<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 30, 1998..................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from................to..................
Commission File Number 1-10860....................................
THE 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 NEW YORK, NEW YORK
10018
....................................................
(Address of principal executive offices)
(Zip Code)
(212) 398-6161
....................................................
(Registrant's telephone number, including area code)
....................................................
(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.
1
<PAGE> 2
Yes....X.... No.........
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes......... No.........
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of registrant's Common Stock, outstanding
as of January 14, 1999, is 11,995,238 shares.
2
<PAGE> 3
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
<S> <C> <C> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets November 30,
1998 and May 31, 1998 ................ 4
Condensed Statements of Operations
Three and Six Months Ended November 30,
1998 and 1997......................... 5
Condensed Statements of Cash Flows
Six Months Ended November 30, 1998
and 1997.............................. 6
Condensed Notes to Consolidated
Financial Statements.................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 9
PART II - OTHER INFORMATION ...................................... 14
</TABLE>
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash.......................................... $ 0 $ 93
------- -------
Accounts receivable:
Trade....................................... 1,820 497
Suppliers and other......................... 2,097 1,649
------- -------
3,917 2,146
Inventory..................................... 13,418 13,781
Other current assets.......................... 200 200
------- -------
Total current assets..................... 17,535 16,220
------- -------
Fixed assets - at cost, net of accumulated
depreciation and amortization................. 1,014 1,173
Intangibles..................................... 10,363 10,933
Other assets.................................... 1,067 1,053
------- -------
$29,979 $29,379
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash Overdraft................................ $ 407 $ 614
Due to factor................................. 9,604 6,883
Accounts payable.............................. 5,894 5,857
Current portion of capital lease obligation... 20 20
Accrued expenses and other current
liabilities................................. 1,616 1,209
Due to affiliate.............................. 2,151 2,151
------- -------
Total current liabilities................ 19,692 16,734
------- -------
Long-term debt--stockholder--Subordinated....... 9,691 9,691
Long-Term portion of capital lease obligation... 36 45
------- -------
9,727 9,736
------- -------
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........................ 120 120
Additional paid-in capital.................. 2,867 2,867
Accumulated deficit......................... (2,427) (78)
-------- --------
Total stockholders' equity.................. 560 2,909
------- -------
Total liabilities and stockholders' equity.. $29,979 $29,379
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Consolidated Consolidated
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(Condensed from (Condensed from
unaudited finan- unaudited finan-
cial statements cial statements
of Nah Nah of Nah Nah
Collection, Inc.) (Note 1) Collection, Inc.) (Note 1)
<S> <C> <C> <C> <C>
Net Sales.............. $12,180 $ 5,463 $23,373 $10,602
Cost of sales.......... 8,813 4,369 15,507 8,118
------- ------- ------- -------
Gross profit........... 3,367 1,094 7,866 2,484
Selling, general and
administrative expenses 3,980 1,273 8,218 2,291
Amortization of goodwill 284 -- 569 --
------- ------- ------- -------
Operating (loss)/income (897) (179) (921) 193
Interest Expense....... 748 117 1,428 221
------- ------- ------- -------
Loss before
income taxes........... (1,645) (296) (2,349) (28)
Provision for income
taxes.................. -- 6 -- 6
------- ------- ------- -------
Net loss .............. $(1,645) $ (302) $(2,349) $ (34)
======== ======= ======= ========
Basic and diluted loss
per share............. $ (0.14) $(0.06) $ (0.20) $ (0.01)
==+==== ======= ======= =======
Weighted average shares
outstanding............ 11,995 5,278 11,995 5,278
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
Six Months Ended Six Months Ended
----------------- -----------------
November 30, 1998 November 30, 1997
----------------- -----------------
(Condensed from
unaudited fin-
ancial statement
of Nah Nah
Collection, Inc.) (Note 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................... $(2,349) $ (34)
-------- --------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating
activities:
Depreciation and amortization............ 787 70
(Increase) decrease in assets:
Trade receivables.......................... (1,323) (176)
Other receivables.......................... (448) (111)
Inventories................................ 363 (144)
Other current assets....................... - (55)
Increase (decrease) in liabilities:
Accounts payable........................... 37 49
Accrued expenses and other current liabilities . 407 (3)
-------- --------
Total adjustments.......................... (177) (370)
-------- --------
Net cash (used in) provided by
operating activities........................ (2,526) (404)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets................ (58) (96)
Increase in other assets................... (14) 0
-------- -------
Net cash used in investing activities........ (72) (96)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance (repayment) of cash overdraft..... (207) 195
Increase (decrease) in bank loans.......... 2,721 311
Repayment of equipment lease............... (9) (6)
-------- --------
Net cash provided by (used in)
financing activities..................... 2,505 500
NET (DECREASE) INCREASE IN CASH.............. (93) 0
-------- --------
CASH, beginning of period.................... 93 0
-------- --------
CASH, end of period.......................... $ 0 $ 0
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
THE NAHDREE GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1998
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
The Nahdree Group, Ltd. and its subsidiaries (hereinafter collectively
referred to as the "Company" unless the context clearly otherwise requires).
