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 June 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)
(708) 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 August 12, 1996, there were 10,241,300 shares outstanding of the
Company's Common Stock ($0.01 par value).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 12
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<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
1996 1995
__________ ____________
(unaudited)
<S>
ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 592 $ 154
Trade accounts receivable, net of
allowance for doubtful accounts 27,592 38,679
Inventories 28,765 17,001
Prepaid expenses and other current assets 3,277 2,662
Prepaid income taxes 1,770 ---
_________ _________
TOTAL CURRENT ASSETS 61,996 58,496
_________ _________
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 21,552 20,348
_________ _________
OTHER ASSETS:
Deferred charges, net of accumulated
amortization 2,916 3,283
Intangible assets, net of accumulated
amortization 59,991 61,212
Deferred tax benefit 79 799
_________ _________
TOTAL OTHER ASSETS 62,986 65,294
_________ _________
TOTAL ASSETS $ 146,534 $ 144,138
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
2
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<TABLE>
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
1996 1995
(unaudited)
___________ ____________
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Current portion of long-term debt $ 7,707 $ 6,728
Accounts payable 11,366 6,398
Accrued expenses:
Compensation 871 1,207
Commissions and royalties 1,488 2,861
Advertising, freight and other
allowances 2,761 4,777
Purchase price --- 2,960
Other 1,042 1,991
Income taxes payable --- 2,882
_________ _________
TOTAL CURRENT LIABILITIES 25,235 29,804
_________ _________
LONG-TERM DEBT:
Revolving loan 29,250 15,225
Term loan 50,000 54,000
Other loans 8,716 9,045
_________ _________
TOTAL LONG-TERM DEBT 87,966 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 (91) 324
Accumulated deficit (4,996) (3,251)
Common stock held in treasury, 120,000
shares and 15,000 shares,respectively,
at cost (773) (102)
_________ _________
TOTAL STOCKHOLDERS' EQUITY 33,333 36,064
_________ _________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,534 $ 144,138
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
3
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ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(unaudited)
For the three months ended June 30,
__________________________________
1996 1995
____ ____
<S> <C> <C>
Net sales $29,608 $37,478
Cost of sales 18,494 24,397
_______ _______
Gross profit 11,114 13,081
Selling, general and administrative expense 8,302 9,505
_______ _______
Operating income 2,812 3,576
Interest expense 1,989 344
_______ _______
Income before income taxes 823 3,232
Income tax provision 340 1,326
_______ _______
Net income $ 483 $ 1,906
======= =======
Net income per share $0.05 $0.18
Weighted average number of shares
outstanding (in thousands) 10,324 10,540
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
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ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(unaudited)
For the six months ended June 30,
________________________________
1996 1995
____ ____
<S> <C> <C>
Net sales $48,492 $52,285
Cost of sales 31,759 33,582
_______ _______
Gross profit 16,733 18,703
Selling, general and administrative expense 15,855 14,752
_______ _______
Operating income 878 3,951
Interest expense 3,835 605
_______ _______
Income before income taxes (2,957) 3,346
Income tax provision (1,212) 1,375
_______ _______
Net income $(1,745) $ 1,971
======= =======
Net income per share ($0.17) $0.19
Weighted average number of shares
outstanding (in thousands) 10,387 10,518
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 six months ended June 30,
________________________________
1996 1995
____ ____
<S>
Cash flows from operating activities: <C> <C>
Net income (loss) $(1,745) $1,971
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation of property,plant and equipment 1,297 558
Amortization of other assets 1,588 1,016
Deferred income taxes 720 (253)
(Gain) loss on the disposition of property,
plant and equipment 1 (3)
Provision for losses on accounts receivable 305 1
Tax benefit of stock options exercised 3 ---
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable 10,668 (7,576)
Inventories (11,959) (3,162)
Prepaid expenses/other current assets (640) 17
Accounts payable 5,018 2,495
Accrued expenses (7,559) (1,614)
Income taxes (4,652) 30
_______ ______
Net cash used for operating activities (6,955) (6,520)
_______ ______
Cash flows from investing activities:
Acquisitions of property, plant and equipment (2,714) (248)
Proceeds from the sale of property,
plant and equipment 6 ---
_______ ______
Net cash used for investing activities (2,708) (248)
_______ ______
Cash flows from financing activities:
Net borrowings under revolving loan facility 14,025 6,750
Net repayments under term loan facility (3,000) ---
Net repayments under other loans (350) ---
Purchase of common stock for treasury (671) ---
Net proceeds from the exercise of stock options 97 ---
_______ ______
Net cash provided by financing activities 10,101 6,750
_______ ______
Net increase (decrease) in cash and cash equivalents 438 (18)
Cash and cash equivalents:
Beginning of period 154 200
_______ ______
End of period $ 592 $ 182
======= ======
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
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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 Report on Form 10-Q for the quarter ended March
31, 1996, each as filed with the Securities and Exchange Commission.
