costs (goodwill) in connection with merger (263)
---------
Net cash used in investing activities (801)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
320
Proceeds from cash overdraft
Decrease in bank loans (8,148)
Repayments on capital lease obligation (10)
---------
Net cash used in financing activities (7,838)
---------
NET INCREASE IN CASH 121
CASH, beginning of period --
---------
CASH, end of period $ 121
=========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 455,000
Income taxes 8,000
Schedule of noncash investing activity (See Notes 1 and 2):
Net liabilities (noncash) assumed in connection with acquisition of He-Ro $ 8,458
Estimated fair value of He-Ro's outstanding common stock on date of
acquisition 2,687
---------
Net goodwill recorded in connection with transaction $ 11,145
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE> 8
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
(FORMERLY KNOWN AS THE HE-RO GROUP, LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company and Description of Business:
Effective May 31, 1998, the Company (formerly known as the The He-Ro
Group, Ltd.) amended its Articles of Incorporation to change the
Company's corporate name to "The Nahdree Group, Ltd."
The Company is primarily engaged in the merchandising and distribution
of designer women's apparel at the wholesale and retail levels. The
principal market for the Company's products is in the United States.
Acquisition:
On December 24, 1997, The He-Ro Group, Ltd. ("Hero") purchased all of
the outstanding capital stock of Nah Nah Collections, Inc. The
transaction has been accounted for as a reverse acquisition. (See Note
2.)
Basis of Presentation and the Company:
The consolidated financial statements include the accounts of The
Nahdree Group, Ltd. and its subsidiaries (hereinafter collectively
referred to as 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.
Use 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.
Accounts Receivable Suppliers:
Accounts receivable - suppliers represent sales of raw materials to
foreign contract suppliers, at cost.
Inventory:
Inventory is stated at lower of cost (first-in, first-out method) or
market.
<PAGE> 9
-2-
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.
Intangibles:
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. Amortization expense is calculated on a
straight line basis over ten years. The Company's policy is to evaluate
long-lived assets, goodwill and certain identifiable intangibles for
possible impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Such an
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the
use of such assets. The Company will, on a continuous basis, evaluate the
carrying value of goodwill to determine whether the remaining estimated
useful life of goodwill warrants revision or whether the carrying amount
may not be recoverable.
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 period's results of operations and are not
significant.
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.
Advertising and Promotion:
All costs associated with advertising and product promotion are expensed
in the period incurred. These expenses amounted to approximately $216,000
for the nine month period ended February 28, 1998.
<PAGE> 10
-3-
Investments:
Included in other assets is an investment in foreign affiliates which is
accounted for on the equity method. (See Note 10).
Cash and Cash Equivalents:
The Company considers highly liquid investments purchased with a maturity
of three months or less to be cash equivalents.
Loss Per Share:
As of December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. ("SFAS") 128, "Earnings Per Share." Basic
earnings (loss) per share excludes dilution and is computed by dividing
earnings (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period, adjusted to reflect potentially
dilutive securities. Options and warrants were not included in the
computation of diluted earnings per share because the exercise price was
greater than the market price of the stock.
Fair Value of Financial Instruments:
The amounts included in the balance sheet at February 28, 1998 for cash,
accounts receivable, bank loans, due to factor, accounts payable, and
accrued expenses approximates fair value because of the short-term nature
of these instruments. The carrying value of long-term debt approximates
the estimated fair value because the long-term debt is at interest rates
comparable to notes currently available to the Company for debt with
similar terms and remaining maturities.
Stock Based Compensation:
The Company applies SFAS 123 "Accounting for Stock Based Compensation" in
accounting for its stock based compensation plan. As permitted by SFAS
123, the Company applies Accounting Principles Board opinion No. 25 and
related interpretations for expense recognition. There were no options
issued during the nine month period ended February 28, 1998.
New Accounting Pronouncements:
In 1997, SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information"
were issued. These standards which will become effective during the
Company's 1999 fiscal year, expand or modify disclosures and,
accordingly, will not have a material effect on the Company's financial
position, results of operations or cash flows.
<PAGE> 11
-4-
2. ACQUISITION:
On December 24, 1997 (the "Closing Date"), the Company acquired all of
the outstanding capital stock of Nah Nah Collection, Inc. ("Nah Nah")
from Hong J. Han, president of Nah Nah, in exchange for the issuance by
the Company to Mr. Han of 5,277,905 shares of common stock (equivalent to
44% of the Company's issued and outstanding capital stock), pursuant to a
Stock Purchase Agreement dated October 16, 1997 (the "Stock Purchase
Agreement"), among the Company, Nah Nah, Mr. Han and Della Rounick (a
former stockholder of He-Ro). In addition, Ms. Rounick granted to Mr.
Han, or his designee, an irrevocable proxy to vote the 4,430,748 shares
of Common Stock owned by her, giving Mr. Han voting control over a total
of approximately 81% of the Company'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). Accordingly, the accompanying financial statements
present the historical results of Nah Nah (June 1, 1997 to February 28,
1998) and the results of operations of The He-Ro Group, Ltd. from the
date of acquisition (December 24, 1997 to February 28, 1998).
