SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934)
For the fiscal year ended December 31, 1996
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: 0-19942
ERO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3573286
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
585 Slawin Court, Mount Prospect, Illinois 60056-2183
(Adress of principal executive offices, including zip code)
(847) 803-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Title of class
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__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 3, 1997 was $53,007,084.
On March 3, 1997, there were 10,266,300 shares of the registrant's Common
Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from
the Registrant's Annual Report to Stockholders for the year ended December
31, 1996 (the "1996 Annual Report"). Part III of this Annual Report on
Form 10-K incorporates by reference information (to the extent specific
sections are referred to herein) from the Registrant's Proxy Statement for
its annual meeting of stockholders to be held April 17, 1997 (the "1997
Proxy Statement").
ERO, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business................................................
Item 2. Properties..............................................
Item 3. Legal Proceedings.......................................
Item 4. Submission of Matters to a Vote of Security Holders.....
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.....................................
Item 6. Selected Financial Data.................................
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations....................
Item 8. Financial Statements and Supplementary Data.............
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......
Item 11. Executive Compensation...................................
Item 12. Security Ownership of Certain Beneficial Owners and
Management...............................................
Item 13. Certain Relationships and Related Transactions...........
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................
<PAGE>
PART I
Item 1. Business
General
ERO, Inc. ("ERO" or the "Company") is a leading designer, manufacturer, importer
and marketer of licensed and branded Children's Leisure Products. ERO's
major product areas are grouped into four business units: ERO Industries, Inc.
("ERO Industries"), which consists of Slumber Shoppe and water sports; Amav
Industries, Inc. ("Amav"), which consists of children's activities, arts and
crafts; Impact, Inc. ("Impact"), which consists of back-to-school products;
and Priss Prints, Inc. ("Priss Prints"), which consists of children's room
decor products. The Company's products are sold to all major mass merchants
and big box retailers such as toy stores, office superstores, home improvement
centers and specialty craft stores.
ERO is a Delaware corporation which was organized in February 1988 by certain
members of ERO's management, Golder, Thoma, Cressey Fund III, Limited
Partnership and other investors to acquire ERO Industries, Inc. Prior to
such acquisition, ERO Industries was publicly owned and its common stock was
traded on the American Stock Exchange.
Business Strategy
The Company's primary objective is to increase shareholder value.
Its strategies to accomplish that goal include: pursuing the business of
Children's Leisure Products, concentrating on those activities where the
Company can achieve a significant competitive advantage, penetrating multiple
departments of mass merchants and other efficient retailers, offering
superior customer service, and pursuing growth through strategic acquisitions
that complement its strategy.
The environment for selling children's products has changed dramatically
during the last two decades. Five retailers now account for approximately
54% of toy sales in America, while the number of mediums companies must
invest in to build a viable brand has grown with new television networks,
cable television and videos. The course ERO has chosen to navigate in this
environment is to "rent" great brands where the Company thinks a brand is
essential, while developing the rest of its product lines to provide excellent
value to the consumer with superior margin and inventory turn performance
for the retailer.
In categories such as slumber, back-to-school, and children's room decor,
where the brand is essential, ERO has acquired broad portfolios of licenses
of the most highly promoted and advertised characters to give the Company a
competitive edge. And in large activity toys and craft kits, where function
is at least as important as brand, the Company has combined great engineering,
capital intensity and vertical integration to put more value in its products,
at substantially lower costs, in order to create a competitive advantage.
ERO also attempts to reduce the risks associated with retailer concentration
by servicing multiple departments of the major retailers. In addition to the
toy department, the Company sells Children's Leisure Products to the sporting
goods, home improvement, stationery, domestics and juvenile departments.
<PAGE>
Acquisitions
The Company made no acquisitions during the year ended December 31, 1996.
Recent prior year acquisitions include the 1995 purchase of Amav Industries
Ltd., manufacturers of children's arts, crafts and activities, the 1994
purchase of Impact International, Inc. and Impact Designs, Ltd., marketers
of licensed school supplies, and the 1994 purchase of a Canadian manufacturer
and distributor of licensed products.
Products
ERO Industries
Slumber Shoppe includes: slumber bags, a lightweight indoor sleeping bag for
slumber parties and children's nap times; carrying cases, which are large
enough to fit the slumber bags, along with pajamas, toothbrushes and other
items a child might need for a "sleepover"; play tents for indoor use; and
children's furniture, including foam and bean bag chairs. All of these
products feature popular licensed characters, such as Mickey's Stuff for
Kids, Barbie, Pooh and Batman and Robin . For the years ended December 31,
1996, 1995 and 1994, Slumber Shoppe accounted for 30%, 40% and 48% of ERO's
net sales, respectively.
The water sports category includes a full range of personal flotation devices
and other swim and pool products, including masks, fins, snorkels and goggles
marketed under the Coral brand name. ERO's primary focus within this area is
on children's water activities. The Company is the premier supplier of U.S.
Coast Guard approved children's flotation products. For the years ended
December 31, 1996, 1995 and 1994, water sports products accounted for 10%,
11% and 13% of ERO's net sales, respectively.
Both Slumber Shoppe and water sports products are sold to sporting goods
buyers and toy buyers at major retailers. ERO's domestic manufacturing
operations produce both slumber bags and flotation devices. The balance of
the line is imported from contract suppliers in China, Taiwan, Italy and
Indonesia.
Amav
Amav is a fully integrated manufacturer of children's products sold under the
Amav brand name. Amav's products are grouped in two categories: arts and
crafts, including craft kits; and activities, including game tables, easels
and play kitchens. Amav manufactures over 90% of its products in an 800,000
square foot production facility in Montreal, Canada.
The acquisition of Amav in 1995 added a strong non-licensed line to ERO's
existing mix of businesses. In addition, Amav added immediate growth
potential with a compounded annual growth rate of more than 40% over the
last six years. Amav has achieved a high level of success with its new
product introductions and, due to the universal appeal of its products, is
ERO's most promising vehicle for international growth.
For the years ended December 31, 1996, 1995 and 1994, Amav's products accounted
for 42%, 19% and 0% of ERO's net sales, respectively.
<PAGE>
Impact
Impact's products include a broad line of fashionable school supplies, including
back packs, book bags, lunch kits, luggage, fanny packs and locker bags, and
stationery products such as portfolios, binders, study kits, pencils, and theme
books. Impact leverages its licensing and graphic strengths across all of these
products, providing children with full sets of items featuring the characters
they love. Because of the age group Impact targets, its revenues are typically
derived from licensing events, such as Batman and Robin and Jurassic Park:The
Lost World, rather than classic licenses. For the years ended December 31,
1996, 1995 and 1994, Impact's products accounted for 9%, 20% and 26% of ERO's
net sales, respectively.
Priss Prints
Priss Prints' product line includes character-licensed stick-on and peel-off
wall decorations for children's rooms. Priss' products are very popular with
mothers of toddlers since they can decorate a room with the child's favorite
theme in minutes. Its most popular licenses are classics such as 101
Dalmatians, Disney Babies and Pooh. For the years ended December 31, 1996,
1995 and 1994, Priss Prints products accounted for 8%, 7% and 6% of ERO's net
sales, respectively.
Licenses and Licensing
An important element in ERO's marketing strategy is the ability to differentiate
its products and stimulate sales by using various popular characters and well-
known brand names on its products. Accordingly, ERO emphasizes the acquisition
and maintenance of a broad portfolio of character licenses. Rather than
attempting to select a few licenses with speculative appeal, ERO maintains
multiple licenses in several categories, including classics (Mickey's Stuff
for Kids, Barbie, Pooh and 101 Dalmatians) and contemporary (such as Disney's
Hercules, Jurassic Park:The Lost World and Batman and Robin). ERO's brand
names include Coral, Priss Prints and Amav. Sales tend to be concentrated in
a limited number of character licenses in each year, although the revenue
generated by any particular license varies year-to-year. For the years ended
December 31, 1996, 1995 and 1994, the five licenses with the highest sales in
each year accounted for approximately 30%, 49% and 65% of ERO's net sales,
respectively.
ERO's license agreements are typically for two years requiring payments of
approximately 10-12% of licensed product revenues. In some cases, ERO's
renewal terms are based upon meeting specified sales levels, while in other
cases they are based on informal understandings or arrangements. License
agreements typically are subject to termination by the licensor upon failure
of the licensee to meet various performance standards.
For the year ended December 31, 1996, royalties paid to licensors represented
approximately 7% of ERO's consolidated net sales. Under the terms of certain
license agreements, ERO is required to pay minimum guaranteed fees to the
licensor over the life of the agreement. The guaranteed license fees payable
by ERO have not been significant because ERO's annual percentage royalties
have generally exceeded its contractual minimum requirements for its licenses.
<PAGE>
International
The section labeled "Note 11 - Geographic Information" which appears on page
20 in the 1996 annual report is incorporated herein by reference.
For the years ended December 31, 1996, 1995, and 1994, ERO's sales to
customers located outside the United States totaled $21.3 million, $11.3
million and $8.7 million, respectively.
Manufacturing and Supply
ERO currently produces slumber bags, personal flotation devices, juvenile
furniture and children's room decor in its Georgia manufacturing plant.
ERO's activities, arts and crafts products are produced in its Quebec and
New York manufacturing facilities. The remainder of the Company's products
are purchased from manufacturers located in the United States, the People's
Republic of China, Taiwan, Italy and Indonesia. In 1996, ERO manufactured
approximately 75% of sales in its own facilities. The Company believes that
this has a positive impact on its ability to meet its customers needs for
rapid response delivery with a minimum of inventory levels. In addition,
because ERO's slumber products and water sports products are produced during
different times of the year, ERO is able to level production costs in all of
its plants during the year and, consequently, is able to minimize higher
costs usually associated with seasonal facilities. ERO believes that raw
materials and labor necessary to produce its products are readily available.
Competition
ERO operates in a highly competitive environment, with many other companies
seeking to license characters and sell children's products to mass
merchandisers. Some of these companies are larger and have greater financial
resources than ERO. ERO believes that it is the largest marketer of products
included in ERO Industries' Slumber Shoppe product group. ERO is one of a
number of companies competing for markets with respect to products in its
water sports, Impact, Priss Prints and Amav lines. In addition, ERO competes
with many others for licenses to use popular characters.
Competitive factors in the market for ERO's products include characters
licensed, cost, product design and quality, new product innovation and
inventiveness of marketing and distribution approaches. Competitive factors
in the market for character licenses include royalty levels, breadth of
product lines, timely royalty reporting and payment, artistic applications
and compliance with licensors' guidelines.
Employees
As of December 31, 1996, ERO had 1,195 employees. ERO believes that its
future success will depend in part on its ability to continue to recruit,
retain and motivate qualified employees. None of ERO's employees are
represented by a labor union. ERO has not experienced any work stoppages
and considers its relations with its employees to be good.
Environmental
ERO believes that its operations currently comply in all material respects
with applicable federal, state and local environmental laws and regulations.
ERO does not anticipate any significant expenditures in order to continue to
comply with such laws and regulations.
<PAGE>
Significant Concentration of Customers
A significant level of the Company's net sales is generated from approximately
five retail companies that serve national markets. Sales to the Company's top
five customers aggregated approximately 56%, 60% and 61% of net sales for the
years ended December 31, 1996, 1995 and 1994, respectively. Three of the
Company's customers, Toys "R" Us, Wal-Mart and Target each accounted for over
10% of the Company's net sales during 1996, 1995 and 1994, aggregating
approximately 46%, 49% and 52% of net sales, respectively.
Backlog
Because the vast majority of ERO's sales are made in response to customer
orders and satisfied relatively promptly, ERO's backlog is not significant.
Item 2. Properties
The following table provides certain information regarding the Company's
principal facilities:
<TABLE> Date
Approximate Constructed,
<S> Square Type of Acquired or
Location Footage Interest Description of Use First Occupied
<C> <C> <C> <C>
Saint Laurent, Quebec* 800,000 Owned Amav Sales, Administration,
Manufacturing and Distribution 1995
Hazlehurst, Georgia** 230,000 Owned ERO Industries and Impact Manufacturing
Manufacturing and Distribution 1947
Plattsburgh, New York*** 80,000 Owned Amav Manufacturing and Distribution 1995
Mount Prospect, Illinois 38,000 Leased ERO and ERO Industries Corporate Office 1992
Hazlehurst, Georgia 27,000 Leased Priss Prints Distribution 1986
Boca Raton, Florida 5,000 Leased Impact Sales and Marketing 1994
Dallas, Texas 4,000 Leased Priss Prints Sales and Marketing 1995
</TABLE>
*This property is subject to a hypothecary claim of first rank in favor of
Amav Industries Ltd. and a hypothecary claim of second rank in favor of The
First National Bank of Chicago, as agent for the lenders under a credit
agreement.
**This property is subject to a deed of trust in favor of The
First National Bank of Chicago, as agent for the lenders under a credit
agreement.
***This property is subject to security agreements in favor of the lenders
to the Company.
The Company believes that its properties and equipment are in good condition
and that it has sufficient capacity to meet its current manufacturing and
distribution needs.
Item 3. Legal Proceedings
The Company is currently involved in several lawsuits arising in the ordinary
course of business. The Company maintains product liability insurance and
does not believe that the outcome of any such lawsuits will have a material
adverse effect on the Company's financial condition. Although historically
the Company has not been required to pay any material liability claims, there
can be no assurance that the Company will not incur claims which are in
excess of its insurance.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of the year ended
December 31, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The sections labeled "Note 12 - Quarterly Financial Data" and "Stockholder
Information" which appear on pages 20 and 24, respectively, in the 1996
Annual Report are incorporated herein by reference. The Company has not
paid cash dividends historically, and does not intend to do so in the
foreseeable future.
Item 6. Selected Financial Data
The section labeled "Five-Year Financial Summary" which appears on page 22
in the 1996 Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
The section labeled "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" which appears on pages 7 and 8 in the
1996 Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, notes thereto and Report of
Independent Accountants thereon which appear on pages 9 through 21 in
the 1996 Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant.
The section labeled "Election of Directors" which appears in the 1997 Proxy
Statement is incorporated herein by reference.
<PAGE>
(b) Executive Officers of the Registrant.
The following table sets forth certain information concerning the Company's
executive officers:
<TABLE>
<S>
Name Age Position
<C> <C>
D. Richard Ryan, Jr 57 Chairman, President and Chief Executive Officer
Thomas M. Gasner 51 Executive Vice President of Operations
Mark D. Renfree 39 Senior Vice President of Finance and Chief Financial
Officer
D. Richard Ryan, Jr., 57, joined the Company in 1993, was elected to the
Board of Directors in 1994 and currently serves as Chairman, President and
Chief Executive Officer. Prior to joining the Company, Mr. Ryan was President
and Chief Executive Officer of Dansk International Designs, Ltd. from November
of 1985 through August of 1991, President and Chief Executive Officer of
Marley Holdings, Inc. from 1981 through 1985 and President of General
Housewares Corp.'s Cookware Group from 1974 through 1981.
Thomas M. Gasner, 51, joined the Company in 1981 and currently serves as
Executive Vice President of Operations where his responsibilities include
production, inventory control and purchasing. Mr. Gasner has been a member
of the Board of Directors since 1988.
Mark D. Renfree, 39, joined the Company in 1997 and currently serves as the
Company's Senior Vice President of Finance and Chief Financial Officer where
his responsibilities include financial planning, treasury, accounting, credit,
human resources, management information systems, insurance and negotiating
and monitoring the Company's borrowing facilities. Prior to joining the
Company, Mr. Renfree served as Senior Vice President of Finance and Chief
Financial Officer of Premier Health Alliance from 1995 through 1996 and
Senior Vice President of Finance and Administration and Chief Financial
Officer of ProGroup from 1992 through 1994.
Item 11. Executive Compensation
The section labeled "Executive Compensation" which appears in the 1997 Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Security Ownership" which appears in the 1997 Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as Part of this Report
(1) Financial Statements
The following financial statements contained on pages 9 through 21 in the
1996 Annual Report are incorporated herein by reference:
Report of Independent Accountants
Consolidated Income Statements for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not applicable or are
not required, or because the required information has been included in the
Consolidated Financial Statements or Notes thereto.
(3) Exhibits
(1) 3.1 Restated Certificate of Incorporation of the Company
(1) 3.2 By-laws of the Company
(1) 4.1 Form of certificate representing shares of Common Stock of the
Company
(1) 10.1 Voting Agreement, dated July 15, 1988, as amended February 27,
1992, among the Company, GTC Fund III, certain other investors
and certain senior managers of the Company ("Senior Management")
(1) 10.2 Registration Agreement, dated July 15, 1988, among the Company,
GTC Fund III, certain other investors and Senior Management
(1) 10.3 Form of Senior Management Agreement, dated July 15, 1988, as
amended April 1, 1991 and February 26, 1992, between the Company
and Senior Management
(1) 10.4 1992 Key Employee Stock Option Plan
(1) 10.5 1992 Directors' Stock Option Plan
<PAGE>
(2) 10.6 Lease Agreement, dated May 26, 1992, between Opus North Company
and ERO Industries, Inc.
(2) 10.7 Amendment to Voting Agreement, dated as of April 1, 1992, among
the Company, GTC Fund III and Senior Management
(3) 10.8 Employment Agreement, effective January 1, 1994, between Impact,
Inc. and Kenneth Litvack
(3) 10.9 Lease, dated November 30, 1993, between Hazlehurst Main Street,
Inc. and ERO Industries, Inc.
(3) 10.10 Lease, dated September 27, 1990, between Compson Group, Ltd.
and Impact International, Inc., First Addendum to the Lease,
effective July 1, 1991, Second Addendum to the Lease, dated
August 24, 1993 and Assignment of the Lease, dated February 11,
1994, by Impact International, Inc. to and in favor of Impact,
Inc.
(3) 10.11 The Third Restatement of ERO Industries, Inc. Retirement Income
Plan (401(k))
(4) 10.12 Second Amended and Restated Credit Agreement dated as of
December 14,1995, among ERO Industries, Inc., the financial
institutions party thereto and The First National Bank of Chicago,
as agent
(4) 10.13 Asset Purchase Agreement, dated October 19, 1995, among Amav
Industries Ltd., Avi Sochaczevski, Amos Sochaczevski, as seller,
ERO Industries, Inc., ERO NY Acquisition, Inc. and ERO Canada
Acquisition, Ltd., as buyer
(5) 10.14 Lease, dated September 15, 1995 between CleveTrust Realty Investors
and Priss Prints, Inc.
(5) 10.15 Employment Agreement, dated December 14, 1995, between Amav
Industries, Ltd. (formerly ERO Canada Acquisition, Ltd.) and
Avi Sochaczevski
(5) 10.16 Employment Agreement, dated December 14, 1995, between Amav
Industries, Ltd. (formerly ERO Canada Acquisition, Ltd.) and
Amos Sochaczevski
10.17 1997 ERO, Inc. Incentive Compensation Plan
10.18 1997 ERO Industries, Inc. Incentive Compensation Plan
10.19 1997 ERO Industries, Inc. Sales Incentive Compensation Plan
10.20 1997 Priss Prints, Inc. Incentive Compensation Plan
10.21 1997 Impact, Inc. Incentive Compensation Plan
10.22 1997 ERO Canada, Inc. Incentive Compensation Plan
10.23 Second Amendment to the Third Restatement of ERO Industries,
Inc. Retirement Income Plan (401(k))
<PAGE>
10.24 ERO, Inc. Nonqualified Deferred Compensation Plan dated
January 27, 1997
10.25 Amendment Number One, dated March 31, 1996, Amendment Number Two,
dated June 28, 1996 and Amendment Number Three, dated March 3,
1997, to the Second Amended and Restated Credit Agreement,
dated as of December 14, 1995, among ERO Industries, Inc., the
financial institutions party thereto and The First National Bank
of Chicago, as agent
10.26 Employment Agreement dated April 3, 1996 between ERO Industries,
Inc. and Barry J. Ryan
13.1 Annual Report to Stockholders for the year ended December 31,
1996
(6) 21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
___________
(1) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-46102).
(2) Incorporated by reference to the respective exhibit to the
Company's Report on Form 10-K (File No. 0-19942) for the fiscal
year ended December 31, 1992.
(3) Incorporated by reference to the respective exhibit to the
Company's Report on Form 10-K (File No. 0-19942) for the fiscal
year ended December 31, 1993.
(4) Incorporated by reference to the respective exhibit to the
Company's Current Report on Form 8-K (File No. 0-19942), regarding
the acquisition of Amav Industries Ltd., dated December 18, 1995
and filed on December 29, 1995.
(5) Incorporated by reference to the respective exhibit to the Company's
Report on Form 10-K (File No. 0-19942) for the fiscal year ended
December 31, 1995.
(6) Incorporated by reference to the section labeled "Operating
Subsidiaries" which appears on page 23 in the Company's 1996
Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of
1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ERO, Inc.
By: /s/Mark D. Renfree
Date: March 28, 1997 Mark D. Renfree
Senior Vice President of Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the Registrant and in the capacities and
on the date set forth above.
Signature Capacity
/s/ D. Richard Ryan, Jr. Chairman of the Board, President and Chief
D. Richard Ryan, Jr. Executive Officer (principal executive officer)
/s/ Thomas M. Gasner Executive Vice President of Operations and Director
Thomas M. Gasner
/s/ Mark D. Renfree Senior Vice President of Finance
Mark D. Renfree (principal financial and accounting officer)
/s/ Robert J. Lipsig Director
Robert J. Lipsig
/s/ Arthur S. Nicholas Director
Arthur S. Nicholas
/s/ Bruce V. Rauner Director
Bruce V. Rauner
/s/ Lee M. Mitchell Director
Lee M. Mitchell
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and
Stockholders of ERO, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 7, 1997 appearing on page 21 of the 1996 Annual Report to
Shareholders of ERO, Inc. (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also
included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/Price Waterhouse LLP
Chicago, Illinois
February 7, 1997
<PAGE>
ERO, Inc.
