424B3 1 pursuant424b3cxn.txt EXPLANATORY NOTE This Supplement No. 2 is Being Re-Filed Solely to Correct a Reference on the Cover Page to the Date of the Market-Making Prospectus to Which This Supplement Relates. The Corrected Date of the Market-Making Prospectus is April 7, 2005 (Revising a Prior, Inadvertant Reference to April 6, 2005.) FILED PURSUANT TO RULE 424(B)(3) File Number 333-115086 BERRY PLASTICS CORPORATION SUPPLEMENT NO. 2 TO AMENDMENT NO. 2 TO MARKET-MAKING PROSPECTUS DATED APRIL 7, 2005 THE DATE OF THIS SUPPLEMENT IS JULY 29, 2005 ON JUNE 8, 2005, BERRY PLASTICS CORPORATION FILED THE ATTACHED FORM 8-K. ON JULY 29, 2005, BERRY PLASTICS CORPORATION FILED THE ATTACHED FORM 8-K/A. THIS SUPPLEMENT INCLUDES BPC HOLDING CORPORATION, BERRY PLASTICS CORPORATION, AND ALL SUBSIDIARY GUARANTORS. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________________________________ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ___________________________________ JUNE 8, 2005 (JUNE 3, 2005) DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) 033-75706 (Commission File Number) BPC HOLDING CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 35-1814673 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
BERRY PLASTICS CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 35-1813706 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 OAKLEY STREET 47710 EVANSVILLE, INDIANA (Zip Code) (Address of principal executive offices)
(812) 424-2904 (Registrant's telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d*2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e*4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. On June 3, 2005 (the "Second Amendment Effective Date"), the registrants entered into a Second Amendment to the Second Amended and Restated Credit and Guaranty Agreement, among Berry Plastics Corporation ("Berry") BPC Holding Corporation, certain subsidiaries of Berry as Guarantors, the Lenders party thereto, Goldman Sachs Credit Partners L.P. and JPMorgan Chase Bank, N.A., as joint lead arrangers, joint book runners and co-syndication agents, Deutsche Bank Trust Company Americas, as Administrative Agent, Collateral Agent, an Issuing Bank and as Swing Line Lender, Bank of America, N.A. as Issuing Bank and predecessor Swing Line Lender, The Royal Bank of Scotland and General Electric Capital Corporation, as Co-Documentation Agents (the "Amended Credit Facility"). The Amended Credit Facility provides for (1) $795 million aggregate principal amount of term loans and (2) up to $150 million in revolving loans, with a $35 million sublimit for letters of credit and a $10 million sublimit for swing line loans. The maturity date of the term loans is December 2, 2011, and the maturity date of the revolving credit facility is March 31, 2010. Borrowings under the Amended Credit Facility bear interest, at the Company's option, at either (i) a base rate (equal to the greater of the prime rate or the federal funds rate plus 0.5%) plus the applicable margin (the "Base Rate Loans") or (ii) an adjusted eurodollar LIBOR (adjusted for reserves) plus the applicable margin (the "Eurodollar Rate Loans"). With respect to the term loans, the "applicable margin" is (i) with respect to Base Rate Loans, 1.25% per annum and (ii) with respect to Eurodollar Rate Loans, 2.25% per annum. In addition, the applicable margins with respect to the term loans can be further reduced by an additional .25% per annum subject to the Company meeting a leverage ratio target. With respect to the revolving credit facility, the "applicable margin" is subject to a pricing grid which ranges from 2.75% per annum to 2.00% per annum, depending on the leverage ratio. The "applicable margin" with respect to swing line loans and revolving loans that are Base Rate Loans will always be 1.00% per annum less than the "applicable margin" for revolving loans that are Eurodollar Rate Loans. The interest rate applicable to overdue payments and to outstanding amounts following an event of default under the Amended Credit Facility is equal to the interest rate at the time of an event of default plus 2.00%. We also must pay commitment fees ranging from 0.375% per annum to 0.50% per annum on the average daily unused portion of the revolving credit facility. The Amended Credit Facility contains significant financial and operating covenants, including prohibitions on our ability to incur specified additional indebtedness or to pay dividends, and restrictions on our ability to make capital expenditures and investments and dispose of assets or consummate acquisitions. The Amended Credit Facility contains (1) a minimum interest coverage ratio as of the last day of any quarter of 2.10:1.00 per quarter for the quarters ending June 2005 through March 2006, 2.15:1.00 per quarter for the quarters ending June 2006 and September 2006, 2.20:1.00 per quarter for the quarters ending December 2006 through September 2007, 2.35:1.00 per quarter for the quarters ending December 2007 through September 2008, 2.45:1.00 per quarter for the quarters ending December 2008 through September 2009 and 2.50:1.00 per quarter thereafter, (2) a maximum amount of capital expenditures (subject to the rollover of certain unexpended amounts from the prior year and increases due to acquisitions) of $85 million for the year ending 2005, $110 million for the year ending 2006, $115 million for the year ending 2007 and $120 million for each year thereafter, and (3) a maximum total leverage ratio (net of restricted cash not to exceed $15 million) as of the last day of any quarter of 6.40:1.00 per quarter for the quarters ending June 2005 through June 2006, 6.00:1.00 per quarter for the quarter ending September 2006, 5.90:1.00 per quarter for the quarters ending December 2006 through September 2007, 5.50:1.00 per quarter for the quarters ending December 2007 through September 2008, 5.10:1.00 per quarter for the quarters ending December 2008 through September 2009 and 4.80:1.00 per quarter thereafter. A copy of the Amended Credit Facility is attached hereto as Exhibit 10.1 and is incorporated herein by reference. ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS. On June 3, 2005, Berry completed its previously announced acquisition of Kerr Group, Inc. ("Kerr"), a Delaware corporation, pursuant to the Agreement and Plan of Merger, dated as of May 5, 2005, amended and restated in its entirety by the Amended and Restated Agreement and Plan of Merger (as amended, the " Merger Agreement"), dated as of May 31, 2005 by and among Berry, Berry Plastics Acquisition Corporation VI, a Delaware corporation, Kerr, the Sellers listed on the signature pages thereto and Fremont Acquisition Company, L.L.C., a Delaware limited liability company, as Sellers' Representative. Pursuant to the Merger Agreement, Berry Plastics Acquisition Corporation VI, a wholly-owned subsidiary of Berry, merged with and into Kerr, with Kerr surviving the merger. Kerr is a privately held corporation. The purchase price for the acquisition was $445 million subject to certain adjustments provided in the Merger Agreement and was financed with borrowings under the Credit Agreement. A copy of the Merger Agreement is attached hereto as Exhibit 99.1 and is incorporated herein by reference. ITEM 5.02. DEPARTURE OF DIRECTOR OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS. On June 3, 2005, Berry announced the promotion and appointment of R. Brent Beeler, 52, to the position of Chief Operating Officer of Berry and BPC Holding Corporation ("Holding"), effective immediately. The material terms of Mr. Beeler's employment agreement with Berry, copies of which have been previously filed, are set forth in the annual report on Form 10-K filed by Berry on March 22, 2005. Mr. Beeler has served as President - Containers and Consumer Products of Berry since October 2003 and Executive Vice President of Holding since July 2002. He had been Executive Vice President and General Manager - Containers and Consumer Products of the Company since October 2002 and was Executive Vice President and General Manager - Containers since August 2000. Prior to that, Mr. Beeler was Executive Vice President, Sales and Marketing of the Company since February 1996 and Vice President, Sales and Marketing of the Company since December 1990. Mr. Beeler was employed by Berry's predecessor from October 1988 to December 1990 as Vice President, Sales and Marketing. ITEM 8.01. OTHER EVENTS. On June 3, 2005, Berry issued a press release announcing the closing of the transactions contemplated by the Merger Agreement, a copy of which is attached hereto as Exhibit 99.2 and is incorporated herein by reference. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (a)To the extent required by this item, financial statements will be filed as an exhibit to an amendment to this report on Form 8-K no later than 71 calendar days after the date this report is required to be filed. (b)To the extent required by this item, pro forma financial statements will be filed as an exhibit to an amendment to this report on Form 8-K no later than 71 calendar days after the date this report is required to be filed. (c)The exhibits listed below and in the accompanying Exhibit Index are furnished as part of this Current Report on Form 8-K.
Exhibit Description 10.1* Second Amendment to the Second Amended and Restated Credit and Guaranty Agreement, among Berry Plastics Corporation, BPC Holding Corporation, certain subsidiaries of Berry as Guarantors, the Lenders party thereto, Goldman Sachs Credit Partners L.P. and JPMorgan Chase Bank, N.A., as joint lead arrangers, joint book runners and co-syndication agents, Deutsche Bank Trust Company Americas, as Administrative Agent, Collateral Agent, an Issuing Bank and as Swing Line Lender, Bank of America, N.A. as Issuing Bank and predecessor Swing Line Lender, The Royal Bank of Scotland and General Electric Capital Corporation, as Co-Documentation Agents. 10.2 Employment Agreement dated December 24, 1990, as amended, between the Company and R. Brent Beeler ("Beeler") (filed as Exhibit 10.10 to the Form S-1 filed on February 24, 1994 and incorporated herein by reference) 10.3 Amendment to Beeler Employment Agreement dated November 30, 1995 (filed as Exhibit 10.8 to the Annual report on Form 10-K filed on March 28, 1996 and incorporated herein by reference) 10.4 Amendment to Beeler Employment Agreement dated June 30, 1996 (filed as Exhibit 10.7 to the Registration Statement on Form S-4 filed on July 17, 1996 and incorporated herein by reference) 10.5 Amendment to Beeler Employment Agreement dated as of June 30, 2001 (filed as Exhibit 10.19 to the Registration Statement on Form-S-4 filed on August 16, 2002 and incorporated herein by reference) 99.1* Amended and Restated Agreement and Plan of Merger, dated as of May 31, 2005, by and among Berry Plastics Corporation, Berry Plastics Acquisition Corporation VI, Kerr Group, Inc., the Sellers listed on the Signature Pages thereto and Fremont Acquisition Company, L.L.C. as Sellers' Representative. 99.2* Press release dated June 3, 2005.
* Filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned hereunto duly authorized. Dated: June 8, 2005. BPC Holding Corporation Berry Plastics Corporation By: ------------------------------ James M. Kratochvil Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the entities listed above EXHIBIT INDEX
ExhibitDescription 10.1* Second Amendment to the Second Amended and Restated Credit and Guaranty Agreement, among Berry Plastics Corporation, BPC Holding Corporation, certain subsidiaries of Berry as Guarantors, the Lenders party thereto, Goldman Sachs Credit Partners L.P. and JPMorgan Chase Bank, N.A., as joint lead arrangers, joint book runners and co-syndication agents, Deutsche Bank Trust Company Americas, as Administrative Agent, Collateral Agent, an Issuing Bank and as Swing Line Lender, Bank of America, N.A. as Issuing Bank and predecessor Swing Line Lender, The Royal Bank of Scotland and General Electric Capital Corporation, as Co-Documentation Agents. 10.2 Employment Agreement dated December 24, 1990, as amended, between the Company and R. Brent Beeler ("Beeler") (filed as Exhibit 10.10 to the Form S-1 filed on February 24, 1994 and incorporated herein by reference) 10.3 Amendment to Beeler Employment Agreement dated November 30, 1995 (filed as Exhibit 10.8 to the Annual report on Form 10-K filed on March 28, 1996 and incorporated herein by reference) 10.4 Amendment to Beeler Employment Agreement dated June 30, 1996 (filed as Exhibit 10.7 to the Registration Statement on Form S-4 filed on July 17, 1996 and incorporated herein by reference) 10.5 Amendment to Beeler Employment Agreement dated as of June 30, 2001 (filed as Exhibit 10.19 to the Registration Statement on Form-S-4 filed on August 16, 2002 and incorporated herein by reference) 99.1* Amended and Restated Agreement and Plan of Merger, dated as of May 31, 2005, by and among Berry Plastics Corporation, Berry Plastics Acquisition Corporation VI, Kerr Group, Inc., the Sellers listed on the Signature Pages thereto and Fremont Acquisition Company, L.L.C. as Sellers' Representative. 99.2* Press release dated June 3, 2005.
