UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1 - 7272
-------------------------
KERR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-0898810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 New Holland Avenue, Lancaster, PA 17602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 299-6511
--------------------
Former name, former address and former fiscal year, if changed
since last year.
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 ____
The number of shares of Registrant's Common Stock, $.50 par value,
outstanding as of September 30, 1997 was 3,933,095.
KERR GROUP, INC.
Index
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets -
September 30, 1997 and December 31, 1996 3 - 4
Condensed Statements of Earnings (Loss) -
One Month Period Ended September 30, 1997,
Two Month Period Ended August 26, 1997 and 5
Three Months Ended September 30, 1996
Condensed Statements of Earnings (Loss) 6
One Month Period Ended September 30, 1997,
Eight Month Period Ended August 26, 1997 and
Nine Months Ended September 30, 1996
Condensed Statements of Cash Flows - 7
One Month Period Ended September 30, 1997,
Eight Month Period Ended August 26, 1997 and
Nine Months Ended September 30, 1996
Notes to Condensed Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 14
Part II. Other Information 15
KERR GROUP, INC.
Condensed Balance Sheets
As of September 30, 1997 and December 31, 1996
(in thousands except per share data)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1)
----------------------------------
(Unaudited) (Audited)
September 30, December 31,
Assets 1997 1996
- ------ ------------ --------
Current Assets
<S> <C> <C>
Cash and cash equivalents 438 $ 9,107
Restricted cash 3,741 0
Receivables-primarily trade accounts, less allowance
for doubtful accounts of $314 at September 30, 1997 13,881 9,710
and $287 at December 31, 1996
Inventories
Raw materials and work in process 5,037 6,702
Finished goods 6,386 8,034
------ ------
Total inventories 11,423 14,736
Prepaid expenses and other current assets 464 31
------ ------
Total current assets 29,947 33,584
------- ------
Net property, plant and equipment 38,828 38,890
Deferred income tax asset 27,630 0
Goodwill and other intangibles, net of
amortization of $120 at September 30, 1997
and $2,749 at December 31, 1996 47,522 5,682
Other assets 2,830 7,370
Assets held for sale 1,500 0
------ ------
$148,257 $85,526
========= =======
</TABLE>
See accompanying notes to condensed financial statements.
KERR GROUP, INC.
Condensed Balance Sheets
As of September 30, 1997 and December 31, 1996
(in thousands except per share data)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1)
-----------------------------------
(Unaudited) (Audited)
September 30, December 31,
Liabilities and Stockholders' Equity 1997 1996
- ------------------------------------ ------------ --------
Current liabilities
<S> <C> <C>
Current portion of long-term debt $4,000 $50,900
Short-term debt 6,822 0
Accounts payable 8,998 7,373
Accrued expenses 8,053 5,622
---------- ---------
Total current liabilities 27,873 63,895
--------- --------
Accrued pension liability 21,799 13,935
Other long-term liabilities 16,891 4,394
Long-term debt 27,667 0
Obligation to acquire 275,962 shares of common stock 3,741 0
@ $5.40/share and 180,006 shares of preferred stock
@ $12.50/share
Stockholders' equity
Preferred Stock, 487 shares authorized and issued,
liquidation value of $22.55 per share at
September 30, 1997 and $21.28 per share
at December 31, 1996 -- 9,748
Predecessor Common Stock, $.50 par value per share,
20,000 shares authorized, 4,226 shares issued -- 2,113
Company Common Stock, $.01 par value per share,
50,000 shares authorized, 5,000 shares issued and
outstanding 50 --
Additional paid-in capital 49,950 27,239
Retained earnings (accumulated deficit) 286 (20,640)
Treasury Stock, 293 shares at cost -- (6,913)
Excess of additional pension liability over
unrecognized prior service cost, net of tax benefits -- (8,245)
------------ ---------
Total stockholders' equity 50,286 3,302
---------- --------
$148,257 $85,526
========= =======
</TABLE>
See accompanying notes to condensed financial statements.
KERR GROUP, INC.
Condensed Statements of Earnings (Loss)
for the One Month Period Ended September 30, 1997,
the Two Month Period Ended August 26, 1997,
and the Three Months Ended September 30, 1996
(Unaudited)
(in thousands except per share data)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1) Predecessor (Note 1)
------------- --------------------------------
One Month Two Month Three Months
Period Ended Period Ended Ended
September 30, August 26, September 30,
1997 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Net sales $ 9,819 $ 18,908 $ 28,024
Cost of sales 7,390 14,820 20,191
--------- --------- ---------
Gross profit 2,429 4,088 7,833
Research and development expenses 117 287 460
Plant administrative expenses 302 1,117 1,274
Selling and warehouse expenses 669 1,304 1,946
General corporate expenses 633 1,431 2,540
Restructuring costs 0 175 1,280
Financing costs 0 777 0
Interest expense, net 239 1,115 1,163
--------- --------- ---------
Income (loss) before income
taxes 469 (2,118) (830)
Provision for income taxes 183 0 3,668
--------- --------- ---------
Net income (loss) before
extraordinary items 286 (2,118) (4,498)
Extraordinary loss on financing 0 (4,419) 0
--------- --------- ---------
Net income (loss) 286 (6,537) (4,498)
Preferred stock dividends -- 138 207
--------- --------- ---------
Net income (loss) applicable
to common stockholders $ 286 $ (6,675) $ (4,705)
========= ========= =========
Net income (loss) per common share,
primary and fully diluted:
From continuing operations $ .06 $ (.55) $ (1.20)
From extraordinary loss on
financing 0 (1.11) 0
--------- --------- ---------
Net income (loss) $ .06 $ (1.66) $ (1.20)
========= ========= =========
Weighted average shares outstanding 5,000 4,028 3,933
========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
KERR GROUP, INC.