Prior to the reverse acquisition, Nah Nah's fiscal year end was April 30.
Subsequent to the acquisition, Nah Nah has changed its fiscal year end to
May 31. Assuming the reverse acquisition had occurred on June 1, 1997,
the Company's (unaudited) net revenues, net loss and basic and diluted
loss per share would have been approximately as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
February 28,
1998
(In Thousands)
--------------
<S> <C>
Net revenue $43,712
=======
Net loss $(3,167)
=======
Basic and diluted loss per share $ (.46)
=======
</TABLE>
3. INVENTORY:
As of February 28, 1998, inventory consist of the following (in
thousands):
<TABLE>
<S> <C>
Finished goods $11,020
Raw materials and work-in-process 3,124
-------
$14,144
=======
</TABLE>
<PAGE> 12
-5-
4. FIXED ASSETS:
As of February 28, 1998, fixed assets consist of the following (in
thousands):
<TABLE>
<S> <C>
Machinery and equipment $ 2,396
Furniture and fixtures 2,588
Leasehold improvements 2,571
-------
7,555
Less accumulated depreciation and amortization 6,440
-------
$ 1,115
=======
</TABLE>
5. INTANGIBLES:
As of February 28, 1998, intangibles consist of the following (in
thousands):
<TABLE>
<CAPTION>
Amortization
Period
------------
<S> <C> <C>
Goodwill $11,408 10 years
Amortization (190)
-------
$11,218
=======
</TABLE>
6. NOTE PAYABLE BANK:
At February 28, 1998, the Company had $674,000 outstanding under a
promissory note which was due and paid by March 31, 1998.
7. DUE TO FACTOR:
On the Closing Date of the acquisition referred to in Note 2, the Company
and all of its active subsidiaries entered into a new factoring and
revolving inventory loan and security agreement (the "Factoring
Agreement") with Heller Financial, Inc. ("Heller"), for a term of two
years, replacing Foothill Capital Corporation ("Foothill") as the senior
lender. All of the outstanding obligations of the Company to Foothill
were paid in full and Foothill released its liens on the assets of the
Company and its subsidiaries. The factoring advances, inventory and
letter of credit facility under the Factoring Agreement may not exceed an
aggregate of $20,000,000 outstanding at any time and includes (a)
collection factoring with advances not to exceed 85% of the purchase
price of net eligible accounts; (b) advances not to exceed 60% of
eligible finished goods inventory located in the United States; (c)
documentary letters of credit; and (d) an over advance formula facility.
Interest charged on advances is the prime rate plus 1% per annum. The
Company is contingently liable to the factor for merchandise disputes and
customer claims on receivables sold to the factor. Receivables sold to
the factor subject to recourse in the event of nonpayment by the customer
amounted to approximately $341,000 at February 28, 1998. The significant
restrictive covenants as defined in the Factoring Agreement are as
follows:
<PAGE> 13
-6-
- Minimum tangible net worth for each fiscal year: $4,250,000 for
1998; $7,000,000 for 1999; $10,500,000 for 2000; and $15,500,000
for each fiscal year thereafter.
- Minimum working capital: $2,200,000.
- Minimum current ratio: 1.30 to 1.10.
- Capital expenditures may not exceed $300,000 in one fiscal year.
The Company's principal subsidiaries granted to Heller continuing
security interests in substantially all of their assets, including
receivables, inventory (other than raw materials and work-in-progress),
intangibles, equipment, and any proceeds from any of the above. The
obligations to Heller are further secured by a guaranty by the Company
and its other subsidiaries, and the obligations of such grantors are
secured by liens on substantially all of the assets of the guarantors.
At February 28, 1998, the Company was in default of certain financial
covenants and has obtained a waiver from Heller as of such date.
Accordingly, the Company is currently in discussions with Heller to
revise such covenants and to negotiate additional accommodations.
Although there is no assurance that such covenant revisions or additional
accommodations will be obtained the Company believes that, if an
accommodation with Heller is not obtained, alternative sources of funds
could be arranged, although it has not made any such alternative
arrangements to cover the eventuality that Heller might curtail the funds
available under the Heller Agreement.
8. SUBORDINATED STOCKHOLDER DEBT:
Mr. Han acquired all of the Company's outstanding obligations ($2,750,000
in principal amount) to the Bank Group, and all of the collateral
therefor, under the Bank Group Credit Agreement. The Company's
indebtedness to Mr. Han, as successor to the Bank Group, is (i)
subordinated to the Company's indebtedness to Heller, its new senior
lender, and (ii) collateralized 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. The Bank Group also
surrendered to the Company for cancellation warrants to purchase 250,000
shares of common stock of the Company.
Furthermore, the Company is obligated on a note payable to Mr. Han in the
amount of $250,000 which is due on January 1, 1999. The note is
subordinated to the general creditors.
<PAGE> 14
-7-
Pursuant to certain conditions set forth in the Stock Purchase Agreement,
on the Closing Date, Mr. Han also purchased from Ms. Rounick subordinated
indebtedness of The He-Ro Group, Inc., a subsidiary of the He-Ro Group,
Ltd. ("HGI"), to the Estate of Herbert Rounick (of which Ms. Rounick is
executrix) in the amount of $4,296,000, plus accrued interest. Ms.
