1
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, 1996
( ) 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
1840 Century Park East, Los Angeles, CA 90067
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 October 31, 1996 was 3,933,095.
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KERR GROUP, INC.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3 - 4
Condensed Consolidated Statements of Earnings (Loss) -
Three Months and Nine Months Ended
September 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 12
Part II. Other Information 13
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KERR GROUP, INC.
Consolidated Balance Sheets
As of September 30, 1996 and December 31, 1995
(in thousands except per share data)
(Unaudited) (As Restated)
September 30, December 31,
Assets 1996 1995
- ------ ------------- -------------
Current assets
Cash and cash equivalents $ 3,564 $ 3,904
Receivables-primarily trade accounts, less allowance
for doubtful accounts of $425 at September 30, 1996
and $212 at December 31, 1995 11,195 7,154
Inventories
Raw materials and work in process 6,311 7,815
Finished goods 8,769 9,933
--------- ---------
Total inventories 15,080 17,748
Prepaid expenses and other current assets 2,605 3,106
Current net assets related to discontinued operations 4,710 12,847
--------- ---------
Total current assets 37,154 44,759
--------- ---------
Property, plant and equipment, at cost 104,279 105,725
Accumulated depreciation and amortization (64,099) (58,907)
--------- ---------
Net property, plant and equipment 40,180 46,818
--------- ---------
Deferred income taxes 8,299 8,057
Goodwill and other intangibles, net of
amortization of $2,580 at September 30, 1996
and $2,247 at December 31, 1995 6,727 6,983
Other assets 7,364 8,026
Non-current net assets related to discontinued operations 0 4,854
--------- ---------
$ 99,724 $ 119,497
========= =========
See accompanying notes to condensed consolidated financial statements.
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KERR GROUP, INC.
Consolidated Balance Sheets
As of September 30, 1996 and December 31, 1995
(in thousands except per share data)
(Unaudited) (As Restated)
September 30, December 31,
Liabilities and Stockholders' Equity 1996 1995
- ------------------------------------ ------------- -------------
Current liabilities
Note payable to bank $ 5,856 $ 6,500
Senior debt due 1997 through 2003
classified as current 45,044 50,000
Accounts payable 7,499 9,739
Accrued expenses 7,385 8,858
Restructuring reserves 2,950 0
--------- ---------
Total current liabilities 68,734 75,097
--------- ---------
Accrued pension liability 13,175 18,318
Other long-term liabilities 4,451 2,175
Stockholders' equity
Preferred Stock, 487 shares authorized and issued,
liquidation value of $20.85 per share at September 30,
1996 and $20 per share at December 31, 1995 9,748 9,748
Common Stock, $ .50 par value per share, 20,000
shares authorized, 4,226 shares issued 2,113 2,113
Additional paid-in capital 27,239 27,239
Retained earnings (accumulated deficit) (10,200) 1,860
Treasury Stock, 293 shares at cost (6,913) (6,913)
Excess of additional pension liability over
unrecognized prior service cost, net of tax benefits (8,623) (10,140)
--------- ---------
Total stockholders' equity 13,364 23,907
--------- ---------
$ 99,724 $ 119,497
========= =========
See accompanying notes to condensed consolidated financial statements.
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5
KERR GROUP, INC.