Schedule VIII
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 1996, 1995, and 1994
Additions Deletions
------------------------ --------------------------
Foreign
Balance at Charged to Charged Currency Balance
Description of Allowances Beginning Costs and to Other Translation at End
and Reserves of Year Expenses Accounts Write-offs Adjustment of Year
- ---------------------------------- ------------ ---------- ---------- ----------- ----------- -----------
1996
Allowance for doubtful accounts $ 1,038,000 $ 770,000 $(559,000)(1) $ (920,000) $ (42,000) $ 287,000
Accumulated amortization
of deferred charges 1,127,000 945,000 -- (1,510,000)(3) -- 562,000
Accumulated amortization
of intangible assets 11,569,000 2,450,000 -- -- (45,000) 13,974,000
1995
Allowance for doubtful acccounts $ 241,000 $ 343,000 $ 723,000 (2) $ (269,000) -- $ 1,038,000
Accumulated amortization
of deferred charges 1,248,000 529,000 -- (650,000)(3) -- 1,127,000
Accumulated amortization
of intangible assets 9,861,000 1,708,000 -- -- -- 11,569,000
1994
Allowance for doubtful accounts $ 81,000 $ 460,000 -- $ (300,000) -- $ 241,000
Accumulated amortization
of deferred charges 632,000 616,000 -- -- -- 1,248,000
Accumulated amortization
of intangible assets 8,293,000 1,568,000 -- -- -- 9,861,000
(1) Represents correction of prior year reserve established on the opening balance sheet pursuant to the Amav Industries Ltd.
acquisition.
(2) Represents reserve established on the opening balance sheet pursuant to the Amav Industries Ltd. acquisition.
(3) Represents the removal of fully amortized items from the accounts.
</TABLE>
February 21, 1997
(FormalName)
ERO, Inc.
585 Slawin Court
Mt. Prospect, Illinois 60056
CONFIDENTIAL
Dear (CommonName):
You are eligible to participate in the ERO, Inc. (the "Company") 1997
Incentive Compensation Plan.
Your bonus base for 1997 will be $(Bonusbase). Your actual incentive
compensation can range from 0% to 200% of this bonus base, depending
on the Company's audited operating income less interest expense for 1997.
The range of your 1997 incentive compensation can vary as follows:
Bonus base: $(Bonusbase) Operating Income % of 1997 Incentive
less Interest Expense Bonus Base Compensation
$(Target1) 0% $0
$(Target2) 100% $(Bonusbase)
$(Target3) 200% $(BONUS200)
The 1997 Incentive Compensation Plan has terms and conditions related to
your participation. A copy of the formal plan is available from Human
Resources for your review. If you have any questions regarding the program,
please talk to Mark Renfree who can explain or clarify any issues.
The reason you are a participant in the 1997 incentive compensation program
is because your efforts can, and will, have a significant impact upon the
performance of our business. I trust you will make every effort to reach
the 200% level, and I personally look forward to authorizing your bonus this
time next year.
Sincerely,
/s/D. Richard Ryan, Jr.
D. Richard Ryan, Jr.
Chairman/CEO
February 21, 1997
(FormalName)
ERO Industries, Inc.
585 Slawin Court
Mt. Prospect, Illinois 60056
CONFIDENTIAL
Dear (CommonName):
You are eligible to participate in the (location) (the "Company") 1997
Incentive Compensation Plan. Although a lot of hard work went into 1996
in trying to achieve our sales and operating income goals, we fell short.
However, 1997 really promises to be a great year. If we work together,
we have a great chance to earn a bonus.
Your bonus base for 1997 will be $(Bonusbase). Your actual incentive
compensation can range from 0% to 200% of this bonus base, depending
on the Company's audited operating income for 1997. The range of your
1997 incentive compensation can vary as follows:
Bonus base: $(Bonusbase) Operating Income % of 1997 Incentive
Achieved Bonus Base Compensation
$(Target1) 0% $0
$(Target2) 100% $(Bonusbase)
$(Target3) 200% $(BONUS200)
The 1997 Incentive Compensation Plan has terms and conditions related to
your participation. A copy of the formal plan is available from Human
Resources for your review. If you have any questions regarding the program,
please talk to Mark Renfree who can explain or clarify any issues.
The reason you are a participant in the 1997 incentive compensation program
is because your efforts can, and will, have a significant impact upon the
performance of our business. I trust you will make every effort to reach
the 200% level, and I personally look forward to authorizing your bonus this
time next year.
Sincerely,
/s/Barry J. Ryan
Barry J. Ryan
President
cc: D. Ryan
February 21, 1997
(FormalName)
(location)
585 Slawin Court
Mt. Prospect, Illinois 60056
CONFIDENTIAL
Dear (CommonName):
You are eligible to participate in the (location) (the "Company") 1997
Sales Incentive Compensation Plan. Although a lot of hard work went into
1996 in trying to achieve our sales and operating income goals, we fell
short. However, 1997 really promises to be a great year. If we work
together, we have a great chance to earn a bonus.
Your bonus base for 1997 will be $(Bonusbase). Your actual incentive
compensation can range from 0% to 200% of this bonus base, depending
on sales in your territory for 1997. The range of your 1997 incentive
compensation can vary as follows:
Bonus base: $(Bonusbase) Sales % of 1997 Incentive
Achieved Bonus Base Compensation
$(Target1) 0% $0
$(Target2) 100% $(Bonusbase)
$(Target3) 200% $(BONUS200)
The 1997 Incentive Compensation Plan has terms and conditions related to
your participation. A copy of the formal plan is available from Human
Resources for your review. If you have any questions regarding the program,
please talk to Mark Renfree who can explain or clarify any issues.
The reason you are a participant in the 1997 incentive compensation program
is because your efforts can, and will, have a significant impact upon the
performance of our business. I trust you will make every effort to reach
the 200% level, and I personally look forward to authorizing your bonus this
time next year.
Sincerely,
/s/Barry J. Ryan
Barry J. Ryan
President
cc: D. Ryan
February 21, 1997
(FormalName)
Priss Prints, Inc.
14800 Quorum Drive
Dallas, TX 75240
CONFIDENTIAL
Dear (CommonName):
You are eligible to participate in the Priss Prints, Inc. (the "Company") 1997
Incentive Compensation Plan.
Your bonus base for 1997 will be $(Bonusbase). Your actual incentive
compensation can range from 0% to 200% of this bonus base, depending
on the Company's audited operating income for 1997. The range of your
1997 incentive compensation can vary as follows:
Bonus base: $(Bonusbase) Operating Income % of 1997 Incentive
Achieved Bonus Base Compensation
$(Target1) 0% $0
$(Target2) 100% $(Bonusbase)
$(Target3) 200% $(BONUS200)
The 1997 Incentive Compensation Plan has terms and conditions related to
your participation. A copy of the formal plan is available from Human
Resources for your review. If you have any questions regarding the program,
please talk to Mark Renfree who can explain or clarify any issues.
The reason you are a participant in the 1997 incentive compensation program
is because your efforts can, and will, have a significant impact upon the
performance of our business. I trust you will make every effort to reach
the 200% level, and I personally look forward to authorizing your bonus this
time next year.
Sincerely,
/s/Richard Schaub, Jr.
Richard Schaub, Jr.
President
cc: D. Ryan
February 21, 1997
(FormalName)
Impact, Inc.
1515 N. Federal Highway, Suite #208
Boca Raton, FL 33432
CONFIDENTIAL
Dear (CommonName):
You are eligible to participate in the Impact, Inc. (the "Company") 1997
Incentive Compensation Plan.
Your bonus base for 1997 will be $(Bonusbase). Your actual incentive
compensation can range from 0% to 200% of this bonus base, depending
on the Company's audited operating income for 1997. The range of your
1997 incentive compensation can vary as follows:
Bonus base: $(Bonusbase) Operating Income % of 1997 Incentive
Achieved Bonus Base Compensation
$(Target1) 0% $0
$(Target2) 100% $(Bonusbase)
$(Target3) 200% $(BONUS200)
The 1997 Incentive Compensation Plan has terms and conditions related to
your participation. A copy of the formal plan is available from Human
Resources for your review. If you have any questions regarding the program,
please talk to Mark Renfree who can explain or clarify any issues.
The reason you are a participant in the 1997 incentive compensation program
is because your efforts can, and will, have a significant impact upon the
performance of our business. I trust you will make every effort to reach
the 200% level, and I personally look forward to authorizing your bonus this
time next year.
Sincerely,
/s/Ken Litvack
Ken Litvack
President
cc: D. Ryan
February 21, 1997
(FormalName)
ERO Canada, Inc.
6660 Kennedy Road, Suite 213
Mississauga, Ontario
Canada L5T 2M9
CONFIDENTIAL
Dear (CommonName):
You are eligible to participate in the ERO Canada, Inc. (the "Company") 1997
Incentive Compensation Plan.
Your bonus base for 1997 will be $(Bonusbase)Cnd. Your actual incentive
compensation can range from 0% to 200% of this bonus base, depending
on the Company's audited operating income less interest expense for 1997.
The range of your 1997 incentive compensation can vary as follows:
Bonus base: $(Bonusbase)Cnd. Operating Income % of 1997 Incentive
less Interest Expense Bonus Base Compensation
$(Target1)Cnd. 0% $0
$(Target2)Cnd. 100% $(Bonusbase)Cnd.
$(Target3)Cnd. 200% $(BONUS200)Cnd.
The 1997 Incentive Compensation Plan has terms and conditions related to
your participation. A copy of the formal plan is available from Human
Resources for your review. If you have any questions regarding the program,
please talk to Mark Renfree who can explain or clarify any issues.
The reason you are a participant in the 1997 incentive compensation program
is because your efforts can, and will, have a significant impact upon the
performance of our business. I trust you will make every effort to reach
the 200% level, and I personally look forward to authorizing your bonus this
time next year.
Sincerely,
/s/Barry J. Ryan
Barry J. Ryan
President
SECOND AMENDMENT TO THE THIRD RESTATEMENT
OF THE ERO INDUSTRIES, INC.
RETIREMENT INCOME PLAN
The Third Restatement of the ERO Industries, Inc. Retirement Income
Plan (the "Plan") is hereby amended, effective July 1, 1996 (unless
otherwise set forth below), as follows:
1. Section 3.1 (Annual Compensation) shall be amended, effective
January 1, 1994, by adding the following paragraphs:
In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the
contrary, for Plan Years beginning on or after January 1, 1994,
the annual compensation of each Employee taken into account under
the Plan shall not exceed the OBRA '93 annual compensation limit.
The OBRA '93 annual compensation limit is $150,000, as adjusted
by the Commissioner for increases in the cost of living in
accordance with Section 401(a)(17)(B) of the Code. The cost-of-
living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, over which compensation is
determined (determination period) beginning in such calendar year.
If a determination period consists of fewer than 12 months, the
OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under Section 401(a)
(17) of the Code shall mean the OBRA '93 annual compensation
limit set forth in this provision.
If compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the
current Plan Year, the compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in
effect for that prior determination period. For this purpose,
for determination periods beginning before the first day of the
first plan year beginning on or after January 1, 1994, the OBRA
'93 annual compensation limit is $150,000.
2. Section 3.3 (Break In Service) shall be amended to read as
follows:
Break in Service shall mean, for purposes of determining Year of
Service, a Plan Year in which an Employee completes five hundred
(500) or fewer Hours of Service and, for purposes of determining
Year of Eligible Service, any twelve (12) consecutive month
period beginning on an Employee's first day of employment, and
succeeding anniversaries thereof, in which an Employee completes
five hundred (500) or fewer Hours of Service.
3. Section 3.9 (Employee) shall be amended by deleting the first
sentence thereof and inserting the following sentence:
Employee shall mean any common law employee of the Company,
excluding (i) any person serving only as a director, (ii) all
independent contractors, (iii) any person whose employment is
governed by the terms of a collective bargaining agreement with
the Company where retirement benefits were the subject of good
faith bargaining between employee representatives and the Company,
and (iv) any person who is a non-resident alien deriving no earned
income from the Company which constitutes income from sources in
the United States.
4. Section 3.32 (Year of Eligible Service) shall be amended
to read as follows:
Year of Eligible Service shall mean any twelve (12) consecutive
month period, beginning with the Employee's first day of
employment and ending on an Employee's anniversary of his first
day of employment, and succeeding anniversaries thereof, during
which period the Employee (i) was employed with the Company or
any member of its controlled group, and (ii) completed one
thousand (1,000) or more Hours of Service.
5. Article IV (Eligibility for Participation) shall be amended
to read as follows:
(a) Each Employee shall become a Participant hereunder upon the
January 1 or July 1 immediately following completion of a
Year of Eligible Service, or, if later, attainment of age 21.
(b) A Participant who terminates employment and is subsequently
reemployed as an Employee shall become a Participant again
on his date of reemployment.
(c) An Employee who terminates employment after being eligible
to become a Participant, but prior to the date upon which
he first becomes eligible to enter the Plan, and who then
is reemployed before incurring a Break in Service, shall be
eligible to become a Participant on his date of reemployment.
(d) An Employee who terminates employment before becoming eligible
to become a Participant and who is reemployed before incurring
a Break in Service shall be eligible to become a Participant
when he satisfies the eligibility requirements of paragraph
(a) hereof, based on his date of reemployment.
(e) An Employee who terminates employment before becoming a
Participant and who is reemployed after incurring a Break
in Service shall be eligible to become a Participant when
he satisfies the eligibility requirements of paragraph (a)
hereof, based on his date of reemployment.
6. Section 5.2 (Company Contributions) shall be amended to read
as follows:
Contributions of the Company to the Trust Fund for Matching
Contributions or Company Elective Contributions shall be made
in cash. Any contributions made hereunder shall be conditioned
upon the deductibility of such contribution under Section 404
of the Code and, to the extent the deduction is not allowed,
the nondeductible contribution shall be returned to the Company
within one (1) year of the date the Trust Fund is notified of
said nondeductibility. The Plan Administrator shall adjust
all Participants' accounts to reflect only the deductible portion
of the Company Elective Contributions and Matching Contributions
for the end of the Plan Year to which the nondeductible
contribution relates.
7. Paragraph (a) of Section 5.4 (Participant's Salary Reduction
Election) shall be amended to read as follows:
Each Participant shall have the option to enter into a written
(or by any other means approved by the Company) salary reduction
agreement, which agreement shall be applicable to all compensation
received thereafter. The salary reduction agreement shall provide
that the Participant agrees to accept a reduction in salary from
the Company equal to an integral percentage of from two percent
(2%) to fifteen percent (15%) of his Annual Compensation, subject
to the then effective dollar limitation in effect ($9,500 for
the 1996 calendar year) under Section 402(g) of the Code. The
amount by which Annual Compensation is reduced shall be treated
as a Company Elective Contribution and allocated to that
Participant's Elective Account.
8. Section 7.1 shall be amended to read as follows:
Section 7.1 Allocation of Matching Contributions and
Forfeitures.
(a) For each Participant who authorizes Company Elective
Contributions during the Plan Year, the Company shall
contribute each payroll period to the Plan, on behalf
of each such Participant, a "Matching Contribution" in
an amount equal to fifty percent (50%) of the Participant's
Company Elective Contribution, provided, however, that the
Matching Contribution shall not be made on the portion of a
Participant's Company Elective Contribution that exceeds six
percent (6%) of the Participant's compensation in each such
payroll period. Matching Contributions hereunder shall be
made to the Trust Fund no later than the time prescribed by
law for filing the Company's federal income tax return for
the Plan Year to which they relate, including any extensions
thereof.
(b) To the extent of one percent (1%) of the Participant's
compensation in each payroll period, Matching Contributions
shall be allocated to a Participant's 100% Account. Matching
Contributions allocated to a Participant in excess of one
percent (1%) of his compensation in each such payroll period,
and all Forfeitures, shall be allocated to a Participant's
Regular Account.
(c) The Company shall direct the Plan Administrator to establish
and maintain a Matching Contribution Account in the name
of each of its Participants on whose behalf Matching
Contributions are made.
(d) Notwithstanding anything in this Plan to the contrary, any
Matching Contributions (and interest thereon), whether
vested or not, that are associated with an excess elective
deferral under Section 5.4 or are associated with an excess
elective contribution under Section 7.2 shall be forfeited
within two and one-half months after the end of the Plan
Year in which such excess elective deferrals or excess
contributions were made and shall be reallocated as a
Forfeiture hereunder.
(e) As of the last day of the Plan Year, Forfeitures shall be
allocated to all Participants who are employed by the
Company at the close of business on the last day of the
Plan Year and who completed a Year of Service in such Plan
Year. A Participant eligible to share in Forfeitures for
the Plan Year shall share in such Forfeitures in the
proportion that his Annual Compensation bears to the Annual
Compensation of all eligible Participants for such Plan Year.
9. Paragraph (b) of Section 7.2 (Limitation of Company Elective
Contributions -- 401(k) Deferral Percentage Tests) shall be amended to
add the following sentence.
For purposes of determining a Participant's compensation hereunder,
if an Employee becomes a Participant during a Plan Year, his
compensation in such Plan Year for purposes of the actual deferral
percentage test provided for hereunder shall be his Annual
Compensation for the entire Plan Year, unless the Company, in
a manner applied uniformly for all Participants for such Plan Year,
determines that compensation shall be based only upon the portion
of Annual Compensation earned during the period in which the
Participant participated in the Plan.
10. The following Paragraph (f) shall be added to Section 9.3
(Other Forms of Settlement):
(f) If a distribution is one to which Sections 401(a)(11) and
417 of the Code do apply, such distribution may be made or
commence less than thirty (30) days after written explanation
of the forms of distribution is given (but not sooner than
seven (7) days after such explanation is given), provided
the requirements set forth in Section 1.417(e)-1T of the
Tax Regulations are met.
11. Section 10.6 (Participant Loans) shall be amended to read
as follows:
Upon application by an Employee who is a Participant or any other
party-in-interest, as defined in Section 3(14) of ERISA, and upon
a determination that the Employee or other party-in-interest is
deemed to have a "serious financial hardship," as determined in
accordance with Section 10.3(d) of the Plan, the Plan's trustee
may lend such Employee or other party-in-interest an amount such
that the aggregate of all of his outstanding loans under this Plan
and all other plans maintained by the Company or any member of its
controlled group does not exceed the lesser of: (1) fifty thousand
dollars ($50,000) (reduced by the excess, if any, of (A) the
highest outstanding balance of loans from the Plan and all other
plans maintained by the Company or any member of its controlled
group during the one (1) year period ending on the day before the
date on which such loan is made over (B) the outstanding balance
of loans from the Plan and all other plans maintained by the
Company or any member of its controlled group on the date on which
such loan is made); or (2) an amount which does not exceed one-half
(1/2) of the Vested Accounts, if any, under the Plan as of the date
on which the loan is approved. All loans shall follow a uniform,
nondiscriminatory policy. Loans shall not be made available to
highly compensated Employees in an amount greater than the amount
made available to other Employees.
In addition to such rules and regulations as the Plan Administrator
may adopt, all loans shall comply with the following terms and
conditions:
(a) An application for a loan by an Employee or other party-in-
interest shall be made in writing to the Plan Administrator,
whose action thereon shall be final. The Plan Administrator
shall specify the form of the application and any supporting
data required.
(b) The period of repayment for any loan shall be five (5) years,
unless the loan is used to acquire a dwelling unit which
within a reasonable time shall be used as the principal
residence of the Employee or other party-in-interest, in
which case the period of repayment shall be determined by
the Plan Administrator. Loans shall be repayable in
substantially equal amortized installments of both principal
and interest payable not less frequently than quarterly.
Loans to Employees shall be repaid through automatic payroll
deduction, and for parties-in-interest who are not Employees,
on such other terms and conditions as the Plan Administrator
deems appropriate. To the extent that such loan is unpaid at
the time a distribution of such Participant's Accounts becomes
payable, such unpaid amount shall be deducted from the amount
otherwise payable from his Account. Any loan described in
this Section 10.6 shall be considered an investment of the
Account from which it was borrowed. Such Account shall not
share in the allocation of earnings under the Plan to the
extent of such loan.
(c) Each loan shall bear interest at a rate which is two percent
(2%) above the prime rate, as such rate is charged from time
to time by area banking businesses.
(d) Each loan shall be supported by collateral equal to no more
than fifty percent (50%) of the Employee's or other party-
in-interest's entire Vested Accounts in the Trust Fund.
A loan also shall be supported by the Employee's or other
party-in-interest's promissory note for the amount of the
loan, including interest, payable to the order of the
trustee. The promissory note shall require that the unpaid
principal and interest will become due and payable if a loan
payment is not made by the last day of the calendar year
quarter following the calendar year quarter in which the
installment was due and owing. In the event of default,
foreclosure on the note and attachment of security will
not occur until a distributable event occurs in the Plan.
(e) Each loan shall be in an amount not less than one thousand
dollars ($1,000.00).
IN WITNESS WHEREOF, the Company has caused this Second Amendment
to the Plan to be executed by its duly authorized officer this ____
day of July, 1996.
ERO INDUSTRIES, INC.,
a Delaware corporation
By: /s/Ted J. Lueken
Its: Senior Vice President of Finance
NONQUALIFIED DEFERRED COMPENSATION PLAN
SECTION 1
Definitions
1.1. Affiliate. "Affiliate" means any corporation. partnership, joint
venture, association or similar organization or entity that is required to be
aggregated with the Company pursuant to Code Sections 414(b), (c), or (m).
1.2. Code. "Code" means the Internal Revenue Code of 1986, as amended
from time to time. Any reference to a section of the Code includes any
comparable section or sections of any future legislation that amends,
supplements or supersedes that section.
1.3. Company. "Company" means ERO, Inc. located at 585 Slawin Court, Mount
Prospect, Illinois, employer tax identification number 36-3573286, which
Company has established the Plan. as set forth herein.
1.4. Compensation. "Compensation" means (select one option):
Option 1. Total taxable salarv, bonuses and commissions paid
to a Participant by the Employer (determined without
regard to any amounts in the Participant's Deferred
Compensation Account).
Option 2. x Total taxable salary and commissions of the
Participant paid or accrued by the Employer, but
not including the value of any bonuses, stock
options, stock appreciation rights (determined
without regard to any amounts in the Participant's
Deferred Compensation Account). and car allowances.
