-----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, QyD+z4GRXJ15QSINBqX9XhRu/QWXHD7Pvu+GmL+302I7Thi5h4AgjsgqKGQCymV0 Vfua2uJdG7ER3YmRWh/ETQ== 0000884319-96-000006.txt : 19960919 0000884319-96-000006.hdr.sgml : 19960919 ACCESSION NUMBER: 0000884319-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960815 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERO INC CENTRAL INDEX KEY: 0000884319 STANDARD INDUSTRIAL CLASSIFICATION: 2390 IRS NUMBER: 363573286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19942 FILM NUMBER: 96615619 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-Q 1 Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For The Quarter Ended June 30, 1996 Commission File Number 0-19942 ERO, INC. (Exact name of registrant as specified in its charter) Delaware 36-3573286 (State or other jurisdiction of incorporation (IRS Employer Identification or organization) Number) 585 Slawin Court, Mount Prospect, Illinois 60056 (Address of principal executive offices, including zip code) (708) 803-9200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ At August 12, 1996, there were 10,241,300 shares outstanding of the Company's Common Stock ($0.01 par value). TOTAL OF SEQUENTIALLY NUMBERED PAGES: 12 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ERO, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) June 30, December 31, 1996 1995 __________ ____________ (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 592 $ 154 Trade accounts receivable, net of allowance for doubtful accounts 27,592 38,679 Inventories 28,765 17,001 Prepaid expenses and other current assets 3,277 2,662 Prepaid income taxes 1,770 --- _________ _________ TOTAL CURRENT ASSETS 61,996 58,496 _________ _________ PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation 21,552 20,348 _________ _________ OTHER ASSETS: Deferred charges, net of accumulated amortization 2,916 3,283 Intangible assets, net of accumulated amortization 59,991 61,212 Deferred tax benefit 79 799 _________ _________ TOTAL OTHER ASSETS 62,986 65,294 _________ _________ TOTAL ASSETS $ 146,534 $ 144,138 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements.
2 ERO, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) June 30, December 31, 1996 1995 (unaudited) ___________ ____________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 7,707 $ 6,728 Accounts payable 11,366 6,398 Accrued expenses: Compensation 871 1,207 Commissions and royalties 1,488 2,861 Advertising, freight and other allowances 2,761 4,777 Purchase price --- 2,960 Other 1,042 1,991 Income taxes payable --- 2,882 _________ _________ TOTAL CURRENT LIABILITIES 25,235 29,804 _________ _________ LONG-TERM DEBT: Revolving loan 29,250 15,225 Term loan 50,000 54,000 Other loans 8,716 9,045 _________ _________ TOTAL LONG-TERM DEBT 87,966 78,270 _________ _________ STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 9,947,700 shares authorized, no shares issued and outstanding --- --- Common stock, $0.01 par value, 50,000,000 shares authorized, 10,361,300 shares and 10,346,300 shares issued, respectively 104 103 Capital in excess of par value 39,089 38,990 Foreign currency translation adjustment (91) 324 Accumulated deficit (4,996) (3,251) Common stock held in treasury, 120,000 shares and 15,000 shares,respectively, at cost (773) (102) _________ _________ TOTAL STOCKHOLDERS' EQUITY 33,333 36,064 _________ _________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,534 $ 144,138 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements.
3 ERO, INC. CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) (unaudited) For the three months ended June 30, __________________________________ 1996 1995 ____ ____ Net sales $29,608 $37,478 Cost of sales 18,494 24,397 _______ _______ Gross profit 11,114 13,081 Selling, general and administrative expense 8,302 9,505 _______ _______ Operating income 2,812 3,576 Interest expense 1,989 344 _______ _______ Income before income taxes 823 3,232 Income tax provision 340 1,326 _______ _______ Net income $ 483 $ 1,906 ======= ======= Net income per share $0.05 $0.18 Weighted average number of shares outstanding (in thousands) 10,324 10,540 The accompanying notes to consolidated financial statements are an integral part of these statements.
4 ERO, INC. CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) (unaudited) For the six months ended June 30, ________________________________ 1996 1995 ____ ____ Net sales $48,492 $52,285 Cost of sales 31,759 33,582 _______ _______ Gross profit 16,733 18,703 Selling, general and administrative expense 15,855 14,752 _______ _______ Operating income 878 3,951 Interest expense 3,835 605 _______ _______ Income before income taxes (2,957) 3,346 Income tax provision (1,212) 1,375 _______ _______ Net income $(1,745) $ 1,971 ======= ======= Net income per share ($0.17) $0.19 Weighted average number of shares outstanding (in thousands) 10,387 10,518 The accompanying notes to consolidated financial statements are an integral part of these statements.