Condensed Consolidated Statements of Earnings (Loss)
for the Three Months and Nine Months Ended September 30, 1996 and 1995
(in thousands except per share data)
(Unaudited) (Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Net sales $ 28,024 $ 28,240 $ 80,488 $ 81,791
Cost of sales 20,746 22,436 64,772 63,958
-------- -------- -------- --------
Gross profit 7,278 5,804 15,716 17,833
Selling, warehouse, general and
administrative expense 5,665 5,997 17,964 17,671
Loss on restructuring 0 0 7,500 0
Other costs associated with restructuring 1,280 0 1,936 0
Financing costs 0 0 245 0
Interest expense 1,241 1,180 3,812 3,501
Interest and other income (78) (53) (268) (138)
-------- -------- -------- --------
Loss from continuing operations
before income taxes (830) (1,320) (15,473) (3,201)
Provision (benefit) for income taxes 3,668 (534) (2,189) (1,304)
-------- -------- -------- --------
Loss from continuing operations $ (4,498) $ (786) $(13,284) $ (1,897)
Discontinued operations:
Gain on sale of discontinued operations 0 0 1,564 0
Earnings (loss) from discontinued operations 0 (313) (133) 126
-------- -------- -------- --------
Net earnings (loss) related to
discontinued operations 0 (313) 1,431 126
-------- -------- -------- --------
Net loss (4,498) (1,099) (11,853) (1,771)
Preferred stock dividends 207 207 621 621
-------- -------- -------- --------
Net loss applicable to
common stockholders $ (4,705) $ (1,306) $(12,474) $ (2,392)
======== ======== ======== ========
Net earnings (loss) per common share,
primary and fully diluted:
From continuing operations $ (1.20) $ (0.25) $ (3.54) $ (0.66)
From discontinued operations 0.00 (0.08) 0.37 0.03
-------- -------- -------- --------
Net loss $ (1.20) $ (0.33) $ (3.17) $ (0.63)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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KERR GROUP, INC.
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and 1995
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------
1996 1995
-------- --------
Cash flows provided (used) by operations
Continuing operations:
Loss from continuing operations $(13,284) $ (1,897)
Add (deduct) noncash items included in
loss from continuing operations
Expenses associated with restructuring, net of tax 5,662 0
Depreciation and amortization 7,197 6,339
Change in deferred income taxes 1,666 (664)
Reduction in total pension liability, net (5,546) (94)
Other, net 226 584
Changes in operating assets and liabilities
Receivables (4,041) 3,328
Inventories 1,620 (1,105)
Other current assets 110 345
Accounts payable (2,240) (3,878)
Accrued expenses (1,074) 502
-------- --------
Cash flow provided (used) by continuing operations (9,704) 3,460
Cash flow provided by discontinued operations 8,026 4,986
-------- --------
Total cash flow provided (used) by operations (1,678) 8,446
-------- --------
Cash flows provided (used) by investing activities
Continuing operations:
Capital expenditures (1,488) (7,921)
Payments associated with restructuring (4,064) 0
Other, net (271) (94)
Discontinued operations:
Capital expenditures (234) (848)
Proceeds from sale of assets of Consumer Products Business 14,417 0
Other, net (970) (884)
-------- --------
Cash flow provided (used) by investing activities 7,390 (9,747)
-------- --------
Cash flows provided (used) by financing activities
Repayment of Senior Notes and Note payable to bank (5,600) 0
Net repayments under lines of credit 0 (100)
Dividends paid (207) (621)
Other, net (245) 32
-------- --------
Cash flow used by financing activities (6,052) (689)
-------- --------
Cash and cash equivalents
Increase (decrease) during the period (340) (1,990)
Balance at beginning of the period 3,904 2,261
-------- --------
Balance at end of the period $ 3,564 $ 271
======== ========
Significant Non-Cash Transactions
Contribution of 250,000 shares of Common Stock to pension plan $ 0 $ 1,891
======== ========
See accompanying notes to condensed consolidated financial statements
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KERR GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) General
The condensed consolidated financial statements include the accounts of
Kerr Group, Inc. and its wholly owned subsidiary (collectively referred to
as the Company). In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position of the Company as of September 30, 1996, and the results of
operations for the three months and nine months ended September 30, 1996
and 1995, and changes in cash flows for the nine months ended September 30,
1996 and 1995.
The results of operations for the first nine months of 1996 are not
necessarily indicative of the results to be expected for the full year.
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
three months and the nine months ended September 30, 1996 and 1995 was not
dilutive.