The consolidated financial statements are presented in accordance with the
requirements of the quarterly report on Form 10-Q and consequently do not
include all of the disclosures normally made in an annual report on Form
10-K filing. Accordingly, the consolidated financial statements included
herein should be reviewed in conjunction with the consolidated financial
statements and the notes included therein with the Company's Annual Report
on Form 10-K for the fiscal year ended May 31, 1998.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has sustained continuing net losses and for the three months
ended November 30, 1998, incurred a substantial loss from operations of
approximately $900,000, primarily attributable to "off-price" selling of
out of season merchandise within certain divisions. Furthermore, the
Company has depleted its working capital as of November 30, 1998. As a
result, the Company has been unable to maintain compliance with certain of
its financial covenants to its senior lender ("Heller") and as of January
13, 1999 has obtained a waiver of such defaults as at November 30, 1998.
From time to time, Heller has extended seasonal and operational
overadvances, however, there is no assurance future accommodations for
such overadvances will continue. Curtailment of such overadvances by Heller
would result in uncertainty as to the Company's ability to generate
sufficient cash flow to support its operations or to continue as a going
concern. Accordingly, the Company has undertaken numerous actions to reduce
its overall operating costs and to reduce the levels of "off-price"
selling. Additionally, management anticipates that it will continue to make
other operational changes that will increase efficiency and profit
margins.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The financial information as of and for the three months and six months
ended November 30, 1998 and 1997 has been prepared in accordance with the
Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments
are of a normal and recurring nature. The foregoing interim results are not
necessarily indicative of the results of operations for the full year ending
May 31, 1999.
2. ACQUISITION
On December 24, 1997, the Company purchased all of the outstanding
capital stock of Nah Nah Collection, Inc. ("Nah Nah"). The transaction has
been accounted for as a reverse acquisition. Accordingly, the accompanying
financial statements present the unaudited consolidated historical results
of operations of The Nahdree Group, Ltd. (which includes Nah Nah) for the
three months and six months ended November 30, 1998 and the results of
operations of Nah Nah, only, for the three months and six months ended
November 30, 1997.
3. 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.
7
<PAGE> 8
4. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5)
"Reporting on the Costs of Start-up Activities". Pursuant to the
provision of SOP 98-5, all costs associated with the start-up activities,
including organization costs, should be expensed as incurred. Companies
that previously capitalized such costs are required to write-off the
unamortized portion of such costs as cumulative effect of a change of
accounting principle. The adoption of SOP 98-5 will not have a
significant impact on the Company's financial statements.
5. EARNINGS (LOSS) 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 (loss) per share because the exercise price
was greater then the market price of the stock.
6. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
(In Thousands)
November 30, May 31,
------------ ------------
1998 1998
(UNAUDITED)
<S> <C> <C>
Finished goods............... $ 9,405 $11,470
Raw materials and work in process 4,013 2,311
------- -------
$13,418 $13,781
======= =======
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Payments of income taxes were $8,000 and $6,000 for the six months ended
November 30, 1998 and 1997, respectively. Payments of interest during the
corresponding periods were $960,000 and $221,000 respectively.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion provides information and analysis of
the results of operations for the three-month and six-month periods ended
November 30, 1998, of The Nahdree Group, Ltd. and its subsidiaries
(collectively, the "Company"). The following discussion and analysis should be
read in conjunction with the financial statements and notes thereto included
elsewhere herein.