Option 3. Other
1.5. Deferred Compensation Account. "Deferred Compensation Account" means the
bookkeeping account maintained under the Plan in the Participant's name
to reflect amounts deferred under the Plan pursuant to Section 3 (as
adjusted under Section 4) and (if elected by the Company) any Emplover
Discretionarv Contributions made on behalf of the Participant (as
adjusted under Section 4).
1.6. Deferral Election. "Deferral Election" means a written notice filed by
the Participant with the Employer specifying the Compensation or bonus to be
deferred by the Participant.
1.7. Distribution Date. "Distribution Date" means the date a Participant
terminates employment or association with the Employers for whatever reason,
unless such termination of employment is for Good Cause.
1.8. Early Retirement Date. "Early Retirement Date" means (select one
option):
__ The date the Participant attains ____ years of age.
__ The date the Participant attains ____ years of age and has
been employed by the Company or its Affiliates for at least
____ years.
1.9. Effective Date. "Effective Date" means January 1. 1997
1.10. Employee. "Employee" means an employee of an Employer who meets
the eligibility criteria set forth in Subsection 3.1 of the Plan and who is
a member of a select group of management or highly compensated employees as
defined under ERISA or the regulations thereunder.
1.11. Employer. "Employer" means, individually, the Company and each
Affiliate of the Company that adopts the Plan in accordance with Subsection
7. 1. The Company and any Affiliates that adopt the Plan are sometimes
collectively referred to herein as the "Employers".
1.12. ERISA. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time. Any reference to a section of ERISA
includes any comparable section or sections of any future legislation that
amends, supplements or supersedes that section.
1.13. Excess Contributions. "Excess Contributions" means contributions
determined to be excess contributions or excess deferrals (as such terms are
defined in the regulations under Section 401(k) of the Code) for the Plan Year
under a plan maintained by an Employer that is qualified under Sections 401(a)
and 401(k) of the Code.
1.14. Independent Contractor. "Independent Contractor" means an individual
who is not a common-law employee of an Employer but who receives payments
from the Employer for services rendered.
1.15. Normal Retirement Date. "Normal Retirement Date" means (select one
option):
x The date the Participant attains 65 years of age.
The date the Participant attains ____years of age and has
been employed by the Company or its Affiliates for at least
____ years.
1.16. Participant. "Participant" means an Employee or Independent
Contractor who meets the eligibility criteria set forth in Subsection 3.1 and
who has made a Deferral Election in accordance with the terms of the Plan.
1.17. Plan. "Plan" means the provisions of the Plan. as set forth
herein, including the variable provisions selected and agreed to by the
Company.
1.18. Plan Administrator - The "Plan Administrator" means (select one
option):
x The Companv.
A committee of at least ____ members appointed by the Companv.
The ___________________ (insert title) of the Companv.
Other
1.19. Plan Year. "Plan Year" means the calendar year. However, if
the Effective Date of the Plan is other than January 1 of a year, the
initial Plan Year shall be a short Plan Year, beginning on the Effective
Date and ending on the following December 31.
1.20. Unforeseeable Financial Emergency. "Unforeseeable Financial
Emergency" means a severe financial hardship of the Participant resulting
from:
(a) A sudden and unexpected illness or accident of the
Participant or of a dependent of the Participant;
(b) Loss of the Participant's principal residence due to
casualty; or
(c) Such other similar extraordinary and unforeseeable
circumstances resulting from events bevond the control of the
Participant.
Whether a Participant has an Unforeseeable Financial Emergency shall be
determined in the sole discretion of the Plan Administrator.
1.21. Valuation Date. "Valuation Date" means (select one option):
x Any business day.
The last dav of any calendar month.
The last dav of any calendar quarter.
The last dav of the Plan Year.
Other
1.22. Other Definitions. In addition to the terms defined in this
Section 1, other terms are defined when first used in later
Sections of this Plan.
SECTION 2
Purpose and Administration
2.1. Purpose. The Company has established the Plan primarily for the
purpose of providing deferred compensation to a select group of management
or highly compensated employees of the Employers. The Plan is intended to be
a top-hat plan described in Section 201(2) of ERISA. If elected by the
Company under Subsection 3.1 of the Plan, Independent Contractors also mav
participate in the Plan. The Company intends that the Plan (and each Trust
under the Plan (as described in Subsection 6.1)) shall be treated as unfunded
for tax purposes and for purposes of Title I of ERISA. An Employer's
obligations hereunder, if any, to a Participant (or to a Participant's
beneficiary) shall be unsecured and shall be a mere promise bv the Employer
to make payments hereunder in the future. A Participant (or the Participant's
beneficiary) shall be treated as a general unsecured creditor of the Employer.
2.2. Administration. The Plan shall be administered by the Plan
Administrator. The Plan Administrator shall serve at the pleasure of the
Company's Board of Directors and may be removed by such Board, with or
without cause. The Plan Administrator may resign upon prior written notice
to the Company's Board of Directors.
The Plan Administrator shall have the powers, rights, and duties set forth
in the Plan and shall have the power, in the Plan Administrator's sole and
absolute discretion, to determine all questions arising under the Plan,
including the determination of the rights of all persons with respect to the
Plan and to interpret the provisions of the Plan and remedy any ambiguities,
inconsistencies, or omissions. Any decisions of the Plan Administrator
shall be final and binding on all persons with respect to the Plan and the
benefits provided under the Plan. The Plan Administrator may delegate the
Plan Administrator's authority under the Plan to one or more officers or
directors of the Company; provided, however, that (a) such delegation must
be in writing, and (b) the officers or directors of the Company to whom
the Plan Administrator is delegating authority must accept such delegation
in writing.
If a Participant is serving as the Plan Administrator (either individually or
as a member of a committee), the Participant mav not decide or determine any
matter or question concerning such Participant's benefits under the Plan that
the Participant would not have the right to decide or determine if the
Participant were not serving as the Plan Administrator.
SECTION 3
Eligibility, Participation, Deferral Elections,
and Employer Contribution
3.1 Eligibilitv and Participation. Subject to the conditions and
limitations of the Plan, the following persons are eligible to participate in
the Plan (select and complete option(s)):
All Emplovees with a rank of ____________ (insert title) or
above and with total earnings of at least __________ per Plan
Year.
X The following Empiovees of the Employers:
See attached list. No Emplovee whose name is stated on this
list may participate in the Plan for a Plan Year unless he
elects to contribute the maximum allowable salarv reduction
amount to the ERO Industries, Inc. Retirement Income Plan during
such Plan Year. This limitation shall not applv during the
first year of an individual's emplovment, if he is ineligible to
contribute to the ERO Industries, Inc. Retirement Income Plan
for that entire year.
The following Independent Contractors:
(Attach a separate sheet if necessary)
Any individuals specified above by an Employer may be changed bv action of
the Employer. An Employee or Independent Contractor shall become a Participant
in the Plan upon the execution and filing with the Plan Administrator of a
written election to defer a portion of the Employee's or Independent
Contractor's Compensation. A Participant shall remain a Participant until
the entire balance of the Participant's Deferred Compensation Account has
been distributed.
3.2. Rules for Deferral Elections. Any person identified in Subsection
3.1 may make a Deferral Election to defer receipt of Compensation he or she
otherwise would be entitled to receive for a Plan Year in accordance with the
rules set forth below:
(a) All Deferral Elections must be made in writing on the form
prescribed by the Plan Administrator and will be effective
only when filed with the Plan Administrator no later than the
date specified by the Plan Administrator. In no event may a
Deferral Election be made later than the last day of the Plan
Year preceding the Plan Year in which the amount being deferred
would otherwise be made available to the Participant. However,
in the case of a Participant's initial year of employment or
association with an Employer, the Participant may make a
Deferral Election with respect to compensation for services
to be performed subsequent to such Deferral Election, provided
such election is made no later than 30 davs after the date the
Participant first becomes eligible for the Plan. Furthermore,
in the case of a short initial Plan Year, each Participant mav
make a Deferral Election with respect to compensation for
services to be performed subsequent to such Deferral Election,
provided such election is made no later than 30 davs after the
Effective Date.
(b) With respect to Plan Years following the Participant's initial
Plan Year of participation in the Plan, failure to complete a
subsequent Deferral Election shall constitute a waiver of the
Participant's right to elect a different amount of Compensation
to be deferred for each such Plan Year and shall be considered
an affirmation and ratification to continue the Participant's
existing Deferral Election. However, a Participant may,
prior to the beginning of any Plan Year, elect to increase or
decrease the amount of Compensation to be deferred for the next
following Plan Year by filing, another Deferral Election with
the Plan Administrator in accordance with paragraph (a) above.
(c) A Deferral Election in effect for a Plan Year may not be
modified during the Plan Year, except that a Participant may
terminate the Participant's Deferral Election during a Plan
Year in the event of an Unforeseeable Financial Emergency.
3.3 Amounts Deferred. (select one option):
Option 1. x Deferral of a Percentage of Compensation plus Bonus.
Commencing on the Effective Date. a Participant mav elect to defer (a)
up to 20% of the Participant's Base Salary for a Plan Year, but not
less than 6% reduced by the percentage of salary reduction contributions
directed bv the Participant for that Plan Year to the ERO Industries,
Inc. Retirement Income Plan, and (b) up to 0% of the Participant's
bonus for a Plan Year. The amount of Compensation and bonus deferred
by a Participant shall be credited to the Participant's Deferred
Compensation
Account as of the Valuation Date coincident with or immediately
following the date such Compensation and bonus would, but for the
Participant's Deferral Election, be payable to the Participant.
Option 2. Deferral of Bonus Only.
Commencing on the Effective Date, a Participant mav elect to defer up
to ___ % of any bonus awarded to the Participant during a Plan Year.
The amount of bonus deferred by a Participant shall be credited to the
Participant's Deferred Compensation Account as of the Valuation Date
coincident with or immecliateiv following such the date such bonus
would, but for the Participant's Deferral Election, be pavable to
the Participant.
Option 3. Deferral of Excess Contributions.
Commencing on the Effective Date, a Participant may elect to defer an
amount equal to the Excess Contributions payable to the Participant
during a Plan Year. Such amount shall be credited to the Participant's
Deferred Compensation Account as of the Valuation Date coincident with
or immediately following the date such amount would, but for the
Participant's Deferral Election, be pavable to the Participant.
3.4 Employer Discretionary Contributions. If selected by the Company
below, an Employer may, in its sole discretion, credit to the Deferred
Compensation Account of any Participant employed by that Employer an amount
determined by the Employer in its sole discretion (an "Employer Discretionary
Contribution") for a Plan Year. Any Employer Discretionary Contribution for
a Plan Year will be credited to a Participant's Deferred Compensation Account
as of the Valuation Date specified by the Employer.
(select one of tbefollowing options)
No Employer Discretionary Contributions will be made
under the Plan.
x Employer Discretionarv Contributions shall be made under
the Plan for each Plan Year for each Participant in the
percentage equal to 3% of such Participant's base compensation
reduced bv the percentage of total compensation which the
Emplover contributes on behalf of the Participant for that year
to the ERO Industries, Inc., Retirement Income Plan. For
example, if the Emplover for a Plan Year contributes 2.25% of
total compensation on behalf of a Participant to the ERO
Industries, Inc. Retirement Income Plan, then the Employer
shall contribute .75% of the Participant's base compensation
for that Plan Year to the Plan.
SECTION 4
Deferred Compensation Accounts
4.1. Deferred Compensation Accounts. All amounts deferred pursuant to one
or more Deferral Elections under the Plan and any Employer Discretionarv
Contributions shall be credited to a Participant's Deferred Compensation
Account and shall be adjusted under Subsection 4.2.
4.2. Deferral Account Adiustments and Investment Options. As of each
Valuation Date, the Plan Administrator shall adjust amounts in a Participant's
Deferred Compensation Account to reflect earnings (or losses) in the Investment
Options (as defined in Subsection 4.4) attributable to the Participant's
Deferred Compensation Account. Earnings (or losses) on amounts in a
Participant's Deferred Compensation Account shall accrue commencing on the
date the Deferred Compensation Account first has a positive balance and shall
continue to accrue until the entire balance in the Participant's Deferred
Compensation Account has been distributed. Earnings (or losses) shall be
credited to a Participant's Deferred Compensation Account based on the realized
rate of return (net of any expenses and taxes paid from the Trust)on the
Investment Options attributable to the Participant's Deferred Compensation
Account.
4.3. Vesting. A Participant shall be fully vested in the amounts in the
Participant's Deferred Compensation Account attributable to the Participant's
Deferral Elections. If Employer Discretionary Contributions are made under
the Plan, a Participant shall be vested in the amount in the Participant's
Deferred Compensation Account attributable to Employer Discretionarv
Contributions in accordance with the following (select Options 1., 2., or 3.
and,if desired, Option 4. and/or Option 5.):
Option 1. Five Year Vesting Schedule
Vesting for Participants will be determined by (select one):
Years of Service with the Employer.
Years of Participation in this Plan.
Nonforfeitable Percentage
Less than 5 years....................................... 0%
5 or more years ...................................... 100%
Option 2. Seven Year Graded Vesting Schedule
Vesting for Participants will be determined by (select one):
Years of Service with the Employer.
Years of Participation in this Plan.
Nonforfeitable Percentaee
Less than 3 years ...................................... 0%
3 years 2O%
4 years 4O%
5 years 60%
6 years 8O%
7 years 100 %
Option 3. Other vesting schedule as described below:
100% Immediate Vesting
Option 4. Notwithstanding the foregoing vesting schedule, the
balance in a Participant's Deferred Compensation Account
attributable to Employer Discretionary Contributions will
be forfeited if the Paricipant's employment or association
with the Employer is terminated for Good Cause, before a
Change of Control occurs.
Option 5. x Notwithstanding the foregoing vesting schedule, the entire
balance in a Participant's Deferred Compensation Account
attributable to Employer Discretionary Contributions will
be fully vested upon the Participant's Early Retirement
Date.
For the purpose of determining a Participant's vested benefit with respect to
Employer Discretionary Contributions, a "Year of Service" means each twelve
month period of employment or association with the Company and the Affiliates,
and a "Year of Participation" means each twelve-month period of active
participation in the Plan. Notwithstanding the foregoing, a Participant
shall be fully vested in the entire balance in the Participant's Deferred
Compensation Account upon the ParEicipant's Normal Retirement Date, death or
becoming disabled (as provided in Subsection 5.2 below), provided the date on
which the Participant dies or becomes disabled occurs while the Participant
is actively employed by or associated with the Emplovers. The portion of a
Participant's Deferred Compensation Account in which the Participant is not
fullv vested shall be forfeited to the Employer by the Participant.
If elected by the Companv under Option 4. above, notwithstanding the vesting
schedule selected in Option 1., 2., or 3. above, the balance in a Participant's
Deferred Compensation Account attributable to Employer Discretionary
Contributions will be forfeited (and neither the Participant nor the
Participant's beneficiaries will have any rights thereto)if the Participant's
employment with the Employer is terminated for Good Cause. "Good Cause"
means the Participant's gross negligence, fraud, dishonesty, or willful
violation of any law or significant policy of the Employer that is committed
in connection with the Participant's employment by or association with the
Employer. Whether a Participant has been terminated for Good Cause shall be
determined by the Plan Administrator.
4.4. Investment Options. The Trust (as described in Subsection 6. 1) shall
contain such investment funds ("Investment Options") as may be determined
under the terms of the Trust. The trustee of the Trust (the "Trustee") may,
at its sole discretion, comply with a Participant's directions with respect
to investment of assets of the Trust that are equal to the value of the
Participant's Deferred Compensation Account. Such directions must be
made to the Trustee at least 30 days prior to the effective date of such
direction. Transfers between Investment Options shall be administered in
accordance with the following: (select one option):
Option 1. The Trustee, in its discretion, may take investment
instructions from a Participant for semi-annual
transfers between Investment Options for those assets
of the Trust equal to the value of the Participant's
Deferred Compensation Account.
Option 2. x The Trustee, in its discretion, may take investment
instructions from a Participant for quarterly transfers
between Investment Options for those assets of the Trust
equal to the value of the Participant's Deferred
Compensation Account.
Option 3. The Trustee, in its discretion, may take instructions
from a Participant for transfers up to times per year
between Investment Options for those assets of the Trust
equal to the value of the Participant's Deferred
Compensation Account.
Option 4. The Trustee, in its discretion, may take investment
instructions from a Participant for transfers as of
any business day between Investment Options for those
assets of the Trust equal to the value of the
Participant's Deferred Compensation Account.
SECTION 5
Payment of Benefits
5.1. Time and Method of Pavment. Payment of the vested portion of a
Participant's Deferred Compensation Account shall be made as soon as
practicable following the Valuation Date coincident with or next following
the Participant's Distribution Date; provided, however, that if the Company
has elected a daily Valuation Date, such payment will be made as soon as
practicable following the last business day of the month in which the
Participant's Distribution Date occurs. Payment of the vested portion of a
Participant's Deferred Compensation Account shall be made as follows (select
one option):
Option 1. x A single, lump sum pavment.
Option 2. Substantially equal monthly installment payments for
months.
Option 3. Substantially equal monthly installment payments for
months with a one-time option to receive a lump sum
payment. The Participant may elect to receive a
single, lump sum payment in lieu of instalhnent
payments. Such election must be made by filig a
written election with the Plan Administrator at least
30 days prior to the time installment payments would
otherwise begin, and such election is subject to
approval by the Employer of the Participant.
5.2. Payment Upon Disabilitv. In the event a Participant becomes disabled
(as defined below) while the Participant is employed by or associated with
an Employer, payment of the Participant's Deferred Compensation Account shall
be made (or shall commence) as soon as practicable after the Valuation Date
coincident with or next following the date on which the Plan Administrator
determines that the Participant is disabled. For purposes of this Subsection
5.2, a Participant shall be considered disabled if the Participant is unable
to engage in any substantially gainful activity by reason of any medically
determined physical or mental impairment that can be expected to result in
death or that has lasted or can be expected to last for a continuous period
of not less than twelve months. Whether a Participant is disabled for purposes
of the Plan shall be determined by the Plan Administrator, and in making such
determination, the Plan Administrator may rely on the opinion of a physician
(or physicians) selected by the Plan Administrator for such purpose.
5.3. Payment Upon Death of a Participant. A Participant's Deferred
Compensation Account shall be paid to the Participant's beneficiary
(designated in accordance with Subsection 5.4) in a single lump sum as soon
as practicable following the Valuation Date coincident with or next following
the Participant's death.
5.4. Beneficiary. If a Participant is married on the date of the
Participant's death, the Participant's beneficiary shall be the Participant's
spouse, unless the Participant names a beneficiary or beneficiaries (other
than the Participant's spouse) to receive the balance of the Participant's
Deferred Compensation Account in the event of the Participant's death prior
to the payment of the Participant's entire Deferred Compensation Account.
To be effective, any beneficiary designation must be filed in writing with
the Plan Administrator in accordance with rules and procedures adopted by
the Plan Administrator for that purpose. A Participant may revoke an existing
beneficiary designation by filing another written beneficiary designation with
the Plan Administrator. The latest beneficiary designation received bv the
Plan Administrator shall be controlling. If no beneficiary is named bv a
Participant, or if the Participant survives all of the Participant's named
beneficiaries and does not designate another beneficiary, the Participant's
Deferred Compensation Account shall be paid in the following order of
precedence:
(a) The Participant's spouse:
(b) The Participant's children (including adopted children)
per stripes; or
(c) The Participant's estate.
5.5. Unforeseeable Financial Emergency. If the Plan Administrator
determines that a Participant has incurred an Unforeseeable Financial
Emergency, the Participant may receive in cash the portion of the balance
of the Participant's Deferred Compensation Account needed to satisfy the
Unforeseeable Financial Emergency, but only if the Unforeseeable Financial
Emergency may not be relieved (a) through reimbursement or compensation
by insurance or otherwise or (b) by liquidation of the Participant's assets
to the extent the liquidation of such assets would not itself cause severe
financial hardship. A payment on account of an Unforeseeable Financial
Emergencv shall not be in excess of the amount needed to relieve such
Unforeseeable Financial Emergencv and shall be made as soon as
practicable following the date on which the Plan Administrator approves
such payment.
5.6. Withholding of Taxes. In connection with the Plan, the Employers
shall withhold any applicable Federal, state or local income tax and any
employment taxes, including Social Securitv taxes, at such time and in such
amounts as is necessary to comply with applicable laws and regulations.
SECTION 6
Miscellaneous
6.1. Funding. Each Employer under the Plan shall establish and maintain one
or more grantor trusts (individually, a "Trust") to hold assets to be used
for payment of benefits under the Plan. A Trust shall confonn with the terms
of Internal Revenue Service Revenue Procedure 92-64 (or any subsequent
administrative ruling). The assets of the Trust with respect to benefits
payable to the Participants employed by or associated with an Employer
shall remain the assets of such Employer subject to the claims of its
general creditors. Any payments by a Trust of benefits provided to a
Participant under the Plan shall be considered payment by the applicable
Employer and shall discharge such Employer from any further liability under
the Plan for such payments.
6.2. Rights. Establishment of the Plan shall not be construed to give any
Employee or Independent Contractor the right to be retained by the Employers
or to any benefits not specifically provided by the Plan.
6.3. Interests Not Transferable. Except as to withholding of any tax under
the laws of the United States or any state or locality and the provisions of
Subsection 5.4, no benefit payable at any time under the Plan shall be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
or any other encumbrance of any kind or to any attachment, garnishment, or other
legal process of any kind. Any attempt by a person (including a Participant
or a Participant's beneficiary) to anticipate, alienate, sell, transfer,
assign, pledge, or otherwise encumber any benefits under the Plan, whether
currently or thereafter payable, shall be void. If any person shall attempt
to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber
such person's benefits under the Plan, or if by any reason of such person's
bankruptcy or other event happening at any time, such benefits would
devolve upon any other person or would not be enjoyed by the person entitled
thereto under the Plan, then the Plan Administrator, in the Plan
Administrator's sole discretion, may terminate the interest in any such
benefits of the person otherwise entitled thereto under the Plan and may hold
or apply such benefits in such manner as the Plan Administrator may deem
proper.