The Company did not declare a dividend on its Class B, Series D Preferred
Stock during the second or third quarters of 1996. The cumulative amount of
undeclared dividends as of September 30, 1996 is $414,000. 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. Under the terms of an agreement
with its lenders, the Company is not permitted to declare or pay any
dividends on its preferred stock on or before December 9, 1996.
2) Discontinued Operations
On March 15, 1996, the Company sold the manufacturing assets of the
Consumer Products Business for a purchase price of $14,417,000. These
proceeds were utilized for working capital, to reduce debt, including
$3,500,000 of debt secured by liens on certain machinery and equipment of
the Company, and to fund costs of the restructuring (see Note 3). From
March 16, 1996 through September 30, 1996, the Company received $11,958,000
from the sale by the Company of the inventory of the Consumer Products
Business and from the collection of the related accounts receivable. The
Company expects to receive approximately $4,700,000 during the remainder of
1996 and 1997 from the sale of inventory and collection of accounts
receivable of the Consumer Products Business.
During the first quarter of 1996, the Company incurred a one-time pretax
gain of $2,607,000 ($1,564,000 after-tax or $0.40 per common share) in
connection with the sale of the manufacturing assets of the Consumer
Products Business. 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 and related costs of $1,000,000, iii) professional fees of
$500,000, iv) asset retirements of $300,000, and v) other costs of
$200,000. During the nine months ended September 30, 1996, the Company made
cash payments related to such reserves for i) severance and related costs
of $600,000, ii) professional fees of $500,000 and iii) other costs of
$100,000.
The assets and liabilities of the discontinued Consumer Products Business
have been reclassified on the December 31, 1995 Consolidated Balance Sheet
from the previously reported classification to separately identify them as
current net assets and non-current net assets related to discontinued
operations. These net assets consist of net working capital, net property,
plant and equipment, other assets and intangible assets, less related
liabilities.
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The results of the Consumer Products Business have been reported separately
as a component of discontinued operations in the Condensed Consolidated
Statements of Earnings (Loss). The presentation of this business as
discontinued had no effect on net loss, net loss applicable to common
stockholders or net loss per common share from the amounts previously
reported.
3) Restructuring
During the first quarter of 1996, the Company recorded an unusual loss of
$7,500,000 ($4,500,000 after-tax or $1.14 per common share) for the
expected 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 nine months ended September 30, 1996,
the Company made cash payments related to such reserves for i) severance
and related costs of $1,900,000 and ii) costs associated with subleasing
facilities of $200,000.
The relocation of the corporate headquarters and the wide-mouth jar
manufacturing operations have been completed. The restructuring is expected
to result in annualized pretax cost savings of approximately $6,500,000
primarily from reduced costs for employment, rentals, manufacturing
overhead, utilities and freight. These cost savings are expected to be
substantially realized in 1997.
During the three month and nine month periods ended September 30, 1996, the
Company incurred unusual pretax losses of $1,280,000 ($768,000 after-tax or
$0.20 per common share) and $1,936,000 ($1,162,000 after-tax or $0.30 per
common share), respectively, for restructuring costs primarily related to
relocation of personnel and equipment. The Company expects to incur an
additional $600,000 ($360,000 after-tax or $0.09 per common share) for
restructuring costs during the remainder of 1996 and early 1997. Accounting
rules require these costs to be expensed as incurred.
4) Receivables
Receivables as of September 30, 1996 and December 31, 1995, as shown on the
accompanying Consolidated Balance Sheets, have been reduced by net proceeds
of $3,959,000 and $7,357,000, respectively, from advances pursuant to the
sale of receivables under the Company's Accounts Receivable Agreement. In
addition, receivables as of December 31, 1995, related to discontinued
operations, included in Current Net Assets Related to Discontinued
Operations on the accompanying Consolidated Balance Sheets, have been
reduced by net proceeds of $343,000 from advances pursuant to the sale of
receivables under the Company's Accounts Receivable Agreement.