On December 24, 1997, The He-Ro Group, Ltd. ("He-Ro") acquired
all the outstanding capital stock of Nah Nah Collection, Inc. ("Nah Nah"), in an
acquisition (the "Acquisition") accounted for as a "reverse acquisition" and a
purchase, thereby forming the Company. As a result, the operating results of the
accounting acquiror (Nah Nah), rather than those of He-Ro, are the operating
results which are reported herein for the three-month and six-month periods
ended November 30, 1997.
The Company's principal selling seasons are the Spring and
Fall seasons. The Company's Spring season begins in December and ends in May,
and the Fall season begins in June and ends in November. Products sold under the
Company's NiteLine and Black Tie labels have historically achieved higher sales
in the Fall season while products under the Company's Nah Nah Collection, Victor
Costa by Nahdree and Constance Saunders by Nahdree labels have achieved higher
sales in the Spring.
LIQUIDITY AND CAPITAL RESOURCES
The Company has sustained continuing net losses from
operations during the three months ended November 30, 1999, of approximately
$900,000 (before interest expenses of about $750,000), as a result of which it
has been unable to maintain compliance with the financial covenants in the
Factoring and Revolving Inventory Loan and Security Agreement Dated December
24, 1997, as amended as of May 31,1998 (the "Heller Agreement"), with its
senior lender, Heller Financial, Inc. ("Heller"). Such losses have been
primarily attributable to greater-than-normal sales of inventory at close-out
prices to generate liquidity, which has had a substantial negative effect on
the Company's working capital. There is a significant possibility that the
Company will continue to realize losses, which could result in its continued
non-compliance with the aforesaid financial covenants. There is no assurance
that, in such eventuality, Heller will be willing to extend or increase the
level of overadvances, although Heller has, from time to time, extended
seasonal and operational overadvances to the Company in the past, or that the
Company will be able to generate adequate liquidity through other means. As a
result, there is uncertainty as to the Company's ability to generate
sufficient cash flow to support its operations or to continue as a going
concern. The Company has undertaken numerous actions, including restructuring
of its organization, to reduce its overall operating costs and its management
anticipates that it will continue to make other operational changes that will
increase efficiency and profit margins.
The financial statements contained elsewhere herein do not
include any adjustments relating to the recoverability and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
9
<PAGE> 10
The Heller Agreement provides that Heller will (i) purchase
eligible receivables and advance to specified operating affiliates of the
Company 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 (overadvances), and (iii) arrange for the issuance
of letters of credit secured by funds available to the Company, provided that
the amount of the 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 the Company's (i) tangible net worth shall not be less than $2.3
million during the fiscal year-ending May 31, 1999, (ii) working capital shall
not be less than negative $515,000 at the end of any fiscal quarter, (iii)
current ratio shall not be less than 1.30 to 1.00 at the end of any fiscal
quarter, and (iv) capital expenditures shall not exceed $450,000 in a fiscal
year. At November 30, 1998, the Company was in default of one covenant,
requiring tangible net worth of $2.3 million, having a tangible net worth at
such date of $1.0 million. The Company has entered into a letter agreement with
Heller reducing the required tangible net worth covenant to $400,000 until
January 31, 1999, at which date the $2.3 million requirement would again become
effective unless a further accommodation is received from Heller. There is no
assurance that such a further accommodation will be obtained, and the company
has not made any alternative arrangements to deal with the possiblity that it
is not obtained.
10
<PAGE> 11
CHANGES IN FINANCIAL CONDITIONS
A comparison of the balance sheet of the Company as at
November 30, 1998, with its balance sheet as at May 31, 1998, indicates that (i)
total assets were $30.0 million at November 30, 1998, compared to $29.4 million
at May 31, 1998, and (ii) working capital was a negative $2.2 million at
November 30, 1998, as compared with negative $0.5 million at May 31, 1998. This
decrease in working capital is a result of an increase in the amount of
overadvances to the Company from Heller during the three-month period ended
November 30, 1998.