The results of operations for the three months and six months ended
June 30, 1996 are not necessarily indicative of the results to be
expected for the entire fiscal year.
NOTE 2 - INVENTORIES:
Inventories at June 30, 1996 and December 31, 1995 consist of the
following:
June 30, December 31,
1996 1995
___________ ___________
Raw materials $ 8,893,000 $ 6,333,000
Work-in-process 2,890,000 3,090,000
Finished goods 16,982,000 7,578,000
___________ ___________
$28,765,000 $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 six
months ended June 30, 1996, the Company repurchased 105,000 shares
of stock for total consideration of approximately $671,000.
NOTE 4 - STOCK OPTION PLANS:
During the six months ended June 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.
7
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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 quarter ended
March 31, 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
June 30,
__________________
Increase
1996 1995 (Decrease)
_______________________________
Net sales $29.6 $37.5 (21.1%)
Gross profit margin 37.5% 34.9% 7.4%
Selling, general & administrative
expense (as a percentage of sales) 28.0% 25.4% 10.2%
Interest expense $2.0 $0.3 566.7%
Summary of Consolidated Financial Results
(Dollars in millions)
Six months
ended
June 30,
__________________
Increase
1996 1995 (Decrease)
_________________________________
Net sales $48.5 $52.3 (7.3%)
Gross profit margin 34.5% 35.8% (3.6%)
Selling, general & administrative
expense (as a percentage of sales) 32.7% 28.2% 16.0%
Interest expense $3.8 $0.6 533.3%
8
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Net sales for the second quarter of 1996 decreased by 21.1% as
compared to the second quarter of last year. For the six months to
date, sales decreased by 7.3% compared to last year. Sales in the
Company's back-to-school and slumber businesses were significantly
below the prior year due to a weak licensing environment. The
Company had no boys licenses in its portfolio during the first
half of 1996 to replace last year's sales of products featuring
Batman(TM) and Mighty Morphin Power Rangers(TM).
Sales in the Amav business, which was acquired in late 1995, and
increases over the prior year in the water sports and children's
room decor businesses due to new product introductions and
increased account penetration, respectively, partially offset
the sales decreases.
The Company believes that its second half licensing portfolio is
strong, including Warner Brothers' Space Jam, Disney's live-action
101 Dalmatians, Disney's Toy Story and R.L. Stine's Goosebumps(R).
In addition, the Amav business is expected to exceed last year's
second half performance as a result of new product introductions
and expanded distribution.
The gross profit margin for the second quarter of 1996 increased by
7.4% compared to the second quarter last year. This increase was
due primarily to the discontinuation of the majority of the
Company's sport bags and coolers products in 1995. These products,
which provided sales of $1.9 million during the three months ended
June 30, 1995, produced relatively low gross margins for the Company.
