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 March 31, 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 April 30, 1997 was 3,933,095.
-1-
2
KERR GROUP, INC.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets -
March 31, 1997 and December 31, 1996 3 - 4
Condensed Statements of Earnings (Loss) -
Three Months Ended March 31, 1997 and 1996 5
Condensed Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 6
Notes to Condensed 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
-2-
3
KERR GROUP, INC.
Condensed Balance Sheets
As of March 31, 1997 and December 31, 1996
(in thousands except per share data)
(Unaudited) (Audited)
March 31, December 31,
Assets 1997 1996
- ------ ----------- -----------
Current assets
Cash and cash equivalents $ 5,080 $ 9,107
Receivables-primarily trade accounts, less allowance
for doubtful accounts of $376 at March 31, 1997
and $287 at December 31, 1996 14,552 9,710
Inventories
Raw materials and work in process 5,995 6,702
Finished goods 7,545 8,034
--------- --------
Total inventories 13,540 14,736
Prepaid expenses and other current assets 731 31
--------- --------
Total current assets 33,903 33,584
--------- --------
Property, plant and equipment, at cost 100,794 99,148
Accumulated depreciation and amortization (62,242) (60,258)
--------- --------
Net property, plant and equipment 38,552 38,890
--------- --------
Deferred income tax asset 0 0
Goodwill and other intangibles, net of
amortization of $2,316 at March 31, 1997
and $2,749 at December 31, 1996 6,025 5,682
Other assets 7,531 7,370
--------- --------
$ 86,011 $ 85,526
========= ========
See accompanying notes to condensed financial statements.
-3-
4
KERR GROUP, INC.
Condensed Balance Sheets
As of March 31, 1997 and December 31, 1996
(in thousands except per share data)
(Unaudited) (Audited)
March 31, December 31,
Liabilities and Stockholders' Equity 1997 1996
- ------------------------------------ -------- --------
Current liabilities
Short-term debt $ 50,900 $ 50,900
Accounts payable 8,914 7,373
Accrued expenses 5,613 5,622
-------- --------
Total current liabilities 65,427 63,895
-------- --------
Accrued pension liability 14,475 13,935
Other long-term liabilities 3,937 4,394
Stockholders' equity
Preferred Stock, 487 shares authorized and issued,
liquidation value of $21.70 per share at March 31,
1997 and $21.28 per share at December 31, 1996 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) (21,770) (20,640)
Treasury Stock, 293 shares at cost (6,913) (6,913)
Excess of additional pension liability over
unrecognized prior service cost, net of tax benefits (8,245) (8,245)
-------- --------
Total stockholders' equity 2,172 3,302
-------- --------
$ 86,011 $ 85,526
======== ========
See accompanying notes to condensed financial statements.
-4-
5
KERR GROUP, INC.
Condensed Statements of Earnings (Loss)
for the Three Months Ended March 31, 1997 and 1996
(in thousands except per share data)
(Unaudited)
Three Months
Ended March 31,
-------------------------
1997 1996
-------- --------
Net sales $ 28,732 $ 25,096
Cost of sales 21,957 22,144
-------- --------
Gross profit 6,775 2,952
Research and development expenses 433 490
Plant administrative expenses 1,309 1,486
Selling and warehouse expenses 2,145 2,086
General corporate expenses 2,323 2,907
Restructuring costs 0 7,500
Financing costs 533 0
Interest expense, net 1,162 1,259
-------- --------
Loss from continuing operations
before income taxes (1,130) (12,776)
Provision (benefit) for income taxes 0 (5,110)
-------- --------
Loss from continuing operations (1,130) (7,666)
Discontinued operations:
Gain on sale of discontinued operations 0 1,564
Loss from discontinued operations 0 (133)
-------- --------
Net earnings related to
discontinued operations 0 1,431
-------- --------
Net loss (1,130) (6,235)
Preferred stock dividends 207 207
-------- --------
Net loss applicable to
common stockholders $ (1,337) $ (6,442)
======== ========
Net earnings (loss) per common share, primary and fully diluted:
From continuing operations $ (0.34) $ (2.00)
From discontinued operations 0.00 0.36
-------- --------
Net loss $ (0.34) $ (1.64)
======== ========
See accompanying notes to condensed financial statements.
