Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 1996 Commission File Number 0-19942
ERO, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3573286
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
585 Slawin Court, Mount Prospect, Illinois 60056
(Address of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
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 _____
At November 13, 1996, there were 10,241,300 shares outstanding of the
Company's Common Stock ($0.01 par value).
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, December 31,
1996 1995
_____________ ____________
(unaudited)
<S>
ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 1,939 $ 154
Trade accounts receivable, net of
allowance for doubtful accounts 45,339 38,679
Inventories 30,006 17,001
Prepaid expenses and other current
assets 4,057 2,662
Prepaid income taxes 637 ---
_________ _________
TOTAL CURRENT ASSETS 81,978 58,496
_________ _________
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 21,336 20,348
_________ _________
OTHER ASSETS:
Deferred charges, net of accumulated
amortization 3,015 3,283
Intangible assets, net of accumulated
amortization 57,558 61,212
Deferred tax benefit 268 799
_________ _________
TOTAL OTHER ASSETS 60,841 65,294
_________ _________
TOTAL ASSETS $ 164,155 $ 144,138
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
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<TABLE>
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, December 31,
1996 1995
_____________ ____________
(unaudited)
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Current portion of long-term debt $ 8,207 $ 6,728
Accounts payable 11,014 6,398
Accrued expenses:
Compensation 1,350 1,207
Commissions and royalties 1,951 2,861
Advertising, freight and other
allowances 4,996 4,777
Purchase price --- 2,960
Other 1,557 1,991
Income taxes payable --- 2,882
_________ _________
TOTAL CURRENT LIABILITIES 29,075 29,804
_________ _________
LONG-TERM DEBT:
Revolving loan 42,150 15,225
Term loan 48,000 54,000
Other loans 8,535 9,045
_________ _________
TOTAL LONG-TERM DEBT 98,685 78,270
_________ _________
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
9,947,700 shares authorized, no
shares issued and outstanding --- ---
Common stock, $0.01 par value,
50,000,000 shares authorized,
10,361,300 shares and 10,346,300
shares issued, respectively 104 103
Capital in excess of par value 39,089 38,990
Foreign currency translation adjustment (96) 324
Accumulated deficit (1,929) (3,251)
Common stock held in treasury, 120,000
shares and 15,000 shares, respectively,
at cost (773) (102)
_________ _________
TOTAL STOCKHOLDERS' EQUITY 36,395 36,064
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 164,155 $ 144,138
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
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<TABLE>
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(unaudited)
For the three months ended September 30,
________________________________________
1996 1995
____ ____
<S> <C> <C>
Net sales $49,633 $28,238
Cost of sales 31,322 18,255
_______ _______
Gross profit 18,311 9,983
Selling, general and administrative expense 10,540 7,957
_______ _______
Operating income 7,771 2,026
Interest expense 2,575 308
_______ _______
Income before income taxes 5,196 1,718
Income tax provision 2,129 704
_______ _______
Net income $ 3,067 $ 1,014
======= =======
Net income per share $0.30 $0.10
Weighted average number of shares
outstanding (in thousands) 10,278 10,529
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
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<TABLE>
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(unaudited)
For the nine months ended September 30,
_______________________________________
1996 1995
____ ____
<S> <C> <C>
Net sales $98,125 $80,523
Cost of sales 63,081 51,837
_______ _______
Gross profit 35,044 28,686
Selling, general and administrative expense 26,395 22,709
_______ _______
Operating income 8,649 5,977
Interest expense 6,410 913
_______ _______
Income before income taxes 2,239 5,064
Income tax provision 917 2,079
_______ _______
Net income $ 1,322 $ 2,985
======= =======
Net income per share $0.13 $0.28
Weighted average number of shares
outstanding (in thousands) 10,305 10,522
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
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<TABLE>
ERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the nine months ended September 30,
_______________________________________
1996 1995
____ ____
<S>
Cash flows from operating activities: <C> <C>
Net income $1,322 $2,985
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation of property, plant and equipment 1,998 835