The gross profit margin for the six months ended June 30, 1996
decreased by 3.6% compared to the first six months of 1995 due
partially to a shift in the sales mix away from its slumber and
back-to-school businesses which carry higher margins than the
Company's water sports business. In addition, because most of this
year's licensing events occur in the second half of the year, sales
of the Company's licensed products did not result in the higher
margins which typically accompany strong licenses.
Selling, general and administrative expense for the three and six
months ended June 30, 1996 increased by 10.2% and 16.0%,
respectively, compared to the prior year. This increase was due
primarily to the Amav acquisition. While a large part of its sales
occur during the second half of the year, ERO now has higher fixed
monthly costs for overhead expenses and acquisition amortization.
Interest expense for the three and six month periods ended June 30,
1996 increased by $1.7 million and $3.2 million, respectively, due
primarily to the Amav acquisition debt and additional working
capital requirements related to Amav.
9
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Liquidity and Capital Resources
_______________________________
The six months ended June 30, 1996 was a period of operational cash
outflows for the Company. During the period, cash was used to fund
capital expenditures of $2.7 million, repurchase common stock for
$0.7 million, repay $3.0 million under the Company's term loan
facility, repay $0.3 million under the Company's other loan
facilities 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 $14.0 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.
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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders (the "Annual Meeting")
of the Company was held on April 18, 1996.
The number of shares of Common Stock of the Company issued
and outstanding and entitled to vote on matters submitted
at the Annual Meeting to the holders of Common Stock was
10,226,300.
There were present at the Annual Meeting, in person or by
a valid proxy, holders of 10,046,339 shares of Common Stock,
which was 98.2% of the total number of shares of Common
Stock outstanding and entitled to vote at the Annual Meeting
and which constituted a quorum for purposes of voting on
each of the matters submitted to the stockholders for their
vote.
10
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With respect to the election of directors, each nominee
for director listed below received the number of votes set
forth opposite his respective name:
Name of Nominee Number of Votes
_______________ _______________
Thomas M. Gasner 9,605,973
Bruce V. Rauner 9,605,973
The above persons received a majority of the votes cast by
the holders of the Common Stock and therefore were duly
elected as directors of the Company.
With respect to the resolution regarding the ratification
of the appointment of Price Waterhouse LLP as the Company's
independent public accountants, such proposal received the
number of votes set forth below:
Number of Votes
_______________
For 10,031,694
Against 12,200
Abstain 2,445
Since a majority of the votes cast by the holders of the
Common Stock, present and voting at the meeting, were
votes for approval, such resolution was approved by the
stockholders of the Company.
With respect to the resolution regarding approval of an
amendment to the Corporation's 1992 Key Employee Stock
Option Plan, such proposal received the number of votes
set forth below:
Number of Votes
_______________
For 9,798,882
Against 238,767
Abstain 8,690
Since a majority of the votes cast by the holders of the
Common Stock, present and voting at the meeting, were
votes for approval, such resolution was approved by the
stockholders of the Company.
Item 5. Other Information
On August 6, 1996, the Company announced that Ted J.
Lueken resigned his position as Chief Financial Officer
to pursue other interests.
Additionally, Elliot W. Maluth resigned from the Board of
Directors on July 31, 1996 to pursue other interests.
Item 6. Exhibits and Reports on Form 8-K
None
11
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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: August 14, 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
12
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<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 592
<SECURITIES> 0
<RECEIVABLES> 27,592
<ALLOWANCES> 0
<INVENTORY> 28,765
<CURRENT-ASSETS> 61,996
<PP&E> 21,552
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,534
<CURRENT-LIABILITIES> 25,235
<BONDS> 87,966
0
0
<COMMON> 104
<OTHER-SE> 33,229
<TOTAL-LIABILITY-AND-EQUITY> 146,534
<SALES> 48,492
<TOTAL-REVENUES> 48,492
<CGS> 31,759
<TOTAL-COSTS> 31,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,835
<INCOME-PRETAX> (2,957)
<INCOME-TAX> (1,212)
<INCOME-CONTINUING> (1,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,745)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