5 ERO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) For the six months ended June 30, ________________________________ 1996 1995 ____ ____ Cash flows from operating activities: Net income (loss) $(1,745) $1,971 Adjustments to reconcile net income (loss) to net cash used for operating activities: Depreciation of property,plant and equipment 1,297 558 Amortization of other assets 1,588 1,016 Deferred income taxes 720 (253) (Gain) loss on the disposition of property, plant and equipment 1 (3) Provision for losses on accounts receivable 305 1 Tax benefit of stock options exercised 3 --- Changes in current assets and current liabilities, net of acquisitions: Accounts receivable 10,668 (7,576) Inventories (11,959) (3,162) Prepaid expenses/other current assets (640) 17 Accounts payable 5,018 2,495 Accrued expenses (7,559) (1,614) Income taxes (4,652) 30 _______ ______ Net cash used for operating activities (6,955) (6,520) _______ ______ Cash flows from investing activities: Acquisitions of property, plant and equipment (2,714) (248) Proceeds from the sale of property, plant and equipment 6 --- _______ ______ Net cash used for investing activities (2,708) (248) _______ ______ Cash flows from financing activities: Net borrowings under revolving loan facility 14,025 6,750 Net repayments under term loan facility (3,000) --- Net repayments under other loans (350) --- Purchase of common stock for treasury (671) --- Net proceeds from the exercise of stock options 97 --- _______ ______ Net cash provided by financing activities 10,101 6,750 _______ ______ Net increase (decrease) in cash and cash equivalents 438 (18) Cash and cash equivalents: Beginning of period 154 200 _______ ______ End of period $ 592 $ 182 ======= ====== The accompanying notes to consolidated financial statements are an integral part of these statements.
6 ERO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - PRINCIPLES OF CONSOLIDATION: The accompanying interim consolidated financial statements include the accounts of ERO, Inc. (the "Company") and its wholly-owned subsidiaries, ERO Industries, Inc., Impact, Inc., Priss Prints, Inc., Amav Industries, Inc., ERO Canada, Inc. and ERO Marketing, Inc. These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition, results of operations and cash flows of the Company. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and in conjunction with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, each as filed with the Securities and Exchange Commission. The results of operations for the three months and six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the entire fiscal year. NOTE 2 - INVENTORIES: Inventories at June 30, 1996 and December 31, 1995 consist of the following: June 30, December 31, 1996 1995 ___________ ___________ Raw materials $ 8,893,000 $ 6,333,000 Work-in-process 2,890,000 3,090,000 Finished goods 16,982,000 7,578,000 ___________ ___________ $28,765,000 $17,001,000 =========== =========== NOTE 3 - COMMON STOCK REPURCHASE PROGRAM: During 1995, the Company's Board of Directors authorized the purchase of up to 500,000 shares of the Company's Common Stock. Such purchases may be made from time to time in the open market, in privately negotiated transactions or otherwise. During the six months ended June 30, 1996, the Company repurchased 105,000 shares of stock for total consideration of approximately $671,000. NOTE 4 - STOCK OPTION PLANS: During the six months ended June 30, 1996, 15,000 vested options were exercised under the 1988 Key Employee Stock Option Plan providing total proceeds to the Company of approximately $97,000 and approximately $3,000 of related income tax benefits. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion of the Company's results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto contained herein, as well as included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, each as filed with the Securities and Exchange Commission. This Quarterly Report on Form 10-Q contains forward- looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements. Results of Operations _____________________ Summary of Consolidated Financial Results (Dollars in millions) Three months ended June 30, __________________ Increase 1996 1995 (Decrease) _______________________________ Net sales $29.6 $37.5 (21.1%) Gross profit margin 37.5% 34.9% 7.4% Selling, general & administrative expense (as a percentage of sales) 28.0% 25.4% 10.2% Interest expense $2.0 $0.3 566.7% Summary of Consolidated Financial Results (Dollars in millions) Six months ended June 30, __________________ Increase 1996 1995 (Decrease) _________________________________ Net sales $48.5 $52.3 (7.3%) Gross profit margin 34.5% 35.8% (3.6%) Selling, general & administrative expense (as a percentage of sales) 32.7% 28.2% 16.0% Interest expense $3.8 $0.6 533.3% 8 Net sales for the second quarter of 1996 decreased by 21.1% as compared to the second quarter of last year. For the six months to date, sales decreased by 7.3% compared to last year. Sales in the Company's back-to-school and slumber businesses were significantly below the prior year due to a weak licensing environment. The Company had no boys licenses in its portfolio during the first half of 1996 to replace last year's sales of products featuring Batman(TM) and Mighty Morphin Power Rangers(TM). Sales in the Amav business, which was acquired in late 1995, and increases over the prior year in the water sports and children's room decor businesses due to new product introductions and increased account penetration, respectively, partially offset the sales decreases. The Company believes that its second half licensing portfolio is strong, including Warner Brothers' Space Jam, Disney's live-action 101 Dalmatians, Disney's Toy Story and R.L. Stine's Goosebumps(R). In addition, the Amav business is expected to exceed last year's second half performance