Condensed Statements of Earnings (Loss)
for the One Month Period Ended September 30, 1997,
the Eight Month Period Ended August 26, 1997,
and the Nine Months Ended September 30, 1996
(Unaudited)
(in thousands except per share data)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1) Predecessor (Note 1)
------------- --------------------------------
One Month Eight Month Nine Months
Period Ended Period Ended Ended
September 30, August 26, September 30,
1997 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Net sale $ 9,819 $ 76,488 $ 80,488
Cost of sales 7,390 58,336 63,057
--------- --------- ---------
Gross profit 2,429 18,152 17,431
Research and development expenses 117 1,214 1,429
Plant administrative expenses 302 3,999 4,114
Selling and warehouse expenses 669 5,629 5,983
General corporate expenses 633 6,124 8,153
Restructuring costs 0 175 9,436
Financing costs 0 2,396 245
Interest expense, net 239 3,910 3,544
--------- --------- ---------
Income (loss) from continuing
operations before income taxes 469 (5,295) (15,473)
Provision (benefit) for income taxes 183 0 (2,189)
--------- --------- ---------
Income (loss) from continuing
operations 286 (5,295) (13,284)
Discontinued operations:
Gain on sale of discontinued
operations 0 0 1,564
Loss from discontinued operations 0 0 (133)
--------- --------- ---------
Net earnings related to
discontinued operations 0 0 1,431
--------- --------- ---------
Net income (loss) before
extraordinary item 286 (5,295) (11,853)
Extraordinary loss on financing 0 (4,419) 0
--------- --------- ---------
Net income (loss) 286 (9,714) (11,853)
Preferred stock dividends -- 552 621
--------- --------- ---------
Net income (loss) applicable
to common stockholders $ 286 $(10,266) $(12,474)
========= ========= =========
Net income (loss) per common share,
primary and fully diluted:
From continuing operations $ .06 $ (1.47) $ (3.54)
From discontinued operations 0 0 0.37
From extraordinary loss on
financing 0 (1.11) 0
--------- --------- ---------
Net income (loss) $ .06 $ (2.58) $ (3.17)
========= ========= =========
Weighted average shares outstanding 5,000 3,985 3,933
========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
KERR GROUP, INC.
Condensed Statements of Cash Flows
for the One Month Period Ended September 30, 1997,
the Eight Month Period Ended August 26, 1997, and
the Nine Months Ended September 30, 1996
(unaudited)
(in thousands)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1) Predecessor (Note 1)
------------- --------------------------------
One Month Eight Month Nine Months
Period Ended Period Ended Ended
September 30, August 26, September 30,
1997 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows provided (used) by operations
- ----------------------------------------
Continuing operations:
Income (loss) from continuing operations $ 286 $ (9,714) $(13,284)
Add (deduct) noncash items included in
loss from continuing operations
Expenses associated with restructuring 0 175 5,662
Payments associated with restructuring (406) (1,129) (4,064)
Expenses associated with financing 0 3,983 147
Depreciation and amortization 835 6,106 7,197
Change in deferred income taxes 183 0 1,666
Change in total pension liability, net 0 512 (5,546)
Other, net (307) 351 (836)
Changes in operating working capital
Receivables 71 (4,242) (4,041)
Inventories 504 1,843 1,620
Other current assets (98) (637) 110
Accounts payable 201 3,002 (2,240)
Accrued expenses (289) (1,020) (1,074)
Cash flow provided (used) by discontinued
operations -- 360 8,026
--------- --------- ---------
Cash flow provided (used) by
operations 980 (410) (6,657)
--------- --------- ---------
Cash flows provided (used) by investing
activities
- ---------------------------------------
Continuing operations:
Capital expenditures (251) (7,710) (1,488)
Proceeds from sale of land 0 3,669 0
Other, net 174 96 (271)
Discontinued operations:
Proceeds from sale of assets of
Consumer Products Business 0 0 14,417
Other, net 0 0 (289)
--------- --------- ---------
Cash flow provided (used) by investing
activities (77) (3,945) 12,369
--------- --------- ---------
Cash flows provided (used) by financing
activities
- ---------------------------------------
Repayment of debt (5,233) 0 (5,600)
Borrowings under Secured Revolving Credit
Facility 0 3,758 0
Payments associated with financing 0 (3,742) (245)
Dividends paid 0 0 (207)
--------- --------- ---------
Cash flow provided (used) by financing
activities (5,233) 16 (6,052)
Cash and cash equivalents
- -------------------------
Decrease during the period (4,330) (4,339) (340)
Balance at beginning of the period 8,509 9,107 3,904
--------- --------- ---------
Balance at end of the period $ 4,179 $ 4,768 $ 3,564
========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements
KERR GROUP, INC.