RESULTS OF OPERATIONS
EXPLANATORY NOTE: The results of operations for the
three-month and six-month periods ended November 30, 1997, are
presented as if the Acquisition had taken place on June 1,
1997, and include the combination of (i) the operating results
of Nah Nah for the three-month and six-month periods ended
November 30, 1997, as reported in the unaudited condensed
financial statements and notes thereto included elsewhere
herein, plus (ii) the operating results of He-Ro as previously
reported in He-Ro's Form 10-Q for the fiscal quarter ended
November 30, 1997. Such figures are denoted by an (*).
THREE MONTHS ENDED NOVEMBER 30, 1998, COMPARED TO THREE MONTHS
ENDED NOVEMBER 30, 1997.
The Company's net loss was $1.7 million for the three-month
period ended November 30, 1998, compared to $0.8* million for the three-month
period ended November 30, 1997. Such increase in net loss is a result of the
factors discussed below.
The net sales for the three-month period ended November 30,
1998, were $12.2 million compared to $16.4* million for the three-month period
ended November 30, 1997. The decline in net sales is attributable to (i) the
closing of eight out of 25 of the Company's retail stores and the reduction in
size of several other of its stores, and (ii) the shut down of the Company's NNP
private label and Nahdree LifeStyle divisions.
11
<PAGE> 12
The cost of sales from operations for the three-month period
ended November 30, 1998, was $8.8 million (72.4% of net sales) compared to
$11.4* million (69.7%) for the three-month period ended November 30, 1997. The
increase in the ratio of cost of sales to net sales is attributable to an
increase in the proportion of products sold at deep-discount close out sale
prices in comparison with previous quarters. As a result, the Company's profit
margin for the three-month period ended November 30, 1998, was significantly
reduced to $3.4 million (27.6%), compared with $5.0* million (30.3%) for the
three-month period ended November 30, 1997.
Selling, general and administrative expenses for the
three-month period ended November 30, 1998, was $4.0 million (32.7%) compared to
$5.1* million (30.8%) for the three-month period ended November 30, 1997. Such
decrease in selling, general and administrative expenses is attributable to (i)
the planned elimination of overlapping functions of Nah Nah and He-Ro, (ii) the
costs eliminated due to the closing and reduction in size of its retail stores
referred to above, and (iii) costs eliminated due to the closing of two of the
Company's divisions discussed above.
- ---------------------
* See Explanatory Note at Top of Section
SIX MONTHS ENDED NOVEMBER 30, 1998, COMPARED TO SIX MONTHS
ENDED NOVEMBER 30, 1997.
The Company's net loss for the six-month period ended November
30, 1998, was $2.3 million, as compared with $1.7* million for the six-month
period ended November 30, 1997. Such increase in net loss is a result of the
factors discussed below.
Net sales for the six-month period ended November 30, 1998,
were $23.4 million as compared to $31.4* million for the six-month period ended
November 30, 1997. The decline in net sales is attributable to (i) the closing
of eight out of 25 of the Company's retail stores and the reduction in size of
several other of its stores, and (ii) the shut down of the Company's NNP private
label and Nahdree LifeStyle divisions.
The cost of sales from operations for the six-month period
ended November 30, 1998, were $15.5 million (66.2% of net sales), compared to
$21.6* million (68.8%) for the six-month period ended November 30, 1997. The
decrease in cost of sales is principally attributable to the shut down of the
Company's NNP private label and Nahdree LifeStyle divisions. As a result gross
profit for the six-month period ended November 30, 1998, was $7.9 million
(33.8%), compared with $9.9* million (31.2%) for the comparable period in 1997.
Selling, general and administrative expenses for the six-month
period ended November 30, 1998, was $8.2 million (35.0%) compared to $10.1*
12
<PAGE> 13
million (32.2%) for the six-month period ended November 30, 1997. Such decrease
in selling, general and administrative expenses is attributable to (i) the
planned elimination of overlapping functions of Nah Nah and He-Ro, (ii) the
costs eliminated due to the closing and reduction in size of its retail stores
referred to above, and (iii) costs eliminated due to the closing of two of the
Company's divisions discussed above.