as a result of new product introductions and expanded distribution. The gross profit margin for the second quarter of 1996 increased by 7.4% compared to the second quarter last year. This increase was due primarily to the discontinuation of the majority of the Company's sport bags and coolers products in 1995. These products, which provided sales of $1.9 million during the three months ended June 30, 1995, produced relatively low gross margins for the Company. The gross profit margin for the six months ended June 30, 1996 decreased by 3.6% compared to the first six months of 1995 due partially to a shift in the sales mix away from its slumber and back-to-school businesses which carry higher margins than the Company's water sports business. In addition, because most of this year's licensing events occur in the second half of the year, sales of the Company's licensed products did not result in the higher margins which typically accompany strong licenses. Selling, general and administrative expense for the three and six months ended June 30, 1996 increased by 10.2% and 16.0%, respectively, compared to the prior year. This increase was due primarily to the Amav acquisition. While a large part of its sales occur during the second half of the year, ERO now has higher fixed monthly costs for overhead expenses and acquisition amortization. Interest expense for the three and six month periods ended June 30, 1996 increased by $1.7 million and $3.2 million, respectively, due primarily to the Amav acquisition debt and additional working capital requirements related to Amav. 9 Liquidity and Capital Resources _______________________________ The six months ended June 30, 1996 was a period of operational cash outflows for the Company. During the period, cash was used to fund capital expenditures of $2.7 million, repurchase common stock for $0.7 million, repay $3.0 million under the Company's term loan facility, repay $0.3 million under the Company's other loan facilities and provide for certain normal operating fluctuations in the non-cash components of working capital. These outflows were offset, in part, by borrowings under the Company's revolving loan facility of $14.0 million and $0.1 million from the proceeds of the exercise of stock options. Management anticipates that cash generated from operations together with current working capital and the Company's credit facility will provide sufficient liquidity and capital resources to pursue the Company's current business strategy, including the funding of working capital, capital expenditures, acquisitions and other needs. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is currently involved in several lawsuits arising in the ordinary course of business. The Company maintains insurance covering such liability, and does not believe that the outcome of any such lawsuits will have a material adverse effect on the Company's financial condition. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders (the "Annual Meeting") of the Company was held on April 18, 1996. The number of shares of Common Stock of the Company issued and outstanding and entitled to vote on matters submitted at the Annual Meeting to the holders of Common Stock was 10,226,300. There were present at the Annual Meeting, in person or by a valid proxy, holders of 10,046,339 shares of Common Stock, which was 98.2% of the total number of shares of Common Stock outstanding and entitled to vote at the Annual Meeting and which constituted a quorum for purposes of voting on each of the matters submitted to the stockholders for their vote. 10 With respect to the election of directors, each nominee for director listed below received the number of votes set forth opposite his respective name: Name of Nominee Number of Votes _______________ _______________ Thomas M. Gasner 9,605,973 Bruce V. Rauner 9,605,973 The above persons received a majority of the votes cast by the holders of the Common Stock and therefore were duly elected as directors of the Company. With respect to the resolution regarding the ratification of the appointment of Price Waterhouse LLP as the Company's independent public accountants, such proposal received the number of votes set forth below: Number of Votes _______________ For 10,031,694 Against 12,200 Abstain 2,445 Since a majority of the votes cast by the holders of the Common Stock, present and voting at the meeting, were votes for approval, such resolution was approved by the stockholders of the Company. With respect to the resolution regarding approval of an amendment to the Corporation's 1992 Key Employee Stock Option Plan, such proposal received the number of votes set forth below: Number of Votes _______________ For 9,798,882 Against 238,767 Abstain 8,690 Since a majority of the votes cast by the holders of the Common Stock, present and voting at the meeting, were votes for approval, such resolution was approved by the stockholders of the Company. Item 5. Other Information On August 6, 1996, the Company announced that Ted J. Lueken resigned his position as Chief Financial Officer to pursue other interests. Additionally, Elliot W. Maluth resigned from the Board of Directors on July 31, 1996 to pursue other interests. Item 6. Exhibits and Reports on Form 8-K None 11 SIGNATURES __________ Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1996 ERO, Inc. /s/ D. Richard Ryan, Jr. ___________________________ D. Richard Ryan, Jr. Chairman, President and Chief Executive Officer /s/ Christopher A. Brown ____________________________ Christopher A. Brown Principal Financial Officer 12 EX-27 2
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 6-MOS DEC-31-1996 JUN-30-1996 592 0 27,592 0 28,765 61,996 21,552 0 146,534 25,235 87,966 0 0 104 33,229 146,534 48,492 48,492 31,759 31,759 0 0 3,835 (2,957) (1,212) (1,745) 0 0 0 (1,745) (0.17) (0.17)
-----END PRIVACY-ENHANCED MESSAGE-----