Notes to Condensed Financial Statements
(Unaudited)
1) Organization and Basis of Presentation
On August 26, 1997, Fremont Acquisition Company, LLC ("Fremont") and
Kerr Acquisition Corporation ("KAC") completed their previously
announced cash tender offer (the "Tender Offer") for all of the
shares of Common Stock, par value $.50 per share (the "Common
Stock") and $1.70 Class B Cumulative Convertible Preferred Stock,
Series D, par value $.50 per share (the "Preferred Stock") of Kerr
Group, Inc. (the "Company") pursuant to the Agreement and Plan of
Merger, dated July 1, 1997, among the Company, Fremont and KAC (the
"Merger Agreement"). Fremont acquired the Common Stock and Preferred
Stock from shareholders who tendered their shares pursuant to the
Tender Offer. Subject to the terms of the Merger Agreement, shares
of Common Stock and Preferred Stock not tendered will be converted
into the right to receive $5.40 net per share of Common Stock and
$12.50 net per share of Preferred Stock pursuant to a second step
merger between KAC and the Company (the "Merger").
As part of the Merger, all options outstanding were cancelled. No
new options have been granted.
The Merger was accounted for using push down purchase accounting,
as if KAC and the Company had merged as of August 26, 1997, and
hence the preceding condensed financial statements are presented
for both the predecessor company (represents activities through
August 26, 1997) and the post-merger company (represents activities
starting August 27, 1997). The shares outstanding and earnings per
share presentation represent shares outstanding of KAC.
The one month period ended September 30, 1997 represents the period
from August 27, 1997 through September 30, 1997.
The two month period ended August 26, 1997 represents the period
from July 1, 1997 through August 26, 1997.
The eight month period ended August 26, 1997 represents the period
from January 1, 1997 through August 26, 1997.
2) General
The condensed financial statements represent the accounts of the
Company. In the opinion of management, the accompanying condensed
financial statements contain all adjustments (consisting of only
normal recurring accruals and certain non-recurring accruals for
restructuring charges as described below) necessary to present
fairly the financial position of the Company as of September 30,
1997, and the results of operations for the one month period ended
September 30, 1997, the two month and eight month periods ended
August 26, 1997 and the three months and nine months ended September
30, 1996, and changes in cash flows for the one month period ended
September 30, 1997, the eight month period ended August 26, and the
nine months ended September 30, 1996.
Fully diluted earnings per common share reflect when dilutive, 1)
the incremental common shares issuable upon the assumed exercise of
outstanding stock options, and 2) the assumed conversion of the
Class B, Series D Preferred Stock and the elimination of the related
dividends. The calculation of fully diluted net earnings (loss) per
common share for the one month period ended September 30, 1997, the
two month and eight month periods ended August 26, 1997, and the
three months and the nine months ended September 30, 1996 was not
dilutive.
The Company has not declared a dividend on its Class B, Series D
Preferred Stock since the first quarter of 1996. The cumulative
amount of undeclared dividends as of August 26, 1997 was $1,174,000.
Under accounting rules, such dividends are not accrued until
declared, however, for financial reporting purposes the amount of
such dividends are shown on the face of the income statement as a
deduction to arrive at net earnings (loss) applicable to common
stockholders.
3) Acquisition
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the
estimated fair values at the date of acquisition. Management is
presently obtaining appraisals and conducting various studies
related to the acquisition. The estimated fair values of the assets
acquired and liabilities assumed are expected to change as these
appraisals are obtained and these studies are completed. The excess
of the purchase price over the fair values of the net assets
acquired was $47.6 million and has been recorded as goodwill, which
is being amortized on a straight-line basis over 35 years. The
amount of goodwill amortization for the one month period ended
September 30, 1997 was $.1 million.
The net purchase price was allocated as follows:
(in thousands)
-----------------------------------------------------
Working capital, other than cash $ 26,245
Property, plant and equipment $ 38,895
Other assets $ 41,318
Goodwill $ 47,642
Other liabilities $(104,100)
-----------------------------------------------------
Purchase price, net of cash received $ 50,000
4) Financing
In connection with the Merger and the consummation of the Tender
Offer, the Company entered into a Loan and Security Agreement, dated
as of August 26, 1997 (the "Loan and Security Agreement"), for an
aggregate amount of $62 million. The credit facilities were used,
among other things, (i) to refinance the outstanding principal
balance of funded indebtedness (including premium, and accrued and
unpaid interest) of the Company at the time of the consummation of
the Tender Offer, (ii) to pay a portion of the fees and expenses
incurred in connection with the Tender Offer and (iii) to provide
for working capital and general corporate purposes of the Company
after the consummation of the Tender Offer. The credit facilities
are guaranteed by the tangible and intangible assets of the Company.