* Filed herewith. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------------------------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------------------------------------------------- DATE OF REPORT:(DATE OF EARLIEST EVENT REPORTED:) JULY 29, 2005 (JUNE 3, 2005) BPC HOLDING CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 35-1814673 (State or Other Jurisdiction of (I.R.S. Employer Incorporation) Identification Number) BERRY PLASTICS COPRORATION (Exact Name of Registrant as Specified in its Charter) Delaware 33-75706 35-1813706 (State or Other (Commission File Number) (I.R.S. Employer Jurisdiction of Identification Number) Incorporation) 101 Oakley Street, Evansville, Indiana 47710 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (812) 424-2904 None (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: __ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) __ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) __ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) __ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) AMENDMENT NO. 1 The undersigned registrants hereby amend the following items, financial statements, exhibits or other portions of their Current Report on Form 8-K, dated June 8, 2005, as set forth in the pages attached hereto: ITEM 9.01 (A)FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED Audited Consolidated Financial Statements of Kerr Group, Inc. for the years ended December 31, 2004 and 2003 Audited Consolidated Financial Statements of Kerr Group, Inc. for the years ended December 31, 2003 and 2002 Unaudited Consolidated Financial Statements of Kerr Group, Inc. as of March 31, 2005 and for quarter ended March 31, 2005 ITEM 9.01 (B)PRO FORMA FINANCIAL INFORMATION Pro Forma Unaudited Condensed Consolidated Financial Statements of BPC Holding Corporation: Pro Forma Unaudited Condensed Consolidated Balance Sheets as of April 2, 2005 Pro Forma Unaudited Condensed Consolidated Statement of Operations for the fiscal year ended January 1, 2005 Pro Forma Unaudited Condensed Consolidated Statement of Operations for the thirteen weeks ended April 2, 2005 Item 9.01. Financial Statements and Exhibits (a) Financial Statements of Businesses Acquired KERR GROUP, INC. Consolidated Financial Statements December 31, 2004 Independent Auditors' Report To the Stockholders and Board of Directors of Kerr Group, Inc.: We have audited the accompanying consolidated balance sheets of Kerr Group, Inc. and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kerr Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KMPG LLP April 15, 2005 Harrisburg, Pennsylvania BALANCE SHEETS
------------------------------------------------------------------------------------------------ December 31, 2004 2003 ------------------------------------------------------------------------------------------------ (in thousands except share data) ASSETS Current assets Cash and cash equivalents $ 6,403 $ 5,517 Accounts receivable, less allowance for doubtful accounts of $1,733 in 2004 and $1,591 in 2003 40,172 34,318 Inventories 38,605 30,244 Prepaid expenses and other current assets 1,851 1,496 Deferred income taxes 5,208 4,647 ---------- ---------- Total current assets 92,239 76,222 ---------- ---------- Property, plant and equipment, at cost Land 408 10,056 Buildings and improvements 8,364 26,467 Machinery and equipment 201,845 175,063 Furniture and office equipment 6,700 5,111 ---------- ---------- 217,317 216,697 Accumulated depreciation (97,542) (72,686) ---------- ---------- Net property, plant and equipment 119,775 144,011 Deferred income taxes 8,375 18,571 Goodwill 105,407 110,292 Other intangibles 1,327 1,580 Other assets 7,408 7,591 ---------- ---------- $334,531 $358,267 ========= =========
See accompanying notes to consolidated financial statements. BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------- December 31, 2004 2003 ------------------------------------------------------------------------------------------------------------------------- (in thousands except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 12,300 $ 9,713 Accounts payable 28,268 18,923 Other current liabilities 16,845 16,234 --------- ---------- Total current liabilities 57,413 44,870 --------- ---------- Long-term debt 173,230 204,150 Retirement obligations 13,361 15,182 Other long-term liabilities 3,953 2,663 --------- ---------- Total liabilities 247,957 266,865 --------- ---------- Stockholders' equity Convertible preferred stock, $.01 par value per share, 40,000 shares authorized, 34,000 shares issued at December 31, 2004 and 2003 1 1 Common stock, $.01 par value per share, 50,000 shares authorized, 6,307.821 and 6,290.821 shares issued at December 31, 2004 and 2003, 1 1 respectively Additional paid-in capital 89,120 98,357 Retained earnings 4,943 1,388 Accumulated other comprehensive loss (7,257) (8,111) Treasury stock, 14.609 shares of common stock at December 31, 2004 and 2003, at cost (234) (234) Total stockholders' equity 86,574 91,402 --------- ---------- $334,531 $358,267 ========= =========
See accompanying notes to consolidated financial statements. STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2004 2003 ------------------------------------------------------------------------------------------- (in thousands) Net sales $381,882 $227,132 Cost of sales 291,848 166,589 Inventory step-up - 1,153 --------- --------- Gross profit 90,034 59,390 Selling, general and administrative expenses 57,465 40,792 Restructuring costs and other charges 2,117 2,448 --------- --------- Operating income 30,452 16,150 Interest expense, net 11,672 7,672 Gain on sale of real estate (1,209) (781) --------- --------- Income before income taxes 19,989 9,259 Provision (benefit) for income taxes 7,067 (21,448) --------- --------- Net income before preferred stock dividends 12,922 30,707 Preferred stock dividends 3,501 1,316 --------- --------- Net income attributable to common stockholders $ 9,421 $ 29,391 ========= =========
See accompanying notes to consolidated financial statements. STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, 2004 December 31, 2003 ----------------------------------------------------------------------------------------------------------------------- (in thousands) CASH FLOW PROVIDED BY OPERATIONS Net income before preferred stock dividends $ 12,922 $ 30,707 Adjustments to reconcile net income to net cash provided by operations Depreciation and amortization 27,094 19,898 Change in deferred income taxes 6,015 (21,448) Gain on sale of fixed assets (1,209) (760) Other, net 104 (262) Changes in other operating working capital - excluding effect of acquisitions Receivables (5,808) (1,979) Inventories (7,895) (961) Other current assets (355) (709) Accounts payable 9,345 (7,200) Other current liabilities 3,758 6,162 Net restructuring/acquisition related spending in excess of expense (1,783) (3,195) Inventory step-up - 1,153 Benefit plan funding in excess of expense (1,756) (3,744) ---------- ---------- Total cash flow provided by operations 40,432 17,662 CASH FLOW PROVIDED BY (USED BY) INVESTING ACTIVITIES Capital expenditures (31,905) (19,691) Proceeds from sale of fixed assets 38,999 6,120 Business acquisition - (133,908) ---------- ---------- Cash flow provided by (used by) investing activities 7,094 (147,479) CASH FLOW PROVIDED BY (USED BY) FINANCING ACTIVITIES Net repayment of long-term debt (28,333) (85,965) Net repayment under secured revolving credit facility - (15,625) Net repayment under Tranche C Facility - (5,400) Payments associated with financing (129) (6,716) Debt proceeds - 215,000 Proceeds from issuance of preferred stock - 34,000 Cash proceeds from termination of hedges 426 - Issuance of common stock 291 - Dividends paid (18,895) - ---------- ---------- Cash flow (used by) provided by financing activities (46,640) 135,294 CASH AND CASH EQUIVALENTS Increase during the period 886 5,477 Balance at beginning of the period 5,517 40 ---------- ---------- Balance at end of the period $ 6,403 $ 5,517 ========== ==========
See accompanying notes to consolidated financial statements. STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
----------------------------------------------------------------------------------------------------------------------------------- Number of Number of Shares of Shares of Company Company Accumulated Preferred Common Company Additional Retained Other Total Stock Preferred Stock Common Paid-In Earnings Treasury Comprehensive Stockholders' Issued Stock Issued Stock Capital (Deficit) Stock Loss Equity ----------------------------------------------------------------------------------------------------------------------------------- (in thousands except share data) Balance, December 31, 2002 - $ - 6,290.821 $ 1 $63,042 $(28,003) $(234) $(7,034) $27,772 (restated) Issuance of preferred stock 34,000 1 - - 33,999 - - - 34,000 Preferred stock dividends - - - - 1,316 (1,316) - - - Net income before preferred - - - - - 30,707 - - 30,707 stock dividends Minimum pension liability - - - - - - - (701) (701) adjustment net of tax benefit of $422 Fair market value adjustment - - - - - - - - (376) (376) hedging programs net of tax benefit of $227 _______ ____ _________ ____ _______ _________ ______ ________ ________ Balance, December 31, 2003 34,000 $ 1 6,290.821 $ 1 $98,357 $ 1,388 $(234) $(8,111) $91,402 Issuance of common stock - - 17.000 - 291 - - - 291 Dividends paid - - - - (13,029) (5,866) - - (18,895) Preferred stock dividends - - - - 3,501 (3,501) - - - Net income before preferred - - - - - 12,922 - - 12,922 stock dividends Minimum pension liability - - - - - - - 41 41 adjustment net of tax expense of $26 Fair market value adjustment - - - - - - - - 813 813 hedging programs net of tax expense of $490 ______ ____ _________ ____ ________ _________ _____ ________ ________ Balance, December 31, 2004 34,000 $ 1 6,307.821 $ 1 $89,120 $ 4,943 $(234) $(7,257) $86,574 ====== ==== ========= ==== ======== ========= ===== ======== ========
Year Ended December 31, 2004 2003 --------- ---------- Comprehensive income Net income before preferred stock dividends $ 12,922 $ 30,707 Minimum pension liability adjustment, net of tax benefit 41 (701) Fair market value adjustment - hedging programs, net of tax benefit 813 (376) --------- ---------- Total comprehensive income $ 13,776 $ 29,630 ========= ==========
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL DESCRIPTION OF BUSINESS The Company is a subsidiary of Fremont Partners, L.P. The Company's operations consist of the manufacture and sale of a variety of plastic packaging products including child-resistant closures, tamper-evident closures, prescription packaging products and other plastic closures and containers. BASIS OF PRESENTATION The consolidated financial statements represent the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 2004 and 2003, and the reported amounts of income and expenses. Actual results could differ from those estimates. ACQUISITIONS On August 26, 1997, Fremont Acquisition Company, LLC completed a cash tender offer for all the shares of Kerr Group, Inc. pursuant to the Agreement and Plan of Merger dated July 1, 1997 ("Kerr Acquisition"). On August 13, 2003, the Company completed its acquisition of substantially all of the net assets of Setco, Inc., Tubed Products, Inc. and O. G. Dehydrated, Inc. (all wholly owned subsidiaries of McCormick, Inc.), collectively known as the "2003 Acquisition", for $133,908,000 including $3,522,000 of deal related costs. The 2003 Acquisition was consummated as part of the Company's overall strategy to grow its business within the packaging industry. Setco and Tubed Products brought strong presences in the bottle and tube markets to strengthen Kerr's overall position within the packaging industry. The 2003 Acquisition was funded by the proceeds from issuance of preferred stock of $34,000,000 (See Note 9) and proceeds associated with the refinancing of the Company's credit facilities. The purchase price was allocated to the specifically identifiable net assets acquired as follows: $37,513,000 to current assets; $86,837,000 to property, plant and equipment; $1,374,000 to other intangibles; $13,913,000 to current liabilities; $1,433,000 to deferred income tax liabilities and $23,530,000 to goodwill. The goodwill was allocated $6,488,000 to Setco (Containers Division) and $17,042,000 to Tubed Products (Tubes Division). The goodwill deductible for tax purposes related to the 2003 Acquisition was $26,007,000. The results of operations of the 2003 Acquisition are included in the consolidated financial results from the date of acquisition. The changes in the carrying amount of goodwill related to the 2003 Acquisition for the year ended December 31, 2004 are as follows: Balance as of December 31, 2003 $28,415,000 Adjustments to reserves (1,515,000) Adjustments to real estate values (5,973,000) Adjustment to deferred income taxes related to above changes 2,603,000 ------------ Balance as of December 31, 2004 $23,530,000 ============ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The adjusted reserves include overage inventory, accrued transaction related costs and accrued acquisition reserves. These changes were the result of the determination that the reserves were no longer needed. The real estate values were adjusted as a result of the sale/leaseback transaction (See Note 5). CASH AND CASH EQUIVALENTS Cash equivalents consist only of investments that have an original maturity of three months or less when purchased, are readily convertible to known amounts of cash and have insignificant risk of changes in value because of changes in interest rates. INVENTORIES Inventories are valued at the lower of cost or market, determined by the use of the first-in, first-out method. At December 31, 2004 and 2003, inventory consisted of the following:
--------------------------------------------------------------------------------- 2004 2003 --------------------------------------------------------------------------------- (in thousands) Raw materials and work in process $20,793 $14,809 Finished goods 17,812 15,435 ------- ------- Total inventories $38,605 $30,244 ======= =======
OTHER ASSETS Other current assets primarily consist of prepaid insurances, rent payments made in advance and other miscellaneous payments made in advance of incurring the expense. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are valued at cost and depreciated using the straight-line method of depreciation over the estimated useful lives of the assets. The estimated useful lives generally used in computing depreciation expense are as follows: Buildings and improvements 5 to 30 years Machinery and equipment 3 to 15 years Furniture and office equipment 5 to 10 years When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed and any resulting gain or loss is reflected in operating results. The policy of the Company is to charge amounts expended for maintenance and repairs to expense and to capitalize expenditures for major replacements and betterments. IMPAIRMENT OF LONG LIVED ASSETS In accordance with Statement of Financial Accounting Standards No. 144, long- lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 Business Combinations ("SFAS No. 141") and No. 142 Goodwill and Other Intangible Assets ("SFAS No. 141"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and eliminates the use of pooling of interests for transactions initiated subsequent to June 30, 2001. SFAS No. 142 eliminated the amortization to expense of goodwill recorded as a result of such combinations, but requires goodwill to be evaluated for impairment at least annually. Write-downs of the balance, if necessary, are to be charged to operating results in the period in which the impairment is determined. Goodwill existing prior to the issuance of the statement was required to be amortized through December 31, 2001. Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The Company evaluated its recorded goodwill under SFAS No. 142 as of December 31, 2004 and as of December 31, 2003 and concluded that there was no impairment at those dates. Accumulated amortization for goodwill was $11,978,000 as of December 31, 2004 and 2003. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Other intangible assets relate primarily to an intangible related to a long- term contract acquired in the 2003 Acquisition ("the Customer Intangible") and patent costs.
------------------------------------------------------------------------------------ As of December 31, 2004 ------------------------------------------------------------------------------------ Weighted Gross Average Net Book Carrying Amortization Accumulated Value Amount Period Amortization -------- ------------ ------------ -------- Amortizing intangible assets Customer Intangible $1,374 7 years $ (270) $1,104 Patents 611 17 years (388) 223 ------ ------- ------ $1,985 $ (658) $1,327 ====== ======= ======
------------------------------------------------------------------------------------ As of December 31, 2003 ------------------------------------------------------------------------------------ Weighted Gross Average Net Book Carrying Amortization Accumulated Value Amount Period Amortization -------- ------------ ------------ -------- Amortizing intangible assets Customer Intangible $1,374 7 years $ (74) $1,300 Patents 611 17 years (331) 282 ------ ------- ------ Total $1,985 $ (405) $1,580 ====== ======= ======
Aggregate amortization expense for amortizing intangible assets was $253,000 and $135,000 for the years ended December 31, 2004 and 2003, respectively. Estimated amortization expense for the next five years is: $225,000 in 2005, $225,000 in 2006, $225,000 in 2007, $225,000 in 2008, and $425,000 in 2009 and thereafter. ACCOUNTING FOR DERIVATIVE AND HEDGING ACTIVITY The Company accounts for derivatives and hedging activities in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended, which requires that all derivative instruments be recorded on the balance sheet at their respective fair values. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) On the date a derivative contract is entered into, the Company designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), a foreign- currency fair-value or cash-flow hedge (foreign currency hedge), or a hedge of a net investment in a foreign operation. For the years ended December 31, 2004 and 2003, the Company has entered into cash flow hedges. For all hedging relationships the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that are designated as cash-flow hedges to specific forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of the change in fair value of a derivative instrument that qualifies as either a fair-value hedge or a cash-flow hedge is reported in earnings. The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is dedesignated as a hedging instrument, because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment or management determines that designation of the derivative as a hedging instrument is no longer appropriate. In all situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Company no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Company removes any asset or liability that was recorded pursuant to recognition of the firm commitment from the balance sheet, and recognizes any gain or loss in earnings. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the Company recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ENVIRONMENTAL RESERVES Environmental liabilities recognized represent the Company's best estimate of remediation expenditures, including legal, consulting and other professional fees, that are probable and that can be reasonably estimated. Environmental costs are expensed unless they increase the value of the related asset and/or prevent or mitigate future contamination (see Note 8). REVENUE RECOGNITION The Company recognizes revenue at the time the product is shipped and the customer takes ownership and assumes the risk of loss. The Company does not have a significant concentration of credit risk with any individual customer. RESEARCH AND DEVELOPMENT Research and development expenses included in selling, general and administrative expenses were $2,154,000 and $1,593,000 for the years ended December 31, 2004 and 2003, respectively. PENSIONS AND OTHER POSTRETIREMENT BENEFITS The Company has two defined benefit pension plans (the "Retirement Plans"), which cover substantially all former employees and former union employees at the Company's former Lancaster facility. The Retirement Plans generally provide benefits based on years of service and average final pay. The Company also sponsors a defined benefit healthcare plan for certain retired employees and their spouses and employees hired prior to September 1, 1992. The Company measures the costs of its obligation based on its best estimate. The net periodic costs are recognized as employees render the services necessary to earn the postretirement benefits. Statement of Financial Accounting Standards No. 87 requires that a company record an additional minimum pension liability to the extent that a company's accumulated pension benefit obligation exceeds the fair value of pension plan assets and accrued pension liabilities. This additional minimum pension liability is offset by an intangible asset, not to exceed prior service costs of the pension plan. Amounts in excess of prior service costs are reflected as a reduction in stockholders' equity and the change is reflected as a reduction in Other Comprehensive Income, net of any tax benefits. The Company accounts for postretirement benefits in accordance with Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash, accounts receivable, accounts payable, other current assets and other current liabilities approximate their carrying amount given the short-term maturity of those instruments. The fair values of the Company's debt and derivative instruments are disclosed in Note 7. STOCK OPTIONS Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), requires the Company to choose between two different methods of accounting for stock options. The statement defines a fair-value-based method of accounting for stock options but allows an entity to continue to measure compensation cost for stock options using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In December 2002, the Financial Accounting Standards Board (APB) issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 clarifies the accounting for options issued in prior periods when a company elects to transition from APB 25 accounting to SFAS No. 123 accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. The Corporation has elected to continue application of APB 25 in accounting for its stock-based compensation plans using the intrinsic-value method of expense recognition and, accordingly, the transition accounting provided by SFAS No. 148 had no impact on the Company's financial statements. All required disclosures have been provided in Note 10. INCOME TAXES Under the asset and liability method of SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies, including environmental remediation costs not within the scope of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Recoveries of environmental remediation costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related environmental liability, in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. The Company accrues for losses associated with environmental remediation obligations not within the scope of Statement No. 143 when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. The Company uses a significant amount of resin in its manufacturing process. From time to time, the Company has experienced substantial increases in the cost of resin. To the extent that the Company is unable to pass on resin cost increases, the cost increases could have a significant impact on the results of operations of the Company. FREIGHT OUT Freight out expenses included in selling, general and administrative expenses were $12,348,000 and $8,597,000 for the years ended December 31, 2004 and 2003, respectively. STOCK SPLIT All share and per share data has been restated to reflect the 1000 for 1 common stock split on October 17, 2003. DIVIDEND In conjunction with the sale leaseback described in Note 5, the Company declared a dividend of $2,280.67 per share for shareholders of record dated August 11, 2004. This dividend amounted to $14,353,000 for common shareholders and $4,542,000 for preferred shareholders. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123"), which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 is a revision to Statement 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. For nonpublic companies, SFAS No. 123 will require measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. This Statement will be effective for the Company as of January 1, 2006. In December 2004, the FASB issued Statement of Financial Accounting Standards No.151, Inventory Costs ("SFAS 151"), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under SFAS 151, such items will be recognized as current- period charges. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement will be effective for the Company for inventory costs incurred on or after January 1, 2006. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations ("FIN 47"). This Interpretation clarifies that the term conditional asset retirement obligation as used in Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for the Company) and the Company is currently assessing the effect of this interpretation. NOTE 2 - BUSINESS SEGMENTS The Company's disclosures are based on the business segments used by management to make operating decisions and measure performance. The accounting policies of the business segments are consistent with those described in Note 1. The Company's business segments are as follows: CLOSURES DIVISION The Company's closures division produces custom and stock closures for pharmaceutical markets and selected segments of food and beverage markets. The division's product line includes two-piece child-resistant, tamper-evident and standard closures. CONTAINERS DIVISION The Company's container division produces custom and stock bottles for selected segments of food and beverage markets, the personal care industry as well as bottles and vials for the pharmaceutical market, drug wholesalers, and drug retailers. TUBES DIVISION The Company's tubes division produces custom and stock tubes for various end use markets such as selected segments of the cosmetic, food, pharmaceutical and household chemical markets. Intercompany transactions and charges are eliminated in consolidation. NOTE 2 - BUSINESS SEGMENTS (CONTINUED) Summary business segment information is included in the following chart:
------------------------------------------------------------------------------------ Year Ended Year Ended December 31, December 31, 2004 2003 ------------------------------------------------------------------------------------ (in thousands) Net sales Closures $ 100,868 $ 96,912 Containers 166,111 89,575 Tubes 114,903 40,645 --------- --------- $ 381,882 $ 227,132 ------------------------------------------------------------------------------------ Operating income (loss) (a) Closures $ 12,126 $ 13,577 Containers 15,083 5,171 Tubes 9,418 2,100 Corporate (6,175) (4,698) ---------- ---------- $ 30,452 $ 16,150 ------------------------------------------------------------------------------------ Assets Closures $ 115,894 $ 110,714 Containers 104,438 106,413 Tubes 77,845 83,761 Corporate (b) 36,354 57,379 --------- --------- $ 334,531 $ 358,267 ------------------------------------------------------------------------------------ Depreciation and amortization Closures $ 9,841 $ 9,997 Containers 10,333 6,723 Tubes 5,577 2,207 Corporate 1,343 971 --------- --------- $ 27,094 $ 19,898 ------------------------------------------------------------------------------------ Capital expenditures Closures $ 8,140 $ 11,709 Containers 10,731 5,123 Tubes 10,621 1,631 Corporate 2,413 1,228 --------- --------- $ 31,905 $ 19,691 ------------------------------------------------------------------------------------
(a)The Company does not allocate corporate expenses to the business segments other than research and development expenses. (b)Corporate assets consist primarily of goodwill of $41,134 related to the Kerr Acquisition and deferred income taxes of $13,583 and $23,218 for 2004 and 2003, respectively. NOTE 3 - INCOME TAXES The provision (benefit) for income taxes consists of the following:
----------------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2004 2003 ----------------------------------------------------------------------------------------------------------- (in thousands) Current U.S. Federal $ 237 $ 189 State 314 - -------- -------- Total current $ 551 $ 189 Deferred U.S. Federal $ 6,347 $(19,321) State 169 (2,316) -------- -------- Total deferred $ 6,516 $(21,637) -------- --------- Total provision (benefit) for income taxes $ 7,067 $(21,448) ======== =========
Total provision (benefit) for income taxes from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to earnings (loss) before income taxes as a result of the following:
------------------------------------------------------------------------------------------------------------------ Year Ended Year Ended December 31, December 31, 2004 2003 ------------------------------------------------------------------------------------------------------------------ (in thousands) Computed "expected" tax provision $ 6,798 $ 3,148 Increase (reduction) in provision resulting from: State income tax provision, net of Federal tax effect 623 469 Increase (decrease) in valuation allowance (49) (25,088) Adjustment to required tax reserves (550) - Other 245 23 --------- --------- Actual tax (benefit) provision $ 7,067 $(21,448) ========= =========
Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2004, will be reported in the statement of operations. NOTE 3 - INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 2004 and 2003 are as follows:
------------------------------------------------------------------------------------------------------------------ December 31, 2004 2003 ------------------------------------------------------------------------------------------------------------------ (in thousands) Deferred income tax assets: Net operating loss carryforwards $16,282 $23,227 Minimum pension liability 4,683 4,708 Environmental liability 115 167 Tax credit carryforwards 1,616 1,125 Accrued retiree benefits 2,944 3,252 Deferred gain on sale of real estate 1,204 765 Straight line lease expense 309 - Workers compensation 219 - Fair market value liability - hedging programs - 227 Allowance for doubtful accounts 652 536 Inventories 1,010 1,228 Accrued vacation pay 1,566 525 Restructuring and severance reserves 174 486 Accrued self-insurance 889 850 Acquisition related reserves 80 474 Other 609 787 -------- -------- Total gross deferred income tax assets 32,352 38,357 Less valuation reserve for deferred income tax assets (3,003) (3,052) -------- -------- Deferred income tax assets, net of valuation reserve 29,349 35,305 Deferred income tax liabilities: Property, plant and equipment, principally due to differences in depreciation (11,518) (9,046) Accrued pension liability (2,779) (2,754) Goodwill (1,205) (249) Fair market value asset - hedging programs (264) - Other - (38) -------- -------- Total gross deferred income tax liabilities (15,766) (12,087) -------- -------- Net deferred income tax assets $13,583 $23,218 ======== ========
NOTE 3 - INCOME TAXES (CONTINUED) As of December 31, 2004, the Company has net operating losses for Federal income tax purposes of $39,703,000, which are available to offset future Federal taxable income. The net operating losses generated prior to August 26, 1997, amounting to $10,203,000, are subject to limitation under Section 382 of the Internal Revenue Code. The remaining net operating losses were generated subsequent to August 26, 1997 and are not subject to limitations. The net operating loss carryforwards will expire as follows: $9,000,000 in 2011; $1,203,000 in 2012; $13,462,000 in 2018; $10,437,000 in 2020; $5,559,000 in 2021; $26,000 in 2022, and $16,000 in 2023. The Company has net operating losses for state income tax purposes. As of December 31, 2004, the Company has recorded $2,783,000 of state income taxes net of federal tax benefit. The Company also has an alternative minimum tax credit carryforward of $1,616,000 with no expiration date. The Company paid net cash payments related to income taxes of $1,823,000 and $0 during the years ended December 31, 2004 and 2003, respectively. The Company has recorded a valuation allowance of $3,003,000 and $3,052,000 as of December 31, 2004 and 2003, respectively. Although there is no assurance that the remaining deferred tax asset will be realized, as of December 31, 2004, the Company believes that it is more likely than not that the net deferred tax asset will be realized. The Company's assessment is based on current budgets, forecasts and the historical financial performance. NOTE 4 - OTHER LONG TERM ASSETS At December 31, 2004 and 2003, other assets consisted of the following:
-------------------------------------------------------------------------------------- 2004 2003 -------------------------------------------------------------------------------------- (in thousands) Deferred financing costs, net of accumulated amortization of $1,434 in 2004 and $465 in 2003 $5,509 $6,545 Repair parts 1,153 1,001 Fair market value - hedges 701 - Certificates of deposit 45 45 ------ ------ $7,408 $7,591 ====== ======
Deferred financing costs are amortized over the term of the related financing with approximately six years of amortization remaining. Amortization expense related to deferred financing costs totaled $989,000 and $860,000 for the years ended December 31, 2004 and 2003, respectively. Future amortization expense is expected to be as follows:
2005 $ 989,000 2006 989,000 2007 989,000 2008 989,000 2009 and thereafter 1,553,000
NOTE 5 - OTHER CURRENT LIABILITIES At December 31, 2004 and 2003 other current liabilities consisted of the following:
------------------------------------------------------------------------- 2004 2003 ------------------------------------------------------------------------- (in thousands) Accrued wages, bonus and vacation pay $8,296 $3,882 Accrued self-insurance 2,945 2,657 Deferred gain on sale of real estate 313 218 Accrued restructuring expenses 717 1,550 Accrued acquisition costs 212 1,258 Accrued environmental 200 200 Accrued and withheld taxes 128 116 Accrued interest 25 206 Other accrued expenses 4,009 6,147 ------ ------- Total other current liabilities 16,845 $16,234 ====== =======
Restructuring costs and other charges:
------------------------------------------------------------------------- Year ended December 31, 2004 2003 ------------------------------------------------------------------------- Severance and employee benefits $1,116 $ 371 Dividend expenses (See Note 1) 424 - Ongoing expenses related to idle facility 375 440 Preferred shareholder settlement 132 - Merger and acquisition activities 70 910 Loss on debt refinancing - 181 Expenses related to 2003 acquisition - 546 ------ ------ Total restructuring and other charges $2,117 $2,448 ====== ====== Total restructuring related payments $2,831 $2,744 ====== ======
During 2002, the Company sold its Sarasota, Florida warehouse for $2,068,000 and recognized a gain of $493,000, which is deferred and amortized over the lease term, $123,000 is included in other current liabilities as of December 31, 2004 and 2003 and $113,000 and $236,000 included in other long-term liabilities as of December 31, 2004 and 2003, respectively. During 2003, the Company sold its purchase option for its Bowling Green, Kentucky and Jackson, Tennessee facilities for $5,900,000. The buyer exercised the purchase option and the Company entered into an eighteen year lease on these properties. The sale of these options yielded a gain of $1,710,000, which is deferred and amortized over the lease term, $95,000 is included in other current liabilities as of December 31, 2004 and 2003 and $1,484,000 and $1,580,000 is included in other long-term liabilities as of December 31, 2004 and 2003, respectively. During 2004, the Company sold its Anaheim and Oxnard, California and Easthampton, Massachusetts facilities for $37,790,000. The buyer and the Company entered into a fifteen year lease on these properties. The sale of these properties yielded a gain of $1,596,000, which was deferred and will be amortized over the lease term, and $95,000 is included in other current liabilities and $1,291,000 is included in other long-term liabilities. NOTE 6 - RETIREMENT BENEFITS PENSIONS The Company has two defined benefit pension plans, which cover substantially all former employees and former union employees at the Company's former Lancaster facility. The Retirement Plans generally provide benefits based on years of service and average final pay. In March 1999, the Company modified its agreement with the Pension Benefit Guaranty Corporation (the "PBGC"). Under this agreement, the Company agreed to maintain certain funding levels in its pension plans. The Company is in compliance with the PBGC agreement as of December 31, 2004. The Company has a pension restoration plan which is an unfunded plan providing benefits to participants not payable by the Retirement Plan because of the limitations on benefits imposed by the Internal Revenue Code of 1986, as amended. The aggregate annual accrued benefit for each participant under the combination of the Retirement Plans and the Pension Restoration Plan when expressed as a single-life annuity is limited to $200,000. The Company uses December 31 measurement date for the Retirement Plans. The following table sets forth a reconciliation of the changes in the Company sponsored defined benefit pension plans:
----------------------------------------------------------------------------------------------- Year ended December 31, 2004 2003 ----------------------------------------------------------------------------------------------- (in thousands) CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation at beginning of year $ 35,381 $ 34,762 Interest cost 2,107 2,254 Actuarial losses 1,013 1,750 Benefit payments (3,366) (3,385) --------- --------- Benefit obligation at end of year 35,135 35,381 CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 29,108 26,218 Actual return on plan assets 2,807 2,674 Employer contribution 1,216 3,601 Benefit payments (3,366) (3,385) --------- --------- Fair value of plan assets at end of year 29,765 29,108 Funded Status (5,370) (6,273) Unrecognized net actuarial loss 12,453 12,521 --------- --------- Net amount recognized $ 7,083 $ 6,248 ========= ========= Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ (7,083) $ (6,270) Adjustment to recognize minimum pension liability 12,453 12,518 --------- --------- Net amount recognized $ 5,370 $ 6,248 ========= =========
NOTE 6 - RETIREMENT BENEFITS (CONTINUED) Weighted average assumptions used in computing the funded status of the plans were as follows:
----------------------------------------------------------------------------------------------------- December 31, December 31, 2004 2003 ----------------------------------------------------------------------------------------------------- Discount rate 5.90% 6.25% Rate of increase in compensation levels 5.00% 5.00% Expected long-term rate of return on assets 8.75% 8.75%
Net pension (income) expense includes the following components:
----------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2004 2003 ----------------------------------------------------------------------------------------------------- (in thousands) Interest cost on projected benefit obligation $2,107 $2,254 Expected return on assets (2,567) (2,609) Net amortization and deferral 844 531 ------- ------- Net pension expense $ 384 $ 176 ======= =======
The majority of all pension plan assets are held by a master trust created for the collective investment of the plans' funds, as well as annuity contracts. At December 31, 2004, assets held by the master trust consisted of cash, money market funds and high yield bonds. The Company's investment policy seeks to provide for growth of capital with a moderate level of volatility by investing assets in accordance with approximately 50% bonds and 50% securities. Our investment performance and policies are reviewed by selected senior management and the majority owner. Our expected long term rate of investment return is based on the expected returns of each of the asset categories, weighted based on the median of the target allocation for each category. Equity securities are expected to return 4% to 7% over the long-term, while fixed income and other is expected to return 10% to 11%. Based on historical experience, we expect our plan assets to provide a modest additional return, when compared to their respective benchmarks. The Company expects to contribute approximately $250,000 to the Retirement Plans in 2005. The following benefit payments are expected to be paid by the Retirement Plans:
2005 $ 3,222,000 2006 3,157,000 2007 3,063,000 2008 2,978,000 2009 2,909,000 2010 through 2014 13,634,000
NOTE 6 - RETIREMENT BENEFITS (CONTINUED) RETIREE HEALTHCARE AND LIFE INSURANCE The Company provides certain healthcare and life insurance benefits for certain retired employees and their spouses (the "Retiree Healthcare and Life Insurance Plans"). The costs of such benefits are shared by retirees through one or more of the following: a) deductibles, b) co-payments and c) retiree contributions. Employees hired prior to September 1, 1992 may become eligible for those benefits if they reach retirement age while working for the Company. The Company does not provide retiree healthcare and life insurance benefits for salaried employees hired after September 1, 1992. Healthcare and life insurance benefits provided by the Company are not funded in advance, but rather are paid by the Company as the costs are actually incurred by the retirees. The Company uses December 31 measurement date for Retiree Healthcare and Life Insurance Plans. The following table sets forth a reconciliation of the changes in the Company sponsored retiree healthcare and life insurance plans.