6.4. Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of
the amounts in the Deferred Compensation Account of a Participant that cannot
be distributed because of the Plan Administrator's inability, after a
reasonable search, to locate a Participant or the Participant's beneficiary,
as applicable, within a period of two years after the Distribution Date upon
which the payment of benefits became due. Unclaimed amounts shall be forfeited
at the end of such two-year period. These forfeitures will reduce the
obligations of the Employers, if any, under the Plan. After an unclaimed
amount has been forfeited, the Participant or beneficiary, as applicable,
shall have no further right to amounts in the Participant's Deferred
Compensation Account.
6.5. Controlling Law. The law of the state of incorporation of the Company
shall be controlling in all matters relating to the Plan to the extent not
preempted by Federal law.
6.6. Number. Words in the plural shall include the singular, and the
singular shall include the plural.
6.7. Action bv the Employers. Except as otherwise specifically provided
herein, any action required of or permitted to be taken bv an Emplover under
the Plan shall be by resolution of its Board of Directors or by resolution
of a duly authorized committee of its Board of Directors or by action of
a person or persons authorized by resolution of such Board of Directors or
such committee.
6.8. Offset for Obligations to Employer. If, at such time as a Participant
or a Participant's beneficiary becomes entitled to benefit payments hereunder,
the Participant has any debt, obligation or other liability representing an
amount owing to an Employer or an Affiliate of the Employer, and if such debt,
obligation, or other liability is due and owing at the time benefit payments
are payable hereunder, the Employer may offset the amount owing it or an
Affiliate against the amount of benefits otherwise distributable hereunder.
6.9. No Fiduciary Relationship. Nothing contained in this Plan, and no
action taken pursuant to its provisions by either the Employers or the
Participants shall create, or be construed to create a fiduciary relationship
between the Employer and the Participant, a designated beneficiary, other
beneficiaries of the Participant, or any other person.
6. 10. Claims Procedures. Any person (hereinafter referred to as a
"Claimant") who believes that he or she is being denied a benefit to which
he or she may be entitled under the Plan may file a written request for
such benefit with the Plan Administrator. Such written request must
set forth the Claimant's claim and must be addressed to the Plan Administrator,
at the Company's principal place of business. Upon receipt of a claim, the Plan
Administrator shall advise the Claimant that a reply will be forthcoming
within ninety days and shall deliver a reply within ninety days. The Plan
Administrator may, however, extend the reply period for an additional ninety
days for reasonable cause. If the claim is denied in whole or in part, the
Plan Administrator shall issue a written determination, using language
calculated to be understood by the Claimant, setting forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan
upon which such denial is based:
(c) A description of any additional material or information
necessary for the Claimant to perfect the Claimant's claim
and an explanation why such material or such information is
necessary; and
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review, and the time
limits for requesting such a review.
Within sixty days after the receipt by the Claimant of the written
determination described above, the Claimant may request in writing, that
the Plan Administrator review the Plan Administrator's determination. The
request must be addressed to the Plan Administrator, at the Company's
principal place of business. The Claimant or the Claimant's duly authorized
representative may, but need not, review the pertinent documents and submit
issues and comments in writing for consideration by the Plan Administrator.
If the Claimant does not request a review of the Plan Administrator's
determination within such sixty day period, the Claimant shall be barred
and estopped from challenging the Plan Administrator's deterinination.
Within sixty days after the Plan Administrator's receipt of a request for
review, the Plan Administrator will review the determination. After
considering all materials presented by the Claimant, the Plan Administrator
will render a written determination, written in a manner calculated to be
understood by the Claimant setting forth the specific reasons for the
decision and containing specific references to the pertinent provisions of
the Plan on which the decision is based. If special circumstances require
that the sixty day time period be extended, the Plan Administrator will so
notify the Claimant and will render the decision as soon as practicable,
but no later than one hundred twenty days after receipt of the request
for review.
6.11. Notice. Any notice required or permitted to be given under the
provisions of the Plan shall be in writing, and shall be signed by the
party giving or making the same. If such notice, consent or demand is
mailed to a party hereto, it shall be sent by United States certified
mail, postage prepaid. addressed to such pariy's last known address as
shown on the records of the Employers. Notices to the Plan Administrator
should be sent in care of the Company at the Company's principal place
of business. The date of such mailing shall be deemed the date of notice.
Either party may change the address to which notice is to be sent by giving
notice of the change of address in the manner set forth above.
SECTION 7
Employer Participation
7.1. Adoption of Plan. Any Affiliate of the Companv may, with the approval
of the Company, adopt the Plan by filing with the Company a resolution of its
Board of Directors to that effect.
7.2. Withdrawal from the Plan by Emplover. Any Emplover shall have the
right, at any time, upon the approval of, and under such conditions as mav
be provided by the Plan Administrator, to withdraw from the Plan by delivering
to the Plan Administrator written notice of its election so to withdraw. Upon
receipt of such notice by the Plan Administrator, the portion of the Deferred
Compensation Account of Participants and beneficiaries attributable to amounts
deferred while the Participants were employed by or associated with such
withdrawing Employer shall be distributed from the Trust at the direction of
the Plan Administrator in cash at such time or times as the Plan Administrator
in the Plan Administrator's sole discretion, may deem to be in the best
interest of such Participants and their beneficiaries. To the extent the
amounts held in the Trust for the benefit of such Participants and
beneficiaries are not sufficient to satisfy the Employer's obligation to
such Participants and their beneficiaries accrued on account of their
employment with the Employer, the remaining amount necessary to satisfy
such obligation shall be an obligation of the Employer, and the other
Employers shall have no further obligation to such Participants and
beneficiaries with respect to such amounts.
SECTION 8
Amendment and Termination
The Companv intends the Plan to be permanent, but reserves the right at
anv time to modifv, amend or terminate the Plan; provided however, that
except as provided below, any amendment or termination of the Plan shall
not reduce or eliminate any balance in a Participant's Deferred Compensation
Account accrued through the date of such amendment or termination. Upon
termination of the Plan, the Companv may provide that notwithstanding the
Participant's Distribution Date, all Deferred Compensation Account balances
will be distributed on a date selected bv the Company.
SECTION 9
Change of Control
9.1. Overriding Provisions Applicable During a Restricted Period. The
following provisions of this Section 9 will become effective on a Restricted
Date as the result of a Change of Control and will remain in effect during
the Restricted Period beginning on that date until the following related
Unrestricted Date, and during the Restricted Period, will supersede any other
provisions of the Plan to the extent necessary to eliminate any inconsistencies
between the provisions of this Section 9 and any other provisions of the Plan,
including any supplements thereto.
9.2. Suspension of Part or All of the Overriding Provisions. If a majority
of the members of the Entire Board are Continuing Directors (provided such
majority is equal to the same number as constituted a majoritv of the Entire
Board immediately prior to the Change of Control), by the affirmative vote of
a majority of the Entire Board and a majority of those members of the Entire
Board who are Continuing Directors, all or a designated portion or portions
of the following provisions of this Section 9 may be declared not applicable
as to the specified transaction or event. No portion of the provisions of
this Section 9 will apply to any transaction or event to the extent such
portion is inconsistent with the requirements of applicable law.
9.3. Definitions. For purposes of this Section 9, the definitions set forth
in Paragraphs (a) throuph (k) below will apply. Definitions set forth
elsewhere in the Plan also will apply to the provisions set forth in this
Section 9, except that where a definition set forth elsewhere in the Plan
and a definition set forth in this Subsection conflict, the definition set
forth in this Subsection will govern.
(a) "Acquiring Person" will mean any Person, who or which,
together with all Affiliates and Associates of such Person,
is the Beneficial Owner of shares of common stock of the
Company constituting more than 20 percent of the common stock
then outstanding.
(b) "Affiliate" and "Associate" will have the meaning ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934 (the "Act").
(c) "Beneficial Owner" will have the meaning ascribed to such term
in Rule 13d-3 of the Act.
(d) "Board of Directors" will mean the Board of Directors of the
Companv.
(e) A "Change of Control" will be deemed to occur (i) upon any
Person becoming an Acquiring Person if the Board of Directors,
including a majority of the Continuing Directors, has not
recommended that stockholders of the Company tender or
otherwise sell their common stock to such Acquiring Person;
(ii) upon the approval bv the stockholders of the Companv of
a reorganization, merger or consolidation, in each case,
with respect to which persons who were stockholders of the
Company immediately prior to such reorganization, merger or
consolidation, do not, immediately thereafter, own more than
50 percent of the combined voting power entitled to vote
generally in the election of directors of the reorganized,
consolidated or merged Company's then outstanding securities;
or (iii) upon a liquidation or dissolution of the Companv or
the sale of all or substantially all of the Companv's assets;
or (iv) when a majority of the Board of Directors is replaced
during any 12 month period by directors whose appointment or
election is not endorsed by a majoritv of the members of the
Board of Directors, including a majority of the Continuing
Directors, immediately prior to the date of the appointment
or election.
(f) "Continuing Director" will mean:
(i) any member of the Board of Directors immediately prior
to a Change of Control, or
(ii) anv successor of a Continuing Director who is recommended
or elected to succeed such Continuing Director bv a
majority of the Continuing Directors then in office and
is neither an Acquiring Person, an Affiliate of an
Acquiring Person, nor a representative or nominee of
an Acquiring Person or of any such Affiliate while
such person is a member of the Board of Directors.
Notwithstanding the foregoing, a successor will not be
deemed to be a Continuing Director unless, immediately
prior to his or her appointment or election, a majoritv
of the members of the Entire Board were Continuing
Directors (and unless such majority is equal to the
same number as constituted a majoritv of the Entire
Board immediately prior to the Change of Control).
(g) "Person" will mean any individual, firm, corporation or
other entity, and will include any "group" as that term
is used in Rule 13d-5(b) of the Act.
(h) "Restricted Date" will mean the date on which a Change of
Control occurs.
(i) "Restricted Period" will mean the period beginning on a
Restricted Date and ending on the fifth anniversary of
such Restricted Date.
(j) "Unrestricted Date" will mean the last day of a Restricted
Period.
(k) "Entire Board will mean the total number of members of
the Board of Directors that there would be if there were
no vacancies on such Board.
9.4 Benefits Vested on the Restricted Date. Effective on a Restricted
Date, the balances in the Deferred Compensation Accounts (including
any contributions and investment earnings after that date) of each
Participant who is a Participant in the Plan on that date will become
fully vested and nonforfeitable. Further, unless declared not
applicable under the previous Section 9.2 the entire balances in the
Deferred Compensation Accounts will be distributed in full upon the
Participant's election within 90 days after Change of Control occurs.
9.5 Prohibition Against Amendment. During the Restricted Period, the
provisions of this Section 9 may not be amended or deleted and may
not be superseded by any other provision of the Plan (including the
provisions of any exhibit or supplement thereto).
IN WITNESS WHEREOF, the Company has caused this plan to be executed by
its duly authorized officers on this 27th day of January, 1997.
ERO, Inc.
By: /s/ Mark D. Renfree
Its: CFO
AMENDMENT NO. I TO THE SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
Dated as of December 14, 1995
THIS AMENDMENT NO. 1 TO THE SECOND AMENDED AND
RESTATED CREDIT AGREEMENT ("Amendment") is made as of March 31,
1996 by and among ERO INDUSTRIES, INC. (the "Borrower'), the financial
institutions listed on the signature pages hereof (the"Lenders') and THE
FIRST NATIONAL BANK OF CHICAGO, in its individual capacity as a Lender and
as contractual representative of the Lenders (die "Agent') under that certain
Second Amended and Restated Credit Agreement dated as of December 14,
1995 by and among the Borrower, the Lenders and the Agent (the "Credit
Agreement'). Defined terms used herein and not otherwise defined herein shall
have the meaning given to them in the Credit Agreement.
WITNESSETH
WHEREAS, the Borrower, the Lenders and the Agent are parties to
the Credit Agreement; and
WHEREAS, the Borrower, the Lenders and the Agent have agreed to
amend the Credit Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth
above, the terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Borrower, the Lenders and the Agent have agreed to the following
amendments to the Credit Agreement.
1. Amendment to the Credit Agreement. Effective as of
March 31, 1996 and subject to the satisfaction of the conditions precedent
set forth in Section 2 below, the Credit Agreement is hereby amended as
follows:
1. 1. Section 7.22(a) of the Credit Agreement is hereby
amended to delete the phrase "through December 31, 1998" now contained
therein and to substitute therefor the following: "through December 31, 1995;
1.00 to 1.00 from January 1, 1996 through June 30, 1996; 1.15 to 1.00 from
July 1, 1996 through December 31, 1998;".
1.2. Section 7 22(d) of the Credit Agreement is hereby amended
to delete the provison now contained therein and substitute therefor the
following:
"(provided, however, that (a) for the fiscal quarter ending March
31, 1996, EBITDA shall be calculated using EBITDA for the
period beginning January 1, 1996 and ending March 31, 1996 and
(b) for the fiscal quarter ending June 30, 1996, EBITDA shall be
calculated using EBITDA for the period beginning January 1, 1996
and ending June 30, 1996)"
and to delete the first two items below the heading M inimum EBITDA which
specify the minimum EBITDA for the periods ending March 31, 1996 and June
30, 1996, respectively, and to substitute therefor "minus $500,000" and
"$6,000,000", respectively for those first two periods.
1.3. Section 7.22(e) of the Credit Agreement is hereby
amended to delete the phrase through June 30, 1996' now contained
therein and to substitute therefor the following: "through December 31, 1995;
4.25 to 1.00 from January 1, 1996 through March 31, 1996; 4.60 to 1.00 from
April 1, 1996 through June 30, 1996; ".
2. Conditions of Effectiveness. This Amendment shall become
effective as of the date set forth above when and only when the
Agent has received a copy of this Amendment executed by each of the
Borrower, the Required Holders and the Agent.
3. Representations and Warranties of the Borrower. The
Borrower hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement as previously
executed and as amended hereby, constitute legal, valid and binding obligations
of the Borrower and are enforceable against the Borrower in accordance with
their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
hereby reaffirms all covenants, representations and warranties made in
the Credit Agreement, to the extent the same are not amended hereby,
agrees that all such covenants, representations and warranties shall be
deemed to have been remade as of the effective date of this Amendment.
4. Reference to the Effect on the Credit Agreement.
(a) Upon the effectiveness of Section I hereof, on and after
the date hereof, each reference in the Credit Agreement to "this Credit
Agreement," "hereunder," "hereof," "herein" or words of like import shall
mean and be a reference to the Credit Agreement dated as of December 14,
1995 and as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
dated as of December 14, 1995, and all other documents, instruments and
agreements executed and/or delivered in connection
therewith, shall remain in full force and effect, and are hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Agent or the Lenders,
nor constitute a waiver of any provision of the Credit Agreement or any other
documents, instruments and agreements executed and/or delivered in connection
therewith.
5. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (as opposed to the conflict of
law provisions) of the State of Illinois.
6. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
7. Counterparts. This Amendment may be executed by one or more
of the parties to the Amendment on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument.
IN WITNESS WHEREOF, this Amendment has been duly executed
as of the day and year first above written.
ERO INDUSTRIES, INC.
By: /s/ Ted J. Lueken
Title: Sr. VP of Finance & CFO
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By: /s/ Nathan L. Bloch
Title: VP
LENDERS:
THE FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Nathan L. Bloch
Title: VP
CAISSE NATIONALE DE CREDIT
AGRICOLE
By: /s/ Dean Balice
Title: Sr. VP
SANWA BUSINESS CREDIT
By: /s/ Michael J. Coe
Title: VP
BHF-BANK AKTIENGESELLSCHAFR
By: /s/ Paul Travers
Title: VP
LASALLE NATIONAL BANK
By: /s/ David Knapp
Title: VP
CREDITANSTALT-BANKVEREIN
By: /s/ Richard P. Buckanavage
Title: VP
<PAGE>
AMENDMENT NO. 2 AND WAIVER TO THE SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
Dated as of December 14, 1995
THIS AMENDMENT NO. 2 AND WAIVER TO THE SECOND
AMENDED AND RESTATED CREDIT AGREEMENT ("Amendment") is
made as of June 28, 1996 by and among ERO INDUSTRIES, INC. (the
"Borrower"), the financial institutions listed on the signature pages
hereof (the "Lenders") and THE FIRST NATIONAL BANK OF CHICAGO, in its
individual capacity as a Lender and as contractual representative of the
Lenders (the "Agent") under that certain Second Amended and Restated
Credit Agreement dated as of December 14, 1995, as amended by that
certain Amendment No. 1 dated as of March 31, 1996, by and among the
Borrower, the Lenders and the Agent (as amended, the "Credit Agreement").
Defined terms used herein and not otherwise defined herein shall have the
meaning given to them in the Credit Agreement.
WITNESSETH
WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement; and
WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend
or waive certain provisions of the Credit Agreement on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower, the Lenders and the Agent have agreed to the
following amendments and waivers to the Credit Agreement.
1. Amendments to Credit Agreement. Effective as of June 30, 1996 and
subject to the satisfaction of the conditions precedent set forth in Section 3
below, the Credit Agreement is hereby amended as follows:
1.1. Exhibit "A-2" and Exhibit "A-3" as attached to this Amendment are
hereby added as Exhibit "A-2" and Exhibit "A-3", respectively, to the Credit
Agreement.
1.2. Article I of the Credit Agreement is hereby amended as follows:
1.2.1. The definition of "Commitments" is hereby deleted in its entirety
and the following is substituted therefor:
"Commitments" means the sum of the Aggregate Term Loan Commitment,
the Aggregate Revolving Loan Commitment and the Facility Letter of Credit
Commitment, which aggregate amount may not exceed $120,000,000, as
such amount may be reduced pursuant to the terms hereof.
1.2.2. The definition of "Lenders" is hereby deleted in its entirety and the
following is substituted therefor:
"Lenders" means the lending institutions listed on the signature pages of this
Agreement, including the Swing Line Bank, and each of their respective
successors and assigns.
1.2.3. The definition of "Loan(s)" is hereby deleted in its entirety and the
following is substituted therefor:
"Loan(s)" means, with respect to a Lender, such Lender's portion of any
Advance made pursuant to Section 2.1, Section 2.2 or Section 2.3, as
applicable, and collectively, all Terms Loans, Revolving Loans and Swing
Line Loans, whether made or continued as or converted to Alternate Base
Rate Loans or Eurodollar Loans."
1.2.4. The definition of "Notes" is hereby amended to add the phrase
"the Swing Line Note" after the phrase "the Term Notes".
1.2.5. The definition of "Required Holders" is hereby amended to add the
following at the end thereof:
"plus the aggregate outstanding unpaid principal amount of the Swing Line
Loans"
1.2.6. The definition of "Revolving Credit Availability" is hereby deleted
in its entirety and the following is substituted therefor:
"Tranche A Revolving Credit Availability" means, at any particular time, the
amount by which the Maximum Tranche A Revolving Credit Amount at
such time exceeds the Tranche A Revolving Credit Obligations at such time.
1.2.7. The definition of "Revolving Credit Obligations" is hereby deleted in
its entirety and the following is substituted therefor:
"Revolving Credit Obligations" means, at any particular time, the
outstanding principal amount of the Revolving Loans at such time plus the
outstanding principal amount of the Swing Line Loans at such time.
1.2.8. The definition of "Revolving Loan" is hereby deleted in its entirety
and the following is substitute therefor:
"Revolving Loan" means a Tranche A Revolving Loan or a Tranche B
Revolving Loan and "Revolving Loans" means, collectively, all Tranche A
Revolving Loans and all Tranche B Revolving Loans.
1.2.9. The definition of "Revolving Loan Commitment" is hereby deleted
in its entirety and the following is substituted therefor:
"Revolving Loan Commitment" means, for each Lender, the aggregate of
such Lender's Tranche A Revolving Loan Commitment and Tranche B
Revolving Loan Commitment.
1.2.10. The definition of "Revolving Note" is hereby deleted in its entirety
and the following is substituted therefor:
"Revolving Note" means a Tranche A Revolving Note or a Tranche B
Revolving Note, and "Revolving Notes" means, collectively, all Tranche A
Revolving Notes and all Tranche B Revolving Notes.
1.2.11. The following definitions are hereby added in proper alphabetical
order:
"Aggregate Tranche A Revolving Loan Commitment" means the aggregate
of the Tranche A Revolving Loan Commitments of all the Lenders, as
reduced from time to time pursuant to the terms hereof.
"Aggregate Tranche B Revolving Loan Commitment" means the aggregate
of the Tranche B Revolving Loan Commitments of all the Lenders, as
reduced from time to time pursuant to the terms hereof.
"Maximum Tranche A Revolving Credit Amount" means, at any particular
time, the lesser of (A) the Aggregate Tranche A Revolving Loan
Commitment at such time and (B) the Borrowing Base less the Letter of
Credit Obligations less the Tranche B Revolving Credit Obligations at such
time.
"Maximum Tranche B Revolving Credit Amount" means, at any particular
time, the lesser of (A) the Aggregate Tranche B Revolving Loan
Commitment at such time, and (B) the Borrowing Base less the Letter of
Credit Obligations less the Tranche A Revolving Credit Obligations at such
time.
"Swing Line Bank" means First Chicago or any other Lender as a successor
Swing Line Bank.
"Swing Line Commitment" means the obligation of the Swing Line Bank to
make Swing Line Loans up to a maximum principal amount of $5,000,000 at
any one time outstanding.
"Swing Line Loan" means a Loan made available to the Borrower by the
Swing Line Bank pursuant to Section 2.3 hereof.
"Swing Line Note" means a promissory note, in substantially the form of
Exhibit "A-3" hereto, duly executed by the Borrower and payable to the
order of the Swing Line Bank in the amount of its Swing Line Commitment,
including any amendment, restatement, modification, renewal or
replacement of such Swing Line Note.