Pursuant to the Loan and Security Agreement the credit facilities
consisted of a $20 million revolving credit facility (which includes
a sublimit for the issuance of standby and commercial letters of
credit) (the "Revolving Credit Facility"), a $32 million term loan
facility (the "Term Loan Facility") and a $10 million equipment
acquisition facility (the "CAPEX Facility" and together with the
Revolving Credit Facility and the Term Loan Facility, the "Senior
Credit Facilities").
The Revolving Credit Facility bears interest at a rate equal to
LIBOR plus 225 basis points or the Base Rate (defined as the higher
of (i) the bank's prime rate and (ii) the Federal Funds rate), at
all times subject to applicable maximum legal interest rates. The
Term Loan Facility and the CAPEX Facility bear interest at a rate
equal to LIBOR plus 275 basis points or the Base Rate plus 50 basis
points, in each case at all times subject to applicable maximum
legal interest rates. The Company may select interest periods of 1,
2, 3 or 6 months for LIBOR loans, subject to availability. A default
rate of interest applies on all loans in the event of default at a
rate per annum of 2% above the applicable interest rate.
The Revolving Credit Facility terminates and all amounts outstanding
thereunder will be due and payable in full five years from the
closing of the Tender Offer (the "Closing"). The Term Loan Facility
is subject to repayment according to scheduled amortization, with
the final payment of all amounts outstanding, plus accrued interest,
due five years from the Closing or upon termination of the Revolving
Credit Facility, whichever is earlier. The CAPEX Facility also is
subject to amortization, with the final payment of all amounts
outstanding, plus accrued interest, due five years from the Closing
or upon termination of the Revolving Credit Facility, whichever is
earlier. The Loan and Security Agreement provides for prepayment of
the Senior Credit Facilities provided that the Company pays
liquidated damages.
On August 26, 1997, the Company refinanced all of its existing
indebtedness, including its 9.45% Senior Series A and 8.99% Series B
Notes and its credit facility with Madeleine L.L.C., through a
secured credit facility with NationsBank.
5) Pension Benefit Guaranty Corporation
On August 24, 1997, the Company and the Pension Benefit Guaranty
Corporation (the "PBGC") entered into a definitive agreement
pursuant to which the PBGC agreed to dismiss its lawsuit now pending
before the United States District court for the Eastern District of
Pennsylvania seeking to terminate the Company's pension plan,
withdraw its Notice of Determination and forbear from instituting
new proceedings with respect to the acquisition. Pursuant to the
terms of the definitive agreement, the Company agreed to (i) future
enhanced pension plan contributions, (ii) grant to the PBGC a second
lien in the amount of $40.7 million secured by substantially all of
the assets of the Company, (iii) various restrictions on future
secured indebtedness and (iv) provisions regarding notice of certain
events. The definitive agreement became effective upon the
consummation of the Tender Offer.
6) Receivables
Receivables as of December 31, 1996, as shown on the accompanying
Condensed Balance Sheets, have been reduced by net proceeds of
$3,861,000, from advances pursuant to the sale of receivables under
the Company's 1996 Accounts Receivable Agreement.
7) Income Taxes
During the two month and eight month periods ended August 26, 1997,
the Company recorded charges of $826 and $2,065, respectively, to
provide a valuation reserve against its deferred income tax asset.
The increase in the valuation reserve eliminated the tax benefit the
Company would have generated during the first eight months of 1997,
and was required because of the continuing unwaived covenant
defaults under loan agreements governing the Company's $50,900,000
principal amount of unsecured debt. Due to the acquisition and
refinancing of the debt, the Company will no longer record a
valuation allowance.
During the third and fourth quarters of 1996, a valuation reserve
was provided to eliminate the tax benefit recorded during the first
and second quarters of 1996.
8) Restructuring
During the first quarter of 1996, the Company recorded a pretax loss
of $7,500,000 for certain costs associated with the restructuring of
the Company, which included moving the corporate headquarters from
Los Angeles, California to Lancaster, Pennsylvania and relocating
the wide-mouth jar operations from Santa Fe Springs, California to
Bowling Green, Kentucky. The pretax loss consisted of reserves for
i) severance, workers' compensation and insurance continuation costs
of $3,000,000, ii) costs associated with subleasing the two
facilities of $2,300,000, iii) asset retirements of $1,600,000 and
iv) other costs of $600,000.
During the eight month period ended August 26, 1997 and the one
month period ended September 30, 1997, the Company made cash
payments related to such reserves for i) costs associated with
terminating the leases of facilities of $618,000 and $0,
respectively, ii) severance pay and related costs of $454,000 and
$34,000, respectively, and iii) other costs of $58,000 and $0,
respectively. During the nine months ended September 30, 1996, the
Company made cash payments related to such reserves for i) severance
pay and related costs of $1,431,000 and ii) other costs of $8,000.
In addition, during the three months and nine months ended September
30, 1996, the Company incurred an unusual pre-tax loss of $1,280,000
and $1,936,000, respectively, for restructuring costs primarily
related to relocation of personnel and equipment.