---------------------------------------------------------------------------------------------- Year ended December 31, 2004 2003 ---------------------------------------------------------------------------------------------- (in thousands) CHANGE IN BENEFIT OBLIGATIONS: Accumulated postretirement benefit obligation at beginning of year $ 9,589 $ 7,588 Service cost 14 20 Interest cost 559 1,216 Actuarial (gains)/losses 445 2,099 Benefit payments (1,392) (1,334) --------- --------- Accumulated postretirement benefit obligation at end of year 9,215 9,589 --------- --------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year - - Employer contribution 1,499 1,334 Benefit payments (1,499) (1,334) --------- --------- Fair value of plan assets at end of year - - --------- --------- Funded Status (9,215) (9,589) Unrecognized net actuarial gain 1,387 943 --------- --------- Net amount recognized $ (7,828) $ (8,646) ========= =========
NOTE 6 - RETIREMENT BENEFITS (CONTINUED) Weighted average assumptions used in computing the funded status of the plans were as follows:
------------------------------------------------------------------------------------------ December 31, 2004 December 31, 2003 ------------------------------------------------------------------------------------------- Discount rate 5.90% 6.25% Healthcare cost trend rate 6.50% trending 7.00% trending down to 5.00% down to 4.50%
Retiree healthcare and life insurance expense included the following components:
------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, 2004 December 31, 2003 ------------------------------------------------------------------------------------------- (in thousands) Service cost (benefit earned during period) $ 14 $ 20 Interest cost on accumulated benefit obligation 559 1,216 Net amortization and deferral - (49) ------ --------- Net retiree healthcare and life insurance expense $ 573 $1,187 ====== =========
The effect of a one percentage point annual increase in these assumed healthcare cost trend rates at December 31, 2004, would increase the postretirement benefit obligation by approximately $256,000 and would increase the service and interest cost components of the annual expense by approximately $18,000. The effect of a one percentage point annual decrease in these assumed healthcare cost trend rates at December 31, 2004, would decrease the postretirement benefit obligation by approximately $236,000 and would decrease the service and interest cost components of the annual expense by approximately $16,000. The Company expects to contribute approximately $1,269,000 to the Retiree Healthcare and Life Insurance Plans. The following benefit payments are expected to be paid:
2005 $1,269,000 2006 1,183,000 2007 1,064,000 2008 901,000 2009 778,000 2010 through 2014 2,745,000
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position (FSP) FAS 106-1 (issued January 2004), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost in 2003 and 2004. FSP FAS 106-2 (issued May 2004), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will require the Company to determine whether its plan is at least actuarially equivalent to the Medicare benefit as of January 1, 2005 and account for the effects of the Act, if any, beginning in 2005. The Company is currently assessing whether the benefits provided by its plan are actuarially equivalent to the Medicare benefit. NOTE 6 - RETIREMENT BENEFITS (CONTINUED) EMPLOYEE SAVINGS PLAN The Company maintains an employee savings plan (the "Employee Savings Plan"), which covers substantially all of the Company's employees. The Employee Savings Plan allows employees to defer up to 50% of eligible pre-tax compensation. The Company offers a matching contribution of 50% of the first $1,000 employee deferral. The Company also offers a matching contribution of 25% of the first 6% of employee deferrals. The Company recorded $1,555,000 and $1,074,000 of expense related to the Employee Savings Plan in 2004 and 2003, respectively. NOTE 7 - DEBT Debt consists of the following:
---------------------------------------------------------------------------------------------------------------------- December 31, 2004 2003 ---------------------------------------------------------------------------------------------------------------------- (in thousands) $215 million Term Loan Facility bearing interest at a rate equal to Libor plus 350 basis points or the Base Rate plus 225 basis points (5.66% at December 31, 2004). $184,630 $212,813 $30 million Revolving Credit Facility bearing interest at a rate equal to Libor plus 300 basis points or the Base Rate plus 175 basis points. - - Industrial Development Revenue bonds bearing interest at 78% of prime (5.84% at December 31, 2004). 900 1,050 ---------- ---------- 185,530 213,863 Less: Current Portion 12,300 9,713 ---------- ---------- Total Long Term Debt $173,230 $204,150 ========== ==========
On August 13, 2003, the Company entered into a Credit Agreement ("Credit Facility") with a bank for an aggregate amount of $245 million. Borrowings under the Credit Facility were used (i) to repay the outstanding principal and accrued interest on the existing credit facility; (ii) to fund the purchase price of the 2003 Acquisition (See Note 1); (iii) to pay fees and expenses related to the Credit Agreement and 2003 Acquisition; and (iv) to provide for working capital and general corporate purposes of the Company. The Credit Facility is secured by substantially all of the assets of the Company and its subsidiaries (excluding the assets securing the Industrial Development Bonds). The Credit Facility consists of a $30 million working capital facility, which includes a $3 million letter of credit related to the Pension Benefit Guaranty Corporation ("Working Capital Facility") and a $215 million term facility ("Term Facility"). The Working Capital Facility bears interest at LIBOR plus 300 basis points or the Base Rate (defined as the higher of (i) the bank's prime rate and (ii) the Federal Funds Rate plus 50 basis points) plus 175 basis points. The Term Facility bears interest at LIBOR plus 350 basis points or the Base Rate plus 225 basis points. The LIBOR and base rate margins are subject to performance pricing step-downs based upon the Company's total debt to EBITDA or debt ratings. The Company may select interest periods of 1, 2, 3, or 6 months for LIBOR advances. A default rate of interest applies in the Credit Facility in the event of default at a rate of 200 basis points above the applicable interest rates. NOTE 7 - DEBT (CONTINUED) The Credit Facility requires that the Company maintain minimum fixed charge and interest coverage ratios and maximum coverage ratios and capital spending. As of December 31, 2004, the Company's long-term debt was payable as follows:
2005 $ 12,300 2006 16,955 2007 19,680 2008 19,680 2009 40,290 2010 and thereafter 76,625 -------- $185,530 ========
During 2003, the Company entered into Interest Rate Swap Agreements with an initial notional amount of $160,000,000. The Interest Rate Swap Agreements have notional amounts that decline on a quarterly basis. As of December 31, 2004, the Company held Interest Rate Swap Agreements with a notional amount of $114,000,000. The agreements call for the Company to receive a variable interest rate based on 90-day LIBOR and to pay fixed interest rates ranging from 1.79% to 2.79%. The Company utilizes interest rate swaps as a method to mitigate its risk on the 90 day LIBOR elections. The Company's policy on interest rate swaps is to mitigate interest rate risk by hedging approximately 60% of its outstanding debt balance and mitigating the 90 day LIBOR risk. The interest rate swaps range from two years to three years in term. During 2004, the Company terminated Interest Rate Swap Agreements with initial notional amounts of $40,000,000 resulting in a $426,000 gain, which was deferred and amortized over the remaining term of the Interest Rate Swaps. Included in interest expense is $85,000 of expense related to the sale of these Interest Rate Swap Agreements. Included in interest expense is $1,248,000 and $603,000 of expense related to the Interest Rate Swap Agreements for the years ended December 31, 2004 and 2003, respectively. The Company paid interest of $11,853,000 and $7,451,000 during the years ended December 31, 2004 and 2003, respectively. The carrying value of the Senior Secured Credit Facility approximates fair value given the variable rate components of the debt instruments. NOTE 8 - ENVIRONMENTAL RESERVES The Company has been designated by the Environmental Protection Agency as a potentially responsible party to share in the remediation costs of several waste disposal sites. Pursuant to the 1992 sale of the Metal Crown Business and the 1998 sale of certain plastic operations of Sun Coast, the Company has indemnified the buyer for certain environmental remediation costs. In addition, pursuant to the 1983 and 1992 sales of the Commercial Glass Container Businesses, the Company has indemnified the buyer for certain environmental remediation costs and has retained ownership of certain real property used in the Commercial Glass Container Business which may require environmental remediation. During the years ended December 31, 2004 and 2003, the Company made cash payments related to environmental remediation of $138,000 and $183,000, respectively. As of December 31, 2004, the Company has accrued $305,000 for the expected remaining costs associated with environmental remediation described above and in connection with its current manufacturing plants. The amount of the accrual was based in part on an environmental study performed by an independent environmental engineering firm. The Company accrues costs associated with environmental matters when they become probable and can be reasonably estimated. NOTE 9 - COMPANY PREFERRED STOCK During 2003, the Company authorized 40,000 shares of $.01 par value Series A Preferred Stock. On August 13, 2003, 34,000 shares were issued at a price of $1,000 per share. The preferred shares carry a conversion feature that allows the preferred stock to convert to common stock at a rate of $18,840 per share. The stated value will accrete for a period of six years from the date of issuance at a rate equal to the greater of (i) dividends paid on the common stock on an as-converted basis and (ii) 10% per annum, compounded quarterly. Thereafter, the stated value will accrete at a rate equal to dividends paid on the common stock on an as-converted basis. The preferred stock is not redeemable and is senior to common stock in terms of dividends and liquidation preference. The convertible value of the preferred stock was $34,275,000 and $35,316,000 at December 31, 2004 and 2003, respectively. As a result of the 2004 Extraordinary Dividend, the owners of preferred stock received $4,542,000. As a result of this dividend, the conversion rate was reduced to $16,559 per share. NOTE 10 - COMPANY STOCK OPTION PLANS In conjunction with the Kerr Acquisition on August 26, 1997, the wives of Richard Hofmann, the President and Chief Executive Officer of the Company, Lawrence Caldwell, an Executive Vice President of the Company and Daniel Gresham, a former principal of New Canaan, were each granted an option to purchase 185.185 shares of Common Stock, at an exercise price of $10,000 per share. One-fifth of such option shares were vested and exercisable on the date of grant; an additional one-fifth of such option shares will vest and become exercisable on each anniversary of the date of grant, subject to the continued employment of Mr. Hofmann (in the case of the options held by Mrs. Hofmann and Mrs. Gresham) or Mr. Caldwell (in the case of the options held by Mrs. Caldwell). The option agreements pursuant to which such options were granted (the "Option Agreements") provide that, upon the termination of the employment of Mr. Hofmann or Mr. Caldwell, as applicable, for any reason other than death or disability, or termination without cause, the option shall be exercisable by the optionee for a period of thirty days after cessation of employment to the extent such option was vested on the date of such cessation of employment. The Option Agreements further provide that in the event of (i) termination of employment due to death or disability, (ii) termination of employment by the Company without cause or by Mr. Hofmann or Mr. Caldwell, as applicable, for good reason, or (iii) a Change of Control (as defined in the Option Agreements), the vesting of the option shall accelerate and the option shall become immediately exercisable for all shares of Common Stock covered by the option. In connection with the Sun Coast Acquisition, Mr. Hofmann, Mr. Caldwell, and Mr. Gresham were also each beneficially granted an option to purchase 46.944 shares of Common Stock of the Company, at an exercise price of $10,000 per share. The option agreements entered into with respect to such options contain substantially the same terms as those entered into in connection with the Kerr Acquisition. On December 18, 2003, the option agreements to each Mrs. Hofmann, Mrs. Caldwell, and Mrs. Gresham were amended such that all shares were fully vested as of December 7, 2000. NOTE 10 - COMPANY STOCK OPTION PLANS (CONTINUED) In April 1998, the Company's Board of Directors adopted, and the stockholders approved, the Kerr Group, Inc. 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"). The 1998 Stock Incentive Plan will be administered by the Board of Directors. All directors, officers, employees, consultants and advisors of the Company are eligible for discretionary awards under the 1998 Stock Incentive Plan. The 1998 Stock Incentive Plan provides for stock-based incentive awards, including incentive stock options, non-qualified stock options, restricted stock, performance shares, stock appreciation rights and deferred stock. The 1998 Stock Incentive Plan permits the Board of Directors to select eligible persons to receive awards and to determine certain terms and conditions of such awards, including the vesting schedule and exercise price of each award, and whether such award shall accelerate upon the occurrence of a change in control of the Company. Under the 1998 Stock Incentive Plan, options, restricted stock, performance shares or stock appreciation rights covering no more than 80% of the shares reserved for issuance under the 1998 Stock Incentive Plan may be granted to any participant in any one year. A total of 366.520 shares have been reserved for issuance under the 1998 Stock Incentive Plan. As of December 31, 2004, 286.300 non-qualified stock options have been issued under the 1998 Stock Incentive Plan. No other stock-based incentive awards have been granted under this 1998 Stock Incentive Plan. In October 2003, the Company's Board of Directors adopted and the stockholders approved the Kerr Group, Inc. 2003 Stock Option Plan (the "2003 Stock Option Plan"). The 2003 Stock Option Plan will be administered by the Board of Directors. All directors, officers, employees, consultants and advisors of the Company are eligible for discretionary awards under the 2003 Stock Option Plan. The 2003 Stock Option Plan permits the Board of Directors to select eligible persons to receive awards and to determine certain terms and conditions of such awards, including the vesting schedule and exercise price of each award, and whether such award shall accelerate upon the occurrence of a change in control of the Company. A total of 3,250 shares have been reserved for issuance under the 2003 Stock Option Plan. As of December 31, 2004, 3,236.400 non-qualified stock options have been issued under the 2003 Stock Option Plan. The board further allocated the options grants into three pools of options. Pool A options were granted with a strike price that escalates from $23,460 on January 1, 2004 to $25,640 on December 31, 2005 and ultimately to $32,310 at the time of their expiration on December 31, 2006. Pool A shares vest at the time of a change of control, as defined. Pool B options were granted with a strike price of $20,000 on January 1, 2004. Pool B options allow for 50% expiration of shares on December 31, 2005 with the remaining expiring on December 31, 2006. Pool B shares are fully vested at time of grant. Pool C options were granted with a strike price of $17,130, a five year vesting period and a ten year term. All shares fully vest upon a change in control, as defined. In October 2004, The Company's Board of Directors approved a total of 132 non- qualified stock options to be granted to Mr. Hofmann, Mr. Caldwell and Mr. Gresham. Each Mr. Hofmann and Mr. Caldwell were granted 49 shares and Mr. Gresham was granted 34 shares at a strike price of $21,719. The shares vest at the earlier of seven years from date of grant or a change in control, as defined. In conjunction with the Dividend (Note 1), all strike prices of options outstanding under all plans as of August 11, 2004, were equitably adjusted to 90.5% of the stated exercise price. NOTE 10 - COMPANY STOCK OPTION PLANS (CONTINUED) The Company accounts for stock-based compensation as described in Note 1. The Company elected to continue the intrinsic-value method of expense recognition. If compensation cost for these plans had been determined using the fair-value method prescribed by SFAS No. 123, the Company's results would have been reduced to the proforma amounts indicated below.
------------------------------------------------------------------------------------------ Year Ended Year Ended December 31, December 31, 2004 2003 ------------------------------------------------------------------------------------------ Net income (loss) before preferred stock dividends $12,922,000 $30,707,000 Compensation expense 1,002,000 168,000 ----------- ----------- Proforma net income (loss) $11,920,000 $30,539,000 =========== ===========
The fair value of each option was estimated on the grant date using the Black- Scholes option-pricing model. Based on the assumptions presented below, the weighted average fair value of options granted was $792 and $5,428 per option in 2004 and 2003, respectively.
------------------------------------------------------------------------------------------ 2004 2003 ------------------------------------------------------------------------------------------ Expected life in years 4 years 10 years Risk-free interest rate 4.37% 4.07% Volatility 0.00% 0.00% Dividend yield 0.00% 0.00%
A summary of stock option activity is presented below.