Rounick retained $1,000,000 of subordinated indebtedness. The aggregate
indebtedness (in the principal amount of $6,660,801, which includes the
accrued interest) is evidenced by subordinated notes of the Company in
favor of each of Mr. Han and Ms. Rounick bearing interest at 9.278% per
annum. The principal ($6,660,801) is due and payable on demand and the
interest on such amount is due on the first of each month commencing
January 1, 1998, or otherwise on demand; however, Mr. Han has agreed not
to require principal payment prior to February 28, 1999. The Company and
all its subsidiaries (except HGI) have guaranteed payment and performance
of the notes. The payments on, and any conversion of, the notes, as well
as other provisions on the notes, will be on a pari passu basis, subject
to certain restrictions, and Ms. Rounick may not take any action to
collect, enforce, convert or otherwise deal with her note unless Mr. Han
has taken such action (in which event Ms. Rounick may take such action
but only to the same extent and on the same terms as Mr. Han) or unless
she has received Mr. Han's prior written consent.
Under the terms of subordination and intercreditor agreements with
Heller, all interest payments to Ms. Rounick and Mr. Han are subject to
certain conditions.
9. INCOME TAXES:
As of February 28, 1998, deferred tax assets and liabilities consist of
the following (in thousands):
<TABLE>
<S> <C>
Deferred income tax assets:
Provision for bad debt $ 143
Accrued shareholder interest 51
Loss carryforward 13,000
--------
13,194
Valuation allowance 13,194
--------
$ -0-
========
Deferred income tax liability:
Undistributed earnings of foreign affiliate $ (325)
Fixed assets 392
--------
67
Valuation allowance 67
--------
$ -0-
========
</TABLE>
<PAGE> 15
-8-
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 February 28, 1998, the Company has approximately $38,000,000 of net
operating loss carryforwards conforming with Section 382 of the Internal
Revenue Service Code. For U.S. tax reporting purposes, these net
operating loss carryforwards begin to expire in 2009.
The provision for income taxes is comprised of state and local current
taxes of $6,000 and deferred taxes of $143,000.
The provision for income taxes for the nine month period ended February
28, 1998 differs from the amounts computed by applying Federal statutory
rates due to the following (in thousands):
<TABLE>
<S> <C>
Computed "expected" tax benefit (34%) $(199)
Increase in valuation allowance for deferred tax assets 348
-----
Tax provision at effective tax rate $ 149
=====
</TABLE>
10. RELATED PARTY TRANSACTIONS:
At February 28, 1998, the Company has an investment of $798,000, included
in other assets, in Great Projects Limited ("GPL"), a Hong Kong
corporation. Fifty percent of GPL is owned by a subsidiary of the
Company, and 25% is owned by each of two Hong Kong companies that are
unaffiliated with the Company or its officers or directors. As of October
31, 1993, the partners agreed to discontinue the operations of GPL. In
January 1996, liquidation proceedings in Hong Kong were commenced to wind
up GPL. Included in accounts payable is $2,151,000 due to the foreign
affiliate at February 28, 1998. The Company does not expect any material
impact on its results of operations due to the liquidation of GPL. (See
Note 1.)
On December 24, 1997, the Company entered into a licensing agreement with
a Company owned by a major stockholder to license the Nahdree trademark
providing for royalties of 1% of net sales on apparel using the Nahdree
name to be paid. Royalty expense approximated $42,000 for the nine month
period ended February 28, 1998.
<PAGE> 16
-9-
11. 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, including the amount relating to the license
agreement referred to in Note 10, approximated $130,000 for the period
ended February 28, 1998.
Leases:
At February 28, 1998, 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:
<TABLE>
<CAPTION>
Period Ending Rental
February 28, Income
------------ ------
(In Thousands)
<S> <C> <C>
1998 $2,526 $ 891
1999 2,109 891
2000 1,828 891
2001 1,478 891
2002 231 594
------ ------
$8,172 $4,158
====== ======
</TABLE>
Total rent expense approximated $519,000 for the nine month period ended
February 28, 1998.
Letters of Credit:
The Company had outstanding letters of credit in the aggregate amount of
$171,000 as of February 28, 1998.
<PAGE> 17
-10-
Concentrations:
For the nine months ended February 28, 1998, one customer accounted for
an aggregate of 16% of the Company's sales.
Commitments:
The Company has entered into certain employment contracts that expire in
October 1998. The aggregate amount due on these contracts at February 28,
1998 is $227,000. The Company has also entered into certain agreements
with designers that expire in various years ending in 2002. The aggregate
amount due on these contracts at February 28, 1998 is $1,198,000.
Litigation:
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 and its counsel, 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.
Professional Fees:
The Company settled certain obligations outstanding prior to the
acquisition referred to in Note 2 whereby monthly principal payments in
the amount of $20,000 are due commencing April 1998 and continuing
through November 1998 (an aggregate of $160,000 which has been accrued at
February 28, 1998 included in accrued expenses and other liabilities in
the accompanying balance sheet). If the Company does not meet the terms
of the agreements, an additional principal amount approximating $164,000
will be due on December 1, 1998 including interest at 12% per annum.