-5-
6
KERR GROUP, INC.
Condensed Statements of Cash Flows
for the Three Months Ended March 31, 1997 and 1996
(in thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------
1997 1996
-------- ---------
Cash flows provided (used) by operations Continuing operations:
- ---------------------------------------------------------------
Loss from continuing operations $(1,130) $ (7,666)
Add (deduct) noncash items included in
loss from continuing operations
Expenses associated with restructuring 0 4,500
Payments associated with restructuring (860) (1,188)
Expenses associated with financing 533 0
Depreciation and amortization 2,128 2,556
Change in deferred income taxes 0 (2,130)
Change in total pension liability, net 540 15
Other, net 53 (92)
Changes in operating working capital
Receivables (4,842) (752)
Inventories 1,196 648
Other current assets (749) 150
Accounts payable 1,429 385
Accrued expenses (135) (1,304)
Cash flow provided (used) by discontinued operations 557 (3,932)
------- --------
Cash flow provided (used) by operations (1,280) (8,810)
------- --------
Cash flows provided (used) by investing activities
- --------------------------------------------------
Continuing operations:
Capital expenditures (1,715) (231)
Other, net (611) 260
Discontinued operations:
Capital expenditures 0 (234)
Proceeds from sale of assets of Consumer Products Business 0 14,417
Other, net 0 (55)
------- --------
Cash flow provided (used) by investing activities (2,326) 14,157
------- --------
Cash flows provided (used) by financing activities
- --------------------------------------------------
Repayment of short-term debt 0 (4,000)
Payments associated with financing (421) 0
Dividends paid 0 (207)
------- --------
Cash flow provided (used) by financing activities (421) (4,207)
------- --------
Cash and cash equivalents
- -------------------------
Increase (decrease) during the period (4,027) 1,140
Balance at beginning of the period 9,107 3,904
------- --------
Balance at end of the period $ 5,080 $ 5,044
======= ========
See accompanying notes to condensed financial statements
-6-
7
KERR GROUP, INC.
Notes to Condensed Financial Statements
(Unaudited)
1) General
The condensed financial statements represent the accounts of Kerr Group,
Inc. (referred to as 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 March 31, 1997, and the
results of operations for the three months ended March 31, 1997 and 1996,
and changes in cash flows for the three months ended March 31, 1997 and
1996.
The results of operations for the first three months of 1997 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 ended March 31, 1997 and 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 March 31, 1997 is $829,000. 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 the Company's $8,500,000 working
capital facility, the Company is not permitted to declare or pay any
dividends on its preferred stock.
Certain reclassifications have been made to prior years' financial
statements to conform to the 1997 presentation.
2) Financing
The Company has been in default with respect to financial covenants under
loan agreements related to its $50,900,000 of unsecured debt since March 7,
1997. The Company has had discussions with the owners of the unsecured debt
regarding a waiver of the defaults and the purchase of the debt by the
Company. The funds for the purchase would be provided by a senior secured
loan and a subordinated loan which the Company is negotiating with
institutional lenders. There can be no assurance that the Company will be
able to reach a definitive agreement with the owners of the unsecured debt.
If the financial restructuring is not consummated or subsequent waiver of
financial covenants and 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
outstanding debt. However, the Company believes that the financial
restructuring will be consummated. The accompanying condensed financial
statements have been prepared on the basis of such belief of the Company.
-7-
8
During April 1997, the Company entered into an $8,500,000 revolving credit
agreement, secured by accounts receivable, for a one-year term. Borrowings
will bear interest at 3% above the prime rate and the lending institution
will receive warrants to purchase 95,000 shares of the Company's common
stock at a purchase price of $0.50 per share. The facility replaces an
accounts receivable sales agreement under which the purchaser was not
providing advances because the Company had been in default with respect to
financial covenants under loan agreements for $50,900,000 of unsecured debt
since March 7, 1997. The grant of the lien on receivables and any
borrowings under the new facility constitute additional defaults under the
existing loan agreements.
During the three month period ended March 31, 1997 the Company incurred
costs of $533,000 for professional fees related to its refinancing efforts
consisting of i) fees paid to the Company's advisors in its negotiations
with lenders and ii) certain fees associated with prospective lenders.