5) Income Taxes
During the quarter ended September 30, 1996, the Company recorded a charge
of $4,000,000 (or $1.02 per common share) to provide a valuation reserve
against its deferred income tax asset. The valuation reserve was provided
due to the amount of the restructuring charges recorded in 1996 and the
projected time period needed to recover the deferred income tax asset.
6) Financing
During October 1996, the Company executed a commitment letter with The CIT
Group/Business Credit, Inc. for $48,000,000 of financing secured by all of
the Company's assets. The proceeds of the financing will permit the Company
to restructure its existing indebtedness. In addition to paying the
Company's Accounts Receivables Agreement, the financing permits the Company
to pay $29,300,000 of the Company's $50,900,000 existing indebtedness. The
Company has agreed to exchange the balance of the Company's existing debt
for secured subordinated notes in the principal amount of $12,000,000 and
convertible preferred stock with a liquidation preference of $13,000,000,
and having no stated dividends. The subordinated notes will bear interest
at the rate of 10% per annum, but will be "pay-in-kind" during the first
three years. The preferred stock will be convertible into approximately
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748,000 shares of common stock. After the financial restructuring, the
Company expects to have approximately $10,000,000 of additional borrowing
availability. The Company expects to record an approximate $3,000,000
pretax gain ($1,800,000 after-tax or $0.46 per common share) related to the
financial restructuring during the fourth quarter of 1996.
The consummation of the restructuring will be subject to the execution and
delivery of definitive loan agreements among The CIT Group/Business Credit,
Inc., the holders of the existing institutional indebtedness and the
Company. There can be no assurance that the restructuring will be
consummated.
In addition, the Company obtained an extension of waivers of certain
financial covenants through December 9, 1996 for its existing institutional
indebtedness and an extension of the maturity date of the unsecured Note to
December 9, 1996.
If the financial restructuring is not consummated and subsequent waivers of
financial covenants or the extension of the maturity date of the unsecured
Note are not obtained, the holders of the institutional indebtedness would
be entitled to exercise certain remedies, including the acceleration of the
due date for payment of the Senior Notes and the unsecured Note, and the
termination of the Accounts Receivable Agreement. However, the Company
believes that the financial restructuring will be consummated. The
accompanying consolidated financial statements have been prepared on the
basis of such belief of the Company.
In connection with an amendment to the Company's Accounts Receivable
Agreement effective September 30, 1996, the maximum amount that can be
advanced to the Company pursuant to the sale of trade accounts receivable
at any time is $8,500,000.
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KERR GROUP, INC.
Computation of Earnings (Loss) Per Common Share
(in thousands except per share data)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Primary Net Earnings (Loss) Per Common Share
Net loss $ (4,498) $ (1,099) $(11,853) $ (1,771)
Less Preferred Stock dividends (207) (207) (621) (621)
-------- -------- -------- --------
Net loss applicable to primary earnings
per common share $ (4,705) $ (1,306) $(12,474) (2,392)
======== ======== ======== ========
Weighted average number of common
shares outstanding 3,933 3,933 3,933 3,812
======== ======== ======== ========
Primary net loss per common share $ (1.20) $ (0.33) $ (3.17) $ (0.63)
======== ======== ======== ========
Fully Diluted Net Earnings (Loss) Per Common Share
Net loss applicable to primary earnings
per common share $ (4,705) $ (1,306) $(12,474) $ (2,392)
Add Preferred Stock dividends 207 207 621 621
-------- -------- -------- --------
Net loss applicable to fully
diluted earnings per common share $ (4,498) $ (1,099) $(11,853) $ (1,771)
======== ======== ======== ========
Weighted average number of common
shares outstanding 3,933 3,933 3,933 3,812
Common shares issuable upon assumed
conversion of Preferred Stock 709 709 709 709
Incremental common shares issuable upon
assumed exercise of outstanding stock options 0 3 3 20
-------- -------- -------- --------
Adjusted weighted average number of common
shares outstanding 4,642 4,645 4,645 4,541
======== ======== ======== ========
Fully diluted net loss per common share:
As computed $ (0.97) $ (0.24) $ (2.55) $ (0.39)
======== ======== ======== ========
As reported (a) $ (1.20) $ (0.33) $ (3.17) $ (0.63)
======== ======== ======== ========
(a) The calculation of fully diluted net loss per common share for the three
months and the nine months ended September 30, 1996 and 1995 was not
dilutive.
