-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AtiMKbQy2wHG3fnn8weOMHmi+FceIqqry/0jwz/BYUGAJT6Ix+GI3jiOiV0wFJoa da3XHD03fqsvs2bJyPAGCg== 0000884319-97-000002.txt : 19970401 0000884319-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000884319-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERO INC CENTRAL INDEX KEY: 0000884319 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 363573286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19942 FILM NUMBER: 97568286 BUSINESS ADDRESS: STREET 1: 585 SLAWIN COURT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8478039200 MAIL ADDRESS: STREET 1: 585 SLAWIN CT CITY: MT PROSPECT STATE: IL ZIP: 60056-2183 10-K 1 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. 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................................................. 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. 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. 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. 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. 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: Date Approximate Constructed, Square Type of Acquired or Location Footage Interest Description of Use First Occupied 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
*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. 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. (b) Executive Officers of the Registrant. The following table sets forth certain information concerning the Company's executive officers: Name Age Position 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. 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 (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)) 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. 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 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 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.
EX-10 2 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 EX-10 3 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 EX-10 4 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 EX-10 5 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 EX-10 6 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 EX-10 7 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 EX-10 8 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 EX-10 9 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 EX-10 10 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 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 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 EX-10 11 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 EX-10 12 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) Net Sales Operating Income Earnings Per Share (In thousands) (In thousands) 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
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. 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. (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 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) 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) 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) Increase (Decrease) ------------------- 1996 1995 Compared to Compared to 1996 1995 1994 1995 1994 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%
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. 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. 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. Consolidated Income Statements (In thousands, except per share data) For the year ended December 31, ------------------------------- 1996 1995 1994 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
Consolidated Balance Sheets (Dollars in thousands, except per share data) December 31, --------------------- ASSETS 1996 1995 CURRENT ASSETS: 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 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: 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 ======== ========
Consolidated Statements of Cash Flows (In thousands) For the year ended December 31, -------------------------- 1996 1995 1994 Cash flows from operating activities: 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
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 Balance at 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 =========== ==== ======= ==== ======= ====== =======
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. 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. 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. 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 =========== 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: For the year ended December 31, ------------------------------------ 1995 1994 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
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. NOTE 4 - COMPOSITION OF BALANCE SHEET ACCOUNTS: The composition of certain balance sheet accounts is as follows: December 31, ------------------------------ 1996 1995 Inventories 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 =========== ===========
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: The sources of pretax income (loss) are as follows: For the year ended December 31, ---------------------------------------------- 1996 1995 1994 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 =========== =========== ===========
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: For the year ended December 31, --------------------------------------- 1996 1995 1994 Current 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 ========== ========== ==========
The provisions for income taxes differ from those computed using the statutory U.S. federal income tax rate as a result of the following: For the year ended December 31, ----------------------------------------------------------------- 1996 1995 1994 ------------------ ------------------ ------------------ Amount Rate Amount Rate Amount Rate 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% ========== == ========== == ========== ==
The net deferred tax asset (liability) is comprised of the following: December 31, ---------------------------- 1996 1995 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 ======== ========
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. The following is a summary of stock option transactions during the three years ended December 31, 1996: Weighted-Average Shares Option Prices Exercise Price Shares under option at 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 ========= ================= =======
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: Options Outstanding Options Exercisable ------------------------------------------------------------- ----------------------------- Range of Exercise Weighted-Average Weighted-Average Weighted-Average Prices Number Remaining Contractual Life Exercise Price Number Exercise Price $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 ================ ========= ==== ====== ======= ======
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. NOTE 11 - GEOGRAPHIC INFORMATION: Summarized geographic information for the years ended December 31, 1996 and 1995 is as follows (in thousands): United Other Foreign States Canada Operations Eliminations Total 1996 Sales to unaffiliated 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 ________ _______ ______ ________ ________
The Company generated no material foreign income for the year ended December 31, 1994 and owned no material foreign assets at December 31, 1994. 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): Quarter ----------------------------------------------------------- 1996 First Second Third Fourth Total 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
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 Five-Year Financial Summary (Dollars in thousands, except per share data) 1996 1995 1994 1993 1992 Statement of Operations Data: 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)
Five-Year Financial Summary (continued) (Dollars in thousands, except per share data) 1996 1995 1994 1993 1992 Balance Sheet Data: 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).
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 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 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. EX-27 13
5 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. 1,000 YEAR DEC-31-1996 DEC-31-1996 5,094 0 48,583 287 22,058 79,533 29,616 8,745 159,994 29,697 86,747 0 0 104 42,910 159,994 157,913 157,913 97,802 97,802 0 0 9,062 12,153 4,395 7,758 0 0 0 7,758 0.75 0.75
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