Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 1996 Commission File Number 0-19942
ERO, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3573286
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
585 Slawin Court, Mount Prospect, Illinois 60056
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(Address of principal executive offices, including zip code)
(847) 803-9200
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(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 May 10, 1996, there were 10,241,300 shares outstanding of the Company's
Common Stock ($0.01 par value).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 8
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
1996 1995
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 871 $ 154
Trade accounts receivable, net of
allowance for doubtful accounts 21,888 38,679
Inventories 19,982 17,001
Prepaid expenses and other current assets 3,248 2,662
Prepaid income taxes 1,516 --
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TOTAL CURRENT ASSETS 47,505 58,496
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PROPERTY, PLANT AND EQUIPMENT, at cost,
net of accumulated depreciation 19,993 20,348
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OTHER ASSETS:
Deferred charges, net of accumulated amortization 3,049 3,283
Intangible assets, net of accumulated amortization 60,599 61,212
Deferred tax benefit 207 799
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TOTAL OTHER ASSETS 63,855 65,294
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TOTAL ASSETS $131,353 $144,138
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,228 $ 6,728
Accounts payable 6,450 6,398
Accrued expenses:
Compensation 652 1,207
Commissions and royalties 1,186 2,861
Advertising, freight and other allowances 4,031 4,777
Purchase price 1,671 2,960
Other 2,533 1,991
Income taxes payable -- 2,882
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TOTAL CURRENT LIABILITIES 23,751 29,804
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LONG-TERM DEBT:
Revolving loan 13,950 15,225
Term loan 52,000 54,000
Other loans 8,863 9,045
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TOTAL LONG-TERM DEBT 74,813 78,270
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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, 10,346,300 shares issued 103 103
Capital in excess of par value 38,990 38,990
Foreign currency translation adjustment (52) 324
Accumulated deficit (5,479) (3,251)
Common stock held in treasury, 120,000 shares
and 15,000 shares, respectively, at cost (773) (102)
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TOTAL STOCKHOLDERS' EQUITY 32,789 36,064
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $131,353 $144,138
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
2
ERO, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(unaudited)
For the
three months ended
March 31,
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1996 1995
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Net sales $18,884 $14,807
Cost of sales 13,265 9,185
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Gross profit 5,619 5,622
Selling, general and administrative expense 7,553 5,247
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Operating income (loss) (1,934) 375
Interest expense 1,846 261
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Income (loss) before income taxes (3,780) 114
Income tax provision (benefit) (1,552) 49
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Net income (loss) $(2,228) $ 65
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Net income (loss) per share ($0.21) $0.01
Weighted average number of shares
outstanding (in thousands) 10,364 10,495
The accompanying notes to consolidated financial statements are
an integral part of these statements.
3
ERO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the
three months ended
March 31,
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1996 1995
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Cash flows from operating activities:
Net income (loss) $ (2,228) $ 65
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation of property, plant and equipment 631 276
Amortization of other assets 847 512
Deferred income taxes 592 (50)
Gain on the disposition of property, plant and
equipment -- (3)
Provision for (recoveries from) losses on
accounts receivable 164 (156)
Changes in current assets and current liabilities, net
of acquisitions:
Accounts receivable 16,523 10,916
Inventories (3,181) (262)
Prepaid expenses and other current assets (611) 134
Accounts payable 102 (3,202)
Accrued expenses (3,648) (5,828)
Income taxes payable (4,398) (1,064)
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Net cash provided by operating activities 4,793 1,338
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Cash flows from investing activities:
Acquisitions of property, plant and equipment (448) (132)
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Proceeds from the sale of property,
plant and equipment -- 3
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Net cash used for investing activities (448) (129)
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Cash flows from financing activities:
Net repayments under revolving loan facility (1,275) (1,275)
Net repayments under term loan facility (1,500) --
Net repayments under other loans (182) --
Purchase of common stock for treasury (671) --
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Net cash used for financing activities (3,628) (1,275)
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Net increase (decrease) in cash and cash equivalents 717 (66)
Cash and cash equivalents:
Beginning of period 154 200
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End of period $ 871 $ 134
======== =======
The accompanying notes to consolidated financial statements are
an integral part of these statements.
4
ERO, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - PRINCIPLES OF CONSOLIDATION:
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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, as
filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire fiscal year.
NOTE 2 - INVENTORIES:
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Inventories at March 31, 1996 and December 31, 1995 consist of the following:
March 31, December 31,
1996 1995
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Raw materials $ 6,032,000 $ 6,333,000
Work-in-process 4,071,000 3,090,000
Finished goods 9,879,000 7,578,000
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$19,982,000 $17,001,000
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NOTE 3 - COMMON STOCK REPURCHASE PROGRAM
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During 1995, the Company's Board of Directors authorized the repurchase 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 three months ended March 31, 1996, the Company repurchased
105,000 shares of stock for total consideration of approximately $671,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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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, as filed with the Securities and Exchange Commission.
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Results of Operations
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Summary of Consolidated Financial Results
(Dollars in millions)
Three months ended
March 31,
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Increase
1996 1995 (Decrease)
---------------------------------
Net sales $18.9 $14.8 27.7%
Gross profit margin 29.8% 38.0% (21.6%)
Selling, general & administrative
expense (as a percentage of sales) 40.0% 35.4% 13.0%
Interest expense $ 1.8 $ 0.3 500.0%
Net sales for the first quarter of 1996 increased 27.7% to $18.9 million as
compared to the first quarter of last year. The first quarter sales growth was
due to the newly acquired Amav business. This increase was partially offset by a
decrease in ERO's licensed product businesses compared to the prior year.
The gross profit margin for the quarter ended March 31, 1996 decreased 21.6%
compared to the prior year. With the addition of Amav's manufacturing facility,
the percentage of ERO's products which are manufactured in-house is expected to
increase from 50% to 75%. This results in an increase in fixed manufacturing
overhead costs reflected in an increase in cost of goods sold, which caused a
decrease in gross profit margins during the first quarter.
Selling, general and administrative expense as a percentage of sales increased
13.0%. This increase resulted primarily from the amortization of goodwill and
higher fixed costs related to the Amav acquisition.
Interest expense for the three months ended March 31, 1996 increased
significantly over 1995 due to the acquisition debt.
Liquidity and Capital Resources
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Net cash generated from operating activities during the three months ended March
31, 1996 totaled approximately $4.8 million. These cash flows were principally
used to repay $3.0 million under the Company's loan facilities repurchase common
stock for $0.7 million and fund capital expenditures of $0.4 million.
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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
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Item 1. Legal Proceedings
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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
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None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
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A Current Report on Form 8-K regarding the acquisition of Amav
Industries Ltd. was initially filed with the Securities and Exchange
Commission on December 18, 1995 and was amended under Form 8/K-A
(Amendment No. 1) on February 12, 1996.
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SIGNATURES
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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: May 15, 1996
ERO, Inc.
/s/ Ted J. Lueken
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Ted J. Lueken
Senior Vice President of Finance
and
Chief Financial Officer
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