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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, 1996 and 1995
Results of Operations
Continuing Operations
Net sales for the three months ended September 30, 1996 were $28,024,000 as
compared to $28,240,000 for the three months ended September 30, 1995, a
decrease of $216,000 or 1%. Net sales for the nine months ended September 30,
1996 were $80,488,000 as compared to $81,791,000 for the nine months ended
September 30, 1995, a decrease of $1,303,000 or 2%. The decrease in net sales
for the three and nine months ended September 30, 1996 over the comparable
periods in 1995 was due primarily to lower unit sales of tamper-evident closures
and wide mouth jars and closures.
Cost of sales for the three months ended September 30, 1996 were $20,746,000 as
compared to $22,436,000 for the three months ended September 30, 1995, a
decrease of $1,690,000 or 8%. The decrease in cost of sales for the quarter was
primarily due to sales of lower cost products, reduced unit costs due to
increased production, lower costs resulting from the restructuring of the
Company and lower unit sales.
Cost of sales for the nine months ended September 30, 1996 were $64,772,000 as
compared to $63,958,000 for the nine months ended September 30, 1995, an
increase of $814,000 or 1%. The increase for the nine month period was due
primarily to inefficiencies resulting from reduced production.
Gross profit as a percent of net sales for the three months ended September 30,
1996 increased to 26% as compared to 21% for the three months ended September
30, 1995 due primarily to sales of higher margin products, reduced unit costs
due to increased production and lower costs resulting from the restructuring of
the Company.
Gross profit as a percent of net sales for the nine months ended September 30,
1996 decreased to 20% as compared to 22% for the nine months ended September 30,
1995 primarily due to increased reserves for customer rebates and inventory
obsolescence, and reduced production, all of which occurred in the first quarter
of 1996.
Selling, warehouse, general and administrative expenses decreased $332,000 or 6%
during the three months ended September 30, 1996, as compared to the same period
in 1995 due primarily to lower costs resulting from the restructuring of the
Company.
Selling, warehouse, general and administrative expenses increased $293,000 or 2%
during the nine months ended September 30, 1996, as compared to the same period
in 1995 due primarily to the start up of operations at the Company's new Bowling
Green, Kentucky facility.
During the first quarter of 1996, the Company recorded an unusual loss of
$7,500,000 ($4,500,000 after-tax or $1.14 per common share) for the expected
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 nine months ended September 30, 1996, the Company made cash
payments related to such reserves for i) severance and related costs of
$1,900,000 and ii) costs associated with subleasing facilities of $200,000.
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The relocation of the corporate headquarters and the wide-mouth jar
manufacturing operation have been completed. The restructuring is expected to
result in annualized pretax cost savings of approximately $6,500,000 primarily
from reduced costs for employment, rentals, manufacturing overhead, utilities
and freight. These cost savings are expected to be substantially realized in
1997.
During the three month and nine month periods ended September 30, 1996, the
Company incurred unusual pretax losses of $1,280,000 ($768,000 after-tax or
$0.20 per common share) and $1,936,000 ($1,162,000 after-tax or $0.30 per common
share), respectively, for restructuring costs primarily related to relocation of
personnel and equipment. The Company expects to incur an additional $600,000
($360,000 after-tax or $0.09 per common share) for restructuring costs during
the remainder of 1996 and early 1997. Accounting rules require these costs to be
expensed as incurred.