"Tranche B Revolving Credit Availability" means, at any particular time, the
amount by which the Maximum Tranche B Revolving Credit Amount at
such time exceeds the Tranche B Revolving Credit Obligations at such time.
"Tranche A Revolving Credit Obligations" means, at any particular time, the
outstanding principal amount of the Tranche A Revolving Loans at such
time.
"Tranche B Revolving Credit Obligations" means, at any particular time, the
outstanding principal amount of the Tranche B Revolving Loans at such
time.
"Tranche A Revolving Loan" means, with respect to a Lender, such Lender's
portion of any Advance made pursuant to Section 2.2(a).
"Tranche B Revolving Loan" means, with respect to a Lender, such Lender's
portion of any Advance made pursuant to Section 2.2(b).
"Tranche A Revolving Loan Commitment" means, for each Lender, the
obligation of such Lender to make Tranche A Revolving Loans not
exceeding the amount set forth opposite its signature hereto, as such amount
may be modified from time to time pursuant to the terms hereof, and shall
not at any time be deemed to include such Lender's Facility Letter of Credit
Commitment or Tranche B Revolving Loan Commitment.
"Tranche B Revolving Loan Commitment" means, for each Lender, the
obligation of such Lender to make Tranche B Revolving Loans not
exceeding the amount set forth opposite its signature hereto, as such amount
may be modified from time to time pursuant to the terms hereof, and shall
not at any time be deemed to include such Lender's Facility Letter of Credit
Commitment or Tranche A Revolving Loan Commitment.
"Tranche A Revolving Note" means a promissory note, in substantially the
form of Exhibit "A" hereto, duly executed by the Borrower and payable to
the order of a Lender in the amount of its Tranche A Revolving Loan
Commitment, including any amendment, restatement, modification, renewal
or replacement of such Tranche A Revolving Note.
"Tranche B Revolving Note" means a promissory note, in substantially the
form of Exhibit "A-2" hereto, duly executed by the Borrower and payable to
the order of a Lender in the amount of its Tranche B Revolving Loan
Commitment, including any amendment, restatement, modification, renewal
or replacement of such Tranche B Revolving Note.
"Tranche B Termination Date" means January 15, 1997.
1.3. Section 2.2 is hereby deleted in its entirety and the following is
substituted therefor:
"2.2.(a) Tranche A Revolving Loans. Upon the satisfaction of the
conditions precedent set forth in Sections 5.1 and 5.2 hereof, from and
including the Effective Date and prior to the Termination Date, each Lender
severally agrees, on the terms and conditions set forth in this Agreement, to
make revolving loans ("Tranche A Revolving Loans") to the Borrower from
time to time in amounts not to exceed in the aggregate at any one time
outstanding the amount of its Tranche A Revolving Loan Commitment or, if
less, its ratable share of Tranche A Revolving Credit Availability, provided,
however, at no time shall (i) the Tranche A Revolving Credit Obligations
exceed the Maximum Tranche A Revolving Credit Amount or (ii) the
Revolving Credit Obligations exceed the Maximum Revolving Credit
Amount. Subject to the terms of this Agreement, the Borrower may borrow,
repay and reborrow Tranche A Revolving Loans at any time prior to the
Termination Date, provided, however, that the Borrower shall be obligated to
repay Tranche B Revolving Loans prior to any repayment or prepayment of
Tranche A Revolving Loans. On the Termination Date, the Borrower shall
repay in full the outstanding principal balance of the Tranche A Revolving
Loans.
2.2.(b) Tranche B Revolving Loans. Upon the satisfaction of the
conditions precedent set forth in Sections 5.1 and 5.2 hereof, at any time
from September 1, 1996 and prior to the Tranche B Termination Date and so
long as the Tranche A Revolving Credit Availability is equal to $0, each
Lender with a Tranche B Revolving Loan Commitment greater than $0
severally and not jointly agrees, on the terms and conditions set forth in
this Agreement, to make revolving loans ("Tranche B Revolving Loans") to
the Borrower from time to time in amounts not to exceed in the aggregate at
any one time outstanding the amount of its Tranche B Revolving Loan
Commitment or, if less, its ratable share of Tranche B Revolving Credit
Availability, provided, however, at no time shall (i) the Tranche B Revolving
Credit Obligations exceed the Maximum Tranche B Revolving Credit
Amount or (ii) the Revolving Credit Obligations exceed the Maximum
Revolving Credit Amount. Each Tranche B Revolving Loan shall consist of
either Alternate Base Rate Advances or Eurodollar Advances with an Interest
Period equal to one month. Subject to the terms of this Agreement, the
Borrower may borrow, repay and reborrow Tranche B Revolving Loans at
any time prior to the Tranche B Termination Date, provided, however, that
the Borrower shall be obligated to repay Tranche B Revolving Loans prior to
any repayment or prepayment of Tranche A Revolving Loans; and provided,
further, that the Borrower shall not be permitted to reborrow Tranche B
Revolving Loans unless the Tranche A Revolving Credit Availability is
equal to $0.
2.2.(c) Ratable Loans. Advances hereunder shall consist of either Tranche
A Revolving Loans or Tranche B Revolving Loans made from the several
Lenders ratably in proportion to the ratio that their respective Tranche A
Revolving Loan Commitments or Tranche B Revolving Loan Commitments,
as appropriate, bear to the Aggregate Tranche A Revolving Loan
Commitment or Aggregate Tranche B Revolving Loan Commitment, as
appropriate, it being understood that no Lender shall be responsible for any
failure by any other Lender to perform its obligation to make a Revolving
Loan hereunder nor shall the Revolving Loan Commitment of any Lender be
increased or decreased as a result of any such failure.
2.2.(d) Rate Options. The Advances may be Alternate Base Rate
Advances or Eurodollar Advances, or a combination thereof, selected by the
Borrower in accordance with Section 2.7. The Borrower may select, in
accordance with Section 2.7, Rate Options and Interest Periods applicable to
portions of the Revolving Loans and the Term Loans; provided, that there
shall be no more than ten Interest Periods in effect with respect to the Loans
at any time."
1.4. Section 2.3 of the Credit Agreement is hereby deleted in its entirety
and the following is substituted therefor:
"2.3. Swing Line Loans. (a) Amount of Swing Line Loans. Subject to
the terms and conditions set forth in this Agreement, at any time prior to the
Termination Date, the Swing Line Bank agrees to make swing line loans to
the Borrower from time to time, in Dollars, in an amount not to exceed the
Swing Line Commitment (each, individually, a "Swing Line Loan" and
collectively, the "Swing Line Loans"); provided, however, at no time shall
the Revolving Credit Obligations exceed the Maximum Revolving Credit
Amount; and provided, further, that at no time shall the sum of (a) the
outstanding amount of the Swing Line Loans, plus (b) the outstanding
amount of Tranche A Revolving Loans made by the Swing Line Bank
pursuant to Section 2.2(a), plus (c) the outstanding amount of Tranche B
Revolving Loans made by the Swing Line Bank pursuant to Section 2.2(b)
(after giving effect to any concurrent repayment of Loans), exceed the Swing
Line Bank's Revolving Loan Commitment at such time. Subject to the terms
of this Agreement, the Borrower may borrow, repay and reborrow Swing
Line Loans at any time prior to the Termination Date.
(b) Borrowing Notice. The Borrower shall give the Agent and the Swing
Line Bank telephonic notice, not later than 11:00 a.m. (Chicago time) on the
Borrowing Date of each Swing Line Loan, specifying (i) the applicable
Borrowing Date (which shall be a Business Day), and (ii) the aggregate
amount of the requested Swing Line Loan. The Swing Line Loans shall at
all times be Alternate Base Rate Loans.
(c) Making of Swing Line Loans. Not later than 1:30 p.m. (Chicago time)
on the applicable Borrowing Date, the Swing Line Bank shall make available
its Swing Line Loan, in funds immediately available in Chicago to the Agent
at its address specified in Article XIV. The Agent will promptly make the
funds so received from the Swing Line Bank available to the Borrower at the
Agent's aforesaid address.
(d) Repayment of Swing Line Loans. The Swing Line Loans shall be
evidenced by the Swing Line Note, and each Swing Line Loan shall be paid
in full by the Borrower on or before the fifth Business Day after the
Borrowing Date for such Swing Line Loan. The Borrower may at any time
pay, without penalty or premium, all outstanding Swing Line Loans upon
notice to the Agent and the Swing Line Bank. In addition, the Agent (i) may
at any time in its sole discretion with respect to any outstanding Swing Line
Loan, or (ii) shall on the fifth Business Day after the Borrowing Date of any
Swing Line Loan, require each Lender (including the Swing Line Bank) to
make a Revolving Loan pursuant to Section 2.2 hereof in the amount of such
Lender's pro rata share (determined by the relation of each Lender's
Revolving Loan Commitment to the Aggregate Revolving Loan
Commitment) of such Swing Line Loan, for the purpose of repaying such
Swing Line Loan. Not later than 1:30 p.m. (Chicago time) on the date of any
notice received pursuant to this Section 2.3(d), each Lender shall make
available its required Revolving Loan(s), in funds immediately available in
Chicago to the Agent at its address specified pursuant to Article XIV.
Unless a Lender shall have notified the Swing Line Bank, prior to its making
any Swing Line Loan, that any applicable condition precedent set forth in
Sections 5.1 and 5.2 had not then been satisfied, such Lender's obligation to
make Revolving Loans pursuant to this Section 2.3(d) to repay Swing Line
Loans shall be unconditional, continuing, irrevocable and absolute and shall
not be affected by any circumstances, including, without limitation, (A) any
set-off, counterclaim, recoupment, defense or any other rights which such
Lender may have against the Agent, the Swing Line Bank or any other
Person, (B) the occurrence or continuance of a Default or Unmatured
Default, (C) any adverse change in the condition (financial or otherwise) of
the Borrower, or (D) any other circumstances, happening or event
whatsoever. In the event that any Lender fails to make payment to the Agent
of any amount due under this Section 2.3(d), the Agent shall be entitled to
receive, retain and apply against such obligation the principal and interest
otherwise payable to such Lender hereunder until the Agent receives such
payment from such Lender or such obligation is otherwise fully satisfied. In
addition to the foregoing, if for any reason any Lender fails to make payment
to the Agent of any amount due under this Section 2.3(d), such Lender shall
be deemed, at the option of the Agent, to have unconditionally and
irrevocably purchased from the Swing Line Bank, without recourse or
warranty, an undivided interest and participation in the applicable Swing
Line Loan in the amount of such Revolving Loan, and such interest and
participation may be recovered from such Lender together with interest
thereon at the Federal Funds Effective Rate for each day during the period
commencing on the date of demand and ending on the date such amount is
received. On the Termination Date, the Borrower shall repay in full the
outstanding principal balance of the Swing Line Loans. Any Lender with a
Tranche A Revolving Loan Commitment greater than zero but with no
Tranche B Revolving Loan Commitment has an obligation to purchase
participations in Swing Line Loans only to the extent that funding such
purchase would not cause such Lender's Tranche A Revolving Credit
Obligations to exceed its Tranche A Revolving Loan Commitment.
(e) Rate Options for Swing Line Loans. The Swing Line Loans shall at all
time be Alternate Base Rate Loans."
1.5. Section 2.4.(a) of the Credit Agreement is hereby amended to add
the following at the end thereof:
"Each voluntary prepayment of Revolving Loans shall be applied first to the
outstanding Tranche B Revolving Loans and then to the outstanding Tranche
A Revolving Loans."
1.6. Section 2.4.(b)(ii) of the Credit Agreement is hereby amended to
add the following at the end thereof:
"If at any time and for any reason (a) the Tranche A Revolving Credit
Obligations are greater than the Maximum Tranche A Revolving Credit
Amount, or (b) the Tranche B Revolving Credit Obligations are greater than
the Maximum Tranche B Revolving Credit Amount, the Borrower shall
immediately make a mandatory prepayment first on the Tranche B
Revolving Credit Obligations and second on the Tranche A Revolving Credit
Obligations in an amount equal to such excess."
1.7. Section 2.5 of the Credit Agreement is hereby amended in its
entirety and the following is substituted therefor:
"2.5. Revolving Loan Commitment Fee and Reduction of Commitments.
The Borrower agrees to pay to the Agent for the ratable account of each
Lender (a) a commitment fee of one-half of one percent (0.5%) per annum
on the daily unborrowed portion of such Lender's Tranche A Revolving
Loan Commitment from the Effective Date to and including the Termination
Date, (b) a commitment fee of one-half of one percent (0.5%) per annum on
the daily unborrowed portion of such Lender's Tranche B Revolving Loan
Commitment from September 1, 1996 to and including the Tranche B
Termination Date, each payable monthly in arrears on the last Business Day
of each month and on the Termination Date or Tranche B Termination Date,
as appropriate. The Borrower may permanently reduce the Aggregate
Tranche A Revolving Loan Commitment or the Aggregate Tranche B
Revolving Loan Commitment in whole, or in part, ratably among the
Lenders in integral multiples of $1,000,000; provided that the Aggregate
Tranche A Revolving Loan Commitment shall not be reduced to an amount
less than $25,000,000 (unless it is reduced to $0); provided, further, that
the Aggregate Tranche A Revolving Loan Commitment shall not be reduced
until the Borrower first reduces the Aggregate Tranche B Revolving Loan
Commitment to $0; and provided, further, that the amount of the Aggregate
Tranche A Revolving Loan Commitment may not be reduced below the
aggregate principal amount of the outstanding Tranche A Revolving Loans
nor may the amount of the Aggregate Tranche B Revolving Loan
Commitment be reduced below the aggregate principal amount of the
outstanding Tranche B Revolving Loans. The Borrower shall give at least
two Business Days' written notice to the Agent of its intent to reduce the
Aggregate Revolving Loan Commitment, which notice shall specify the
amount of any such reduction and the Tranche of the Aggregate Revolving
Loan Commitment to be reduced. All accrued commitment fees shall be
payable on the effective date of any termination of the obligations of the
Lenders to make Revolving Loans hereunder."
1.8. Section 2.8 of the Credit Agreement is hereby amended to delete
the phrase "Aggregate Revolving Loan Commitment" at the end thereof and
to substitute therefor the phrase "Aggregate Tranche A Revolving Loan
Commitment or Aggregate Tranche B Revolving Loan Commitment, as
permitted by the terms hereof."
1.9. Section 7.22(a) of the Credit Agreement is hereby amended to
delete the phrase "through June 30, 1996; 1.15 to 1.00 from July 1, 1996
through December 31, 1998;" and to substitute the following therefor
"through March 30, 1996; .875 to 1.00 from April 1, 1996 through June 30,
1996; 1.00 to 1.00 from July 1, 1996 through December 31, 1996; 1.15 to
1.00 from January 1, 1997 through December 31, 1998;".
1.10. Section 7.22(d) of the Credit Agreement is hereby amended to
delete section (b) of the proviso now contained therein and substitute
therefor the following:
"(b) for the fiscal quarters ending June 30, 1996, September 30, 1996 and
December 31, 1996, EBITDA shall be calculated for the three-month period
then ended)".
Section 7.22(d) is further amended to delete the Minimum EBITDA
covenant levels for the Fiscal Quarters Ending June 30, 1996, September 30,
1996 and December 31, 1996 and to substitute the following therefor:
Fiscal Quarter Ending Minimum EBITDA
June 30, 1996 $ 4,200,000
September 30, 1996 $ 8,900,000
December 31, 1996 $13,900,000
1.11. Section 7.22(e) of the Credit Agreement is hereby amended as
follows:
a. to delete the phrase "4.60 to 1.00 from April 1, 1996 through June 30,
1996;" and to substitute the following therefor "5.15 to 1.00 from April 1,
1996 through June 30, 1996;"
b. to delete the phrase "3.50 to 1.00 from July 1, 1996 through September
30, 1996;" and to substitute the following therefor "5.00 to 1.00 from July 1,
1996 through September 30, 1996;"
c. to delete the phrase "3.00 to 1.00 from October 1, 1996 through
September 30, 1997;" and to substitute the following therefor "4.35 to 1.00
from October 1, 1996 through December 31, 1996; 3.00 to 1.00 from
January 1, 1997 through September 30, 1997;"
1.12. Section 7.22(f) of the Credit Agreement is hereby amended as
follows:
a. to delete the phrase "2.00 to 1.00 from the Effective Date through June
30, 1996;" and to substitute therefor "2.00 to 1.00 from the Effective Date
through March 31, 1996; 1.95 to 1.00 from April 1, 1996 through June 30,
1996;"
b. to delete the phrase "2.50 to 1.00 from October 1, 1996 through
December 31, 1996;" and to substitute therefor "2.40 to 1.00 from October 1,
1996 through December 31, 1996;"
1.13. Section 9.2 of the Credit Agreement is hereby amended to add the
following at the end thereof:
"No amendment of any provision of this Agreement relating to the Swing
Line Loans shall be effective without the written consent of the Swing Line
Bank."
2. Waivers to Credit Agreement. Effective as of June 30, 1996 and
subject to the satisfaction of the conditions precedent set forth in Section 3
below, the Lenders hereby agree to waive the Borrower's compliance with
the requirement contained in Section 7.22(c) for the fiscal quarters ending
September 30, 1996 and December 31, 1996.
3. Conditions of Effectiveness. This Amendment shall become
effective and be deemed effective as of the date hereof, if, and only if the
Agent shall have received each of the following:
(a) duly executed originals of this Amendment from the Borrower, the
Required Holders and the Agent;
(b) duly executed notes from the Borrower in the form of Exhibits A-2
and A-3;
(c) a duly executed reaffirmation from each of Priss Prints, Inc.,
Impact, Inc., ERO Marketing, Inc., ERO Canada, Inc., AMAV Industries
Limited, ERO NY Acquisition, Inc. and ERO Canada Acquisition, Ltd. in
the form attached hereto as Exhibit B;
(d) payment by the Borrower of all fees required to be paid pursuant to
the Credit Agreement and that certain Fee Letter dated as of July 25, 1996;
(e) such other documents, instruments and agreements as the Agent
may reasonably request.
4. Representations and Warranties of the Borrower. The Borrower
hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement as previously executed and
as amended hereby, constitute legal, valid and binding obligations of the
Borrower and are enforceable against the Borrower in accordance with their
terms.
(b) Upon the effectiveness of this Amendment, the Borrower hereby
reaffirms all covenants, representations and warranties made in the Credit
Agreement, to the extent the same are not amended hereby, agrees that all
such covenants, representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment.
5. Reference to the Effect on the Credit Agreement.
(a) Upon the effectiveness of Section 1 hereof, on and after the date hereof,
each reference in the Credit Agreement to "this Credit Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Credit Agreement dated as of December 14, 1995, as
amended by Amendment No. 1 thereto dated as of March 31, 1996 and as
amended hereby.
(b) Except as specifically amended above, the Credit Agreement dated as of
December 14, 1995, as amended by Amendment No. 1 dated as of March 31,
1996, and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any right, power
or remedy of the Agent or the Lenders, nor constitute a waiver of any
provision of the Credit Agreement or any other documents, instruments and
agreements executed and/or delivered in connection therewith.
6. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (as opposed to the conflict of
law provisions) of the State of Illinois.
7. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by one or more of
the parties to the Amendment on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument.
* * * * Remainder of This Page Intentionally Blank * * * *
IN WITNESS WHEREOF, this Amendment has been duly executed as of
the day and year first above written.
ERO INDUSTRIES, INC.
By: /s/ D. Richard Ryan, Jr.
Title: CEO
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By: /s/ Nathan L. Bloch
Title: VP
SWING LINE BANK:
THE FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Nathan L. Bloch
Title: VP
LENDERS:
Tranche A Revolving Loan Commitment: THE FIRST NATIONAL
BANK OF CHICAGO
$4,800,000
Tranche B Revolving Loan Commitment:
$4,000,000
By: /s/ Nathan L. Bloch
Title: VP
Tranche A Revolving Loan Commitment: CAISSE NATIONALE DE
CREDIT AGRICOLE
$6,000,000
Tranche B Revolving Loan Commitment:
$__________
By: /s/ David Bouhl
Title: FVP
Tranche A Revolving Loan Commitment: SANWA BUSINESS CREDIT
$8,000,000
Tranche B Revolving Loan Commitment:
$4,000,000
By: /s/ Michael J. Coe
Title: VP
Tranche A Revolving Loan Commitment: BHF-BANK
KTIENGESELLSCHAFT
$8,000,000
Tranche B Revolving Loan Commitment:
$__________
By: /s/ Paul Travers
Title: VP
Tranche A Revolving Loan Commitment: LASALLE NATIONAL
BANK
$8,000,000
Tranche B Revolving Loan Commitment:
$2,000,000
By: /s/ David Knapp
Title: VP
Tranche A Revolving Loan Commitment: CREDITANSTALT
BANKVEREIN
$5,200,000
Tranche B Revolving Loan Commitment:
$___________
By: /s/ Richard P. Buckanavage
Title: VP
<PAGE>
AMENDMENT NO. 3 TO THE SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
Dated as of December 14, 1995
THIS AMENDMENT NO. 3 TO THE SECOND AMENDED AND RESTATED CREDIT
AGREEMENT ("Amendment") is made as of March 3, 1997 by and among
ERO INDUSTRIES, INC. (the "Borrower"), the financial institutions listed on
the signature pages hereof (the "Lenders") and THE FIRST NATIONAL BANK OF
CHICAGO, in its individual capacity as a Lender and as contractual
representative of the Lenders (the "Agent") under that certain Second
Amended and Restated Credit Agreement dated as of December 14, 1995,
as amended by that certain Amendment No. 1 dated as of March 31, 1996,
and that certain Amendment No. 2 dated as of June 28, 1996, by and among
the Borrower, the Lenders and the Agent (as amended, the "Credit Agreement").
Defined terms used herein and riot otherwise defined herein shall have the
meaning given to them in the Credit Agreement.
WITNESSETH
WHEREAS, the Borrower, the Lenders and the Agent are
parties to the Credit Agreement; and
WHEREAS, the Borrower, the Lenders and the Agent have
agreed to amend certain provisions of the Credit Agreement on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises set
forth above, the terms and conditions contained herein, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower, the Lenders and the Agent have agreed to the
following amendments and waivers to the Credit Agreement.