12. 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 seven (7%)
percent of the Company's employees, or approximately 19 persons. 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.
<PAGE> 18
-11-
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.
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. At February
28, 1998 there were 175,000 options outstanding under the Director's
Option Plans.
Changes in common shares under both option plans for the nine months
ended February 28, 1998 are as follows:
<TABLE>
<CAPTION>
Shares Subject Price Range Weighted Average
to Option Per Share Exercise Price
--------- --------- --------------
<S> <C> <C> <C>
Outstanding, May 31, 1997 468,600 $ 1-$17 $2.77
Exercised - -
Canceled (78,000) $1-$4.875 $2.62
-------
Outstanding, February 28, 1998 390,600 $ 1-$17 $2.86
=======
</TABLE>
Options granted under the plans become exercisable immediately or at
rates ranging from 20%-100% per year. All options expire within ten years
from the date on which they were granted, commencing in 1998 through
2003. At February 28, 1998, there were 313,800 outstanding options which
were exercisable at a weighted-average exercise price of $3.17 for all
plans.
<PAGE> 19
-12-
13. 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 does not match
participant contributions. Contributions are fully and immediately
vested.
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion provides information and analysis of registrant's
results of operations for the three-month and nine-month periods ended February
28, 1998, and its liquidity and capital resources. The following discussion and
analysis should be read in conjunction with the financial statements included
elsewhere herein.
On December 24, 1997, The He-Ro Group, Ltd. ("He-Ro") acquired (the
"acquisition") all the outstanding capital stock of Nah Nah Collection, Inc.
("Nah Nah") 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.
The Acquisition is being accounted for as a purchase. Therefore, the
operating results of the accounting acquiror (i.e., Nah Nah) are required to be
presented for periods prior to the effective date of the acquisition to the end
of the period and include He-Ro from the date of Acquisition to the end of the
period.
LIQUIDITY AND CAPITAL RESOURCES
On December 24, 1997, registrant entered into a Factoring and Revolving
Inventory Loan and Security Agreement ("Heller Agreement") with Heller
Financial, Inc. ("Heller"), replacing the credit agreement with He-Ro's prior
senior lender, Foothill Capital Corp. ("Foothill"). All obligations of He-Ro to
Foothill were paid in full at the time of the Acquisition.
The Heller Agreement provides that Heller will (i) purchase eligible
receivables and advance to specified operating affiliates of registrant up to
85% of the amount thereof, (ii) in its discretion, make revolving loans, secured
by a lien on assets, upon request in amounts up to approximately 60% of eligible
finished goods inventory located in the United States, plus certain supplemental
amounts, and (iii) arrange for the issuance of letters of credit secured by
funds available to registrant, provided that
<PAGE> 21
the amount of loans and letters of credit outstanding at any time may not exceed
$20,000,000 in the aggregate.
The Heller Agreement contains certain financial covenants, including that
registrant's working capital shall not be less than $2.2 million and its current
ratio shall not be less than 1.30 to 1.00. At February 28, 1998, registrant was
in default of the foregoing covenants, having a negative working capital at such
date of $0.8 million and a current ratio of just under 1 to 1. Registrant has
received from Heller a waiver of the aforesaid covenants as at February 28,
1998, but such waiver by its terms does not apply to any period after said date.
Accordingly, registrant is currently in discussions with Heller to revise the
aforesaid covenants and to negotiate additional accommodations. There is no
assurance, however, that such covenant revisions or additional accommodations
will be obtained. Registrant believes that, if an accommodation with Heller is
not obtained, alternative sources of funds could be arranged, although it has
not made any such alternative arrangements to cover the eventuality that Heller
might curtail the funds available under the Heller Agreement.
Registrant does not anticipate making any significant capital investments
during the forthcoming year and believes that, assuming the accommodation
referred to in the immediately preceding paragraph, the Heller Agreement
provides sufficient capital resources to meet its capital needs for the
foreseeable future. By contrast with registrant's present situations vis-a-vis
Heller, prior to the Acquisition, He-Ro's losses made it impossible to service
its bank debt without violating its credit agreement with Foothill, there was
serious concern about He-Ro's ability to replace or extend that credit
agreement, and as a result, there was substantial doubt about He-Ro's ability to
continue as a going concern.
CHANGES IN FINANCIAL CONDITION
A comparison of the balance sheet of registrant as at February 28, 1998,
with its balance sheet as at April 30, 1997, indicates that (i) total assets
have increased from $5.5 million to $32.1 million, including $11.2 million of
goodwill arising out of the Acquisition, and (ii) working capital is a negative
$0.8 million compared with a working capital of $1.3 million at April 30, 1997.
These changes are attributable principally to the effects of the Acquisition.