- ---------------------
* See Explanatory Note at Top of Section
YEAR 2000 PROBLEM.
The Company has retained a consulting firm to implement
upgrades to its management information computer systems to deal with the Year
2000 problem. The Company uses its management information systems to coordinate
and monitor the components of its business and provide its management with
information it needs to make informed decisions. Such systems were designed to
provide the Company with, among other things, comprehensive order processing,
predictions, accounting and management information for the marketing,
manufacturing, importing and distribution functions of the Company's business.
The Company's consultant has assessed the Year 2000 readiness
of the Company's systems and commenced the renovation of the Company's software
and hardware to rectify Year 2000 problems which it has identified. The Company
has increased the estimate of its costs to make the necessary modifications of
its computer systems from $150,000 to $200,000, of which approximately $15,000
has been paid or accrued, and believes that such modifications will be able to
be completed by September 1999, which will enable the renovations to be
fully-effective by December 31, 1999.
There can be no assurance that the renovations described above
will accomplish their objectives or that the aforesaid estimated costs may not
increase as such renovations are made. The Company will expense all such costs
as they are incurred. In order to assess and remedy the Year 2000 problem, the
Company has foregone certain planned information system projects, including a
hardware upgrade, a custom code upgrade, the installation of a test system, and
a system and integration test.
The failure to correct the Year 2000 problem could result in
an interruption of certain normal business activities or operations. Such
interruption could have an adverse affect on the Company's results of
operations, liquidity, and financial condition. There is general uncertainty
inherent in the Year 2000 problem, particularly with regards to the effects the
failure of computer systems operated by the Company's suppliers and vendors
might have on the Company's operations.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In December 1997, Mr. Hong J. Han acquired from Mrs. Della
Rounick, subordinated indebtedness of the Company to the Estate of Herbert
Rounick (of which Mrs. Rounick is executrix) in the amount of $5,482,117 (Mrs.
Rounick retained $1,209,064 of such indebtedness). Such debt (i) bears interest
at 9.278% per annum payable on the first of each month commencing January 1,
1998, or otherwise on demand, and (ii) is subordinated to Heller (see "Liquidity
and Capital Resources" above) pursuant to the Subordination Agreement dated
December 24, 1997, among Mr. Han, Mrs. Rounick, He-Ro and Heller. The Company
has defaulted on the payment of interest to Mr. Han and Mrs. Rounick on such
indebtedness, and at January 14, 1999, is in arrears in the amount of $660,040
on the payment of such interest.
In December 1997, Mr. Han also acquired all of the obligations
due and owing by the Company to its former bank group in the aggregate principal
amount of $2,750,000. These obligations are evidenced by term notes bearing
interest at 2% above the prime rate. Pursuant to the terms of the Subordination
and Intercreditor Agreement dated December 24, 1997, between Heller and Mr. Han,
such indebtedness is subordinated to Heller (see "Liquidity and Capital
Resources" above). The Company has defaulted on the payment of interest to Mr.
Han on such indebtedness, and at January 14, 1999, is in arrears in the amount
of $226,932 on the payment of such interest.
ITEM 5. OTHER INFORMATION.
OLEG CASSINI LICENSE
The Company's license agreement with Oleg Cassini, Inc. to use
the trademark "Oleg Cassini" in conjunction with its proprietary "Black Tie"
trademark expires on May 31, 1999, by its terms. The Company's management has
advised Oleg Cassini, Inc. that it does not intend to renew such license
agreement.
14
<PAGE> 15
ITEM 6. EXHIBITS AND OTHER REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
(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 fiscal year ended May 31,
1995 ("Registrant's 1995 10-K").
3.2 Certificate of Amendment to Articles of Incorporation of
Registrant changing the name of Registrant to The Nahdree
Group, Ltd., effective May 31, 1998. Incorporated by reference
to Exhibit 3.2 of Registrant's Annual Report on Form 8-K for
the fiscal year ended May 31, 1998 ("Registrant's 1998 10-K").
3.3 By-Laws of Registrant, as amended. Incorporated by reference
to Exhibit 3.2 of Registrant's 1995 10-K.
4.1 Specimen Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1 of Registrant's 1998
10-K.