Amortization of other assets 2,415 1,473
Deferred income taxes 531 (528)
(Gain) loss on the disposition of
property, plant and equipment 1 (3)
Provision for losses on accounts receivable 524 95
Tax benefit of stock options exercised 3 ---
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable (7,339) 2,284
Inventories (13,195) (5,478)
Prepaid expenses and other current assets (1,420) (207)
Accounts payable 4,666 (321)
Accrued expenses (2,002) (2,657)
Income taxes (3,519) (1,065)
_______ ______
Net cash used for operating activities (16,015) (2,587)
_______ ______
Cash flows from investing activities:
Acquisitions of property, plant and equipment (3,216) (523)
Proceeds from the sale of property,
plant and equipment 6 ---
_______ ______
Net cash used for investing activities (3,210) (523)
_______ ______
Cash flows from financing activities:
Net borrowings under revolving loan facility 26,925 3,200
Net repayments under term loan facility (4,500) ---
Net repayments under other loans (531) ---
Financing fees paid (310) ---
Purchase of common stock for treasury (671) ---
Net proceeds from the exercise of stock
options 97 ---
_______ ______
Net cash provided by financing activities 21,010 3,200
_______ ______
Net increase in cash and cash equivalents 1,785 90
Cash and cash equivalents:
Beginning of period 154 200
_______ ______
End of period $ 1,939 $ 290
======= ======
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
<PAGE>
ERO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements include the
accounts of ERO, Inc. (the "Company") and its wholly-owned subsidiaries,
ERO Industries, Inc., Impact, Inc., Priss Prints, Inc., Amav Industries,
Inc., ERO Canada, Inc. and ERO Marketing, Inc. These financial
statements are unaudited but, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial condition, results of operations and
cash flows of the Company.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and in conjunction with the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30,
1996, each as filed with the Securities and Exchange Commission.
The results of operations for the three months and nine months ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the entire fiscal year.
NOTE 2 - INVENTORIES:
Inventories at September 30, 1996 and December 31, 1995 consist of the
following:
September 30, December 31,
1996 1995
_____________ ____________
Raw materials $ 8,227,000 $ 6,333,000
Work-in-process 3,993,000 3,090,000
Finished goods 17,786,000 7,578,000
___________ ___________
$30,006,000 $17,001,000
=========== ===========
NOTE 3 - COMMON STOCK REPURCHASE PROGRAM:
During 1995, the Company's Board of Directors authorized the purchase of
up to 500,000 shares of the Company's Common Stock. Such purchases may
be made from time to time in the open market, in privately negotiated
transactions or otherwise. During the nine months ended September 30,
1996, the Company repurchased 105,000 shares of stock for total
consideration of approximately $671,000.
NOTE 4 - STOCK OPTION PLANS:
During the nine months ended September 30, 1996, 15,000 vested options
were exercised under the 1988 Key Employee Stock Option Plan providing
total proceeds to the Company of approximately $97,000 and approximately
$3,000 of related income tax benefits.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION:
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto contained
herein, as well as included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and in the Company's Quarterly
Report on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996,
each as filed with the Securities and Exchange Commission. This Quarterly
Report on Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. Actual
results could differ materially from those projected in the forward-looking
statements.
Results of Operations
_____________________
Summary of Consolidated Financial Results
(Dollars in millions)
Three months ended
September 30,
__________________
Increase
1996 1995 (Decrease)
________________________________
Net sales $49.6 $28.2 75.9%
Gross profit margin 36.9% 35.4% 4.2%
Selling, general & administrative
expense (as a percentage of sales) 21.2% 28.2% (24.8%)
Interest expense $2.6 $0.3 $2.3
Summary of Consolidated Financial Results
(Dollars in millions)
Nine months ended
September 30,
_________________
Increase
1996 1995 (Decrease)
______________________________
Net sales $98.1 $80.5 21.9%
Gross profit margin 35.7% 35.6% 0.3%
Selling, general & administrative
expense (as a percentage of sales) 26.9% 28.2% (4.6%)
Interest expense $6.4 $0.9 $5.5
<PAGE>
Net sales for the third quarter of 1996 increased to $49.6 million, or
75.9%, as compared to $28.2 million in the third quarter of last year.