RESULTS OF OPERATIONS
Comparison of Three and Nine-Month Ended
January 31, 1997, and February 28, 1998
For the reasons discussed under "General" above, the operating results of
registrant for the three and nine-month periods ended February 28, 1998, and the
corresponding periods ended January 31, 1997, are not truly comparable because
of the reverse acquisition accounting treatment. However, footnote 3 to the
financial statements included herein indicates that if the Acquisition had
occurred on June 1, 1996, instead of December 24, 1997, registrant's net
revenues for the three months ended February 28, 1998, would have declined to
$12.3 million from $14.9 million for the corresponding period one year earlier,
and for the nine months ended February 28, 1998, would have declined to $43.7
million from $51.2 million for the corresponding period one year earlier. For
the same periods, registrant's loss would have decreased from $2.9 million to
$1.3 million (three-month periods) and from $4.0 million to $3.2 million
(nine-month periods). The declines in net revenues were principally due to a
decline in He-Ro's net revenues during the periods ending with the Acquisition,
the reduction in the losses were principally due to He-Ro's reduction in its
less profitable activities during such periods. (The figures for the three
month periods ending February 28, 1998, and January 31, 1997, and for the nine
month period ending January 31, 1997, are taken from the Quarterly Report on
Form 10-Q for the fiscal quarter ended February 28, 1998, before amendment
hereby. Such figures were not audited and are not included in the audited
financial statements filed herewith.)
Management of registrant does not believe that there have been any
significant developments indicative of registrant's future operating results
except that after the Acquisition and prior to February 28, 1998:
<PAGE> 22
(a) registrant liquidated inventory held in Hong Kong, the
right to sell which had been restricted by the credit agreement with
Foothill, a prior lender to He-Ro which was repaid in full as part of the
Acquisition. Such liquidation involved the sale to a vendor, for about
$135,000, of inventory with a cost basis of approximately $2.4
million, resulting in a non-recurring loss of about $500,000 in excess of
reserves established therefor. Such non-recurring loss is included in the
cost of goods sold.
(b) in the period ending May 31, 1999, registrant's earnings
will be reduced by about $95,000 per month because of the amortization of
its goodwill on a straight-line basis over ten years. In addition, at May
31, 1999, (the end of the first full fiscal year following the
Acquisition), registrant will evaluate the carrying value of certain
intangible assets which may not be recoverable, including goodwill, and
currently anticipates that the unamortized portion of such goodwill not
amortized prior to May 31, 1999, may be expensed in its entirety at that
date.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On December 24, 1997, 5,277,905 shares of Common Stock of registrant
("Common Stock"), par value $.01 per share, were issued Hong J. Han in exchange
for the acquisition by He-Ro of all the outstanding shares of capital stock of
Nah Nah, as a result of which Nah Nah became a wholly-owned subsidiary of
registrant. Such issuance of Common Stock was exempt from registration under the
Securities Act of 1933 as a transaction by an issuer not involving any public
offering pursuant to Section 4(2) of that Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Prior to the Acquisition, The He-Ro Group, Inc. (a subsidiary of
registrant, was indebted to the estate of Herbert Rounick in the amount of
$5,296,000 plus $1,119,000 of accrued and unpaid interest thereon (the "Rounick
Debt"). Although, under the terms of registrant's credit agreements, payments
on the Rounick debt was prohibited, interest was payable monthly and the
failure to pay such interest constituted a default on the Rounick Debt. The
interest on the Rounick Debt was added to principal in this Acquisition and new
demand promissory notes representing the outstanding Rounick Debt were issued
to H. J. Han and to Della Rounick (the distributee of the estate of Rounick)
reflecting principal of $4,296,000 to Mr. Han and of $1,000,000 to Ms. Rounick.
Such debt bears interest at 9.278% per annum payable on
<PAGE> 23
the first of each month commencing January 1, 1998, or otherwise on demand.
Because of the terms of the subordination agreements with Heller and Hong J.
Han, interest has not been paid to the estate of Rounick since December 24,
1997. He-Ro had also been in default prior to the Acquisition under its Bank
Groupo Credit Agreement. In addition, registrant has been in default under
certain financial covenants under the Heller Agreement, as more fully discussed
under "Liquidity and Capital Resources" above.
ITEM 5. OTHER INFORMATION.
Prior to the Acquisition, registrant had a net operating loss
("NOL") carryover of approximately $38 million, which could have been offset
against subsequent taxable income of registrant. Registrant has obtained a legal
opinion (filed as an Exhibit hereto) from Baer Marks & Upham LLP, which acted as
special counsel to Nah Nah and its sole stockholder, Mr. H. J. Han, in the
Acquisition, to the effect that "for federal income tax purposes the
acquisition of the stock and certain debt by Han [in connection with the
Acquisition] did not result in an ownership change in [registrant] under Section
382 of the [Tax] Code." The absence of an "ownership change" means that the NOL
will be fully available for use as an offset against future taxable income of
registrant during the 15-year NOL carryover period, beginning on the respective
dates as of which the NOL arose. On the other hand, under said Section 382, an
ownership change would occur whenever one or more "5% shareholders" increase the
percentage of stock held by an aggregate of more than 50% over the lowest
percentages of stock so owned during the preceding three-year period. Since Mr.