The ultimate required amount of the reserves related to the
restructuring is expected to approximate the original estimate.
9) Discontinued Operations
During the first quarter of 1996, the Company sold the manufacturing
assets of the Consumer Products Business for a purchase price of
$14,417,000. The Company recorded a pretax gain of $2,607,000
($1,564,000 after-tax) in connection with this sale. This pretax
gain has been reduced by $5,800,000 of reserves for i) retiree
health care and pension expenses of $3,800,000, ii) severance pay,
workers' compensation claims and insurance continuation costs of
$1,000,000, iii) professional fees of $500,000, iv) asset
retirements of $300,000, and v) other costs of $200,000.
The ultimate required amount of the reserves related to the disposal
of the Consumer Products Business is expected to approximate the
original estimate.
The gain on the sale and the results of the Consumer Products
Business have been reported separately as a component of
discontinued operations in the Condensed Statements of Earnings
(Loss).
10) Recently Issued Accounting Pronouncements
In the first quarter of 1997, the Financial Accounting Standards
Board adopted Statement No. 128, Earnings per Share (FASB No. 128)
and Statement No. 129, Disclosure of Information about Capital
Structure (FASB No. 129). FASB No. 128 simplifies the computation of
earnings per common share by replacing primary and fully diluted
presentations with the new basic and diluted disclosures. FASB No.
129 establishes standards for disclosing information about an
entity's capital structure. These statements will be adopted by the
Company effective December 31, 1997.
KERR GROUP, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
Three Months and Nine Months Ended September 30, 1997 and 1996
Results of Operations
As of August 27, 1997, the purchase method of accounting was used to
record the acquisition of the Company. Such accounting generally results
in increased amortization and depreciation reported in future periods.
Accordingly, the accompanying financial statements of the predecessor and
the Company are not comparable in all material respects since those
financial statements report financial position, results of operations,
and cash flows of the Company before and after application of the
purchase method of accounting.
Continuing Operations
Net sales for the three months ended September 30, 1997 were $28,727,000
as compared to $28,024,000 for the three months ended September 30, 1996,
an increase of $703,000 or 3%. The increase in net sales for the three
months ended September 30, 1997 over the comparable period in 1996 was
due primarily to higher unit sales of pharmaceutical packaging. Net sales
for the nine months ended September 30, 1997 were $86,307,000 as compared
to $80,488,000 for the nine months ended September 30, 1996, an increase
of $5,819,000 or 7%. The increase in net sales for the nine months ended
September 30, 1997 over the comparable period in 1996 was due primarily
to higher unit sales and improved pricing of pharmaceutical packaging and
prescription packaging.
Cost of sales for the three months ended September 30, 1997 were
$22,210,000 as compared to $20,191,000 for the three months ended
September 30, 1996, an increase of $2,019,000 or 10%. Cost of sales for
the nine months ended September 30, 1997 were $65,726,000 as compared to
$63,057,000 for the nine months ended September 30, 1996, an increase of
$2,669,000 or 4%. The increase in cost of sales for both periods was
primarily the result of higher unit sales.
Gross profit as a percent of net sales for the three months ended
September 30, 1997 decreased to 23% as compared to 28% for the three
months ended September 30, 1996 due to product mix. Gross profit as a
percent of net sales for the nine months ended September 30, 1997
increased to 24% as compared to 22% for the nine months ended September
30, 1996 due, primarily, to lower manufacturing costs, particularly
because of higher production levels, and, secondarily, improved pricing
of prescription packaging and pharmaceutical packaging.
Research and development, selling, warehouse, plant and general
administrative expenses decreased $360,000 or 6% during the three months
ended September 30, 1997, as compared to the same period in 1996.
Research and development, selling, warehouse, general and administrative
expenses decreased $992,000 or 5% during the nine months ended September
30, 1997. The decrease for both periods was, primarily, due to lower
costs resulting from the restructuring of the Company.
During the three month and nine month periods ended September 30, 1997,
the Company incurred costs of $777,000 and $2,396,000, respectively, for
professional fees in connection with its refinancing efforts consisting
primarily of fees paid to the owners of the Company's unsecured debt and
fees paid to the Company's financial and legal advisors.
During the three month and nine month periods ended September 30, 1996,
the Company incurred costs of $0 and $245,000, respectively, for
professional fees related to its refinancing efforts.
During the first quarter of 1996, the Company recorded a pretax loss of
$7,500,000 for certain costs associated with the restructuring of the
Company, which included moving the corporate headquarters from Los
Angeles, California to Lancaster, Pennsylvania and relocating the
wide-mouth jar operations from Santa Fe Springs, California to Bowling
Green, Kentucky. The pretax loss consisted of reserves for i) severance,
workers' compensation and insurance continuation costs of $3,000,000, ii)
costs associated with subleasing the two facilities of $2,300,000, iii)
asset retirements of $1,600,000 and iv) other costs of $600,000.
In addition, during the three months and nine months ended September 30,
1996, the Company incurred an unusual pre-tax loss of $1,280,000 and
$1,936,000, respectively, for restructuring costs primarily related to
relocation of personnel and equipment.
