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 March 31, 1997 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 April 30, 1997, there were 10,274,300 shares outstanding of the
Company's Common Stock ($0.01 par value).
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
1997 1996
(unaudited)
___________ ___________
<S>
ASSETS
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 1,364 $ 5,094
Trade accounts receivable, net of
allowance for doubtful accounts 22,419 48,296
Inventories 25,237 22,058
Prepaid expenses and other current assets 5,067 4,085
Prepaid income taxes 3,084 ---
________ ________
TOTAL CURRENT ASSETS 57,171 79,533
________ ________
PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 20,244 20,871
________ ________
OTHER ASSETS:
Deferred charges, net of accumulated amortization 2,592 2,648
Intangible assets, net of accumulated amortization 56,374 56,942
________ ________
TOTAL OTHER ASSETS 58,966 59,590
________ ________
TOTAL ASSETS $136,381 $159,994
======== ========
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)
March 31, December 31,
1997 1996
(unaudited)
___________ ___________
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Current portion of long-term debt $ 9,393 $ 8,893
Accounts payable 7,765 9,389
Accrued expenses:
Compensation 1,139 1,131
Commissions and royalties 2,578 4,793
Advertising, freight and other allowances 1,963 3,821
Other 2,160 1,600
Income taxes payable --- 70
________ ________
TOTAL CURRENT LIABILITIES 24,998 29,697
________ ________
LONG-TERM DEBT:
Revolving loan 17,600 31,525
Term loan 43,500 46,000
Other loans 8,938 9,222
________ ________
TOTAL LONG-TERM DEBT 70,038 86,747
________ ________
DEFERRED TAX LIABILITY 696 536
________ ________
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, 10,394,300 shares issued 104 104
Capital in excess of par value 39,329 39,173
Foreign currency translation adjustment (365) 3
Retained earnings 2,354 4,507
Common stock held in treasury, 120,000 shares
and 15,000 shares,respectively, at cost (773) (773)
________ ________
TOTAL STOCKHOLDERS' EQUITY 40,649 43,014
________ ________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,381 $159,994
======== ========
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 three months ended March 31,
____________________________________
1997 1996
____ ____
<S> <C> <C>
Net sales $19,939 $18,883
Cost of sales 13,814 13,264
_______ _______
Gross profit 6,125 5,619
Selling, general and administrative expense 7,763 7,553
_______ _______
Operating loss (1,638) (1,934)
Interest expense 2,010 1,846
_______ _______
Loss before income taxes (3,648) (3,780)
Income tax benefit (1,495) (1,552)
_______ _______
Net loss $(2,153) $(2,228)
======= =======
Net loss per share ($0.20) ($0.21)
Weighted average number of shares
outstanding (in thousands) 10,652 10,364
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 three months ended March 31,
____________________________________
1997 1996
____ ____
<S>
Cash flows from operating activities: <C> <C>
Net loss $(2,153) $(2,228)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation of property, plant and equipmen 742 631
Amortization of other assets 715 847
Deferred income taxes 160 592
Provision for losses on accounts receivable 68 164
Tax benefit of stock options exercised 18 ---
Changes in current assets and current liabilities, net of
acquisitions:
Accounts receivable 25,659 16,523
Inventories (3,304) (3,181)
Prepaid expenses and other current asse (982) (611)
Accounts payable (1,592) 102
Accrued expenses (3,469) (3,648)
Income taxes payable (3,154) (4,398)
_______ _______
Net cash provided by operating activities 12,708 4,793
_______ _______
Cash flows from investing activities:
Acquisitions of property, plant and equipment (289) (448)
_______ _______
Net cash used for investing activities (289) (448)
_______ _______
Cash flows from financing activities:
Net repayments under revolving loan facility (13,925) (1,275)
Net repayments under term loan facility (2,000) (1,500)
Net repayments under other loans (284) (182)
Financing fees paid (78) ---
Net proceeds from the exercise of stock options 138 ---
Purchase of common stock for treasury --- (671)
_______ _______
Net cash used for financing activities (16,149) (3,628)
_______ _______
Net increase (decrease) in cash and cash equivalents (3,730) 717
Cash and cash equivalents:
Beginning of period 5,094 154
_______ _______
End of period $ 1,364 $ 871
======= =======
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, 1996,
as filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
NOTE 2 - INVENTORIES:
Inventories at March 31, 1997 and December 31, 1996 consist of the following:
March 31, December 31,
1997 1996
___________ ____________
Raw materials $ 7,277,000 $ 6,823,000
Work-in-process 4,161,000 1,720,000
Finished goods 13,799,000 13,515,000
___________ ___________
$25,237,000 $22,058,000
=========== ===========
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, 1996, as filed with the Securities and Exchange Commission.