------------------------------------------------------------------------------------------ Weighted Average Shares Exercise Price ------------------------------------------------------------------------------------------ 2004 Outstanding, beginning of year 982.687 $11,170 Granted 3,368.400 21,058 Exercised (10.000) 14,500 Forfeited/canceled (102.433) 15,682 ----------- ------- Outstanding, end of year 4,238.654 $18,704 Exercisable, end of year 1,789.094 $14,142 Available for grant, end of year 93.820 2003 Outstanding, beginning of year 867.687 $10,460 Granted 115.000 16,500 Forfeited/canceled -- -- ------- ------- Outstanding, end of year 982.687 $11,170 Exercisable, end of year 840.738 $10,280 Available for grant, end of year 80.220
For options outstanding at the end of 2004, exercise prices consisted of the following: $9,050; $14,489; $14,932; $15,502; $18,099; $21,719, and $22,216. The weighted average remaining life was approximately 2.8 years. NOTE 11 -LEASE COMMITMENTS The Company occupies certain manufacturing facilities, warehouse facilities and office space and uses certain automobiles, machinery and equipment under noncancelable lease arrangements. Rent expense related to these agreements was $7,695,000 and $3,752,000 for the years ended December 31, 2004 and 2003, respectively. At December 31, 2004, the Company was obligated under various noncancelable operating leases. Future minimum rental commitments under the Company's leases are as follows:
----------------------------------------------------------------------------- Years Ended December 31, Total Commitment ----------------------------------------------------------------------------- (in thousands) 2005 $ 7,940 2006 7,019 2007 5,299 2008 5,314 2009 5,205 2010 and thereafter $60,309
The Company is not a party to contingent lease payments. The leases for real estate for the Company's Bowling Green, Kentucky; Jackson, Tennessee; Anaheim, California; Oxnard, California; and Easthampton, Massachusetts locations each contain provisions for escalating lease payments each year with a range of 2.5%-3.0% each year. Each of the real estate leases contain options to extend the term of the lease one to five years from date of expiration. NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings and litigation arising in the normal course of business. In the opinion of management, the outcome of such proceedings will not materially affect the Company's consolidated financial position or results of operations. NOTE 13 - RELATED PARTY TRANSACTIONS The Company and Fremont entered into an Advisory Services Agreement (the "Advisory Services Agreement") dated August 13, 2003. The Advisory Services Agreement provides that Fremont will provide Kerr such services as may from time to time be reasonably requested by the Company and which are necessary and appropriate for the operation of the business of the Company. The Advisory Services Agreement provides for the semi-annual payment to Fremont of $275,000, and for the reimbursement of Fremont for its expenses reasonably incurred in providing services for the Company. The Advisory Services Agreement also indemnifies Fremont for any and all losses, claims, damages and liabilities related to or arising out of the Advisory Services Agreement. The Advisory Services Agreement may be terminated by mutual consent of the parties. The Advisory Services Agreement also called for a payment of $1,687,500 plus expenses of transaction services related to the 2003 Acquisition (Note 1) and services related to the refinancing of the Company's long term debt (Note 7). Included in selling, general and administrative expenses was $664,000 and $401,000 in 2004 and 2003, respectively, related to the Advisory Services Agreement. As of December 31, 2004 and 2003, the Company has $229,000 and $260,000, respectively, in other current liabilities related to the Advisory Services Agreement. On January 1, 2003, the Company entered into a letter agreement with New Canaan (the "New Canaan Agreement"), for the provision of certain strategic planning and advisory services to the Company by New Canaan. The agreement provides for the payment to New Canaan of an annual fee of $600,000 through December 2005, so long as Fremont remains the majority stockholder of the Company and Mr. Caldwell and Mr. Hofmann remain employed by the Company. Included in selling, general and administrative expenses was $600,000 for each of the years ended December 31, 2004 and 2003, respectively, related to the New Canaan Agreement. In conjunction with the New Canaan agreement, the Company also entered into employment agreements with each Richard Hofmann and Lawrence Caldwell, each of whom are partners in New Canaan. The employment agreements expire December 31, 2005 and provide for non-competition arrangements. KERR GROUP, INC. Consolidated Financial Statements December 31, 2003 Independent Auditors' Report To the Stockholders and Board of Directors of Kerr Group, Inc.: We have audited the accompanying consolidated balance sheets of Kerr Group, Inc. and subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, cash flows and stockholders' equity for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Kerr Group, Inc. and subsidiaries for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, before the revision described in Note 1 to the financial statements, in their report dated March 13, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the financial position of Kerr Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed above, the 2001 financial statements of Kerr Group, Inc. and subsidiaries were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of Kerr Group, Inc. and subsidiaries other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole. /s/ KMPG LLP March 1, 2004 Harrisburg, Pennsylvania BALANCE SHEETS iv.
-------------------------------------------------------------------------------------------------------------- December 31, 2003 2002 -------------------------------------------------------------------------------------------------------------- (in thousands except share data) ASSETS Current assets Cash and cash equivalents $ 5,517 $ 40 Receivables - primarily trade accounts, less allowance for doubtful accounts of $1,591 in 2003 and $501 in 2002 34,318 12,851 Inventories Raw materials and work in process 14,809 5,279 Finished goods 15,435 8,071 --------- --------- Total inventories 30,244 13,350 Prepaid expenses and other current assets 1,496 326 Deferred income taxes 4,647 - --------- --------- Total current assets 76,222 26,567 --------- --------- Property, plant and equipment, at cost Land 10,056 408 Buildings and improvements 26,467 6,710 Machinery and equipment 175,063 111,531 Furniture and office equipment 5,111 3,981 --------- --------- 216,697 122,630 Accumulated depreciation (72,686) (56,617) --------- --------- Net property, plant and equipment 144,011 66,013 Deferred income taxes 18,571 - Goodwill, net of amortization of $11,978 in 2003 and 2002 110,292 82,599 Other intangibles, net of amortization of $432 in 2003 and $295 in 2002 1,580 343 Other assets, net of amortization of $463 in 2003 and $2,485 in 2002 7,591 1,770 --------- --------- $358,267 $177,292 ========= =========
See accompanying notes to consolidated financial statements. BALANCE SHEETS v.
--------------------------------------------------------------------------------------------------------------- December 31, 2003 2002 --------------------------------------------------------------------------------------------------------------- (in thousands except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 9,713 $104,800 Accounts payable 18,923 14,207 Other current liabilities 16,234 10,905 --------- --------- Total current liabilities 44,870 129,912 --------- --------- Long-term debt 204,150 1,050 Retirement benefits 15,182 17,803 Other long-term liabilities 2,663 755 --------- --------- Total liabilities 266,865 149,520 --------- --------- Stockholders' equity Preferred stock, $.01 par value per share, 40,000 shares authorized, 1 - 34,000 shares issued at December 31, 2003 Common stock, $.01 par value per share, 50,000 and 10,000 shares authorized, 6,290.821 and 6,290.821 shares issued at December 31, 2003 and 2002, respectively 1 1 Additional paid-in capital 98,357 63,042 Retained earnings (deficit) 1,388 (28,003) Accumulated other comprehensive loss (8,111) (7,034) Treasury stock, 14.609 shares at December 31, 2003 and 2002 (234) (234) --------- --------- Total stockholders' equity 91,402 27,772 --------- --------- $358,267 $177,292 ========= =========
See accompanying notes to consolidated financial statements. STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2003 2002 ---------------------------------------------------------------------------------------------------- (in thousands) Net sales $227,132 $143,273 Cost of sales 166,589 93,326 Inventory step-up 1,153 - --------- --------- Gross profit 59,390 49,947 Selling, general and administrative expenses 40,792 29,896 Restructuring costs and other charges 2,448 1,660 --------- --------- Operating income 16,150 18,391 Interest expense, net 7,672 6,457 Gain on sale of real estate (781) - --------- --------- Income (loss) before income taxes 9,259 11,934 Provision (benefit) for income taxes (21,448) 31,308 --------- --------- Net income (loss) before preferred stock dividends 30,707 (19,374) Preferred stock dividends 1,316 - --------- --------- Net income (loss) attributable to common stockholders $ 29,391 $(19,374) ========= =========
See accompanying notes to consolidated financial statements. STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, 2003 December 31, 2002 ---------------------------------------------------------------------------------------------------------------------------- (in thousands) CASH FLOW PROVIDED BY OPERATIONS Net income (loss) before preferred stock dividends $ 30,707 $(19,374) Adjustments to reconcile net income (loss) to net cash provided by operations Depreciation and amortization 19,898 15,620 Change in deferred income taxes (21,448) 31,308 (Gain) loss on sale of fixed assets (760) - Other, net (262) (254) Changes in other operating working capital Receivables (1,979) 1,210 Inventories (961) (1,967) Other current assets (709) (195) Accounts payable (7,200) 2,312 Accrued expenses 6,162 (2,909) Expenses associated with restructuring 2,448 1,660 Payments associated with restructuring (2,744) (1,524) Payments associated with acquisition (2,899) (72) Inventory step-up 1,153 - Benefit plan funding in excess of expense (3,744) (4,417) --------- --------- Total cash flow provided by operations 17,662 21,398 CASH FLOW USED BY INVESTING ACTIVITIES Capital expenditures (19,691) (12,796) Proceeds from sale of fixed assets 6,120 2,068 Business acquisition (133,908) - --------- --------- Cash flow used by investing activities (147,479) (10,728) CASH FLOW PROVIDED BY (USED BY) FINANCING ACTIVITIES Net repayment of long-term debt (85,965) (9,402) Net repayment under secured revolving credit facility (15,625) (3,375) Net (repayment) borrowing under Tranche C Facility (5,400) 1,400 Payments associated with financing (6,716) - Debt proceeds 215,000 - Proceeds from issuance of preferred stock 34,000 - --------- --------- Cash flow provided (used by) by financing activiti 135,294 (11,377) CASH AND CASH EQUIVALENTS Increase (decrease) during the period 5,477 (707) Balance at beginning of the period 40 747 --------- --------- Balance at end of the period $ 5,517 $ 40 ========= =========
See accompanying notes to consolidated financial statements. STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
----------------------------------------------------------------------------------------------------------------------------------- Number of Number of Shares of Shares of Company Company Accumulated Preferred Common Company Additional Retained Other Total Stock Preferred Stock Common Paid-In Earnings Treasury Comprehensive Stockholders' Issued Stock Issued Stock Capital (Deficit) Stock Loss Equity ----------------------------------------------------------------------------------------------------------------------------------- (in thousands except share data) Balance, December 31, 2001 - $ - 6,290.821 $ 1 $63,042 $ (8,629) $ (234) $(5,827) $ 48,353 (restated) Net income - - - - - (19,374) - - (19,374) Minimum pension liability - - - - - - - (1,207) (1,207) adjustment net of tax benefit of $730 ----- ---- --------- ---- ------- --------- ------- -------- --------- Balance, December 31, 2002 - $ - 6,290.821 $ 1 $63,042 $(28,003) $ (234) $(7,034) $ 27,772 (restated) Issuance of preferred stock 34,000 1 - - 33,999 - - - 34,000 Preferred stock dividends - - - - 1,316 (1,316) - - - Net income - - - - - 30,707 - - 30,707 Minimum pension liability - - - - - - - (701) (701) adjustment net of tax benefit of $422 Fair market value adjustment - - - - - - - - (376) (376) hedging programs net of tax benefit of $227 ------ ---- --------- ---- ------- --------- ------- -------- --------- Balance, December 31, 2003 34,000 $ 1 6,290.821 $ 1 $98,357 $ 1,388 $ (234) $(8,111) $ 91,402 ====== ==== ========= ==== ======= ========= ======= ======== =========
Year Ended December 31, --------------------------------------------------------------------------------------------------------------------------- 2003 2002 --------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) Net income (loss) before preferred stock dividends $ 30,707 $(19,374) Minimum pension liability adjustment, net of tax benefit (701) (1,207) Fair market value adjustment - hedging programs, net of tax benefit (376) - --------- --------- Total comprehensive income (loss) $ 29,630 $(20,581) ========= =========
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL DESCRIPTION OF BUSINESS The Company is a subsidiary of Fremont Partners, L.P. The Company's operations consist of the manufacture and sale of a variety of plastic packaging products including child-resistant closures, tamper-evident closures, prescription packaging products and other plastic closures and containers. The Company uses a significant amount of resin in its manufacturing process. From time to time, the Company has experienced substantial increases in the cost of resin. To the extent that the Company is unable to pass on resin cost increases, the cost increases could have a significant impact on the results of operations of the Company. BASIS OF PRESENTATION The consolidated financial statements represent the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 2003 and 2002, and the reported amounts of income and expenses. Actual results could differ from those estimates. The Company's Senior Secured Credit Facility was scheduled to expire on October 31, 2003 (see Note 7). The Company did not complete its refinancing of this facility until August 13, 2003 and, therefore, at December 31, 2003, the Senior Secured Credit Facility was classified in the current portion of long-term debt on the balance sheet. ACQUISITIONS On August 13, 2003, the Company completed its acquisition of substantially all of the net assets of Setco, Inc., Tubed Products, Inc. and O. G. Dehydrated, Inc. (all wholly owned subsidiaries of McCormick, Inc.), collectively known as the "2003 Acquisition", for $133,908,000 including $3,718,000 of deal related costs. The 2003 Acquisition was consummated as part of the Company's overall strategy to grow its business within the packaging industry. Setco and Tubed Products brought strong presences in the bottle and tube markets to strengthen Kerr's overall position within the packaging industry. The 2003 Acquisition was funded by the proceeds from issuance of preferred stock of $34,000,000 (See Note 9) and proceeds associated with the refinancing of the Company's credit facilities. The purchase price was allocated to the specifically identifiable net assets acquired as follows: $37,047,000 to current assets; $80,863,000 to property, plant and equipment; $1,374,000 to other intangibles; $1,170,000 to deferred income taxes; $14,961,000 to current liabilities and $28,415,000 to goodwill. The goodwill was allocated $7,257,000 to Setco (Containers Division) and $21,158,000 to Tubed Products (Tubes Division). The goodwill deductible for tax purposes related to the 2003 Acquisition was $26,473,000. The results of operations of the 2003 Acquisition are included in the consolidated financial results from the date of acquisition. CASH EQUIVALENTS Cash equivalents consist only of investments that have an original maturity of three months or less when purchased, are readily convertible to known amounts of cash and have insignificant risk of changes in value because of changes in interest rates. INVENTORIES Inventories are valued at the lower of cost or market, determined by the use of the first-in, first-out method. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are valued at cost and depreciated using the straight-line method of depreciation over the estimated useful lives of the assets. The estimated useful lives used in computing depreciation expense are as follows: Buildings and improvements 5 to 30 years Machinery and equipment 3 to 15 years Furniture and office equipment 5 to 10 years When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed and any resulting gain or loss is reflected in operating results. The policy of the Company is to charge amounts expended for maintenance and repairs to expense and to capitalize expenditures for major replacements and betterments. IMPAIRMENT OF LONG TERM ASSETS The Company follows Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144 requires that impairments, measured using fair value, be recognized whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). This statement expanded the previous definition of derivatives to include certain additional transactions. Entities are required to record derivatives at their fair values and recognize any changes in fair value in current period earnings, unless specific hedge criteria are met, then charged to specific components of equity. BUSINESS COMBINATIONS AND INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 Business Combinations ("SFAS No. 141") and No. 142 Goodwill and Other Intangible Assets ("SFAS No. 141"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and eliminates the use of pooling of interests for transactions initiated subsequent to June 30, 2001. SFAS No. 142 eliminated the amortization to expense of goodwill recorded as a result of such combinations, but requires goodwill to be evaluated for impairment at least annually. Write-downs of the balance, if necessary, are to be charged to operating results in the period in which the impairment is determined. Goodwill existing prior to the issuance of the statement was required to be amortized through December 31, 2001. The Company evaluated its recorded goodwill under SFAS No. 142 as of December 31, 2002 and as of December 31, 2003 and concluded that there was no impairment at those dates. As a result of not amortizing goodwill, the Company realized a benefit of approximately $3,038,000 in 2002. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Other intangible assets relate primarily to an intangible related to a long- term contract acquired in the 2003 Acquisition ("the Customer Intangible") and patent costs. The Customer Intangible is being amortized over the term of the related contract with approximately seven years remaining. Patents are amortized over their useful lives of approximately 17 years. Amortization expense related to intangible assets totaled $135,000 and $65,000 for the years ended December 31, 2003 and 2002, respectively. Future amortization expense is expected to be as follows:
2004 $253,000 2005 253,000 2006 253,000 2007 253,000 2008 and thereafter 568,000
ENVIRONMENTAL RESERVES Environmental liabilities recognized represent the Company's best estimate of remediation expenditures, including legal, consulting and other professional fees, that are probable and that can be reasonably estimated. Environmental costs are expensed unless they increase the value of the related asset and/or prevent or mitigate future contamination (see Note 8). REVENUE RECOGNITION The Company recognizes revenue at the time the product is shipped to the customer. The Company does not have a significant concentration of credit risk with any individual customer. RESEARCH AND DEVELOPMENT Research and development expenses included in selling, general and administrative expenses were $1,593,000 and $2,012,000 for the years ended December 31, 2003 and 2002, respectively. PENSIONS AND OTHER POSTRETIREMENT BENEFITS Statement of Financial Accounting Standards No. 87 requires that a company record an additional minimum pension liability to the extent that a company's accumulated pension benefit obligation exceeds the fair value of pension plan assets and accrued pension liabilities. This additional minimum pension liability is offset by an intangible asset, not to exceed prior service costs of the pension plan. Amounts in excess of prior service costs are reflected as a reduction in stockholders' equity and the change is reflected as a reduction in Other Comprehensive Income, net of any tax benefits. The Company accounts for postretirement benefits in accordance with Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash, accounts receivable, accounts payable, other current assets and other current liabilities approximate their carrying amount given the short-term maturity of those instruments. The fair values of the Company's debt and derivative instruments are disclosed in Note 7. STOCK OPTIONS Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), requires the Company to choose between two different methods of accounting for stock options. The statement defines a fair-value-based method of accounting for stock options but allows an entity to continue to measure compensation cost for stock options using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In December 2002, the Financial Accounting Standards Board (APB) issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 clarifies the accounting for options issued in prior periods when a company elects to transition from APB 25 accounting to SFAS No. 123 accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. The Corporation has elected to continue application of APB 25 in accounting for its stock-based compensation plans and, accordingly, the transition accounting provided by SFAS No. 148 had no impact on the Company's financial statements. All required disclosures have been provided in Note 10. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FREIGHT OUT Freight out expenses included in selling, general and administrative expenses were $8,597,000 and $6,901,000 for the years ended December 31, 2003 and 2002, respectively. STOCK SPLIT All share and per share data has been restated to reflect the 1000 for 1 common stock split on October 17, 2003. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statements to conform to 2003 presentation. NOTE 2 - BUSINESS SEGMENTS The Company accounts for business segments in accordance with Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires disclosures based on the Company's business segments used by management to make operating decisions and measure performance. The accounting policies of the business segments are consistent with those described in Note 1. The Company's business segments are as follows: CLOSURES DIVISION The Company's closures division produces custom and stock closures for pharmaceutical markets and selected segments of food and beverage markets. The division's product line includes two-piece child-resistant, tamper-evident and standard closures. CONTAINERS DIVISION The Company's container division produces custom and stock bottles for selected segments of food and beverage markets, the personal care industry as well as bottles and vials for the pharmaceutical market, drug wholesalers, and drug retailers. TUBES DIVISION The Company's tubes division produces custom and stock tubes for various end use markets such as selected segments of the cosmetic, food, pharmaceutical and household chemical markets. NOTE 2 - BUSINESS SEGMENTS (CONTINUED) Summary business segment information is included in the following chart:
---------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2003 2002 ---------------------------------------------------------------------------------------------- (in thousands) Net sales Closures $ 96,912 $ 96,177 Containers 89,575 47,096 Tubes 40,645 - --------- --------- $227,132 $143,273 ---------------------------------------------------------------------------------------------- Operating income (loss) before restructuring costs and other charges (a) Closures $ 13,633 $ 17,730 Containers 5,832 5,350 Tubes 2,588 - Corporate (3,455) (3,029) --------- --------- $ 18,598 $ 20,051 ---------------------------------------------------------------------------------------------- Assets Closures $110,714 $107,603 Containers 106,413 26,799 Tubes 83,761 - Corporate (b) 57,379 42,890 --------- --------- $358,267 $177,292 ---------------------------------------------------------------------------------------------- Depreciation and amortization Closures $ 9,997 $ 10,593 Containers 6,723 3,778 Tubes 2,207 - Corporate 971 1,249 --------- --------- $ 19,898 $ 15,620 ---------------------------------------------------------------------------------------------- Capital expenditures Closures $ 11,709 $ 10,794 Containers 5,123 1,699 Tubes 1,631 - Corporate 1,228 303 --------- --------- $ 19,691 $ 12,796 ----------------------------------------------------------------------------------------------
(a)The Company does not allocate corporate expenses to the business segments other than research and development expenses. (b)Corporate assets consist primarily of goodwill of $41,134 and $41,134 related to the Kerr Acquisition and deferred income taxes of $23,218 and $0 for 2003 and 2002, respectively. NOTE 3 - INCOME TAXES The provision (benefit) for income taxes consists of the following:
----------------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2003 2002 ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Current U.S. Federal $ 189 $ - State - - --------- -------- Total current $ 189 $ - Deferred U.S. Federal $(19,321) $27,542 State (2,316) 3,766 --------- -------- Total deferred $(21,637) $31,308 --------- -------- Total provision (benefit) for income taxes $(21,448) $31,308 ========= ========
Total provision (benefit) for income taxes from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to earnings (loss) before income taxes as a result of the following:
----------------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended December 31, December 31, 2003 2002 ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Computed "expected" tax provision $ 3,148 $ 4,058 Increase (reduction) in provision resulting from: State income tax (benefit) provision, net of Federal tax effect 469 1,272 Increase (decrease) in valuation allowance (25,088) 26,382 Other 23 (404) --------- -------- Actual tax (benefit) provision $(21,448) $31,308 ========= ========
NOTE 3 - INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 2003 and 2002 are as follows:
------------------------------------------------------------------------------------------------------------- December 31, 2003 2002 ------------------------------------------------------------------------------------------------------------- (in thousands) Deferred income tax assets: Net operating loss carryforwards $23,227 $26,576 Minimum pension liability 4,708 4,289 Environmental liability 167 236 Tax credit carryforwards 1,125 936 Accrued retiree benefits 3,252 3,344 Deferred gain on sale of real estate 765 185 Fair market value liability - hedging programs 227 - Allowance for doubtful accounts 536 188 Inventories 1,228 527 Accrued vacation pay 525 295 Restructuring and severance reserves 486 168 Accrued self-insurance 850 524 Acquisition related reserves 474 164 Other 787 568 --------- --------- Total gross deferred income tax assets 38,357 38,000 Less valuation reserve for deferred income tax assets (3,052) (28,140) --------- --------- Deferred income tax assets, net of valuation reserve 35,305 9,860 Deferred income tax liabilities: Property, plant and equipment, principally due to differences in depreciation (9,046) (8,109) Accrued pension liability (2,754) (1,734) Goodwill (249) - Other (38) (17) --------- --------- Total gross deferred income tax liabilities (12,087) (9,860) --------- --------- Net deferred income tax assets $23,218 $ - ========= =========
NOTE 3 - INCOME TAXES (CONTINUED) As of December 31, 2003, the Company has net operating losses for Federal income tax purposes of $59,521,000, which are available to offset future Federal taxable income. The net operating losses generated prior to August 26, 1997, amounting to $13,311,000, are subject to limitation under Section 382 of the Internal Revenue Code. The remaining net operating losses were generated subsequent to August 26, 1997 and are not subject to limitations. The net operating loss carryforwards will expire as follows: $512,000 in 2010; $11,597,000 in 2011; $9,791,000 in 2012; $21,599,000 in 2018; $10,437,000 in 2020; $5,559,000 in 2021; and $26,000 in 2022. The Company has net operating losses for state income tax purposes. As of December 31, 2003, the Company has recorded $2,985,000 of state income taxes net of federal tax benefit. The Company also has an alternative minimum tax credit carryforward of $1,125,000 with no expiration date. There were no net cash payments related to income taxes for 2003 and 2002. The Company has recorded a valuation allowance of $3,052,000 and $28,140,000 as of December 31, 2003 and 2002, respectively. The valuation reserve as of December 31, 2002 was attributable to the uncertainty associated with the Senior Secured Credit Facility that was due to expire on October 31, 2003 (see Note 1 and Note 7). During 2003, the debt was refinanced, therefore, the valuation reserve was reduced as the Company will more likely than not recover the remaining deferred tax assets. NOTE 4 - OTHER LONG TERM ASSETS At December 31, 2003 and 2002, other assets consisted of the following:
-------------------------------------------------------------------------------------------- 2003 2002 -------------------------------------------------------------------------------------------- (in thousands) Repair parts $1,001 $1,052 Certificates of deposit 45 45 Deferred financing costs, net of amortization of $463 in 2003 6,545 673 and $2,485 in 2002 ------ ------ $7,591 $1,770 ====== ======
Deferred financing costs are amortized over the term of the related financing with approximately seven years of amortization remaining. Amortization expense related to deferred financing costs totaled $860,000 and $1,028,000 for the years ended December 31, 2003 and 2002, respectively. Future amortization expense is expected to be as follows:
2004 $1,058,000 2005 1,058,000 2006 1,058,000 2007 1,058,000 2008 and thereafter 2,313,000
NOTE 5 - OTHER CURRENT LIABILITIES At December 31, 2003 and 2002, other current liabilities consisted of the following:
------------------------------------------------------------------------------ 2003 2002 ------------------------------------------------------------------------------ (in thousands) Accrued wages, bonus and vacation pay $3,882 $2,328 Accrued interest 206 - Accrued and withheld taxes 116 22 Accrued acquisition costs 1,258 133 Accrued insurances 2,657 1,407 Accrued environmental 200 200 Deferred acquisition liability - 1,544 Accrued restructuring expenses 1,550 571 Deferred gain on sale of real estate 218 164 Other accrued expenses 6,147 4,536 ------- ------- Total other current liabilities $16,234 $10,905 ======= =======
Restructuring costs and other charges:
------------------------------------------------------------------------------ Year ended December 31, 2003 2002 ------------------------------------------------------------------------------ Severance and employee benefits $ 371 $ 476 Relocation and start-up expenses 440 700 Merger and acquisition activities 910 484 Loss on debt refinancing 181 - One-time expenses related to 2003 acquisition 546 - ------ ------ Total restructuring expenses $2,448 $1,660 ====== ====== Total restructuring related payments $2,744 $1,524 ====== ======
During 2003, the Company sold its purchase option for its Bowling Green, Kentucky and Jackson, Tennessee facilities for $5,900,000. The buyer exercised the purchase option and the Company entered into an eighteen year lease on these properties. The sale of these options yielded a gain of $1,710,000, which is deferred and amortized over the lease term, and $95,000 is recorded in other current liabilities and $1,580,000 in other long-term liabilities. During 2002, the Company closed its Cleveland, Ohio leased warehouse. Also during 2002, the Company sold its Sarasota, Florida warehouse for net proceeds of $2,068,000 and recognized a gain of $493,000 of which $123,000 is in other current liabilities and $236,000 in other long-term liabilities as of December 31, 2003. NOTE 6 - RETIREMENT BENEFITS PENSIONS The Company has two defined benefit pension plans (the "Retirement Plans"), which cover substantially all former employees and former union employees at the Company's former Lancaster facility. The Retirement Plans generally provide benefits based on years of service and average final pay. In March 1999, the Company modified its agreement with the Pension Benefit Guarantee Corporation (the "PBGC"). Under this agreement, the Company agreed to maintain certain funding levels in its pension plans. The Company is in compliance with the PBGC agreement as of December 31, 2003. The Company has a pension restoration plan which is an unfunded plan providing benefits to participants not payable by the Retirement Plan because of the limitations on benefits imposed by the Internal Revenue Code of 1986, as amended. The aggregate annual accrued benefit for each participant under the combination of the Retirement Plans and the Pension Restoration Plan when expressed as a single-life annuity is limited to $200,000. The following table sets forth a reconciliation of the changes in the Company sponsored defined benefit pension plans:
------------------------------------------------------------------------------------------------------ Year ended December 31, 2003 2002 ------------------------------------------------------------------------------------------------------ (in thousands) CHANGE IN BENEFIT OBLIGATIONS: Benefit obligation at beginning of year $ 34,762 $ 34,374 Interest cost 2,254 2,405 Actuarial losses 1,750 1,398 Benefit payments (3,385) (3,415) ---------- --------- Benefit obligation at end of year 35,381 34,762 CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 26,218 24,668 Actual return on plan assets 2,674 1,826 Employer contribution 3,601 3,139 Benefit payments (3,385) (3,415) ---------- --------- Fair value of plan assets at end of year 29,108 26,218 Funded Status (6,273) (8,544) Unrecognized net actuarial loss 12,521 11,364 ---------- --------- Net amount recognized $ 6,248 $ 2,820 ========== ========= Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ (6,270) $ (8,575) Adjustment to recognize minimum pension liability 12,518 11,395 ---------- --------- Net amount recognized $ 6,248 $ 2,820 ========== =========
NOTE 6 - RETIREMENT BENEFITS (CONTINUED) Assumptions used in computing the funded status of the plans were as follows:
December 31, December 31, 2003 2002 ------------- ------------- Discount rate 6.25% 6.75% Rate of increase in compensation levels 5.00% 5.00% Expected long-term rate of return on assets 8.75% 8.75%
Net pension (income) expense includes the following components:
Year Ended Year Ended December 31, 2003 December 31, 2002 ----------------- ----------------- (in thousands) Interest cost on projected benefit obligation $ 2,254 $ 2,405 Expected return on assets (2,609) (2,494) Net amortization and deferral 531 69 -------- -------- Net pension expense $ 176 $ (20) ======== ========
The majority of all pension plan assets are held by a master trust created for the collective investment of the plans' funds, as well as in private placement insurance contracts. At December 31, 2003, assets held by the master trust consisted of cash, money market funds and high yield bonds. RETIREE HEALTH CARE AND LIFE INSURANCE The Company provides certain health care and life insurance benefits for retired employees and their spouses. The costs of such benefits are shared by retirees through one or more of the following: a) deductibles, b) co-payments and c) retiree contributions. Salaried employees hired prior to September 1, 1992, and certain hourly employees may become eligible for those benefits if they reach retirement age while working for the Company. The Company does not provide retiree health care and life insurance benefits for salaried employees hired after September 1, 1992. Health care and life insurance benefits provided by the Company are not funded in advance, but rather are paid by the Company as the costs are actually incurred by the retirees. NOTE 6 - RETIREMENT BENEFITS (CONTINUED) The following table sets forth a reconciliation of the changes in the Company sponsored retiree health care and life insurance plans.