Net interest expense increased $191,000 and $605,000 during the three
month and nine month periods ended September 30, 1997, respectively, as
compared to the same periods in 1996, primarily as a result of the
Company's unsecured debt accruing interest at the default rate beginning
in the second quarter of 1997.
The loss before income taxes increased $819,000 during the three months
ended September 30, 1997 as compared to 1996 due primarily to increased
financing costs and increased interest expense. The loss before income
taxes decreased $10,647,000 during the nine months ended September 30,
1997 as compared to the same period in 1996, due primarily to i) the
$9,436,000 pretax loss in 1996 related to the restructuring, ii) lower
manufacturing costs in 1997 and iii) improved pricing of prescription
packaging and pharmaceutical packaging.
The provision for income taxes decreased $3,485,000 and the benefit for
income taxes decreased $2,372,000 during the three months and nine months
ended September 30, 1997, respectively, as compared to the same period in
1996, primarily as a result of the valuation reserve recorded against the
Company's net deferred income tax asset during 1997. The increase in the
valuation reserve eliminated the tax benefit the Company would have
generated during the first nine months of 1997, and was required because
of the continuing unwaived covenant defaults under loan agreements
governing the Company's $50,900,000 principal amount of unsecured debt.
During the third and fourth quarters of 1996, a valuation reserve was
provided to eliminate the tax benefit recorded during the first nine
months of 1996.
Discontinued Operations
During the first quarter of 1996, the Company sold the manufacturing
assets of the Consumer Products Business for a purchase price of
$14,417,000. The Company recorded a pretax gain of $2,607,000 ($1,564,000
after-tax) in connection with this sale. This pretax gain has been
reduced by $5,800,000 of reserves for i) retiree health care and pension
expenses of $3,800,000, ii) severance pay, workers' compensation claims
and insurance continuation costs of $1,000,000, iii) professional fees of
$500,000, iv) asset retirements of $300,000, and v) other costs of
$200,000.
Liquidity and Capital Resources
During the nine months of 1997, the principal sources of cash were
$3,669,000 received in April from the sale of real estate in Santa Ana,
California and borrowings under the Company's Secured Revolving Credit
Facility of $3,758,000. The principal uses of cash were to fund i)
capital expenditures of $7,961,000, ii) a reduction in the level of
advances under the Company's Accounts Receivable Facility of $3,861,000,
iii) cash costs of the Company's financing efforts of $3,742,000 and iv)
cash costs of the restructuring of $1,535,000.
During the first nine months of 1996, the principal source of cash was
$14,417,000 received from the sale of the manufacturing assets of the
Consumer Products Business. The principal uses of cash were to fund i)
pretax losses, ii) net debt retirements of $5,600,000 and iii) cash costs
of the restructuring of $4,064,000.
The Company has not declared a dividend on its Class B, Series D
Preferred Stock since the first quarter of 1996. The cumulative amount of
undeclared dividends as of August 26, 1997 was $1,174,000. Under
accounting rules, such dividends are not accrued until declared, however,
for financial reporting purposes the amount of such dividends are shown
on the face of the income statement as a deduction to arrive at net
earnings (loss) applicable to common stockholders.
On August 26, 1997, Fremont Acquisition Company, LLC ("Fremont") and Kerr
Acquisition Corporation ("KAC") completed their previously announced cash
tender offer (the "Tender Offer") for all of the shares of Common Stock,
par value $.50 per share (the "Common Stock") and $1.70 Class B
Cumulative Convertible Preferred Stock, Series D, par value $.50 per
share (the "Preferred Stock") of Kerr Group, Inc. (the "Company")
pursuant to the Agreement and Plan of Merger, dated July 1, 1997, among
the Company, Fremont and KAC (the "Merger Agreement"). Fremont acquired
the Common Stock and Preferred Stock from shareholders who tendered their
shares pursuant to the Tender Offer. Subject to the terms of the Merger
Agreement, shares of Common Stock and Preferred Stock not tendered will
be converted into the right to receive $5.40 net per share of Common
Stock and $12.50 net per share of Preferred Stock pursuant to a second
step merger between KAC and the Company (the "Merger").
On August 24, 1997, the Company and the Pension Benefit Guaranty
Corporation (the "PBGC") entered into a definitive agreement pursuant to
which the PBGC agreed to dismiss its lawsuit now pending before the
United States District court for the Eastern District of Pennsylvania
seeking to terminate the Company's pension plan, withdraw its Notice of
Determination and forbear from instituting new proceedings with respect
to the acquisition. Pursuant to the terms of the definitive agreement,
the Company agreed to (i) future enhanced pension plan contributions,
(ii) grant to the PBGC a second lien in the amount of $40.7 million
secured by substantially all of the assets of the Company, (iii) various
restrictions on future secured indebtedness and (iv) provisions regarding
notice of certain events. The definitive agreement became effective upon
the consummation of the Tender Offer.