Han acquired 44% of the stock of registrant in the Acquisition, if any other 5%
shareholder or shareholders should acquire or increase their holdings during the
three year period ending on December 24, 2000, by an aggregate of 6% of the
stock of registrant, an ownership change could occur, thereby substantially
limiting the use of the NOL. The Baer Marks opinion points out that "an opinion
of counsel represents our best legal judgment as to the probable outcome of tax
issues which the opinion addresses and is not binding on the Internal Revenue
Service (the 'Service') or the courts." It also points out the possibility of
retroactive changes in the Code, promulgations of the Service or court decisions
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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.
*8 Opinion of Baer Marks & Upham LLP re tax matters dated April
20, 1998.
10.1 Stock Purchase Agreement dated October 16, 1997, among
Registrant, Vasiliki Della Pasvantidou Rounick ("Della
Rounick"), Nah Nah Collection, Inc. ("Nah Nah"), and Hong J.
Han. Incorporated by reference to Exhibit 2.1 of registrant's
Current Report on Form 8-K dated December 31, 1997.
10.2 Debt Purchase and Intercreditor Agreement dated December 24,
1997, among Hong J. Han, Della Rounick and The He-Ro Group,
Inc. Incorporated by reference to Exhibit C of Form 13-D of
Hong J. Han filed January 13, 1998.
10.3 Guaranty by registrant and its subsidiaries in favor of Hong
J. Han and Della Rounick as Executrix of the Estate of Herbert
Rounick dated December 24, 1997.
10.4 Registration Rights Agreement dated December 24, 1997, between
registrant and Hong J. Han.
10.5 Amended and Restated Employment Agreement dated November 1,
1997, between The He-Ro Group, Inc. and Katherine Wong.
10.6 Amended and Restated Employment Agreement dated November 1,
1997, between The He-Ro Group, Inc. and David Minka.
10.7 Agreement dated July 30, 1997, among Nah Nah, C.A.S. Designs,
Inc. and Constance Saunders.
10.8 Employment Agreement dated January 1, 1997, between Nah Nah,
and Victor Costa.
<PAGE> 24
10.9 Sublease dated March 6, 1997, between The He-Ro Group, Inc.
(as sublessor) and Harve Benard (as sublessee) relating to
premises located at One American Way, Secaucus, New Jersey.
Incorporated by reference to Exhibit 10.2 to registrant's
Annual Report on Form 10-K for the year ended May 31, 1997.
10.10.1 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.
10.10.2 Letter Agreement dated December 15, 1995, from Oleg Cassini,
Inc. to The He-Ro Group, Inc., amending the Cassini License.
Incorporated by reference to Exhibit 10.8.1 of registrant's
Annual Report on Form 10-K for the year ended May 31, 1996
("Registrant's 1996 10-K").
10.10.3 Agreement dated December 30, 1997, between The He-Ro Group,
Inc., and Oleg Cassini, Inc., amending the Cassini License.
10.11 Licensing Agreement dated as of December 24, 1997, between
N.N.C.S., Inc. and Nah Nah.
10.12 1991 Stock Option Plan. Incorporated by reference to Exhibit
10.12 of Registrant's 1995 10-K.
10.13 1992 Outside Director Stock Option Plan. Incorporated by
reference to Exhibit 10.13 of Registrant's 1995 10-K.
10.14 1993 Outside Director Stock Option Plan. Incorporated by
reference to Exhibit 10.14 of Registrant's 1995 10-K.
10.15 Amended and Restated 1994 Outside Director Stock Option Plan.
Incorporated by reference to Exhibit 10.15 of Registrant's
1996 10-K.
11 Computation of Per Share Earnings Statement.
*23 Consent of Counsel of Baer Marks & Upham LLP dated April 23,
1998.
**27 Financial Data Schedule
99.1 Irrevocable Proxy granted by Della Rounick in favor of Hong J.
Han. Incorporated by reference to Exhibit B of Form 13-D of
Hong J. Han filed January 13, 1998.
99.2 Factoring Agreement dated December 24, 1997 among Heller
Financial, Inc., The He-Ro Group, Inc., HRNL, Inc., Nah Nah,
registrant and certain other
<PAGE> 25
subsidiaries. Incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated December 31,
1997.
99.3 Subordination Agreement dated December 24, 1997, among Hong J.
Han, Nah Nah, and Heller Financial Inc. subordinating
indebtedness owed by Nah Nah to Hong J. Han.
99.4 Subordination Agreement dated December 24, 1997, among Della
Rounick, Hong J. Han, The He-Ro Group, Inc., and Heller
Financial Inc. subordinating indebtedness owed by The He-Ro
Group, Inc. to Della Rounick and Hong J. Han.
---------------------------------
* Exhibit filed herewith
** Amended exhibit filed herewith
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the
quarter ended February 28, 1998:
(i) A report dated December 24, 1997, was filed on December
31, 1997, covering Items 1, 2, 4 and 5. No financial statements were
filed therewith.
(ii) Amendment no. 1 to the report was filed on March 8,
1998, amending Item 7. No financial statements were filed therewith.