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. Incorporated by reference to
Exhibit 10.3 of Registrant's Form 10-Q for the quarter ended
February 28, 1998.
10.4 Registration Rights Agreement dated December 24, 1997, between
Registrant and Hong J. Han. Incorporated by reference
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C>
to Exhibit 10.4 of Registrant's Form 10-Q for the quarter
ended February 28, 1998.
10.5 Amended and Restated Employment Agreement dated November 1,
1997, between The He-Ro Group, Inc. and Katherine Wong.
Incorporated by reference to Exhibit 10.5 of Registrant's Form
10-Q for the quarter ended February 28, 1998.
10.6 Amended and Restated Employment Agreement dated November 1,
1997, between The He-Ro Group, Inc. and David Minka.
Incorporated by reference to Exhibit 10.6 of Registrant's Form
10-Q for the quarter ended February 28, 1998.
10.7 Agreement dated July 30, 1997, among Nah Nah, C.A.S. Designs,
Inc. and Constance Saunders. Incorporated by reference to
Exhibit 10.7 of Registrant's Form 10-Q for the quarter ended
February 28, 1998.
10.8 Employment Agreement dated January 1, 1997, between Nah Nah,
and Victor Costa. Incorporated by reference to Exhibit 10.8 of
Registrant's Form 10-Q for the quarter ended February 28,
1998.
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 of Registrant's
Annual Report on Form 10-K for the fiscal 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 fiscal year ended May 31,
1996 ("Registrant's 1996 10-K").
10.10.3 Agreement dated December 30, 1997, between The HeRo Group,
Inc., and Oleg Cassini, Inc., amending the Cassini License.
Incorporated by reference to Exhibit 10.4 of Registrant's Form
10-Q for the quarter ended February 28, 1998.
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C>
10.11 1991 Stock Option Plan. Incorporated by reference to Exhibit
10.12 of Registrant's 1995 10-K.
10.12 1992 Outside Director Stock Option Plan. Incorporated by
reference to Exhibit 10.13 of Registrant's 1995 10-K.
10.13 1993 Outside Director Stock Option Plan. Incorporated by
reference to Exhibit 10.14 of Registrant's 1995 10-K.
10.14 Amended and Restated 1994 Outside Director Stock Option Plan.
Incorporated by reference to Exhibit 10.15 of Registrant's
1996 10-K.
10.15 License Agreement between N.N.C.S., Inc. and The Nahdree
Group, Ltd. dated as of June 1, 1998. Incorporated by
reference to Exhibit 10.15 of Registrant's 1998 10-K.
*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 The He-Ro
Group, Inc., HRNL, Inc., Nah Nah, Registrant, certain other
subsidiaries and Heller Financial, Inc. Incorporated by
reference to Exhibit 99.1 of 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. Incorporated by
reference to Exhibit 99.3 of Registrant's Form 10-Q for the
quarter ended February 28, 1998.
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. Incorporated by
reference to Exhibit 99.4 of Registrant's Form 10-Q for the
quarter ended February 28, 1998.
99.5 Letter agreement dated August 27, 1998, between The Nahdree
Group, Inc. f/k/a The He-Ro Group, Inc., Nah Nah, HRNL, Inc.,
Registrant, certain other subsidiaries and Heller
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C>
Financial, Inc., amending as of May 31, 1998, the
Factoring and Revolving Inventory Loan and Security
Agreement dated December 24, 1997, between The He-Ro
Group, Inc., Nah Nah, HRNL, Inc., Registrant, certain
other subsidiaries and Heller Financial, Inc.
Incorporated by reference to Exhibit 99.5 of Registrant's
1998 10-K.
*99.6 Letter agreement dated January 14, 1999, between The
Nahdree Group, Inc. f/k/a The He-Ro Group Inc., Nah Nah,
HRNL, Inc., Registrant, certain other subsidiaries and
Heller Financial, Inc., waiving default of certain
covenants under the Factoring and Revolving Inventory
Loan and Security Agreement dated December 24, 1997,
between The He-Ro Group, Inc. Nah Nah, HRNL, Inc.,
Registrant, certain other subsidiaries and Heller
Financial, Inc.