3) Receivables
Receivables as of March 31, 1997 and December 31, 1996, as shown on the
accompanying Condensed Balance Sheets, have been reduced by net proceeds of
$0 and $3,861,000, respectively, from advances pursuant to the sale of
receivables under the Company's Accounts Receivable Agreement.
4) Income Taxes
During the quarter ended March 31, 1997, the Company recorded a charge of
$441,000 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 quarter of 1997, and was
provided due to the uncertainty related to the Company's financing.
During the third and fourth quarters of 1996, a valuation reserve was
provided to eliminate the tax benefit recorded during the first quarter of
1996.
5) 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 first quarter of 1997, the Company made cash payments related to
such reserves for i) costs associated with terminating the leases of
facilities of $611,000, ii) severance pay and related costs of $195,000,
and iii) other costs of $54,000. During the first quarter of 1996, the
Company made cash payments related to such reserves for severance pay and
related costs of $1,188,000.
The ultimate required amount of the reserves related to the restructuring
is expected to approximate the original estimate.
6) 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.
-8-
9
During the first quarter of 1997, the Company made cash payments related to
such reserves for severance pay and related costs of $110,000. During
the first quarter of 1996, the Company made cash payments related to such
reserves for i) professional fees of $36,000, and ii) other costs of
$3,000.
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).
-9-
10
KERR GROUP, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
Three Months Ended March 31, 1997 and 1996
Results of Operations
Continuing Operations
Net sales for the three months ended March 31, 1997 were $28,732,000 as compared
to $25,096,000 for the three months ended March 31, 1996, an increase of
$3,636,000 or 14%. The increase in net sales for the three months ended March
31, 1997 over the comparable period in 1996 was due primarily to higher unit
sales, as well as improved pricing of prescription packaging and pharmaceutical
packaging.
Cost of sales for the three months ended March 31, 1997 were $21,957,000 as
compared to $22,144,000 for the three months ended March 31, 1996, a decrease of
$187,000 or 1%. The decrease in cost of sales for the quarter in spite of higher
unit sales was primarily due to lower manufacturing costs which were partially
due to higher production levels which reduced unit
costs.
Gross profit as a percent of net sales for the three months ended March 31, 1997
increased to 24% as compared to 12% for the three months ended March 31, 1996
due primarily to improved pricing of prescription packaging and pharmaceutical
packaging and secondarily to lower manufacturing costs, which were partially due
to higher production levels.
Research and development, selling, warehouse, general and administrative
expenses decreased $759,000 or 11% during the three months ended March 31, 1997,
as compared to the same period in 1996, due primarily to lower costs resulting
from the restructuring of the Company.
During the three month period ended March 31, 1997, the Company incurred costs
of $533,000 for professional fees in connection with its refinancing efforts
consisting of i) fees paid to the Company's advisors in its negotiations with
lenders and ii) certain fees associated with prospective lenders.
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. The ultimate required amount of the reserves related to the
restructuring is expected to approximate the original estimate.
The relocations of the corporate headquarters and the wide-mouth jar
manufacturing operation have been completed. The restructuring resulted in
annualized pretax cost savings of approximately $6,500,000.
Net interest expense decreased $97,000 during the three month period ended March
31, 1997 as compared to the same period in 1996, primarily as a result of lower
levels of short-term financing.
The loss before income taxes decreased $11,646,000 during the three months
ended March 31, 1997 as compared to the same period in 1996, due primarily to
i) the $7,500,000 pretax loss in 1996 related to the restructuring, ii)
improved pricing of prescription packaging and pharmaceutical packaging and
iii) lower manufacturing costs. In addition, lower corporate expenses as a
result of the restructuring and higher unit sales of prescription packaging
and pharmaceutical packaging improved 1997 results.