Year ended December 31, 2003 2002 ------------------------------------------------------------------------------------------------- (in thousands) CHANGE IN BENEFIT OBLIGATIONS: Accumulated postretirement benefit obligation at beginning of year $ 7,588 $ 8,295 Service cost 20 17 Interest cost 1,216 573 Actuarial (gains)/losses 2,099 226 Benefit payments (1,334) (1,523) ---------- ---------- Accumulated postretirement benefit obligation at end of year 9,589 7,588 ---------- ---------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year - - Employer contribution 1,334 1,523 Benefit payments (1,334) (1,523) ---------- ---------- Fair value of plan assets at end of year - - ---------- ---------- Funded Status (9,589) (7,588) Unrecognized net actuarial gain 943 (1,303) ---------- ---------- Net amount recognized $ (8,646) $ (8,891) ========== ==========
Assumptions used in computing the funded status of the plans were as follows:
December 31, 2003 December 31, 2002 ----------------- ----------------- Discount rate 6.25% 6.75% Health care cost trend rate 7.00% trending 7.50% trending down to 4.50% down to 5.00%
Retiree health care and life insurance expense included the following components:
Year Ended Year Ended December 31, 2003 December 31, 2002 ------------------ ------------------ (in thousands) Service cost (benefit earned during period) $ 20 $ 17 Interest cost on accumulated benefit obligation 1,216 573 Net amortization and deferral (49) (248) -------- -------- Net retiree health care and life insurance expense $1,187 $ 342 ======== ========
NOTE 6 - RETIREMENT BENEFITS (CONTINUED) The effect of a one percentage point annual increase in these assumed health care cost trend rates at December 31, 2003, would increase the postretirement benefit obligation by approximately $266,000 and would increase the service and interest cost components of the annual expense by approximately $19,000. The effect of a one percentage point annual decrease in these assumed health care cost trend rates at December 31, 2003, would decrease the postretirement benefit obligation by approximately $245,000 and would decrease the service and interest cost components of the annual expense by approximately $17,000. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Bill") was signed into law. The Medicare Bill expands Medicare benefits, primarily by adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. FASB Staff Position 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" permits deferring the recognition of the new Medicare provisions' impact due to lack of specific authoritative guidance on accounting for the federal subsidy. The Company has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the postretirement benefit obligations and net periodic costs reported in the accompanying financial statements and notes do not reflect the impact of this legislation. Adoption of this standard when final guidance is issued is not expected to have a material impact on the Company's financial statements. NOTE 7 - DEBT Debt consists of the following:
December 31, 2003 2002 ------------------------------------------------------------------------------------------------------------------- (in thousands) $215 million Term Loan Facility bearing interest at a rate equal to Libor plus 350 basis points or the Base Rate plus 225 basis points. $212,813 $ - $30 million Revolving Credit Facility bearing interest at a rate equal to Libor plus 300 basis points or the Base Rate plus 175 basis points. - - $25 million Revolving Credit Facility bearing interest at a rate equal to LIBOR plus 225 basis points or the Base Rate plus 75 basis points - 15,625 $50 million Term Loan Facility bearing interest at a rate equal to LIBOR plus 225 basis points or the Base Rate plus 75 basis points - 35,000 $50 million Term Loan Facility bearing interest at a rate equal to LIBOR plus 325 basis points or the Base Rate plus 175 basis points - 48,625 $15 million Facility bearing interest at a rate equal to LIBOR plus 175 basis points or the Base Rate plus 50 basis points - 5,400 Industrial Development Revenue bonds bearing interest at 78% of prime 1,050 1,200 -------- -------- 213,863 105,850 Less: Current Portion 9,713 104,800 -------- -------- Total Long Term Debt $204,150 $ 1,050 ======== ========
NOTE 7 - DEBT (CONTINUED) On August 13, 2003, the Company entered into a Credit Agreement ("Credit Facility") with a bank for an aggregate amount of $245 million. Borrowings under the Credit Facility was used (i) to repay the outstanding principal and accrued interest on the existing credit facility; (ii) to fund the purchase price of the 2003 Acquisition (See Note 1); (iii) to pay fees and expenses related to the Credit Agreement and 2003 Acquisition; and (iv) to provide for working capital and general corporate purposes of the Company. The Credit Facility is secured by substantially all of the assets of the Company and its subsidiaries (excluding the assets securing the Industrial Development Bonds). The Credit Facility consists of a $30 million working capital facility, which includes a $3 million letter of credit related to the Pension Benefit Guaranty Corporation ("Working Capital Facility") and a $215 million term facility ("Term Facility"). The Working Capital Facility bears interest at LIBOR plus 300 basis points or the Base Rate (defined as the higher of (i) the bank's prime rate and (ii) the Federal Funds Rate plus 50 basis points) plus 175 basis points. The Term Facility bears interest at LIBOR plus 350 basis points or the Base Rate plus 225 basis points. The LIBOR and base rate margins are subject to performance pricing step-downs based upon the Company's total debt to EBITDA or debt ratings. The Company may select interest periods of 1, 2, 3, or 6 months for LIBOR advances. A default rate of interest applies in the Credit Facility in the event of default at a rate of 200 basis points above the applicable interest rates. The Credit Facility requires that the Company maintain minimum fixed charge and interest coverage ratios and maximum coverage ratios and capital spending. The Company previously carried a $140 million Credit Facility ("Senior Secured Credit Facility"). The Senior Credit Facility consisted of a $25 million revolving credit facility ("Senior Secured Revolving Credit Facility"); a $50 million senior secured term facility ("Senior Secured Term Facility A"); a $50 million senior secured term facility ("Senior Secured Term Facility B") and up to $15 million of availability under a Tranche C Facility ("Tranche C Facility"). The Senior Secured Credit Facility was secured by substantially all of the assets of the Company and its subsidiaries (excluding the assets securing the Industrial Development Bonds), 100% of the stock of all domestic subsidiaries of the Company, and 65% of the capital stock of foreign subsidiaries. The Senior Secured Credit Facility was guaranteed by Fremont Acquisition Company, LLC and all existing and hereafter acquired subsidiaries of the Company. The Senior Secured Revolving Credit Facility, Senior Secured Term Facility A, and Senior Secured Term Facility B were to expire October 31, 2003 and the Tranche C Facility was to expire on November 1, 2003. As of December 31, 2003, the Company's long-term debt was payable as follows:
2005 $13,525 2006 18,650 2007 21,650 2008 21,650 2009 and thereafter 128,675 ------- $204,150 =======
During 2003, the Company entered into Interest Rate Swap Agreements with a notional amount of $160,000,000. The agreements call for the Company to receive a variable interest rate based on 90-day LIBOR and to pay fixed interest rates ranging from 1.79% to 2.79%. On March 13, 2001, the Company entered into an Interest Rate Swap Agreement with a notional amount of $120,000,000. The Agreement called for the Company to receive a variable interest rate based on 30-day LIBOR, and to pay a fixed interest rate of 4.80%. The swap was settled every 30 days and concluded on March 16, 2002. NOTE 7 - DEBT (CONTINUED) Included in interest expense is $603,000 and $698,000 of expense related to the Interest Rate Swap Agreements for the years ended December 31, 2003 and 2002, respectively. The Company paid interest of $7,451,000 and $6,949,000 during the years ended December 31, 2003 and 2002, respectively. The carrying value of the Senior Secured Credit Facility approximates fair value given the variable rate components of the debt instruments. NOTE 8 - ENVIRONMENTAL RESERVES The Company has been designated by the Environmental Protection Agency as a potentially responsible party to share in the remediation costs of several waste disposal sites. Pursuant to the 1992 sale of the Metal Crown Business and the 1998 sale of certain plastic operations of Sun Coast, the Company has indemnified the buyer for certain environmental remediation costs. In addition, pursuant to the 1983 and 1992 sales of the Commercial Glass Container Businesses, the Company has indemnified the buyer for certain environmental remediation costs and has retained ownership of certain real property used in the Commercial Glass Container Business which may require environmental remediation. The estimated ultimate liability of the environmental indemnities related to these businesses is not material to the results of operations or the balance sheet of the Company. During the years ended December 31, 2003 and 2002, the Company made cash payments related to environmental remediation of $183,000 and $289,000, respectively. As of December 31, 2003, the Company has accrued $443,000 for the expected remaining costs associated with environmental remediation described above and in connection with its current manufacturing plants. The amount of the accrual was based in part on an environmental study performed by an independent environmental engineering firm. The Company accrues costs associated with environmental matters when they become probable and can be reasonably estimated. NOTE 9 - COMPANY PREFERRED STOCK During 2003, the Company authorized 40,000 shares of $.01 par value Series A Preferred Stock. On August 13, 2003, 34,000 shares were issued at a price of $1,000 per share. The preferred shares carry a conversion feature that allows the preferred stock to convert to common stock at a rate of $18,840 per share. The stated value will accrete for a period of six years from the date of issuance at a rate equal to the greater of (i) dividends paid on the common stock on an as-converted basis and (ii) 10% per annum, compounded quarterly. Thereafter, the stated value will accrete at a rate equal to dividends paid on the common stock on an as-converted basis. The preferred stock is not redeemable and is senior to common stock in terms of dividends and liquidation preference. NOTE 10 - COMPANY STOCK OPTION PLANS In conjunction with the Kerr Acquisition on August 26, 1997, Richard Hofmann, the President and Chief Executive Officer of the Company, Lawrence Caldwell, the Chief Financial Officer of the Company and Daniel Gresham, a principal of New Canaan, were each beneficially granted an option to purchase 185.185 shares of Common Stock, at an exercise price of $10,000 per share. One-fifth of such option shares were vested and exercisable on the date of grant; an additional one-fifth of such option shares will vest and become exercisable on each anniversary of the date of grant, subject to the continued employment of Mr. Hofmann (in the case of the options beneficially held by Mr. Hofmann and Mr. Gresham) or Mr. Caldwell (in the case of the options beneficially held by Mr. Caldwell). The option agreements pursuant to which such options were granted (the "Option Agreements") provide that, upon the termination of the employment of Mr. Hofmann or Mr. Caldwell, as applicable, for any reason other than death or disability, the option shall be exercisable by the optionee for a period of thirty days after cessation of employment to the extent such option was vested on the date of such cessation of employment. In the case of termination of employment due to death or disability, the option is exercisable, to the extent vested, for a period of six months after such date. The Option Agreements further provide that in the event of (i) termination of employment due to death or disability, (ii) termination of employment by the Company without cause or by Mr. Hofmann or Mr. Caldwell, as applicable, for good reason, or (iii) a Change of Control (as defined in the Option Agreements), the vesting of the option shall accelerate and the option shall become immediately exercisable for all shares of Common Stock covered by the option. In connection with the Sun Coast Acquisition, Mr. Hofmann, Mr. Caldwell, and Mr. Gresham were also each beneficially granted an option to purchase 46.944 shares of Common Stock of the Company, at an exercise price of $10,000 per share. The option agreements entered into with respect to such options contain substantially the same terms as those entered into in connection with the Kerr Acquisition. NOTE 10 - COMPANY STOCK OPTION PLANS (CONTINUED) In April 1998, the Company's Board of Directors adopted, and the stockholders approved, the Kerr Group, Inc. 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"). The 1998 Stock Incentive Plan will be administered by the Compensation and Stock Option Committee of the Board of Directors (the "Committee") upon the establishment thereof, and by the Board of Directors prior to such time. All directors, officers, employees, consultants and advisors of the Company are eligible for discretionary awards under the 1998 Stock Incentive Plan. The 1998 Stock Incentive Plan provides for stock-based incentive awards, including incentive stock options, non-qualified stock options, restricted stock, performance shares, stock appreciation rights and deferred stock. The 1998 Stock Incentive Plan permits the Board of Directors, or the Committee, as the case may be, to select eligible persons to receive awards and to determine certain terms and conditions of such awards, including the vesting schedule and exercise price of each award, and whether such award shall accelerate upon the occurrence of a change in control of the Company. Under the 1998 Stock Incentive Plan, options, restricted stock, performance shares or stock appreciation rights covering no more than 80% of the shares reserved for issuance under the 1998 Stock Incentive Plan may be granted to any participant in any one year. A total of 366.520 shares have been reserved for issuance under the 1998 Stock Incentive Plan. As of December 31, 2003, 286.300 non-qualified stock options have been issued under the 1998 Stock Incentive Plan. No other stock-based incentive awards have been granted. The Company accounts for stock-based compensation as described in Note 1. The Company elected to continue the intrinsic-value method of expense recognition. If compensation cost for these plans had been determined using the fair-value method prescribed by SFAS No. 123, the Company's results would have been reduced to the proforma amounts indicated below.
Year Ended Year Ended December 31, 2003 December 31, 2002 ------------------ ------------------- Net income (loss) before preferred stock dividends $30,707,000 $(19,374,000) Compensation expense 168,000 70,000 ----------- ------------- Proforma net income (loss) $30,539,000 $(19,444,000) =========== =============
The fair value of each option was estimated on the grant date using the Black- Scholes option-pricing model. Based on the assumptions presented below, the weighted average fair value of options granted $5,428 per option in 2003. No options were granted in 2002.
2003 2002 -------- -------- Expected life in years 10 years -- Risk-free interest rate 4.07% -- Volatility 0.00% -- Dividend yield 0.00% --
NOTE 10 - COMPANY STOCK OPTION PLANS (CONTINUED) A summary of stock option activity is presented below.