</TABLE>
- -------------------
* Exhibit filed herewith
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the three-month
period ended November 30, 1998.
18
<PAGE> 19
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 NAHDREE GROUP, LTD.
Date: January 14, 1999 By: /s/ Hong J. Han
----------------
Hong J. Han
President
Date: January 14, 1999 /s/ Chris Han
----------------
Chris Han
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATEED BALANCE SHEET, AS OF NOVEMBER 30, 1998, AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,445,000
<ALLOWANCES> 528,000
<INVENTORY> 13,418,000
<CURRENT-ASSETS> 17,535,000
<PP&E> 7,780,000
<DEPRECIATION> 6,766,000
<TOTAL-ASSETS> 29,979,000
<CURRENT-LIABILITIES> 19,692,000
<BONDS> 0
0
0
<COMMON> 120,000
<OTHER-SE> 440,000
<TOTAL-LIABILITY-AND-EQUITY> 29,979,000
<SALES> 23,373,000
<TOTAL-REVENUES> 23,373,000
<CGS> 15,507,000
<TOTAL-COSTS> 15,507,000
<OTHER-EXPENSES> 8,787,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,428,000
<INCOME-PRETAX> (2,349,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,349,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,349,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
<PAGE> 1
[HELLER FINANCIAL LETTERHEAD]
January 14, 1999
The Nahdree Group, Inc.
f/k/a The He-Ro Group, Inc.
530 Seventh Avenue
New York, New York 10018
Nah Nah Collection, Inc.
213 West 35th Street
New York, New York 10001
HRNL, Inc.
530 Seventh Avenue
New York, New York 10018
Gentlemen:
Reference is made to that certain Factoring and Revolving Inventory Loan
and Security Agreement having the Effective Date of December 24, 1997 (the
"Agreement") entered into among THE NAHDREE GROUP, INC. f/k/a The He-Ro Group,
Inc., NAH NAH COLLECTION, INC., HRNL, INC., (collectively and severally
referred to as "Client"), the other Loan Parties and HELLER FINANCIAL, INC.
("Heller") Capitalized terms used herein and not otherwise defined, shall have
the meanings ascribed to them in the Agreement.
Client has advised Heller that it is in violation of the Tangible Net
Worth covenant contained in subsection 7.10(a) of the Agreement for the Fiscal
Quarter ended November 30, 1998 (the "Existing Default"). Client has requested
that Heller waive the Existing Default and Heller hereby waives the Existing
Default. This is a limited waiver and shall not be deemed to constitute a
waiver of any other existing Default or any future breach of the Agreement or
any of the other Documents (including, without limitation, a breach of the
covenants causing the Existing Defaults for any period other than that
specified herein).
Client shall maintain Tangible Net Worth for December 1998 and January
1999 of not less than $400,000. Also, client will provide to Heller a
consultant report from Getzler & Co., Inc. no later than close of business
January 31, 1999.
Except as herein or heretofore amended or supplemented, the Agreement
remains in full force and effect in accordance with its original terms and
conditions.
<PAGE> 2
The Nahdree Group, Inc.
f/k/a The He-Ro Group, Inc.;
Nah Nah Collection, Inc.;
HRNL, Inc.
January 14, 1999
Page 2
If the foregoing correctly sets forth Client's and Heller's understanding,
please sign the enclosed copy of this letter agreement in the space provided
and return such fully executed copy to the undersigned as soon as possible.
Very truly yours,
HELLER FINANCIAL, INC.
By: /s/ MICHAEL T. RAYNOR
-----------------------
Michael T. Raynor
Vice President
CONSENTED AND AGREED TO
this 14th day of January, 1999
THE NAHDREE GROUP, INC.
f/k/a The He-Ro Group, Inc.
By: /s/ CHRIS HAN
--------------
Chris Han
Chief Financial Officer
CONSENTED AND AGREED TO
this 14th day of January, 1999
NAH NAH COLLECTION, INC.
By: /s/ CHRIS HAN
--------------
Chris Han
Chief Financial Officer
CONSENTED AND AGREED TO
this 14th day of January, 1999
HRNL, INC.
By: /s/ CHRIS HAN
--------------
Chris Han
Chief Financial Officer