During the nine months ended September 30, 1996, the Company also incurred
unusual expenses of $245,000 ($147,000 after-tax or $0.04 per common share) to
reimburse its unsecured lenders for professional fees incurred in connection
with the Company obtaining waivers of certain covenants and extension of the
maturity date of an unsecured Note.
Net interest expense decreased $36,000 during the three month period ended
September 30, 1996 as compared to the same period in 1995. Net interest expense
increased $181,000 during the nine month period ended September 30, 1996, as
compared to the same period in 1995, primarily as a result of higher levels of
short-term financing during the first quarter of 1996.
The loss before income taxes decreased $490,000 during the three months ended
September 30, 1996 as compared to the same period in 1995, due primarily to
sales of higher margin products and increased production.
The loss before income taxes increased $12,272,000 during the nine months ended
September 30, 1996 as compared to the same period in 1995, due primarily to the
impact of restructuring charges.
The provision for income taxes increased $4,202,000 and decreased $885,000
during the three month and nine month periods ended September 30, 1996 as
compared to the same periods in 1995, respectively, as a result of the Company
recording a charge of $4,000,000 (or $1.02 per common share) to provide a
valuation reserve against its deferred income tax asset. The valuation reserve
was provided due to the amount of the restructuring charges recorded in 1996 and
the projected time period needed to recover the deferred income tax asset.
Discontinued Operations
The Company had no net earnings from discontinued operations for the third
quarter of 1996 as compared to $313,000 of net earnings from discontinued
operations for the third quarter of 1995.
The Company reported net earnings from discontinued operations of $1,431,000 for
the first nine months of 1996 as compared to $126,000 for the first nine months
of 1995. The net earnings in 1996 includes a pretax gain of $2,607,000
($1,564,000 after-tax or $0.40 per common share) in connection with the sale of
the manufacturing assets of the Consumer Products Business. 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 and related costs of $1,000,000, iii)
professional fees of $500,000, iv) asset retirements of $300,000 and v) other
costs of $200,000. During the nine months ended September 30, 1996, the Company
made cash payments related to such reserves for i) severance and related costs
of $600,000, ii) professional fees of $500,000 and iii) other costs of $100,000.
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13
Financial Condition
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 and $8,026,000 of net cash flow related to the operations of
the Consumer Products Business, which primarily relate to the liquidation of
receivables and inventory. The principal uses of cash were to fund pretax
losses, net debt retirements of $5,600,000, cash payments associated with the
restructuring of $4,064,000 and a reduction in the net proceeds from the sale of
receivables under the Company's Accounts Receivable Agreement of $3,398,000.
During the first nine months of 1995, the principal source of cash was from
operations, which includes $6,089,000 related to net proceeds from the sale of
receivables under the Company's Accounts Receivable Agreement and $3,407,000 of
proceeds from the seasonal reduction in receivables and inventories of the
Consumer Products Business. The principal use of cash was to fund capital
expenditures of $7,921,000.
As of September 30, 1996, the Company expects to receive approximately
$4,700,000 during the remainder of 1996 and 1997, from the sale to its customers
of Consumer Products Business inventory and the collection of related accounts
receivable. Such assets are presented as discontinued operations in the
accompanying Consolidated Balance Sheets.
On May 10, 1995, the Company contributed 250,000 shares of its Common Stock, at
a price of $7.56 per share, to the Kerr Group, Inc. Retirement Income Plan. The
contribution reduced Kerr's pension liability by $1,891,000.
Since the third quarter of 1990, the Company has not declared any dividends on
its Common Stock. The Company's Senior Notes, Accounts Receivable Agreement and
unsecured Note limit the payment of dividends on Common Stock. Under the most
restrictive covenant of such agreements, the payment of dividends on Common
Stock is not permitted as of September 30, 1996.