(iii) Amendment no. 2 to the report was filed on March 9,
1998, covering Item 7 and filing the following financing statements:
(1) Unaudited Financial Statements of Nah Nah
Collection, Inc. for three years ended April 30, 1995, 1996, and
1997, and Interim Financial Statements for the period May 1, 1997 to
December 23, 1997; and
(2) Pro Forma Combined Condensed Balance Sheet and
Statement of Operations for The He-Ro Group, Ltd. giving effect to
the reverse acquisition.
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HE-RO GROUP, LTD.
June 17, 1998 By /s/ HONG J. HAN
--------------------------------
Hong J. Han
President
By /s/ CHRIS HAN
--------------------------------
Chris Han
Principal Financial Officer
<PAGE> 27
EXHIBIT INDEX
Page No.
--------
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.
*8 Opinion of Baer Marks & Upham LLP re tax matters dated April 20,
1998.
10.1 Stock Purchase Agreement dated October 16, 1997, among
Registrant, Vasiliki Della Pasvantidou Rounick ("Della
Rounick"), Nah Nah Collection, Inc.("Nah Nah"), and Hong J.
Han. Incorporated by reference to Exhibit 2.1 of registrant's
Current Report on Form 8-K dated December 31, 1997.
10.2 Debt Purchase and Intercreditor Agreement dated December 24,
1997, among Hong J. Han, Della Rounick and The He-Ro Group,
Inc. Incorporated by reference to Exhibit C of Form 13-D of
Hong J. Han filed January 13, 1998.
10.3 Guaranty by registant and its subsidiaries in favor of Hong J.
Han and Della Rounick as Executrix of the Estate of Herbert
Rounick dated December 24, 1997.
10.4 Registration Rights Agreement dated December 24, 1997,
between registrant and Hong J. Han.
10.5 Amended and Restated Employment Agreement dated November 1,
1997, between The He-Ro Group, Inc. and Katherine Wong.
10.6 Amended and Restated Employment Agreement dated November 1,
1997, between The He-Ro Group, Inc. and David Minka.
10.7 Agreement dated July 30, 1997, among Nah Nah, C.A.S. Designs,
Inc. and Constance Saunders.
10.8 Employment Agreement dated January 1, 1997, between Nah Nah,
and Victor Costa.
<PAGE> 28
10.9 Sublease dated March 6, 1997, between The He-Ro Group, Inc.
(as sublessor) and Harve Benard (as sublessee) relating to
premises located at One American Way, Secaucus, New Jersey.
Incorporated by reference to Exhibit 10.2 to registrant's
Annual Report on Form 10-K for the year ended May 31, 1997.
10.10.1 License Agreement dated June 1, 1990, between The He-Ro Group,
Inc., and Oleg Cassini, Inc. ("Cassini License"). Incor-
porated by reference to Exhibit 10.8 of Registrant's 1995
10-K.
10.10.2 Letter Agreement dated December 15, 1995, from Oleg Cassini,
Inc. to The He-Ro Group, Inc., amending the Cassini License.
Incorporated by reference to Exhibit 10.8.1 of registrant's
Annual Report on Form 10-K for the year ended May 31, 1996
("Registrant's 1996 10-K").
10.10.3 Agreement dated December 30, 1997, between The He-Ro Group,
Inc., and Oleg Cassini, Inc., amending the Cassini License.
10.11 Licensing Agreement dated as of December 24, 1997, between
N.N.C.S., Inc. and Nah Nah.
10.12 1991 Stock Option Plan. Incorporated by reference to Exhibit
10.12 of Registrant's 1995 10-K.
10.13 1992 Outside Director Stock Option Plan. Incorporated by
reference to Exhibit 10.13 of Registrant's 1995 10-K.
10.14 1993 Outside Director Stock Option Plan. Incorporated by
reference to Exhibit 10.14 of Registrant's 1995 10-K.
10.15 Amended and Restated 1994 Outside Director Stock Option Plan.
Incorporated by reference to Exhibit 10.15 of Registrant's
1996 10-K.
11 Computation of Per Share Earnings Statement
*23 Consent of Counsel of Baer Marks & Upham LLP dated April 23,
1998.
**27 Financial Data Schedule
<PAGE> 29
99.1 Irrevocable Proxy granted by Della Rounick in favor of Hong J.
Han. Incorporated by reference to Exhibit B of Form 13-D of
Hong J. Han filed January 13, 1998.
99.2 Factoring Agreement dated December 24, 1997 among Heller
Financial, Inc., The He- Ro Group, Inc., HRNL, Inc., Nah Nah,
registrant and certain other subsidiaries. Incorporated by
reference to Exhibit 99.1 to the Registrant's Current Report
on Form 8-K dated December 31, 1997.
99.3 Subordination Agreement dated December 24, 1997, among Hong J.
Han, Nah Nah, and Heller Financial Inc. subordinating in-
debtedness owed by Nah Nah to Hong J. Han.
99.4 Subordination Agreement dated December 24, 1997, among Della
Rounick, Hong J. Han, The He-Ro Group, Inc., and Heller Finan-
cial Inc. subordinating indebtedness owed by The He-Ro Group,
Inc. to Della Rounick and Hong J. Han.