1. Amendments to Credit Agreement. Effecfive as of March 3, 1997
and subject to the satisfaction of the conditions precedent set forth in
Section 2 below, the Credit Agreement is hereby amended as follows:
1. 1. Section 2. 1 (d) is hereby amended by adding a new
subsection (iii) at the end thereof as follows:
"(iii) The Borrower shall have the option of reducing the
Term Loan payment required June 30, 1997 (the "June 30,
1997 Deferral") and the payment required September 30, 1997
(the "September 30, 1997 Deferral") from $2,000,000 to
$250,000 in each case. If the Borrower elects to reduce
either or both of such payments, the Borrower will provide
the Agent with three Business Days notice prior to June 30,
1997 or September 30, 1997, as applicable, and the
$1,750,000 amount by which each of such payments are
reduced would be due and payable on January 15, 1998.
1.2. Section 1.1 is hereby amended to add the following
language at the end of the definition of 'Facility Letter of Credit
Commitment":
"The Facility Letter of Credit Comniitrnent will be
decreased from $10,000,000 to $3,000,000 between June 30,
1997 and January 15, 1998."
1.3. Section 1.1 is hereby further amended by adding the
following language at the end of the definition of "Aggregate
Tranche A Revolving Loan Commitment":
"The Aggregate Tranche A Revolving Loan Commitment will be
increased from $40,000,000 to $47,000,000 between June 30,
1997 and January 15, 1998 with First Chicago increasing its
Tranche A Revolving Loan Commitment by $7,000,000 between
June 30, 1997 and January 15, 1998 to accommodate such
increase without increasing the Tranche A Revolving Loan
Commitment of any other Lender."
1.4. Section 1. I is hereby further amended by amending the
definition of "Maximum Revolving Credit Amount" to delete the language
now contained therein and to substitute the following therefor:
"'Maximum Revolving Credit Amount' means, at any particular
time, the lesser of (i) the Aggregate Revolving Loan
Commitment at such time and (ii) the Borrowing Base at such
time minus the Letter of Credit Obligations at such time
(provided, however, between June 30, 1997 and January 15,
1998 the Letter of Credit Obligations will not be deducted
from the Borrowing Base)."
1.5. Section 2.4(b)(ii) is hereby amended by adding the
following language immediately after "minus the Letter of Credit
Obligations": "(provided, however, between June 30, 1997 and January
15, 1998 the Letter of Credit Obligations will not be deducted from the
Maximum Revolving Credit Amount)"; and adding the following language at the
end thereof:
"If at any time the Letter of Credit Obligations are greater
than the Facility Letter of Credit Commitment, the Borrower
shall immediately make a mandatory prepayment of the Letter
of Credit Obligations in an amount equal to such excess."
1.6. Section 3.2(i)(fa is hereby amended by adding the
following language immediately after "exceed the Borrowing Base":
"(provided, however, between June 30, 1997 and January 15,
1998 the Letter of Credit Obligations will not be added to
the Revolving Credit Obligations to determine whether or
not the Borrowing Base has been exceeded)".
1.7. Section 1.1 is hereby amended by amending the definition
of "Fixed Charges" by deleting "and (d) cash payments of
taxes during such period", by adding "and" immediately
prior to "(c)" and adding immediately after the word
"Indebtedness" the following:
"without taking into account any exercise by the
Borrower of its right to defer any portion of any such
scheduled payment pursuant to Section 2.l(d)(iii) in
connection with the June 30, 1997 Defeffal or the
September 30, 1997 Deferral."
1.8. Section 7.22(c) is hereby deleted in its entirety.
1.9. Section 7.22(d) is hereby deleted in its entirety.
1.10. Section 7.22(c) is hereby amended to delete the
phrase " 3.00 to 1.00 from January 1, 1997 through
September 30, 1997" and the remaining provisions of
Section 7.22(c) and substituting therefor:
"(i) 3.25 to 1.0 from January 1, 1997
through March 31, 1997;
(ii) 3.50 to 1.0 from April 1, 1997
through June 30, 1997;
(iii) 4.00 to 1.0 from July 1,1997
through September 30, 1997;
(iv) 3.50 to 1.0 from October 1,
1997 through December 31, 1997;
(v) 3.00 to 1.0 from January 1, 1998
through June 30, 1998;
(vi) 3.75 to 1.0 from July 1, 1998
through September 30, 1998;
(vii) 3.00 to 1.0 from October 1, 1998
through December 31, 1998;
(viii) 2.00 to 1.0 from January 1, 1999
through September 30, 1999;
(ix) 1.50 to 1.0 from October 1, 1999
through September 30, 2000; and
(x) 1.00 to 1.0 thereafter."
1.11. Section 7.22(f) is hereby amended to delete the
phrase " (iv) 3.00 to 1.00 from January 1, 1997 through December 31,
1997" and the remaining provisions of Section 7.22(f) and substituting
therefor:
"(i) 2.25 to 1.0 from January 1,
1997 through December 31, 1997;
(ii) 2.50 to 1.0 from January 1, 1998
through September 30, 1998;
(iii) 2.75 to 1.0 from October 1, 1998
through December 31, 1998; and
(iv) 4. 00 to 1. 0 thereafter."
2. Conditions of Effectiveness. This Amendment shall
become effective and be deemed effective as of the date hereof, if, and only
if the Agent shall have received each of the following:
(a) duly executed originals of this Amendment
from the Borrower, each of the Lenders and the Agent;
(b) a duly executed reaffirmation from each of
Priss Prints, Inc., Impact, Inc., ERO Marketing, Inc., ERO Canada,
Inc., AMAV Industries Limited, AMAV Industries, Inc. (f/k/a
ERO NY Acquisition, Inc.) and AMAV Industries, Ltd. (f/k/a ERO
Canada Acquisition, Ltd.) in the form attached hereto as Exhibit A;
(c) payment of the amendment fee prescribed
herein; and
(d) such other documents, instruments and
agreements as the Agent may reasonably request.
3. Representations and Warranties of the Borrower. The
Borrower hereby represents and warrants as follows:
(a) This Amendment and the Credit Agreement as
previously executed and as amended hereby, constitute legal, valid and
binding obligations of the Borrower and are enforceable against the
Borrower in accordance with their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
hereby reaffirms all covenants, representations and warranties made in the
Credit Agreement, to the extent the same are not amended hereby,
agrees that all such covenants, representations and warranties shall be
deemed to have been remade as of the effective date of this Amendment.
4. Reference to the Effect on the Credit Affeement.
(a) Upon the effectiveness of Section I hereof, on and after
the date hereof, each reference in the Credit Agreement to " this Credit
Agreement, " "hereunder, " "hereof, " "herein" or words of like import
shall mean and be a reference to the Credit Agreement dated as of
December 14, 1995, as amended by Amendment No. 1 thereto dated as of
March 31, 1996 and by Amendment No. 2 thereto dated as of June 28, 1996
and as amended hereby.
(b) Except as specifically amended above, the Credit
Agreement dated as of December 14, 1995, as amended by Amendment No. 1
dated as of March 31, 1996, and by Amendment No. 2 thereto dated
as of June 28, 1996 and all other documents, instruments and agreements
executed and/or delivered in connection therewith, shall remain in full
force and effect, and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of the Agent or the Lenders,
nor constitute a waiver of any provision of the Credit Agreement or any
other documents, instruments and agreements executed and/or delivered
in connection therewith.
5. Fees. The Borrower agrees to pay to the Agent for the
ratable benefit of the Lenders based on the amount of each Lender's
Commitment on the effective date of this Amendment an amendment fee of
7.5 basis points on the amount of each Lender's Commitment. In addition,
the Borrower will pay $25,000 to the Agent for the ratable benefit of the
Lenders based on the amount of each Lender's Comniittnent if the
Borrower exercises the June 30, 1997 Deferral pursuant to Section 2.l(d)(iii)
and the Boffower will pay an additional $25,000 to the Agent for
the ratable benefit of the Lenders based on the amount of each Lender's
Commitment if the Borrower exercises the September 30, 1997
Deferral pursuant to Section 2. l(d)(iii), such amounts to be due and
payable, in each case, by the Borrower upon the Boffower's notification to
the Agent of its decision to exercise the deferral right.
6. Governing Law. This Amendment shall be governed by
and construed in accordance with the internal laws (as opposed to the
conflict of law provisions) of the State of Illinois.
7. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by one or
more of the parties to the Amendment on any number of separate
counterparts and all of said counterparts taken together shall be, deemed
to constitute one and the same instrument.
* * * * Remainder of This Page Intentionally Blank * * * *
IN WITNESS WHEREOF, this Amendment has been duly
executed as of the day and year first above written.
ERO INDUSTRIES, INC.
By: /s/ Mark D. Renfree
Title: Sr VP & CFO
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By: /s/ Thomas J. Connally
Title: VP
SWING LINE BANK:
THE FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Thomas J. Connally
Title: VP
LENDERS:
THE FIRST NATIONAL BANK OF
CHICAGO
By: /s/ Thomas J. Connally
Title: VP
CAISSE NATIONALE DE CREDIT
AGRICOLE
By: /s/ David Bouhl
Title: FVP
SANWA BUSINESS CREDIT
By: /s/ Michale J. Coe
Title: VP
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ Paul Travers
Tide: VP
LASALLE NATIONAL BANK
By: /s/ David Knapp
Title: FVP
CREDITANSTALT-BANKVEREIN
By: /s/ Alan Offenberg
Title: Senior Assoc
By: /s/ Richard P. Buckanavage
Title: VP
April 3, 1996
Mr. Barry J. Ryan
9530 Cutlers Trace
Dayton, OH 45458
Dear Barry:
I am pleased to offer you the position of President of ERO Industries, Inc.
The position reports to the President and CEO of ERO, Inc. and is responsible
for managing all aspects of our ERO Industries business. Your base salary
will be $200,000 per year and you will be entitled to participate in our
1996 Bonus Plan for the full year of 1996. Your initial Bonus Base will
be $90,000, and our 1996 Bonus Plan provides for a range of 0% to 200%
of the Bonus Base depending upon ERO's operating income, before taxes
and interest. You will receive a minimum bonus of $16,000 each year
for your first three years of employment.
ERO will provide a one-time relocation allowance of $30,000 to facilitate
your family's relocation to the Chicago area and will pay for temporary
housing for a reasonable period of time. All reasonable relocation costs,
including real estate commissions on the sale of your present residence,
moving your personal property and closing costs on both the sale and
purchase of a home would be reimbursed by ERO, as well as a 'gross-up'
to make you whole on any taxes payable as a result of your receiving
relocation expense reimbursement.
You will also be entitled to participate in the senior management benefits
during your employment, including a company provided automobile. Except
for misconduct, you would be entitled to twelve months of base salary
severance should you be terminated at any time during the first three years
of your employment.
The compensation committee of the Board of Directors has agreed to offer you
options on 125,000 shares of ERO stock at an exercise price equal to the
closing price on your first date of employment. At this level of options,
we would expect you to accumulate 10,000 shares through open market purchases
by the end of 1996. Since these options exceed the amount that we currently
have available, we have proposed an increase in authorized options to our
shareholders through the proxy which will be voted upon at our April Annual
Meeting. Your options would vest over five years, and be subject to all
the terms and conditions in our 1992 key employee stock option plan.
Mr. Barry J. Ryan
April 3, 1996
Page 2
I am very pleased that you have decided to join us on May 1st, and we all
look forward to working with you. If there is anything that you need in
the meantime, please feel free to call Ted or me.
Sincerely,
/s/D. Richard Ryan, Jr.
Accepted:/s/Barry J. Ryan
Barry J. Ryan
Date: ______________________________
cc: Daniel O'Hara/Lynch Miller Moore Partners, Inc.
DRR/jka
ERO, Inc.
1996 Annual Report
ERO is an efficient manufacturer and full service marketer of
Children's Leisure Products. All of our companies focus on a
narrow range of children's products distributed through mass
market channels, provide superior customer service and own a
clear competitive advantage in each of their product lines.
Our long term financial objectives include 20% earnings growth
and 15% operating income as a percentage of net sales.
(graph appears here)
<TABLE>
Net Sales Operating Income Earnings Per Share
(In thousands) (In thousands)
<S> <C> <C> <C>
1996 $157,913 $21,215 $0.75
1995 $128,722 $14,846 $0.73
1994 $126,734 $12,880 $0.61
1993 $ 95,459 $ 4,486 $0.21
</TABLE>
To Our Shareholders
1996 Results
We are pleased to report record sales and earnings performance for
1996. Our sales grew by 23% to $158 million, our operating income
grew by 43% to $21 million, and our net income increased to $0.75
per share from $0.73 per share in 1995. The results for 1995 were
unusually enhanced by the timing of the Amav acquisition.
The acquisition was concluded at the beginning of the fourth
quarter of 1995 and about half of Amav's annual sales occur
during the fourth quarter.
Our most significant strategic accomplishment reflected in 1996's
performance is the redirection of ERO's business from a pure licensed
products business to a more stable Children's Leisure Products
business. Practically all of our products are now for children, and
licensed product sales represent less than half of ERO's sales. We
think we have added further stability to the licensing segment of our
business by reducing our dependence on event licensing, and
increasing our sales of brand or classic licensed products.
(graph appears here)
1996 1995 1994
Percentage of Sales Derived
from Licensed Products 48% 71% 84%
Performance by Business
The first full year of Amav's performance is reflected in our 1996
results. We enjoyed substantial growth in both the arts and crafts
and the activity product lines, resulting in a 32% year-to-year gain
in sales. Amav has participated in the overall growth in demand for
children's arts and crafts, and it has been a major beneficiary of
mass retailers seeking better consumer values combined with
adequate retailer margins.
<PAGE>
Overall, 1996 was a poor year for the licensing industry, and our
three businesses which rely upon licensed properties reported mixed
results. There were no dominant boys licenses to drive sales, and
Disney's summer movie did not live up to our expectations. The events
that were successful, Disney's 101 Dalmatians and Warner Bros.
Space JamTM, did not occur until the fourth quarter, but they did
happen in time to dramatically improve our Slumber Shoppe business
and bring 1996 results in line with expectations.
Priss Prints is dependent on licensing to generate interest in its
children's room decor products. Since the Priss consumer is very
young, we have been able to focus 80% of sales into evergreen brands
such as Mickey's Stuff for Kids, Pooh, 101 Dalmatians and Looney
Tunes LovablesTM, insulating Priss' performance from the ups and
downs of the box office. Stable licenses combined with new packaging
and merchandising concepts have enabled Priss to broaden
distribution, resulting in sales gains of 47% for the year.
Impact, our back-to-school business, had a poor year with sales
declining 43% from 1995. Impact relies upon licensed event properties
to drive sales in the second quarter and third quarter, so it is
dependent upon the success of summer movie releases as well as
strong boys properties.
Strategy
The environment for selling children's products has changed
dramatically during the last two decades. Five retailers now account
for approximately 54% of toy sales in America, while the number of
mediums one must invest in to build a viable brand has grown with new
networks, cable television and videos. The course we have chosen to
navigate in this environment is to "rent" great brands where we think
a brand is essential, while developing the rest of our product lines
to provide excellent value to the consumer with superior margin and
inventory turn performance for the retailer.
In categories such as slumber, back-to-school, and children's room
decor, where the brand is essential, we have acquired broad
portfolios of licenses of the most highly promoted and advertised
characters to give ERO a competitive edge. And in large activity toys
and craft kits, where function is at least as important as brand, we
have combined great engineering, capital intensity and vertical
integration to put more value in our products, at substantially lower
costs, in order to create a competitive advantage. ERO also attempts
to reduce the risks associated with retailer concentration by
servicing multiple departments of the major retailers. In addition
to the toy department, we sell Children's Leisure Products to the
sporting goods, home improvement, stationery, domestics and
juvenile departments.
<PAGE>
(photo)
1997 Outlook
We think each of our businesses has the potential to perform better
in 1997 than in 1996.
Amav has added 40 new craft kits to its line, has entered into an
agreement with Disney to do a Mickey's Stuff for Kids line of crafts,
and has established distribution in the European Economic Community
through France's largest independent toy company. In addition to the
highly successful game tables, Amav will be selling a line of battery
operated ride-on vehicles in the fall that will permit retailers to
hit more attractive price points in this $200 million product
category.
ERO Industries has four strong basic licenses in Mickey's Stuff for
Kids, Pooh, BarbieTM and 101 Dalmatians to anchor retailer
planograms. This year's summer licensing events are promising with
Disney's Hercules, which will have a strong boy and girl appeal, and
we expect good reaction from boys to Jurassic ParkTM: The Lost World
and Batman and RobinTM. After Thanksgiving, Disney plans to release
The Little Mermaid, and Fox will launch their first major animated
children's feature film, Anastasia.
Priss Prints has some new additions to its line of room decor
for 1997 and a strong line-up of licenses, so we expect sales
improvements on top of last year's growth.
Impact has the licenses for Jurassic ParkTM: The Lost World,
Batman and RobinTM, Pooh and Hercules - a much stronger lineup than
we had for 1996.
(photo)
Commitment to Shareholder Value
ERO, Inc. management's primary objective is to increase shareholder
value. Although our stock price has increased by 40 to 50% from
prior year levels, we think the group of businesses we have assembled
and the way we have structured them has stabilized our earnings and
given us a platform that can continue to produce superior earnings
growth.
We think our strategy - to pursue the business of Children's Leisure
Products, to concentrate our resources on those activities where we
can achieve a significant competitive advantage, to penetrate
multiple departments of mass merchants and other efficient retailers,
to offer superior customer service, and to pursue growth through
strategic acquisitions that complement our strategy - remains the
best current avenue for increasing ERO's long-term shareholder value.
ERO now has over 1,500 full- and part-time employees in North America,
most of them involved in manufacturing what we sell. I wish to thank
all of them for their support.
/s/ D. Richard Ryan, Jr.
D. Richard Ryan, Jr.
Chairman, President and Chief Executive Officer
<PAGE>
Mount Prospect, Illinois
March 3, 1997
(photo)
Our Business
ERO, Inc.
ERO, Inc. is a leading designer, manufacturer, importer and marketer
of licensed and branded Children's Leisure Products. We reach the
consumers of our products - primarily children ages two through
twelve - through multiple departments, including the toy, sporting
goods, juvenile, room decor, arts and crafts, back-to-school and
stationery departments at mass merchants and big box retailers such
as toy stores, office superstores, home improvement centers and
specialty craft stores.
For retailers, we are the principal supplier of most of our lines of
children's products, providing convenience in terms of consolidating
electronic data interchange, shipping and distribution and
centralizing inventory control and accounts payable. This convenience
has earned us the confidence of our principal customers, which
include all major mass retailers, such as Wal-Mart, K-mart and
Target; toy retailers, such as Toys "R" Us and Kay-Bee; department
stores, such as J.C. Penney and Sears; and catalog showrooms, such
as Service Merchandise.
Our growth strategy includes aggressive internal product development
to expand and solidify our dominant share of selected niches, to
leverage our licensing and manufacturing efficiencies for
international growth, and to selectively acquire new Children's
Leisure Products businesses where we can own a significant
competitive advantage.
ERO's major product areas are grouped into four business units:
ERO Industries, which consists of Slumber Shoppe and water sports;
Amav, which consists of children's activities, arts and crafts;
Impact, which consists of back-to-school products; and Priss Prints,
which consists of children's room decor products.
(photo)
ERO Industries
Slumber Shoppe includes: slumber bags, a lightweight indoor sleeping
bag for slumber parties and children's nap times; carrying cases,
which are large enough to fit the slumber bags, along with pajamas,
toothbrushes and other items a child might need for a "sleepover";
play tents for indoor use; and children's furniture, including foam
and beanbag chairs. All of these products feature popular licensed
characters such as Mickey's Stuff for Kids, BarbieTM , Pooh and
Batman and RobinTM . For the years ended December 31, 1996, 1995
and 1994, Slumber Shoppe accounted for 30%, 40% and 48% of ERO's
net sales, respectively.
(photo)
<PAGE>
The water sports category includes a full range of personal flotation
devices and other swim and pool products, including masks, fins,
snorkels and goggles marketed under the Coral brand name. ERO's
primary focus within this category is on children's water activities.
The Company is the premier supplier of U.S. Coast Guard approved
children's flotation products. For the years ended December 31, 1996,
1995 and 1994, water sports products accounted for 10%, 11% and 13%
of ERO's net sales, respectively. Both Slumber Shoppe and water
sports products are sold to sporting goods buyers and toy buyers
at major retailers. ERO's domestic manufacturing operations produce
both slumber bags and flotation devices. The balance of the line is
imported from contract suppliers in China, Taiwan, Italy and
Indonesia.
(photo)
Amav
Amav is a fully integrated manufacturer of children's products sold
under the Amav brand name. Amav's products are grouped in two
categories: arts and crafts, including craft kits; and activities,
including game tables, easels and play kitchens. Amav manufactures
over 90% of its products in an 800,000 square foot production
facility in Montreal.
The acquisition of Amav in 1995 added a strong non-licensed line to
ERO's existing mix of businesses. In addition, Amav added immediate
growth potential with a compounded annual growth rate of more than
40% over the last six years. Amav has achieved a high level of
success with its new product introductions and, due to the universal
appeal of its products, is ERO's most promising vehicle for
international growth. For the years ended December 31, 1996, 1995
and 1994, Amav's products accounted for 42%, 19% and 0% of ERO's net
sales, respectively.
(photo)
Impact
Impact's products include a broad line of fashionable school
supplies, including back packs, book bags, lunch kits, luggage, fanny
packs and locker bags, and stationery products such as portfolios,
binders, study kits, pencils, and theme books. Impact leverages its
licensing and graphic strengths across all of these products,
providing children with full sets of items featuring the characters
they love. Because of the age group Impact targets, its revenues
are typically derived from licensing events, such as Batman and
RobinTM and Jurassic ParkTM : The Lost World, rather than classic
licenses. For the years ended December 31, 1996, 1995 and 1994,
Impact's products accounted for 9%, 20% and 26% of ERO's net sales,
respectively.