In connection with the Merger and the consummation of the Tender Offer,
the Company entered into a Loan and Security Agreement, dated as of
August 26, 1997 (the "Loan and Security Agreement"), for an aggregate
amount of $62 million. The credit facilities were used, among other
things, (i) to refinance the outstanding principal balance of funded
indebtedness (including premium, and accrued and unpaid interest) of the
Company at the time of the consummation of the Tender Offer, (ii) to pay
a portion of the fees and expenses incurred in connection with the Tender
Offer and (iii) to provide for working capital and general corporate
purposes of the Company after the consummation of the Tender Offer. The
credit facilities are guaranteed by the tangible and intangible assets of
the Company.
Pursuant to the Loan and Security Agreement the credit facilities
consisted of a $20 million revolving credit facility (which includes a
sublimit for the issuance of standby and commercial letters of credit)
(the "Revolving Credit Facility"), a $32 million term loan facility (the
"Term Loan Facility") and a $10 million equipment acquisition facility
(the "CAPEX Facility" and together with the Revolving Credit Facility and
the Term Loan Facility, the "Senior Credit Facilities").
The Revolving Credit Facility bears interest at a rate equal to LIBOR
plus 225 basis points or the Base Rate (defined as the higher of (i) the
bank's prime rate and (ii) the Federal Funds rate), at all times subject
to applicable maximum legal interest rates. The Term Loan Facility and
the CAPEX Facility bear interest at a rate equal to LIBOR plus 275 basis
points or the Base Rate plus 50 basis points, in each case at all times
subject to applicable maximum legal interest rates. The Company may
select interest periods of 1, 2, 3 or 6 months for LIBOR loans, subject
to availability. A default rate of interest applies on all loans in the
event of default at a rate per annum of 2% above the applicable interest
rate.
The Revolving Credit Facility terminates and all amounts outstanding
thereunder will be due and payable in full five years from the closing of
the Tender Offer (the "Closing"). The Term Loan Facility is subject to
repayment according to scheduled amortization, with the final payment of
all amounts outstanding, plus accrued interest, due five years from the
Closing or upon termination of the Revolving Credit Facility, whichever
is earlier. The CAPEX Facility also is subject to amortization, with the
final payment of all amounts outstanding, plus accrued interest, due five
years from the Closing or upon termination of the Revolving Credit
Facility, whichever is earlier. The Loan and Security Agreement provides
for prepayment of the Senior Credit Facilities provided that the Company
pays liquidated damages.
On August 26, 1997, the Company refinanced all of its existing
indebtedness, including its 9.45% Senior Series A and 8.99% Series B
Notes and its credit facility with Madeleine L.L.C., through a secured
credit facility with NationsBank.
Disclosure Regarding Forward Looking Statements
Portions of the Quarterly Report on Form 10-Q include forward looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although the Company believes that the expectations reflected
in such forward looking statements are based upon reasonable assumptions,
it can give no assurance that its expectations will be achieved.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.1 Statement re: Computation of Per Common Share
Earnings (Loss).
27.1 Financial Data Schedule.
b. Reports on Form 8-K
1. The Company's Current Report on Form 8-K, with respect to
Item 5, filed on July 1, 1997.
2. The Company's Current Report on Form 8-K, with respect to
Item 5, filed on August 20, 1997.
3. The Company's Current Report on Form 8-K, with respect to
Item 1, filed on September 10, 1997.
4. The Company's Current Report on Form 8-K, with respect to
Item 4, filed on November 13, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KERR GROUP, INC.
November 14, 1997 By /s/ Richard D. Hofmann
----------------------------------
Richard D. Hofmann
President, Chief Executive Officer
November 14, 1997 By /s/ Lawrence C. Caldwell
---------------------------------
Lawrence C. Caldwell
Vice President, Finance
Chief Financial Officer
EXHIBIT 11.1
KERR GROUP, INC.
Statement Re: Computation of Per Share Earnings (Loss)
(in thousands except per share data)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1) Predecessor (Note 1)
------------- --------------------------------
One Month Eight Month Nine Months
Period Ended Period Ended Ended
September 30, August 26, September 30,
1997 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Primary Net Earnings (Loss)
Per Common Share
- ---------------------------
Net earnings (loss) $ 286 $ (9,714) $(11,853)
Less Preferred Stock dividends -- (552) (621)
--------- --------- ---------
Net loss applicable to primary
earnings per common share $ 286 $(10,266) $(12,474)
========= ========= =========
Weighted average number of common
shares outstanding 5,000 3,933 3,933
Weighted average number of common
share equivalents outstanding 0 52 3
--------- --------- ---------
Weighted average number of common
shares and common share
equivalents outstanding 5,000 3,985 3,936
========= ========= =========
Primary net earnings (loss) per
common share $ 0.06 $ (2.58) $ (3.17)
========= ========= =========
Fully Diluted Net Earnings (Loss)
Per Common Share
- ---------------------------------
Net earnings (loss) applicable to
primary earnings per common share $ 286 $(10,266) $(12,474)
Add Preferred Stock dividends -- 552 621
--------- --------- ---------
Net earnings (loss) applicable to
fully diluted earnings per
common share $ 286 $ (9,714) $(11,853)
========= ========= =========
Weighted average number of common
shares and common share
equivalents outstanding 5,000 3,985 3,933
Common shares issuable upon assumed
conversion of Preferred Stock -- 709 709
Incremental common shares issuable
upon assumed exercise of outstanding
stock options -- 0 3
--------- --------- ---------
Adjusted weighted average number of
common shares and common share
equivalents outstanding 5,000 4,694 4,645
========= ========= =========
Fully diluted net earnings (loss)
per common share:
As computed $ 0.06 $ (2.07) $ (2.55)
========= ========= =========
As reported (a) $ 0.06 $ (2.58) $ (3.17)
========= ========= =========
</TABLE>
(a) The calculation of fully diluted net loss per common share for the
three months and six months ended September 30, 1997 and 1996 was
not dilutive.