Weighted Average Shares Exercise Price -------- ---------------- 2003 Outstanding, beginning of year 867.687 $10,460 Granted 115.000 16,500 Forfeited/canceled -- -- ------- ------- Outstanding, end of year 982.687 $11,170 Exercisable, end of year 840.738 $10,280 Available for grant, end of year 80.220 2002 Outstanding, beginning of year 883.775 $10,510 Forfeited/canceled (16.088) $12,960 ------- ------- Outstanding, end of year 867.687 $10,460 Exercisable, end of year 805.200 $10,180 Available for grant, end of year 195.220
For options outstanding at the end of 2003, exercise prices ranged from $10,000 to $16,500 and the weighted average remaining life was approximately 4.5 years. NOTE 11 - RENTAL EXPENSE AND LEASE COMMITMENTS The Company occupies certain manufacturing facilities, warehouse facilities and office space and uses certain automobiles, machinery and equipment under noncancelable lease arrangements. Rent expense related to these agreements was $3,752,000 and $1,714,000 for the years ended December 31, 2003 and 2002, respectively. At December 31, 2003, the Company was obligated under various noncancelable operating leases. Future minimum rental commitments under the Company's leases are as follows:
Years Ended December 31, Total Commitment ---------------------------------------------------------------------- (in thousands) 2004 $5,071 2005 4,285 2006 3,423 2007 2,024 2008 1,734 2009 and thereafter 23,577
NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings and litigation arising in the normal course of business. In the opinion of management, the outcome of such proceedings will not materially affect the Company's consolidated financial position or results of operations. NOTE 13 - RELATED PARTY TRANSACTIONS The Company and Fremont entered into a Advisory Services Agreement (the "Advisory Services Agreement") dated August 13, 2003. The Advisory Services Agreement provides that Fremont will provide Kerr such services as may from time to time be reasonably requested by the Company and which are necessary and appropriate for the operation of the business of the Company. The Advisory Services Agreement provides for the semi-annual payment to Fremont of $275,000, and for the reimbursement of Fremont for its expenses reasonably incurred in providing services for the Company. The Advisory Services Agreement also indemnifies Fremont for any and all losses, claims, damages and liabilities related to or arising out of the Advisory Services Agreement. The Advisory Services Agreement may be terminated by mutual consent of the parties. The Advisory Services Agreement also called for a payment of $1,687,500 plus expenses of transaction services related to the 2003 Acquisition (Note 1) and services related to the refinancing of the Company's long term debt (Note 7). Included in selling, general and administrative expenses was $401,000 and $374,000 in 2003 and 2002, respectively, related to the Advisory Services Agreement. As of December 31, 2003 and 2002, the Company has $260,000 and $575,000, respectively, in other current liabilities related to the Advisory Services Agreement. On January 1, 2003, the Company entered into a letter agreement with New Canaan (the "New Canaan Agreement"), for the provision of certain strategic planning and advisory services to the Company by New Canaan. The agreement provides for the payment to New Canaan of an annual fee of $600,000 through December 2005, so long as Fremont remains the majority stockholder of the Company and Mr. Caldwell and Mr. Hofmann remain employed by the Company. Included in selling, general and administrative expenses was $600,000 for each of the years ended December 31, 2003 and 2002, respectively, related to the New Canaan Agreement. In conjunction with the New Canaan agreement, the Company also entered into employment agreements with each Richard Hofmann and Lawrence Caldwell, each of whom are partners in New Canaan. The employment agreements expire December 31, 2005 and provide for non-competition arrangements. KERR GROUP, INC. BALANCE SHEETS
(IN THOUSANDS OF DOLLARS) MARCH 31, 2005 DECEMBER 31, 2004 ------------------------------------------------------ -------------- ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents..... $ 1,674 $ 6,403 Accounts receivable, net...... 47,087 40,172 Inventories................... 37,863 38,605 Deferred income taxes......... 5,208 5,208 Other current assets.......... 2,465 1,851 -------- -------- Total current assets....... 94,297 92,239 Property and equipment; net..... 120,545 119,775 Deferred income taxes........... 6,888 8,375 Goodwill........................ 105,407 105,407 Other intangibles............... 1,264 1,327 Other assets.................... 6,895 7,408 -------- -------- Total assets.................... $335,296 $334,531 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............. $ 29,036 $ 28,268 Other current liabilities..... 16,991 16,845 Current portion of long-term debt 13,549 12,300 -------- -------- Total current liabilities.. 59,576 57,413 Long-term liabilities: Long-term debt, net of current portion 169,219 173,230 Retirement obligations........ 13,149 13,361 Other long-term liabilities... 4,092 3,953 -------- -------- Total liabilities............... 246,036 247,957 -------- -------- Stockholders' equity: Preferred stock............... 1 1 Common stock.................. 1 1 Additional paid-in capital.... 89,968 89,120 Retained earnings............. 6,964 4,943 Accumulated other comprehensive loss (7,440) (7,257) Treasury stock................ (234) (234) -------- -------- Total stockholders' equity...... 89,260 86,574 -------- -------- Total liabilities and stockholders' equity $335,296 $334,531 ======== ========
See accompanying notes to financial statements KERR GROUP, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
QUARTER ENDED QUARTER ENDED (IN THOUSANDS OF DOLLARS) MARCH 31, 2005 MARCH 31, 2004 ------------------------------------ -------------- -------------- (UNAUDITED) Net sales...................... $ 99,471 $ 90,691 Cost of sales.................. 78,720 70,334 -------- -------- Gross profit................... 20,751 20,357 -------- -------- Selling, general & administrative expenses 13,163 12,861 Restructuring and other charges 422 113 -------- -------- Operating income............... 7,166 7,383 Interest expense............... 2,702 3,045 Provision for income taxes..... 1,598 1,567 -------- -------- Net income before preferred stock dividends 2,866 2,771 Preferred stock dividend....... 845 890 -------- -------- Net income attributable to common stockholders 2,021 1,881 Retained earnings-beginning of year 4,943 1,388 -------- -------- Retained earnings-end of period $ 6,964 $ 3,269 ======== ========
See accompanying notes to financial statements KERR GROUP, INC. STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS) MARCH 31, 2005 MARCH 31, 2004 ------------------------------------------------------ -------------- -------------- (UNAUDITED) Cash flows from operating activities: Net income before preferred stock dividend $2,863 $2,771 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..... 6,779 6,799 Payments associated with acquisition - (817) Restructuring related payments.... (531) (520) Restructuring related expenses.... 422 113 Change in deferred income taxes... 1,598 1,268 Benefit payments in excess of expense (207) (627) Changes in operating working capital: Accounts receivable............ (6,913) (1,845) Inventory...................... 744 (1,549) Other current assets........... (611) (688) Accounts payable............... 762 5,426 Accrued expenses............... 253 2,787 Other long-term assets......... (23) (60) Other long-term liabilities.... 142 (95) ------- ------- Net cash provided by operating activities 5,278 12,963 ------- ------- Cash flows from investing activities: Capital expenditures.............. (7,282) (6,751) Other............................. 39 - ------- ------- Net cash used in investing activities (7,243) (6,751) ------- ------- Cash flows from financing activities: Repayment of term loans........... (2,764) (2,225) Payments associated with financing - (106) ------- ------- Net cash used in financing activities (2,764) (2,331) ------- ------- Net increase (decrease) in cash...... (4,729) 3,881 Cash and cash equivalents at beginning of year 6,403 5,517 ------- ------- Cash and cash equivalents at end of period $1,674 $9,398 ======= =======
See accompanying notes to financial statements KERR GROUP, INC. NOTES TO THE FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED) (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Kerr Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full fiscal year. 2. LONG-TERM DEBT Borrowing as of Marrch 31, 2005 and December 31, 2004, are as follows:
MARCH 31, DECEMBER 31, 2005 2004 ---------- ---------- $215 million Term Loan Facility bearing interest at a rate equal to Libor plus 350 basis points or the Base Rate plus 225 basis points. $181,905 $184,630 $30 million Revolving Credit Facility bearing interest at a rate equal to Libor plus 300 basis points or the Base Rate plus 175 basis points. - - Industrial Development Revenue bonds bearing interest at 78% of prime 863 900 ---------- --------- Total debt................................... 182,768 185,530 Less: current portion........................ (13,549) (12,300) ---------- --------- Long-term debt............................... $169,219 $173,230 ========== =========
Maturities of long-term debt for the next five years are as follows:
2005 2006 2007 2008 2009 ---- ---- ---- ---- ---- $9,537 $16,955 $19,680 $19,680 $40,289 ------ ------- ------- ------- -------
The provisions of the Company's loan and credit agreements with Wells Fargo require the maintenance at each calendar quarter end a minimum ratio of fixed charge coverage, a maximum ratio of funded debt to earnings before interest, depreciation and amortization, and a minimum ratio of interest expense to earnings before interest, depreciation and amortization. The Company is also limited to a maximum capital expenditure for each calendar year. The Company was in compliance with the aforementioned covenants as of March 31, 2005. 3. SUBSEQUENT EVENT On May 6, 2005, Berry Plastics Corporation ("Berry") announced that it has entered into a definitive agreement to acquire Kerr Group, Inc. ("Kerr") for $445.0 million, including repayment of existing indebtedness. The purchase price will be funded with a combination of debt, and cash on Berry's balance sheet. The transaction is scheduled to close in the second quarter of 2005 and is subject to customary closing conditions. (b) Pro forma financial information UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION As used in this report, "BPC Holding" or "Holding" refers to BPC Holding Corporation, "we," "our" or "us" refers to BPC Holding Corporation together with its consolidated subsidiaries (not including Kerr Group, Inc. ("Kerr"), unless the context otherwise requires), "Berry Plastics" or "the Company" refers to Berry Plastics Corporation, a wholly-owned subsidiary of BPC Holding. On June 3, 2005 Berry Plastics completed the acquisition of Kerr, a privately held Delaware Corporation, through a merger of Berry Plastics Acquisition Corporation VI, a wholly owned subsidiary of Berry Plastics, with and into Kerr, with Kerr surviving the merger. Set forth below are the unaudited pro forma combined condensed balance sheet of BPC Holding as of April 2, 2005 and Kerr as of March 31, 2005, assuming the acquisition occurred on April 2, 2005 (with respect to BPC Holding) and March 31, 2005 (with respect to Kerr), and the unaudited pro forma combined condensed statements of operations of BPC Holding for the year ended January 1, 2005 and the thirteen weeks ended April 2, 2005 and of Kerr for the year ended December 31, 2004 and the quarter ended March 31, 2005, assuming the acquisition occurred at the beginning of the respective period. The pro forma statements of operations do not reflect transaction costs that will be expensed in connection with the acquisition or any write-offs that may result from the acquisition. We do not believe that any write-offs will be material to the Company unless we are required under accounting principles to write-off deferred financing fees resulting from the amendment to our senior secured credit facility. The unaudited pro forma combined financial information is presented for informational purposes only and does not purport to represent the financial condition of BPC Holding had the acquisition occurred on April 2, 2005 or the results of operations of us for the year ended January 1, 2005, or the thirteen weeks ended April 2, 2005 had the acquisition occurred at the beginning of such period, or to project the results for any future date or period. PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 2, 2005
BPC HOLDING KERR AS OF AS OF ADJUSTMENTS PRO FORMA APRIL 2, MARCH 31, FOR THE FOR THE (DOLLARS IN THOUSANDS) 2005 2005 ACQUISITION ACQUISITION -------------------------------- --------- --------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 637 $ 1,674 $(1,674) (1) $ 637 Accounts receivable 105,829 47,087 - 152,916 Inventories 111,386 37,863 - 149,249 Other current assets 20,814 7,673 - 28,487 -------- ------- -------- -------- Total current assets 238,666 94,297 (1,674) 331,289 Property and equipment, net 282,198 120,545 - 402,743 Intangible assets 500,391 106,671 199,646 (2) 806,708 Other assets 71 13,783 (5,673) (3) 8,181 -------- ------- -------- -------- Total assets $1,021,326 $335,296 $192,299 $1,548,921 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 75,542 $29,036 $ - $ 104,578 Other current liabilities 48,543 16,991 (469) (4) 65,065 Current portion of long-term debt 9,894 13,549 (8,924) (5) 14,519 -------- ------- -------- -------- Total current liabilities 133,979 59,576 (9,393) 184,162 Long-term debt (less current portion) 689,690 169,219 291,207 (5) 1,150,116 Other long-term liabilities 11,272 17,241 (255) (4) 28,258 -------- ------- -------- -------- Total liabilities 834,941 246,036 281,559 1,362,536 Stockholders' equity: Preferred stock - 1 (1) (6) - Common stock 34 1 (1) (6) 34 Additional paid-in capital 345,001 89,868 (89,868) (6) 345,001 Adjustment of the carryover basis of continuing stockholders (196,603) - - (196,603) Notes receivable-common stock (15,056) - - (15,056) Treasury stock (2,049) (234) 234 (6) (2,049) Retained earnings 42,977 6,964 (6,964) (6) 42,977 Accumulated other comprehensive income (loss) 12,081 (7,440) 7,440 (6) 12,081 -------- ------- -------- -------- Total stockholders' equity 186,385 89,260 (89,260) 186,385 -------- ------- -------- -------- Total liabilities and stockholders' equity $1,021,326 $335,296 $192,299 $1,548,921 ======== ======== ========= ========
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 2, 2005 (DOLLARS IN THOUSANDS) (1) This adjustment reflects the elimination of Kerr cash of ($1,674) not being acquired in the Kerr Acquisition. (2) The Kerr Acquisition will be accounted for as a purchase. Preliminarily, we have allocated the excess of the purchase price over the net assets acquired to goodwill (included in intangible assets). Under generally accepted accounting principles, goodwill is not amortized but is reviewed for impairment annually. We have not completed the process of reviewing our assets to determine the amount of any write-up or write-down to fair value of our net assets in connection with the Kerr Acquisition. Accordingly, the allocation described below is subject to change when we determine the purchase price allocation. If our non-goodwill assets are written up to fair value in connection with the Kerr Acquisition, our expenses in the future will be higher as a result of increased depreciation and amortization of our assets. Similarly, if our non-goodwill assets are written down to fair value, our depreciation and amortization will decrease in the future.
Purchase price...... $445,000 Estimated transaction costs 20,051 -------- Total consideration. 465,051 Less: Net assets acquired (265,045) -------- Net adjustment...... $199,946 ========
(3) This adjustment reflects the elimination of Kerr unamortized deferred financing fees ($5,265) and the fair market value adjustment of a Kerr interest rate hedge ($408) that will be written off as a result of debt repayment in connection with the acquisition. (4) This adjustment reflects the elimination of deferred gains associated with a Kerr interest rate hedge ($469 current and $255 long-term) that will be written off as a result of debt repayment in connection with the acquisition. (5) This adjustment reflects the retirement of Kerr debt and borrowings under the amendment to our senior secured credit facility in connection with the acquisition.
CURRENT PORTION LONG-TERM DEBT -------------- --------------- Retirement of Kerr debt $(13,549) $(169,219) Existing term loan.. (3,325) (326,624) New term loan....... 7,950 787,050 --------- --------- Net adjustments..... $(8,924) $291,207 ========= =========
(6) This adjustment reflects the elimination of Kerr stockholders' equity. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED JANUARY 1, 2005
BPC HOLDING KERR FISCAL YEAR YEAR ENDED ADJUSTMENTS PRO FORMA ENDED JANUARY 1, DECEMBER 31, FOR THE FOR THE (DOLLARS IN THOUSANDS) 2005 2004 ACQUISITION ACQUISITION -------------------------------- -------------- ------------- -------------- --------------- Net sales.................. $814,213 $381,882 $ - $1,196,095 Cost of goods sold......... 639,329 291,848 - 931,177 ------------- ------------- -------------- --------------- Gross profit............... 174,884 90,034 - 264,918 Operating expenses......... 81,008 59,582 - 140,590 ------------- ------------- -------------- --------------- Operating income........... 93,876 30,452 - 124,328 Other income............... - (1,209) - (1,209) Interest expense, net...... 53,185 11,672 18,145 (1) 83,002 ------------- ------------- -------------- --------------- Income (loss) before income taxes 40,691 19,989 (18,145) 42,535 Income taxes (benefit)..... 17,740 7,067 (7,258) (2) 17,549 ------------- ------------- -------------- --------------- Net income (loss).......... 22,951 12,922 (10,887) 24,986 Preferred stock dividends.. - 3,501 (3,501) (3) - ------------- ------------- -------------- --------------- Net income (loss) attributable to common stockholders............. $22,951 $9,421 $(7,386) $24,986 ============ ============ ============== ===============
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 2, 2005
BPC HOLDING THIRTEEN KERR WEEKS ENDED QUARTER ENDED ADJUSTMENTS PRO FORMA APRIL 2, MARCH 31, FOR THE FOR THE (DOLLARS IN THOUSANDS) 2005 2005 ACQUISITION ACQUISITION ----------------------------------- ----------- ------------- ------------ ----------- Net sales $225,310 $99,471 $ - $324,781 Cost of goods sold 184,016 78,720 - 262,736 -------- -------- -------- -------- Gross profit 41,294 20,751 - 62,045 Operating expenses 19,286 13,585 - 32,871 -------- -------- -------- -------- Operating income 22,008 7,166 - 29,174 Other expense............... 632 - - 632 Interest expense, net 13,818 2,702 4,752 (1) 21,272 -------- -------- -------- -------- Income (loss) before income taxes 7,558 4,464 (4,752) 7,270 Income taxes (benefit) 3,759 1,598 (1,901)(2) 3,456 -------- -------- -------- -------- Net income (loss) 3,799 2,866 (2,851) 3,814 Preferred stock dividends - 845 (845)(3) - -------- -------- -------- -------- Net income (loss) attributable to common stockholders.............. $ 3,799 $ 2,021 $(2,006) $ 3,814 ======== ======== ======== ========
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (1) This adjustment reflects the elimination of Kerr interest expense and changes in interest expense resulting from the financing of the Kerr acquisition.
THIRTEEN WEEKS ENDED 2004 APRIL 2, 2005 ------- ------------- Kerr existing interest...... $(11,672) $(2,702) Amendment of credit agreement: Interest................. 28,587 7,147 Amortization of deferred financing 1,231 308 ------- ------- Net adjustments............. $18,145 $ 4,752 ======= =======
(2) This adjustment represents the income tax change as a result of the other items reflected in these notes to pro forma combined condensed consolidated statement of operations. (3) This adjustment reflects the elimination of preferred stock dividends on the preferred stock of Kerr redeemed in connection with the acquisition. 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 hereunto duly authorized. Dated: July 29, 2005 BPC HOLDING CORPORATION BERRY PLASTICS CORPORATION By:/s/ James M. Kratochvil ------------------------------------------- James M. Kratochvil Executive Vice President, Chief Financial Officer, Treasurer and Secretary