(photo)
<PAGE>
Priss Prints
Priss Prints' product line includes character-licensed stick-on and
peel-off wall decorations for children's rooms. Priss' products are
very popular with mothers of toddlers since they can decorate a
room with the child's favorite theme in minutes. Its most popular
licenses are classics such as 101 Dalmatians, Disney Babies and Pooh.
For the years ended December 31, 1996, 1995 and 1994, sales of Priss
Prints products accounted for 8%, 7% and 6% of ERO's net sales,
respectively.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 notes thereto
appearing elsewhere in this report.
Summary of consolidated financial results
(Dollars in millions)
<TABLE> Increase (Decrease)
-------------------
1996 1995
Compared to Compared to
1996 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C>
Net sales $157.9 $128.7 $126.7 22.7% 1.6%
Gross profit margin 38.1% 37.3% 37.1% 2.1% 0.5%
Selling, general and administrative
expense (as a percentage of sales) 24.6% 25.8% 26.9% (4.7%) (4.1%)
Interest expense $ 9.1 $ 2.0 $ 1.9 355.0% 5.3%
</TABLE>
1996 Compared to 1995
Sales increased to $157.9 million, or 22.7%, in 1996 due primarily to
Amav's first full year of operations. Amav, which was acquired
October 1, 1995, contributed $66.1 million in 1996 compared to $24.6
million in 1995, a $41.5 million increase. Partially offsetting
Amav's contribution, sales in the Company's Impact business fell far
short of 1995 levels due to the timing of 1996's major licensing
events. The success of Impact's back-to-school products relies
heavily on major summer licensing events. In 1996, the major
licensing events occurred in the fourth quarter, which is after the
back-to-school selling season.
Amav's sales of $66.1 million represent a $16.1 million, or 32.2%,
increase over 1995 full year sales of $50.0 million. Amav's sales
growth is attributable to several factors including increased
production capacity, working capital availability, growth of the arts
and crafts market, the introduction of new products and increased
account penetration. Gross profit margins for 1996 increased by 2.1%
compared to 1995 due primarily to a shift in the sales mix to ERO's
businesses with higher margins, Amav and Priss Prints.
Selling, general and administrative expenses as a percentage of sales
decreased by 4.7% primarily due to a decrease in royalty expense as
a percentage of sales resulting from a shift in the sales mix to
non-licensed products. This decrease was partially offset by the
increase in amortization expense resulting from the Amav acquisition.
<PAGE>
Interest expense increased significantly from the prior year due to
the acquisition debt and higher working capital requirements.
The Company's effective tax rate for 1996 was 36% compared to 40%
in 1995 due to an increase in the percentage of income derived from
the Company's foreign subsidiaries, which carry lower statutory tax
rates than its U.S. subsidiaries.
1995 Compared to 1994
Sales increased to $128.7 million, or 1.6%, in 1995 due primarily to
the acquisition of Amav. Amav, which was acquired October 1, 1995,
contributed $24.6 million to sales in 1995. Offsetting Amav's positive
impact on sales, ERO's sales of licensed products were significantly
below the record levels achieved during 1994 due to the lack of a
strong boy's license. During 1994, the Company's strongest license,
Mighty Morphin Power RangersTM, generated approximately 29% of total
sales. There was no such license in 1995.
Amav's full year sales in 1995 were $50.0 million as compared to
$24.8 million in 1994, a 102% increase. Amav's sales improvement from
the prior year resulted from a number of factors including increased
capacity due to its new facility in Montreal, Quebec, increased
account penetration and the introduction of several new products.
See Note 3 to the consolidated financial statements which provides
pro forma combined results for ERO and Amav.
During 1995, ERO discontinued the majority of products within the
Sports Bags and Coolers product group. The products within this
group, which did not carry an exclusive license, offered the Company
no competitive advantages and did not fit into ERO's strategy of
providing children's leisure products.
Gross profit margins were relatively consistent with the prior year.
The shift in sales mix to ERO's businesses with higher margins,
Amav and Priss Prints, was slightly offset by the discontinuation of
products in the Sports Bag and Coolers product group, as discussed
above, and the liquidation of certain slow-moving inventory.
Selling, general and administrative expenses as a percentage of sales
decreased by 4.1% primarily due to a decrease in royalty expense as
a percentage of sales resulting from a shift in the sales mix to
Amav's non-licensed products. This decrease was partially offset by
the effect on ERO's fixed cost structure of the decrease in licensed
product sales.
Interest expense was relatively consistent with the prior year as
the Company's new $110 million credit facility, used to finance the
Amav acquisition, was not in effect until December 1995.
<PAGE>
Liquidity and Capital Resources
An increase in working capital needs during the fourth quarter
resulted in net cash outflows from operating activities during 1996.
Net borrowings of $10.6 million under the Company's credit facilities
and $0.2 million received from the exercise of stock options were
used to fund this operating cash need, fund capital expenditures of
$3.6 million, consisting primarily of machinery, equipment and
information systems projects, fund the repurchase of the Company's
common stock for $0.7 million and fund financing fees of $0.3 million.
It is anticipated that capital expenditures in 1997 will be
approximately $5.5 million, relating primarily to facilities expansion
and the acquisition of machinery and equipment. ERO generates no
material income from investment activities.
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 ERO's
current business strategy, including the funding of working capital,
capital expenditures, and other needs.
<TABLE>
Consolidated Income Statements
(In thousands, except per share data)
For the year ended December 31,
-------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net sales $157,913 $128,722 $126,734
Cost of sales 97,802 80,693 79,776
________ ________ ________
Gross profit 60,111 48,029 46,958
Selling, general and administrative expense 38,896 33,183 34,078
________ ________ ________
Operating income 21,215 14,846 12,880
Interest expense 9,062 1,997 1,939
________ ________ ________
Income before income taxes 12,153 12,849 10,941
Income tax provision 4,395 5,167 4,482
________ ________ ________
Net income $ 7,758 $ 7,682 $ 6,459
======== ======== ========
Net income per share $0.75 $0.73 $0.61
Weighted average number
of shares outstanding (in thousands) 10,316 10,487 10,580
<PAGE>
</TABLE>
<TABLE>
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
<S> ---------------------
ASSETS 1996 1995
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 5,094 $ 154
Trade accounts receivable,
net of allowance for doubtful
accounts of $287 and $1,038, respectively 48,296 38,679
Inventories 22,058 17,001
Prepaid expenses and other current assets 4,085 2,662
________ ________
TOTAL CURRENT ASSETS 79,533 58,496
________ ________
PROPERTY, PLANT AND EQUIPMENT,
at cost, net of accumulated depreciation 20,871 20,348
________ ________
OTHER ASSETS:
Deferred charges, net of accumulated amortization 2,648 3,283
Intangible assets, net of accumulated amortization 56,942 61,212
Deferred income tax benefit - 799
________ ________
TOTAL OTHER ASSETS 59,590 65,294
________ ________
TOTAL ASSETS $159,994 $144,138
======== ========
</TABLE>
<PAGE>
<TABLE>
<S>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: <C> <C>
Current portion of long-term debt $ 8,893 $ 6,728
Accounts payable 9,389 6,398
Accrued expenses:
Compensation 1,131 1,207
Commissions and royalties 4,793 2,861
Advertising, freight and other allowances 3,821 4,777
Purchase price - 2,960
Other 1,600 1,991
Income taxes payable 70 2,882
________ ________
TOTAL CURRENT LIABILITIES 29,697 29,804
________ ________
LONG-TERM DEBT:
Revolving loan 31,525 15,225
Term loan 46,000 54,000
Other loans 9,222 9,045
________ ________
TOTAL LONG-TERM DEBT 86,747 78,270
________ ________
DEFERRED INCOME TAX LIABILITY 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, 10,373,300 and 10,346,300 shares issued,
respectively 104 103
Capital in excess of par value 39,173 38,990
Foreign currency translation adjustment 3 324
Retained earnings/(accumulated deficit),
per accompanying statement 4,507 (3,251)
Common stock held in treasury, 120,000 and 15,000
shares, respectively, at cost (773) (102)
________ ________
TOTAL STOCKHOLDERS' EQUITY 43,014 36,064
________ ________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $159,994 $144,138
======== ========
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands) For the year ended
December 31,
--------------------------
<S> 1996 1995 1994
Cash flows from operating activities: <C> <C> <C>
Net income $ 7,758 $ 7,682 $ 6,459
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation of property, plant and equipment 2,739 1,422 1,018
Amortization of other assets 3,395 2,237 2,184
Deferred income taxes 1,335 (588) (294)
Loss (gain) on the disposition of
property, plant and equipment 21 (3) 21
Provision for losses on accounts receivable 770 343 460
Tax benefit of stock options exercised 9 - 162
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable (10,405) (59) (8,600)
Inventories (4,958) 3,626 3,425
Prepaid expenses (1,414) (936) 471
Accounts payable 2,942 (7,907) 1,682
Accrued expenses (657) (1,735) 1,268
Income taxes payable (2,812) 1,500 576
_______ _______ _______
Net cash provided by (used for)
operating activities (1,277) 5,582 8,832
_______ _______ _______
Cash flows from investing activities:
Acquisitions of property, plant and equipment (3,625) (1,772) (1,287)
Proceeds from the sale of property,
plant and equipment 6 3 -
Acquisition of Amav Industries Ltd - (55,098) -
Acquisition of Impact, Inc. - - (4,400)
Acquisition of ERO Canada, Inc. - - (755)
_______ _______ _______
Net cash used for investing activities (3,619) (56,867) (6,442)
_______ _______ _______
Cash flows from financing activities:
Net borrowings(repayments)under revolving loan 16,300 (5,236) (2,775)
Net borrowings(repayments)under term loan (6,000) 60,000 -
Net borrowings(repayments) under other loans 342 (315) -
Financing fees paid (310) (3,210) -
Net proceeds from the exercise of stock options 175 - 260
Purchase of common stock for treasury (671) - -
_______ _______ _______
Net cash provided by (used for)
financing activities 9,836 51,239 (2,515)
_______ _______ _______
Net increase (decrease)in
cash and cash equivalents 4,940 (46) (125)
Cash and cash equivalents:
Beginning of year 154 200 325
_______ _______ _______
End of year $ 5,094 $ 154 $ 200
======= ======= =======
Supplemental disclosures
of cash flow information:
Interest paid $ 8,515 $ 1,574 $ 1,822
Income taxes paid 5,872 4,295 4,038
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Capital Foreign Retained
Common Stock in Excess Currency Earnings/
--------------------- of Par Translation (Accumulated Treasury
Shares Par Value Value Adjustment Deficit) Stock Total
<S>
Balance at <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 10,257,300 $103 $38,568 - ($17,392) ($102) $21,177
Stock options exercised 89,000 - 260 - - - 260
Tax benefit from stock
options exercised - - 162 - - - 162
Foreign currency
translation adjustment - - - ($61) - - (61)
Net income - - - - 6,459 - 6,459
__________ ____ _______ ___ _______ ____ _______
Balance at December 31, 1994 10,346,300 103 38,990 (61) (10,933) (102) 27,997
Foreign currency
translation adjustment - - - 385 - - 385
Net income - - - - 7,682 - 7,682
___________ ____ _______ ___ _______ ____ _______
Balance at
December 31, 1995 10,346,300 103 38,990 324 (3,251) (102) 36,064
Stock options exercised 27,000 1 174 - - - 175
Tax benefit from stock
options exercised - - 9 - - - 9
Purchase of common
stock for treasury - - - - - (671) (671)
Foreign currency
translation adjustment - - - (321) - - (321)
Net income - - - - 7,758 - 7,758
___________ ____ _______ ____ _______ ____ _______
Balance at
December 31, 1996 $10,373,300 $104 $39,173 $ 3 $ 4,507 ($773) $43,014
=========== ==== ======= ==== ======= ====== =======
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF OPERATIONS:
ERO, Inc. ("ERO" or the "Company") is a leading designer, manufacturer,
importer and marketer of children's leisure products. ERO's major
product areas are grouped into four business units: ERO Industries,
Inc., which consists of Slumber Shoppe and water sports products;
Impact, Inc., which consists of back-to-school products; Priss Prints,
Inc., which consists of children's room decor products; and Amav
Industries, Inc., which consists of children's activities, arts and
crafts. The Company's products are sold to all major mass retailers,
sporting goods stores, toy retailers and specialty craft chains.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of 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. All intercompany
balances and transactions have been eliminated in consolidation.
These consolidated financial statements include estimates that are
determined by the Company's management.
Cash and cash equivalents
Cash and cash equivalents include short-term investments with original
maturities of three months or less. These investments are stated at
cost which approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. The cost of
manufactured products includes materials, direct labor and an
allocation of plant overheads. The cost of the purchased products
includes inbound freight and duty.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the
assets. Additions and improvements are capitalized, while expenditures
for maintenance and repairs are charged to operations as incurred.
The cost and accumulated depreciation of property sold or retired are
removed from the respective accounts and the resultant gains or
losses, if any, are included in current operations.
The estimated useful lives of these assets are as follows:
Buildings and improvements 5-20 years
Machinery and equipment 3-10 years
Computer hardware and software 3-5 years
Furniture and fixtures 5-10 years
Depreciation is allocated to cost of sales and selling, general and
administrative expense based upon the related asset's use.
Depreciation of approximately $2,046,000, $786,000 and $482,000 is
included in cost of sales for the years ended December 31, 1996, 1995
and 1994, respectively. Depreciation of approximately $693,000,
$636,000 and $536,000 is included in selling, general and
administrative expense for the years ended December 31, 1996,
1995 and 1994, respectively.
<PAGE>
Deferred charges
Deferred charges consist of costs associated with certain prepaid
noncompetition agreements and professional fees and other costs
incurred in connection with obtaining borrowings under long-term
debt agreements. The costs of noncompetition agreements are amortized
over their terms using the straight-line method. Deferred financing
costs are amortized over the life of the related debt. Fully amortized
items are removed from the accounts.
Amortization of noncompetition agreements of approximately $100,000,
$435,000 and $483,000 is included in selling, general and
administrative expense for the years ended December 31, 1996, 1995
and 1994, respectively. Amortization of deferred financing costs of
approximately $845,000, $94,000 and $133,000 is included as additional
interest expense for the years ended December 31, 1996, 1995
and 1994, respectively.
Intangible assets
Capitalized intangible assets include license agreements, trademarks
and trade names, patents and the excess of cost over the fair value
of identifiable assets acquired (goodwill). License agreements are
amortized using an accelerated method over their average estimated
useful lives of 10 years. Trademarks and trade names and goodwill
are amortized using the straight-line method over their estimated
useful lives of 10 years and 15-40 years, respectively. Patents are
amortized using the straight-line method over their remaining lives.
Amortization of intangible assets of $2,450,000, $1,708,000
and $1,568,000 is included in selling, general and administrative
expense for the years ended December 31, 1996, 1995 and 1994,
respectively.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of
"(SFAS 121). SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event that
facts and circumstances indicate that the cost of long-lived assets
may be impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's
carrying amount to determine if a write-down to market value or
discounted cash flow is required. The Company did not write-down
any long-lived assets during the year ended December 31, 1996.
Income taxes
Deferred income taxes are determined under the asset and liability
method in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Deferred income
taxes arise from temporary differences between the income tax basis
of assets and liabilities and their reported amounts in the
financial statements.
<PAGE>
Fair value of financial instruments
The carrying amount reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses approximates fair value because of the immediate
or short-term maturity of these financial instruments. The carrying
amount reported for long-term debt approximates fair market value
because the underlying instruments are at rates similar to current
rates offered to the Company for debt with the same remaining
maturities.
Foreign currency translation
The financial position and results of operations of the Company's
foreign subsidiaries are measured using each subsidiary's local
currency as the functional currency. Assets and liabilities of the
foreign subsidiaries are translated to U.S. dollars using exchange
rates in effect at balance sheet dates. Income and expense items are
translated at monthly average rates of exchange. The resultant
translation gains or losses are included in the component of
stockholders' equity designated as foreign currency translation
adjustment. Transaction gains or losses were not significant in
any year.
Earnings per common share
Earnings per share are determined by dividing net income by the
weighted average number of common shares outstanding, including
common stock equivalents (stock options granted), using the treasury
stock method.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation"(SFAS 123), encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount the employee
must pay to acquire the stock. See Note 7.
Significant concentration of customers
All trade accounts receivable are unsecured. A significant level of
the Company's net sales is generated from approximately five retail
companies that serve national markets. Sales to the Company's top
five customers aggregated approximately 56%, 60% and 61% of net
sales for the years ended December 31, 1996, 1995 and 1994,
respectively. Three of the Company's customers, Toys "R" Us,
Wal-Mart and Target, each accounted for over 10% of the Company's
net sales during 1996, 1995 and 1994, aggregating approximately
46%, 49% and 52% of net sales, respectively.
<PAGE>
Significant concentration of licensors
The Company has entered into numerous license agreements with multiple
licensors. Typically, these licenses have a life of two years. A
significant level of the Company's net sales is generated from a
variety of products licensed from four licensors. Sales of these
products aggregated approximately 42%, 62% and 73% of net sales for
the years ended December 31, 1996, 1995 and 1994, respectively.
One of the Company's licensors, The Walt Disney Company, accounted
for over 10% of the Company's net sales during 1996, aggregating
approximately 33% of net sales. Two of the Company's licensors,
The Walt Disney Company and Warner Bros., each accounted for over
10% of the Company's net sales during 1995, aggregating approximately
48% of net sales. Three of the Company's licensors, The Walt Disney
Company, Warner Bros. and Saban Merchandising, Inc., each accounted
for over 10% of the Company's net sales during 1994, aggregating
approximately 70% of net sales.
NOTE 3 - ACQUISITIONS:
Amav Industries Ltd.
Pursuant to the terms of an asset purchase agreement, on October 1, 1995
(the date effective control was transferred to the Company), the
Company, through its newly formed subsidiary, Amav Industries, Inc.
("Amav"), acquired certain assets and assumed certain liabilities of
Amav Industries Ltd. ("Seller") of Montreal, Quebec and its wholly-
owned U.S. subsidiary, and acquired the stock of its wholly-owned
U.K. subsidiary for $54.4 million in cash. The purchase price for
the assets acquired, including related transaction costs, was
approximately $61.3 million. The Company financed the acquisition
through borrowings under a new $110 million credit facility (Note 5).
The Company recorded a $2,960,000 current liability to account for
an estimate of an unpaid purchase price contingency as well as unpaid
transaction costs relating to the acquisition. The actual amount of
this liability was paid in 1996 and approximated the estimate. The
purchase agreement also includes an additional C$5 million (Canadian
dollars) of purchase price contingent upon the achievement of certain
conditions. If these conditions are met, the contingent purchase
price is due to be paid March 1, 1998.
This transaction has been accounted for using the purchase method.
Accordingly, the total purchase price of $61.3 million, which
includes transaction costs, was allocated to the assets acquired and
liabilities assumed based upon their fair market values at the
effective date of acquisition.
The fair value of assets acquired and liabilities assumed, reflecting
the final allocation, was as follows:
Net working capital $17,748,000
Property, plant and equipment 15,229,000
Goodwill 43,755,000
Deferred financing fees 3,210,000
Debt assumed (18,674,000)
___________
$61,268,000
===========
<PAGE>
The income statement for the year ended December 31, 1995 reflects
the operations of Amav since October 1, 1995. Unaudited pro forma
combined results of operations for the Company and Amav for the
years ended December 31, 1995 and 1994, as if the acquisition had
occurred on January 1, 1994, would be as follows:
<TABLE>
For the year ended December 31,
------------------------------------
1995 1994
<S> <C> <C>
Net sales $154,144,000 $151,530,000
Net income $6,792,000 $3,806,000
Net income per share $0.65 $0.36
Weighted average shares outstanding 10,487,000 10,580,000
</TABLE>
The unaudited pro forma amounts are not necessarily indicative of
the actual results of operations had the acquisition occurred on
January 1,1994.
Impact, Inc.
Effective January 1, 1994, pursuant to the terms of an asset purchase
agreement, the Company, through its newly formed subsidiary,
Impact, Inc., acquired, for $4,400,000 in cash, certain assets of
Impact International, Inc. and Impact Designs, Ltd., marketers
of licensed school supplies.
The acquisition has been accounted for using the purchase method.
Accordingly, the net purchase price was allocated to the assets
acquired and liabilities assumed based upon their fair values at
the date of acquisition. The income statement for the year ended
December 31, 1994 reflects the operations of Impact, Inc.
since January 1, 1994.
ERO Canada, Inc.
During the third quarter of 1994, the Company incorporated a wholly-
owned subsidiary, ERO Canada, Inc., which subsequently purchased
certain assets of a Canadian manufacturer and distributor of licensed
products for a purchase price of $755,000. These assets primarily
consisted of inventories and prepaid expenses.