-10-
11
The benefit for income taxes decreased $5,110,000 during the three months ended
March 31, 1997 as compared to the same period in 1996, primarily as a result of
lower pretax losses. In addition, during the first quarter of 1997, the Company
recorded an income tax charge of $441,000 to increase the valuation reserve
against the Company's net deferred income tax asset. The increase in the
valuation reserve eliminated the tax benefit the Company would have generated
during the first quarter of 1997, and was provided due to the uncertainty
related to the Company's financing. During the third and fourth quarters of
1996, a valuation reserve was provided to eliminate the tax benefit recorded
during the first quarter 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. The ultimate required amount of the reserves related to
the disposal of the Consumer Products Business is expected to approximate the
original estimate.
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.
Liquidity and Capital Resources
During the first quarter of 1997, the Company used its existing cash balances to
reduce the level of advances under the Company's Accounts Receivable Facility by
$3,861,000 and fund cash costs of the restructuring of $860,000.
During the first quarter 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 $4,000,000 and iii) increased operating working capital
requirements of $3,821,000 related to the seasonal increase in inventories and
receivables of the Consumer Products Business, which is presented as
discontinued operations in the accompanying financial statements.
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 March 31, 1997 was $829,000. 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. Furthermore, since the third quarter of 1990, the Company has not
declared any dividends on its Common Stock. Under the terms of the Company's
$8,500,000 working capital facility, the Company is not permitted to declare or
pay any dividends on its preferred or common stock.
The ratio of current assets to current liabilities at both March 31, 1997 and
December 31, 1996 was 0.5. 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 is in default of certain
financial covenants. The ratio of total debt to total capitalization increased
to 96% at March 31, 1997 from 94% at December 31, 1996 due to lower
stockholders' equity.
-11-
12
The Company has been in default with respect to financial covenants under loan
agreements related to its $50,900,000 of unsecured debt since March 7, 1997. The
Company has had discussions with the owners of the unsecured debt regarding a
waiver of the defaults and the purchase of the debt by the Company. The funds
for the purchase would be provided by a senior secured loan and a subordinated
loan which the Company is negotiating with institutional lenders. There can be
no assurance that the Company will be able to reach a definitive agreement with
the owners of the unsecured debt.
If the financial restructuring is not consummated or subsequent waiver of
financial covenants and 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
outstanding debt. However, the Company believes that the financial restructuring
will be consummated. The accompanying condensed financial statements have been
prepared on the basis of such belief of the Company.
During April 1997, the Company entered into an $8,500,000 revolving credit
agreement, secured by accounts receivable, for a one-year term. Borrowings will
bear interest at 3% above the prime rate and the lending institution will
receive warrants to purchase 95,000 shares of the Company's common stock at a
purchase price of $0.50 per share. The facility replaces an accounts receivable
sales agreement under which the purchaser was not providing advances because the
Company had been in default with respect to financial covenants under loan
agreements for $50,900,000 of unsecured debt since March 7, 1997. The grant of
the lien on receivables and any borrowings under the new facility constitute
additional defaults under the existing loan agreements.
At March 31, 1997, the Company had unused sources of liquidity consisting of
cash and cash equivalents of $5,080,000, a tax net operating loss carryforward
of $28,300,000, a minimum tax credit carryforward of $1,068,000 and other tax
credit carryforwards of $417,000. The Company believes that its financial
resources, including i) borrowings available under the Company's one-year
$8,500,000 working capital facility entered into in April 1997, ii) the
$3,669,000 of cash received in April from the sale of real estate in Santa Ana,
California and iii) 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.
-12-
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Loan and Security Agreement by and between Madeleine L.L.C. as
Lender and Kerr Group, Inc. as Borrower, dated as of April 18,
1997
10.2 Kerr Group, Inc. Common Stock Purchase Warrant, dated April
18, 1997
10.3 Registration Agreement by and among Kerr Group, Inc. and
Madeleine L.L.C., et al, dated as of April 18, 1997
11.1 Statement re: Computation of Per Common Share Earnings (Loss).
27.1 Financial Data Schedule.
b. Reports on Form 8-K
There were no reports filed on Form 8-K for the three months ended
March 31, 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.
May 13, 1997 By /s/ D. Gordon Strickland
------------------------------------
D. Gordon Strickland
President, Chief Executive Officer
May 13, 1997 By /s/ Geoffrey A. Whynot
------------------------------------
Geoffrey A. Whynot
Vice President, Finance
Chief Financial Officer
-13-