<PAGE>
Results of Operations
_____________________
Summary of Consolidated Financial Results
(Dollars in millions)
Three months
ended
March 31,
_________________
Increase
1997 1996 (Decrease)
_______________________________
Net sales $19.9 $18.9 5.3%
Gross profit margin 30.7% 29.8% 3.0%
Selling, general & administrative
expense (as a percentage of sales) 38.9% 40.0% (2.8)%
Interest expense $ 2.0 $ 1.8 11.1%
The Company's first quarter results reflect the seasonal nature of its
business. The majority of the Company's sales occur in the third and
fourth quarters, while a substantial portion of its expenses remain
relatively consistent throughout the year.
Net sales for the first quarter of 1997 increased 5.3% to $19.9 million as
compared to the first quarter of last year. The first quarter sales growth
can be attributed to the Company's Slumber Shoppe and Priss Prints businesses
whose emphasis on classic licenses resulted in gaining year-round placement
at certain retailers.
The gross profit margin for the quarter ended March 31, 1997 increased 3.0%
compared to the prior year due to improved pricing on its licensed products
when compared to a relatively weak performance in licensed products in the
first quarter of 1996.
Selling, general and administrative expense as a percentage of sales decreased
2.8% as the Company was able to control fixed cost spending in a period of
increased revenues.
Interest expense increased by 11.1% compared to the prior year due to higher
interest rates and an increase in working capital requirements.
Liquidity and Capital Resources
_______________________________
Net cash generated from operating activities during the three months ended
March 31, 1997 totaled approximately $12.7 million. These cash flows,
together with cash on-hand, were principally used to repay $16.2 million
under the Company's loan facilities and fund capital expenditures of $0.3
million.
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, 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.
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
Recent Events
On April 10, 1997, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement")
with Hedstrom Corporation and HC Acquisition Corp.
(the "Purchaser"). Pursuant to the Merger Agreement,
on April 17, 1997, the Purchaser commenced a tender
offer to purchase all of the issued and outstanding
shares of common stock of the Company at $11.25 net
per share in cash.
Item 6. Exhibits and Reports on Form 8-K
A Current Report on Form 8-K dated April 10, 1997
regarding the Company's merger agreement with Hedstrom
Corporation was filed with the Securities and
Exchange Commission on April 16, 1997.
<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: April 30, 1997
ERO, Inc.
/s/ Mark D. Renfree
________________________________
Mark D. Renfree
Senior Vice President of Finance
and Chief 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,364
<SECURITIES> 0
<RECEIVABLES> 22,419
<ALLOWANCES> 0
<INVENTORY> 25,237
<CURRENT-ASSETS> 57,171
<PP&E> 29,710
<DEPRECIATION> 9,466
<TOTAL-ASSETS> 136,381
<CURRENT-LIABILITIES> 24,998
<BONDS> 70,038
0
0
<COMMON> 104
<OTHER-SE> 40,545
<TOTAL-LIABILITY-AND-EQUITY> 136,381
<SALES> 19,939
<TOTAL-REVENUES> 19,939
<CGS> 13,814
<TOTAL-COSTS> 13,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,010
<INCOME-PRETAX> (3,648)
<INCOME-TAX> (1,495)
<INCOME-CONTINUING> (2,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,153)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