<PAGE>
NOTE 4 - COMPOSITION OF BALANCE SHEET ACCOUNTS:
<TABLE>
The composition of certain balance sheet accounts is as follows:
December 31,
------------------------------
<S> 1996 1995
Inventories <C> <C>
Raw materials $ 6,823,000 $ 6,333,000
Work-in-process 1,720,000 3,090,000
Finished goods 13,515,000 7,578,000
___________ ___________
$22,058,000 $17,001,000
=========== ===========
Property, plant and equipment
Buildings and improvements $ 9,049,000 $ 9,066,000
Machinery and equipment 12,817,000 10,490,000
Computer hardware and software 2,856,000 2,186,000
Furniture and fixtures 1,084,000 1,045,000
___________ ___________
25,806,000 22,787,000
Less: Accumulated depreciation (8,745,000) (6,324,000)
___________ ___________
17,061,000 16,463,000
Land 3,810,000 3,885,000
___________ ___________
$20,871,000 $20,348,000
=========== ===========
Deferred Charges
Noncompetition agreements $ - $1,200,000
Deferred financing costs 3,210,000 3,210,000
___________ ___________
3,210,000 4,410,000
Less: Accumulated amortization (562,000) (1,127,000)
___________ ___________
$ 2,648,000 $ 3,283,000
=========== ===========
Intangible assets
License agreements $ 6,463,000 $ 6,463,000
Trademarks and trade names 3,984,000 3,984,000
Patents 335,000 335,000
Goodwill 60,134,000 61,999,000
___________ ___________
70,916,000 72,781,000
Less: Accumulated amortization (13,974,000) (11,569,000)
___________ ___________
$56,942,000 $61,212,000
=========== ===========
</TABLE>
<PAGE>
NOTE 5 - LONG-TERM DEBT:
On December 14, 1995, in connection with the Amav acquisition
(Note 3), the Company amended its existing credit agreement with a
group of banks to provide a $110,000,000 Credit Facility (the "Credit
Facility") consisting of a $60,000,000 Term Loan (the "Term Loan"),
a $40,000,000 Revolving Credit Facility (the "Revolving Loan"),
and a $10,000,000 Letter of Credit Facility. During 1996, the Company
amended the Credit Facility to provide a seasonal increase of
$10,000,000 to the Revolving Loan limit. This increase was in
effect from September 1, 1996 through January 15, 1997. Borrowings
under the Credit Facility bear interest, at the option of the
Company, at either the prime rate plus 1.75% or a Eurodollar
rate plus 3.0%. The Company is also required to pay a commitment
fee of 0.50% per annum on the daily unborrowed portion of the
Revolving Loan.
The Credit Facility, which expires on December 14, 2001, is secured
by substantially all of the Company's assets and contains customary
restrictive covenants requiring the maintenance of certain minimum
financial ratios and limiting the amount of any dividends paid by
the Company.
As of December 31, 1996, the Company had two three-year interest
rate swap agreements (the "Swap Agreements") in place with two of
its lenders, with notional amounts totaling $27 million. Under the
Swap Agreements, the Company exchanged a variable interest rate
for a fixed interest rate of 8.41%. The Company anticipates that the
counter parties to the Swap Agreements will fully perform their
obligations.
The Company also maintains various other mortgages, equipment loans
and other loans ("Other Loans") with varying interest rates and
maturities, including the mortgage on Amav's Montreal, Quebec
facility ("Amav Mortgage") with a balance and interest rate of
$5,750,000 and 9.88% at December 31, 1996, respectively. The Amav
Mortgage is payable in full on December 14, 2002, is held by the
Seller and is secured by the Montreal facility.
Aggregate maturities of long-term debt over the next five years are
as follows: 1997 - $8,893,000; 1998 - $10,847,000; 1999 - $10,658,000;
2000 - $12,383,000; 2001 - $14,213,000.
NOTE 6 - INCOME TAXES:
<TABLE>
The sources of pretax income (loss) are as follows:
For the year ended December 31,
----------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Domestic $ (397,000) $ 5,419,000 $10,941,000
Foreign 12,550,000 7,430,000 -
___________ ___________ ___________
$12,153,000 $12,849,000 $10,941,000
=========== =========== ===========
</TABLE>
<PAGE>
The Company has not provided for U.S. federal income and foreign
income withholding taxes on its foreign subsidiaries' undistributed
earnings as of December 31, 1996, because such earnings are considered
to be indefinitely reinvested. Repatriation of these earnings would
not materially increase the Company's tax liability. If these
earnings were distributed in the form of dividends or otherwise,
foreign tax credits could be used to offset the U.S. income taxes
due on income earned from foreign sources.
The components of the provisions for income taxes are as follows:
<TABLE>
For the year ended December 31,
---------------------------------------
<S> 1996 1995 1994
Current <C> <C> <C>
State $ (21,000) $ 498,000 $ 860,000
U.S. Federal (102,000) 2,403,000 3,916,000
Foreign 3,183,000 2,854,000 -
__________ __________ __________
3,060,000 5,755,000 4,776,000
__________ __________ __________
Deferred:
State (7,000) (114,000) (53,000)
U.S. Federal (33,000) (518,000) (241,000)
Foreign 1,375,000 44,000 -
__________ __________ __________
1,335,000 (588,000) (294,000)
__________ __________ __________
$4,395,000 $5,167,000 $4,482,000
========== ========== ==========
</TABLE>
The provisions for income taxes differ from those computed using
the statutory U.S. federal income tax rate as a result of the following:
<TABLE>
For the year ended December 31,
-----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Expected provision $4,132,000 34% $4,369,000 34% $3,720,000 34%
Rate difference on
foreign income 279,000 2 372,000 3 - -
State income taxes,
net of federal benefit 1,000 - 254,000 2 521,000 5
Amortization of goodwill 106,000 1 106,000 1 106,000 1
Other (123,000) (1) 66,000 - 135,000 1
__________ __ __________ __ __________ __
Actual provision $4,395,000 36% $5,167,000 40% $4,482,000 41%
========== == ========== == ========== ==
</TABLE>
<PAGE>
The net deferred tax asset (liability) is comprised of the following:
<TABLE>
December 31,
----------------------------
1996 1995
<S> <C> <C>
Depreciation of property, plant and equipment ($946,000) ($411,000)
Amortization of package design costs 871,000 714,000
Amortization of intangible assets (547,000) 146,000
Allowance for doubtful accounts 70,000 191,000
Additional inventory capitalization 18,000 65,000
Accrued restructuring costs - 64,000
Other (2,000) 30,000
________ ________
($536,000) $799,000
======== ========
</TABLE>
NOTE 7 - STOCK OPTION PLANS:
The Company maintains three stock option plans, the 1988 Key Employee
Stock Option Plan, the 1992 Key Employee Stock Option Plan and the
1992 Directors' Stock Option Plan, which entitle certain employees
and directors of the Company to acquire up to 490,000, 900,000 and
15,000 shares, respectively, of the Company's authorized common
stock. Options granted under these plans have a maximum term of
10 years. Awards can no longer be granted under the 1988 plan.
Options granted under the 1992 plans are made at the discretion of
the Compensation Committee of the Board of Directors, are to be
issued at no less than the fair market value of the Company's common
stock at the date of the grant, and vest over periods of time, as
determined by the Compensation Committee.
Additionally, during 1993, options to purchase 540,000 shares of
the Company's common stock were granted to the Company's Chairman,
President and Chief Executive Officer at the fair market value of
the Company's common stock on the date of grant. These options
vest in equal annual installments over three years and have a
maximum term of 10 years.
<PAGE>
The following is a summary of stock option transactions during the
three years ended December 31, 1996:
<TABLE>
Weighted-Average
<S> Shares Option Prices Exercise Price
Shares under option at <C> <C> <C>
December 31, 1993 1,270,000 $0.974 to $12.750 $ 7.275
Options granted 481,000 6.750 to 8.750 8.005
Options exercised (89,000) 0.974 to 7.250 2.928
Options terminated (451,000) 1.160 to 12.750 10.154
_________ _________________ _______
Shares under option at
December 31, 1994 1,211,000 0.974 to 10.125 6.646
Options granted 91,500 6.250 to 8.625 6.773
Options exercised -
Options terminated (62,934) 8.000 to 8.500 8.076
_________ _________________ _______
Shares under option at
December 31, 1995 1,239,566 0.974 to 10.125 6.583
Options granted 317,000 5.750 to 6.500 6.020
Options exercised (27,000) 6.456 to 6.456 6.456
Options terminated (111,066) 6.250 to 9.750 7.605
_________ _________________ _______
Shares under option at
December 31, 1996 1,418,500 0.974 to 10.125 6.370
========= ================= =======
Shares exercisable at
December 31, 1996 853,367 0.974 to 10.125 6.168
Shares exercisable at
December 31, 1995 636,600 0.974 to 10.125 6.122
Shares exercisable at
December 31, 1994 312,400 $0.974 to $10.125 $ 5.515
========= ================= =======
</TABLE>
At December 31, 1996, 202,500 remaining options are available for
grant under the 1992 Key Employee Stock Option Plan and 9,000
remaining options are available for grant under the 1992 Director's
Stock Option Plan.
The following table summarizes information about shares under option
at December 31, 1996:
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------------------------- -----------------------------
<S>
Range of Exercise Weighted-Average Weighted-Average Weighted-Average
Prices Number Remaining Contractual Life Exercise Price Number Exercise Price
<C> <C> <C> <C> <C> <C>
$0.974 - $ 1.320 55,000 2.42 $1.100 55,000 $1.100
5.250 - 5.750 187,000 9.10 5.737 1,000 5.250
6.110 - 6.750 851,500 7.13 6.212 646,900 6.164
7.000 - 7.875 115,000 7.19 7.353 50,000 7.330
8.000 - 8.750 206,600 7.62 8.394 97,067 8.348
9.750 - 10.125 3,400 6.04 9.816 3,400 9.816
________________ _________ ____ ______ _______ ______
$0.974 - $10.125 1,418,500 7.28 $6.370 853,367 $6.168
================ ========= ==== ====== ======= ======
</TABLE>
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's plans been
determined based on the fair value at the grant date for awards in
the years ended December 31, 1996 and 1995, the Company's net income
and net income per share would not have been materially different
from the amounts reported by the Company.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted during the
years ended December 31, 1996 and 1995: dividend yield of 0.0%;
risk-free interest rate of 7.5%; and expected term of 7.5 years. For
options granted during the years ended December 31, 1996 and 1995,
an expected volatility of 40.0% and 41.7%, respectively, was assumed.
The weighted-average fair value of options granted during the year
ended December 31, 1996 totaled $3.47.
NOTE 8 - EMPLOYEE BENEFIT PLAN:
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue
Code which provides retirement benefits for eligible employees of
the Company. The Company may make annual discretionary contributions
to the plan. Discretionary contributions during the years ended
December 31, 1996, 1995 and 1994 aggregated $187,000, $72,000
and $296,000, respectively.
NOTE 9 - COMMITMENTS UNDER OPERATING LEASE AGREEMENTS:
The Company leases certain office and distribution facilities and
manufacturing and office equipment under operating lease agreements
with terms expiring at various times through 2001.
Aggregate future minimum lease commitments, exclusive of escalation
payments, for noncancellable leases that have initial or remaining
lease terms in excess of one year as of December 31, 1996 are as
follows: 1997 - $1,159,000; 1998 - $982,000; 1999 - $421,000;
2000 - $55,000; 2001 - $53,000.
Rent expense under operating leases for the years ended
December 31, 1996, 1995 and 1994 aggregated approximately $1,035,000,
$1,544,000 and $1,006,000, respectively.
NOTE 10 - STOCK REPURCHASE:
On October 19, 1995, the Company's Board of Directors approved the
repurchase of up to 500,000 shares of the Company's common stock.
Such repurchases can be made from time to time in the open market,
in privately negotiated transactions or otherwise. As of
December 31, 1996, the Company had repurchased 105,000 shares of
common stock under this program at a total cost of $671,000. The
Company's Credit Facility allows for annual stock repurchases of up
to 10% of the prior year's net income, or $776,000, in 1997.
<PAGE>
NOTE 11 - GEOGRAPHIC INFORMATION:
Summarized geographic information for the years ended December 31, 1996
and 1995 is as follows (in thousands):
<TABLE>
United Other Foreign
States Canada Operations Eliminations Total
<S>
1996
Sales to unaffiliated <C> <C> <C> <C> <C>
customers $139,579 $11,205 $7,129 $ - $157,913
Transfers between
geographic areas 9,649 52,637 - (62,286) -
________ _______ ______ ________ ________
Total net sales $149,228 $63,842 $7,129 ($ 62,286) $157,913
________ _______ ______ ________ _________
Operating income $ 6,206 $15,760 $675 ($ 1,426) $ 21,215
________ _______ ______ ________ ________
Identifiable assets $210,106 $64,761 $5,145 ($120,018) $159,994
________ _______ ______ ________ ________
United Other Foreign
States Canada Operations Eliminations Total
1995
Sales to unaffiliated
customers $121,314 $ 6,261 $1,147 $ - $128,722
Transfers between
geographic areas 2,389 18,332 _ (20,721) -
________ _______ ______ ________ ________
Total net sales $123,703 $24,593 $1,147 ($ 20,721) $128,722
________ _______ ______ ________ ________
Operating income $ 8,029 $ 7,544 $ 334 ($ 1,061) $ 14,846
________ _______ ______ ________ ________
Identifiable assets $194,500 $66,026 $5,645 ($122,033) $144,138
________ _______ ______ ________ ________
</TABLE>
The Company generated no material foreign income for the year ended
December 31, 1994 and owned no material foreign assets at
December 31, 1994.
<PAGE>
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly data for the years ended
December 31, 1996 and 1995 are as follows (dollars in thousands,
except per share data):
<TABLE>
Quarter
-----------------------------------------------------------
<S>
1996 First Second Third Fourth Total
<C> <C> <C> <C> <C>
Net sales $18,883 $29,609 $49,633 $59,788 $157,913
Gross profit 5,619 11,115 18,310 25,067 60,111
Operating income (loss) (1,934) 2,812 7,771 12,566 21,215
Net income (loss) (2,228) 483 3,067 6,436 7,758
Net income (loss per share $ (0.21) $0.05 $0.30 $0.62 $ 0.75
Weighted average number of
shares outstanding
(in thousands) 10,364 10,324 10,305 10,406 10,316
Market price of common stock:
High $ 7.250 $ 7.250 $6.250 $ 8.750 $ 8.750
Low 5.750 5.750 4.250 5.125 4.250
Quarter
-----------------------------------------------------------
1995 First Second Third Fourth Total
Net sales $14,807 $37,478 $28,238 $48,199 $128,722
Gross profit 5,622 13,081 9,983 19,343 48,029
Operating income 375 3,576 2,026 8,869 14,846
Net income 65 1,906 1,014 4,697 7,682
Net income per share $ 0.01 $ 0.18 $ 0.10 $ 0.45 $ 0.73
Weighted average number
of shares outstanding
(in thousands) 10,495 10,540 10,529 10,380 10,487
Market price of
common stock:
High $ 8.250 $ 9.250 $ 9.000 $ 7.250 $ 9.250
Low 6.750 7.000 6.500 5.250 5.250
</TABLE>
<PAGE>
Management's Responsibility for Financial Statements
The consolidated financial statements of ERO, Inc. presented in this
Annual Report have been prepared by management which has responsibility
for their integrity and objectivity. These financial statements have
been prepared in conformity with generally accepted accounting
principles, and by applying certain estimates and judgments based
upon currently available information and management's view of
current conditions and circumstances.
Management has developed and maintains a system of internal
accounting controls designed to provide reasonable assurance that the
Company's assets are protected from improper use and that accounting
records provide a reliable basis for the preparation of financial
statements. This system is continually reviewed, improved and
modified in response to changing business conditions and operations
and to recommendations made by the Company's independent accountants.
Management believes that the accounting and control systems provide
reasonable assurance that assets are safeguarded and financial
information is reliable.
The independent accounting firm, Price Waterhouse LLP, has been
retained to audit the Company's consolidated financial statements.
Their accompanying report is based on an audit conducted in accordance
with generally accepted auditing standards, which includes the
consideration of the Company's internal controls to establish a basis
for reliance thereon in determining the nature, timing, and extent
of audit tests to be applied.
The Board of Directors, through the activities of its Audit Committee
consisting solely of independent non-management Directors, participates
in the process of reporting financial information. The duties of the
Committee include keeping informed of the financial condition of
the Company and reviewing its financial policies and procedures,
its internal accounting controls and the objectivity of its financial
reporting. The Company's independent accountants have free access
to the Audit Committee and the Board of Directors and meet with
the Committee periodically, with and without management present.
/s/ Mark D. Renfree
Mark D. Renfree
Senior Vice President of Finance
and Chief Financial Officer
March 3, 1997
<PAGE>
<TABLE>
Five-Year Financial Summary
(Dollars in thousands, except per share data)
<S> 1996 1995 1994 1993 1992
Statement of Operations Data:
<C> <C> <C> <C> <C>
Net sales $157,913 $128,722 $126,734 $95,459 $101,777
Cost of sales 97,802 80,693 79,776 63,028 64,984
________ ________ ________ _______ ________
Gross profit 60,111 48,029 46,958 32,431 36,793
Selling, general and
administrative expense 38,896 33,183 34,078 26,245 26,919
Restructuring charge - - - 1,700 -
________ ________ ________ _______ ________
Operating income 21,215 14,846 12,880 4,486 9,874
Interest expense 9,062 1,997 1,939 1,261 2,292
________ ________ ________ _______ ________
Income before income taxes 12,153 12,849 10,941 3,225 7,582
Income tax provision 4,395 5,167 4,482 1,040 2,630
________ ________ ________ _______ ________
Income from continuing
operations 7,758 7,682 6,459 2,185 4,952
Extraordinary expense - early
extinguishment of debt,
net of applicable income taxes - - - - (1,558)
________ ________ _________ ________ ________
Income before cumulative effect
of the change
accounting for income taxes 7,758 7,682 6,459 2,185 3,394
Cumulative effect of the change
in accounting for income taxes - - - - (1,911)
________ ________ ________ ________ ________
Net income $ 7,758 $ 7,682 $ 6,459 $ 2,185 $ 1,483
======== ======== ======== ======== ========
Per share amounts:
Income from continuing
operations $ 0.75 $ 0.73 $ 0.61 $ 0.21 $ 0.37(a)
Net income 0.75 0.73 0.61 0.21 0.02(a)
Weighted average number of
shares outstanding
(in thousands) 10,316 10,487 10,580 10,444 9,847
Statement of Cash Flow Data:
Depreciation and amortization $ 6,134 $ 3,659 $ 3,202 $ 2,967 $ 3,220
Capital expenditures 3,625 1,772 1,287 989 1,881
Net cash provided by (used
for) operating activities (1,277) 5,582 8,832 9,468 9,369
Net cash used for
investing activities (3,619) (56,867) (6,442) (6,289) (13,443)
Net cash provided by (used
for) financing activities 9,836 51,239 (2,515) (3,118) (920)
</TABLE>
<PAGE>
<TABLE>
Five-Year Financial Summary (continued)
(Dollars in thousands, except per share data)
<S>
1996 1995 1994 1993 1992
Balance Sheet Data:
<C> <C> <C> <C> <C>
Working capital $ 49,836 $ 28,692 $16,990 $15,093 $19,026
Total assets 159,994 144,138 56,792 48,935 51,112
Long-term debt 86,747 78,270 11,875 14,650 17,800
Stockholders' equity 43,014 36,064 27,997 21,177 18,781
Notes to Five-Year Financial Summary:
(a) Includes revaluation of warrant to purchase common stock per
share of ($0.13).
</TABLE>
Board of Directors
- ------------------
D. Richard Ryan, Jr.
President, Chief Executive Officer and Chairman of the Board
ERO, Inc.
Thomas M. Gasner
Executive Vice President of Operations
ERO, Inc.
Robert J. Lipsig
Principal
Core Financial Corporation
Private investment and business development firm
Lee M. Mitchell
Principal
Golder, Thoma, Cressey, Rauner, Inc.
Investment firm
Arthur S. Nicholas
President
The Antech Group
Private investment and business development firm
Bruce V. Rauner
Principal
Golder, Thoma, Cressey, Rauner, Inc.
Investment firm
Corporate Officers
- ------------------
D. Richard Ryan, Jr.
President and Chief Executive Officer
Mark D. Renfree
Senior Vice President of Finance and Chief Financial Officer
Christopher A. Brown
Vice President of Finance and Corporate Controller
<PAGE>
Operating Subsidiaries
- ----------------------
ERO Industries, Inc.
585 Slawin Court
Mount Prospect, Illinois 60056-2183
Barry J. Ryan, President
Thomas M. Gasner, Executive Vice President of Operations
Amav Industries, Inc.
4505 Hickmore Street
St. Laurent, Quebec H4T IK4
Amos Sochaczevski, President
Avi Sochaczevski, Executive Vice President
Impact, Inc.
1515 North Federal Highway
Suite 208
Boca Raton, Florida 33432
Kenneth E. Litvack, President
Priss Prints, Inc.
14800 Quorum Drive
Suite 385
Dallas, TX 75240
Richard F. Schaub, Jr., President
ERO Canada, Inc.
6600 Kennedy Road
Suite 213
Missisauga, Ontario L5T 2M9
ERO Marketing, Inc.
585 Slawin Court
Mount Prospect, Illinois 60056-2183
Duncan J. Billing, President
Stockholder Information
- -----------------------
Annual Report and Form 10-K
Additional copies of the Company's Annual Report and copies of
the annual report to the Securities and Exchange Commission on
Form 10-K may be obtained upon written request.
Direct your request to:
Mark D. Renfree
Senior Vice President of Finance
ERO, Inc.
585 Slawin Court
Mount Prospect, Illinois 60056-2183
Annual Meeting
Thursday, April 17, 1997
10:00 a.m. Local Time
ERO, Inc.
585 Slawin Court
Mount Prospect, Illinois 60056-2183
<PAGE>
Corporate Offices
585 Slawin Court
Mount Prospect, Illinois 60056-2183
(847)803-9200
Independent Accountants
Price Waterhouse LLP
200 East Randolph Drive
Chicago, Illinois 60601
Transfer Agent and Registrar
The First National Bank of Chicago
Shareholder Services Administration
Chicago, Illinois 60670-0123
Common Stock
ERO, lnc.'s common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol EROI.
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,094
<SECURITIES> 0
<RECEIVABLES> 48,583
<ALLOWANCES> 287
<INVENTORY> 22,058
<CURRENT-ASSETS> 79,533
<PP&E> 29,616
<DEPRECIATION> 8,745
<TOTAL-ASSETS> 159,994
<CURRENT-LIABILITIES> 29,697
<BONDS> 86,747
0
0
<COMMON> 104
<OTHER-SE> 42,910
<TOTAL-LIABILITY-AND-EQUITY> 159,994
<SALES> 157,913
<TOTAL-REVENUES> 157,913
<CGS> 97,802
<TOTAL-COSTS> 97,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,062
<INCOME-PRETAX> 12,153
<INCOME-TAX> 4,395
<INCOME-CONTINUING> 7,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,758
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