The Company did not declare a dividend on its Class B, Series D Preferred Stock
during the second or third quarters of 1996. The cumulative amount of undeclared
dividends as of September 30, 1996 is $414,000. Under accounting rules, such
dividends are not accrued until declared. Under the terms of an agreement with
its lenders, the Company is not permitted to declare or pay any dividends on its
preferred stock on or before December 9, 1996.
The ratio of current assets to current liabilities at September 30, 1996 and
December 31, 1995 was 0.5 and 0.6, respectively. The ratio of current assets to
current liabilities is less than 1.0 due to the classification of the Company's
outstanding Senior Notes as a current liability because the Company was in
default of certain financial covenants for which the Company has received
waivers only through December 9, 1996. The ratio of total debt to total
capitalization increased to 79% at September 30, 1996 from 70% at December 31,
1995 due to lower stockholders' equity.
During October 1996, the Company executed a commitment letter with The CIT
Group/Business Credit, Inc. for $48,000,000 of financing secured by all of the
Company's assets. The proceeds of the financing will permit the Company to
restructure its existing indebtedness. In addition to paying the Company's
Accounts Receivables Agreement, the financing permits the Company to pay
$29,300,000 of the Company's $50,900,000 existing indebtedness. The Company has
agreed to exchange the balance of the Company's existing debt for secured
subordinated notes in the principal amount of $12,000,000 and convertible
preferred stock with a liquidation preference of $13,000,000, and having no
stated dividends. The subordinated notes will bear interest at the rate of 10%
per annum, but will be "pay-in-kind" during the first three years. The preferred
stock will be convertible into approximately 748,000 shares of common stock.
After the financial restructuring, the Company expects to have approximately
$10,000,000 of additional borrowing availability. The Company expects to record
an approximate $3,000,000 pretax gain ($1,800,000 after-tax or $0.46 per common
share) related to the financial restructuring during the fourth quarter of 1996.
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The consummation of the restructuring will be subject to the execution and
delivery of definitive loan agreements among The CIT Group/Business Credit,
Inc., the holders of the existing institutional indebtedness and the Company.
There can be no assurance that the restructuring will be consummated.
In addition, the Company obtained an extension of waivers of certain financial
covenants through December 9, 1996 for its existing institutional indebtedness
and an extension of the maturity date of the unsecured Note to December 9, 1996.
If the financial restructuring is not consummated and subsequent waivers of
financial covenants or the extension of the maturity date of the unsecured Note
are not obtained, the holders of the institutional indebtedness would be
entitled to exercise certain remedies, including the acceleration of the due
date for payment of the Senior Notes and the unsecured Note, and the termination
of the Accounts Receivable Agreement. However, the Company believes that the
financial restructuring will be consummated. The accompanying consolidated
financial statements have been prepared on the basis of such belief of the
Company.
At September 30, 1996, the Company had unused sources of liquidity consisting of
cash and cash equivalents of $3,564,000, additional advances available under the
Accounts Receivable Agreement of approximately $2,000,000, a tax net operating
loss carryforward of $17,256,000, a minimum tax credit carryforward of $812,000
and other tax credit carryforwards of $201,000. The Company believes that its
financial resources, including proceeds from the sale of certain assets of the
Consumer Products Business and other internally generated funds, are adequate to
meet its foreseeable needs, subject to the consummation of the financial
restructuring.
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.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.2 Consent, Waiver and Amendment Agreement dated September 30, 1996
between PNC Bank, N.A., the Purchasers identified in the Note
Agreement dated as of September 15, 1993, The First National Bank of
Boston and the Company.
b. Reports on Form 8-K
There were no reports filed on Form 8-K for the three months ended
September 30, 1996.
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 13, 1996 By /s/ D. Gordon Strickland
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D. Gordon Strickland
President, Chief Executive Officer
November 13, 1996 By /s/ Geoffrey A. Whynot
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Geoffrey A. Whynot
Vice President, Finance
Chief Financial Officer
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