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
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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.