- ---------------------------------
* Exhibit filed herewith
** Amended exhibit filed herewith
<PAGE> 1
[BAER MARKS & UPHAM LLP LETTERHEAD]
April 20, 1998
The He-Ro Group Ltd.
Board of Directors
550 Seventh Avenue
New York, New York 10018
Ladies and Gentlemen:
We have acted as special counsel to Mr. Hong J. Han ("Han") and Nah-Nah
Collections, Inc. ("Nah-Nah") in connection with the acquisition of (a) common
stock of The He-Ro Group, Ltd. ("He-Ro") pursuant to the Stock Purchase
Agreement dated October 16, 1997 by and among He-Ro, Vasiliki Della
Passvantidou Rounick ("Rounick"), Nah-Nah and Han, (b) certain debt of He-Ro
pursuant to the Debt Purchase Agreement dated December 24, 1997 by and among
Han, Marine Midland Bank, individually and as Agent, The Chase Manhattan Bank,
The Hong Kong and Shanghai Banking Corporation Limited and ABN Amro Bank N.V.,
and (c) certain debt of He-Ro pursuant to the Debt Purchase and Intercreditor
Agreement dated December 24, 1997 by and among Han, Rounick and He-Ro. You have
requested our opinion as to whether the acquisition by Han of such stock and
debt would result in an ownership change under Section 382 of the Internal
Revenue Code of 1986, as amended ("Code").
Our opinions are based upon representations furnished to us by Rounick and
He-Ro with respect to transfers of stock during the "testing period" as defined
in Section 382(i) of the Code and upon the assumption that all shares held by
stockholders other than Rounick (including those shares held by Rounick
pursuant to the constructive ownership rules of Section 382(1) of the Code) is
to be treated as stock owned by one 5% shareholder. Furthermore, in reaching
our opinion we have examined such documents as we deemed necessary and
appropriate to reach our legal conclusion including, without limitation, the
Irrevocable Proxy dated December 24, 1997 executed and delivered by Rounick. We
have exercised what we believe to be due diligence and reasonable inquiry in
determining the accuracy and completeness of the assumed facts.
You should be aware that an opinion of counsel represents our best legal
judgment as to the probable outcome of the tax issues which the opinion
addresses and is not binding on the Internal Revenue Service (the "Service") or
the courts. Our
<PAGE> 2
[BAER MARKS & UPHAM LLP SECOND SHEET]
April 20, 1998
Page 2
opinions set forth below are also based upon the existing provisions of the
Code, the Treasury Regulations (including temporary and proposed Treasury
Regulations) promulgated under the Code, published Revenue Rulings, Revenue
Procedures and other announcements of the Service and existing court decisions,
any of which could be changed at any time. Any such changes may be retroactive
with respect to transactions entered into prior to the date of such changes and
could affect the continuing validity of the opinion set forth below.
Based on the foregoing and subject to the qualifications and assumptions
described above, we are of the opinion that for federal income tax purposes the
acquisition of the stock and certain debt by Han referred to above did not
result in an ownership change in He-Ro under Section 382 of the Code. We
express no opinions other than as set forth above.
This opinion is solely for your benefit and may not be relied upon by any
other person or entity or published, quoted or otherwise used for any other
purpose without our prior written consent. The above opinions are based on the
law (and interpretations thereof) and facts existing as of the date hereof. We
disclaim any obligations to advise you of any changes therein that may be
brought to our attention after the date hereof.
Very truly yours,
[BAER MARKS & UPHAM]
<PAGE> 1
[BAER MARKS & UPHAM LLP LETTERHEAD]
CONSENT OF COUNSEL
We hereby consent to the inclusion of our opinion dated April 20, 1998 as
an exhibit to Amendment No. 1 to the Quarterly Report of The He-Ro Group, Ltd
for the fiscal quarter ended February 28, 1998 on Form 10-Q/A. In giving this
consent, we do not hereby concede that we are in the category of persons whose
consent is required, or that we are experts within the meaning of the federal
securities laws and the rules and regulations thereunder.
[BAER MARKS & UPHAM LLP]
New York, New York
April 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 1998 AND
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTH PERIOD ENDING
FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 121,000
<SECURITIES> 0
<RECEIVABLES> 4,155,000
<ALLOWANCES> 0
<INVENTORY> 14,144,000
<CURRENT-ASSETS> 18,702,000
<PP&E> 7,555,000
<DEPRECIATION> 6,440,000
<TOTAL-ASSETS> 32,090,000
<CURRENT-LIABILITIES> 19,478,000
<BONDS> 0
0
0
<COMMON> 120,000
<OTHER-SE> 2,744,000
<TOTAL-LIABILITY-AND-EQUITY> 32,090,000
<SALES> 21,339,000
<TOTAL-REVENUES> 21,339,000
<CGS> 15,767,000
<TOTAL-COSTS> 15,767,000
<OTHER-EXPENSES> 5,514,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 642,000
<INCOME-PRETAX> (584,000)
<INCOME-TAX> 149,000
<INCOME-CONTINUING> (733,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (733,000)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