For the nine months to date, sales increased to $98.1 million, or 21.9%,
compared to $80.5 million last year. The increase in sales is primarily
attributable to sales in the Amav business, acquired during the fourth
quarter of 1995.
With the acquisition of Amav, less than half of the Company's 1996
revenues are expected to be from licensed products. However, a greater
share of the Company's revenues will now occur during the last four
months of the year. These changes will be particularly noticeable in
1996 due to an overall weakness in the Company's license portfolio
during the first half of this year followed by what appears to be strong
fourth quarter licenses such as Warner Brothers' Space Jam, Disney's
live-action 101 Dalmatians, Disney's Toy Story and R.L. Stine's
Goosebumps(R).
The gross profit margin for the three and nine months ended September
30, 1996 increased to 36.9% of net sales and 35.7% of net sales, or an
increase of 4.2% and 0.3%, respectively, compared to the prior year.
The increase was due primarily to the relatively higher margins
generated by the Amav business.
Selling, general and administrative expense as a percentage of sales for
the three and nine months ended September 30, 1996 decreased to 21.2% of
net sales and 26.9% of net sales, or a decrease of 24.8% and 4.6%,
respectively, compared to the prior year. This decrease is due primarily
to a shift in the sales mix to the Amav business whose branded products do
not generate royalty expense.
Interest expense for the three and nine month periods ended September
30, 1996 increased by $2.3 million and $5.5 million, respectively, due
primarily to the Amav acquisition debt and additional working capital
requirements related to Amav.
Liquidity and Capital Resources
_______________________________
The nine months ended September 30, 1996 was a period of operational
cash outflows for the Company. During the period, cash was used to fund
capital expenditures of $3.2 million, repay $4.5 million under the
Company's term loan facility, repurchase common stock for $0.7 million,
repay $0.5 million under the Company's other loan facilities, fund
financing fees of $0.3 million related to amending the Company's Credit
Facility and provide for certain normal operating fluctuations in the
non-cash components of working capital. These outflows were offset, in
part, by borrowings under the Company's revolving loan facility of $26.9
million and $0.1 million from the proceeds of the exercise of stock
options.
Management anticipates that cash generated from operations together with
current working capital and the Company's credit facility will provide
sufficient liquidity and capital resources to pursue the Company's
current business strategy, including the funding of working capital,
capital expenditures, acquisitions and other needs.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved in several lawsuits arising
in the ordinary course of business. The Company maintains
insurance covering such liability, and does not believe that
the outcome of any such lawsuits will have a material adverse
effect on the Company's financial condition or consolidated
results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On October 17, 1996, William T. Alldredge resigned from the
Board of Directors to pursue other interests.
On October 17, 1996, the Board of Directors elected Lee M.
Mitchell to serve on the Board as a Director to fill the
vacancy created by the resgination of William T. Alldredge.
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURES
__________
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 13, 1996
ERO, Inc.
/s/ D. Richard Ryan, Jr.
___________________________
D. Richard Ryan, Jr.
Chairman, President
and Chief Executive Officer
/s/ Christopher A. Brown
____________________________
Christopher A. Brown
Principal Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Income Statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,939
<SECURITIES> 0
<RECEIVABLES> 45,339
<ALLOWANCES> 0
<INVENTORY> 30,006
<CURRENT-ASSETS> 81,978
<PP&E> 21,336
<DEPRECIATION> 0
<TOTAL-ASSETS> 164,155
<CURRENT-LIABILITIES> 29,075
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 36,291
<TOTAL-LIABILITY-AND-EQUITY> 164,155
<SALES> 98,125
<TOTAL-REVENUES> 98,125
<CGS> 63,081
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,410
<INCOME-PRETAX> 2,239
<INCOME-TAX> 917
<INCOME-CONTINUING> 1,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,322
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