EXHIBIT 11.1
KERR GROUP, INC.
Statement Re: Computation of Per Share Earnings (Loss)
(in thousands except per share data)
AS OF AUGUST 27, 1997, THE PURCHASE METHOD OF ACCOUNTING WAS USED TO
RECORD THE ACQUISITION OF THE COMPANY. SUCH ACCOUNTING GENERALLY RESULTS
IN INCREASED AMORTIZATION AND DEPRECIATION REPORTED IN FUTURE PERIODS.
ACCORDINGLY, THE ACCOMPANYING FINANCIAL STATEMENTS OF THE PREDECESSOR AND
THE COMPANY ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS SINCE THOSE
FINANCIAL STATEMENTS REPORT FINANCIAL POSITION, RESULTS OF OPERATIONS,
AND CASH FLOWS OF THE COMPANY BEFORE AND AFTER APPLICATION OF THE
PURCHASE METHOD OF ACCOUNTING.
<TABLE>
<CAPTION>
(Note 1) Predecessor (Note 1)
------------- --------------------------------
One Month Two Month Three Months
Period Ended Period Ended Ended
September 30, August 26, September 30,
1997 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Primary Net Earnings (Loss)
Per Common Share
- ---------------------------
Net earnings (loss) $ 286 $(6,537) $(4,498)
Less Preferred Stock dividends -- (138) (207)
-------- -------- --------
Net loss applicable to primary
earnings per common share $ 286 $(6,675) $(4,705)
======== ======== ========
Weighted average number of common
shares outstanding 5,000 3,933 3,933
Weighted average number of common
share equivalents outstanding 0 95 0
-------- -------- --------
Weighted average number of common
shares and common share
equivalents outstanding 5,000 4,028 3,933
======== ======== ========
Primary net earnings (loss) per
common share $ 0.06 $ (1.66) $ (1.20)
======== ======== ========
Fully Diluted Net Earnings (Loss)
Per Common Share
- ---------------------------------
Net earnings (loss) applicable to
primary earnings per common share $ 286 $(6,675) $(4,705)
Add Preferred Stock dividends -- 138 207
-------- -------- --------
Net earnings (loss) applicable to
fully diluted earnings per common
share $ 286 $(6,537) $(4,498)
======== ======== ========
Weighted average number of common
shares and common share
equivalents outstanding 5,000 4,028 3,933
Common shares issuable upon assumed
conversion of Preferred Stock 0 709 709
Incremental common shares issuable
upon assumed exercise of
outstanding stock options 0 0 0
-------- -------- --------
Adjusted weighted average number of
common shares and common share
equivalents outstanding 5,000 4,737 4,642
======== ======== ========
Fully diluted net earnings (loss)
per common share:
As computed $ 0.06 $ (1.38) $ (0.97)
======== ======== ========
As reported (a) $ 0.06 $ (1.66) $ (1.20)
======== ======== ========
</TABLE>
(a) The calculation of fully diluted net loss per common share for the
three months and six months ended September 30, 1997 and 1996 was
not dilutive.
[TYPE] EX-27
[DESCRIPTION] EXHIBIT 27.1 - FINANCIAL DATA SCHEDULE
[ARTICLE] 5
[LEGEND] THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S STATEMENTS OF EARNINGS
(LOSS) AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] SEP-30-1997
[CASH] 4,179
[SECURITIES] 0
[RECEIVABLES] 14,195
[ALLOWANCES] 314
[INVENTORY] 11,423
[CURRENT-ASSETS] 29,947
[PP&E] 38,828
[DEPRECIATION] 0
[TOTAL-ASSETS] 148,257
[CURRENT-LIABILITIES] 27,873
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 50,000
[OTHER-SE] 286
[TOTAL-LIABILITY-AND-EQUITY] 148,257
[SALES] 86,307
[TOTAL-REVENUES] 86,307
[CGS] 65,726
[TOTAL-COSTS] 65,726
[OTHER-EXPENSES] 21,258
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 4,149
[INCOME-PRETAX] (4,826)
[INCOME-TAX] 183
[INCOME-CONTINUING] (5,009)
[DISCONTINUED] 0
[EXTRAORDINARY] 4,419
[CHANGES] 0
[NET-INCOME] (9,428)
[EPS-PRIMARY] (2.52)
[EPS-DILUTED] (2.52)
</TABLE>
