EXHIBIT 13.1
Published on March 30, 2000
Exhibit 13.1
Consolidated Statements of Earnings
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheets
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Cash Flows
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Shareholders' Equity and Comprehensive Earnings
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
Ball Corporation and Subsidiaries
1. Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Ball Corporation
and its controlled affiliates in which it holds a majority equity position
(collectively, Ball or the Company). Investments in 20 percent through
50 percent-owned affiliates are accounted for by the equity method where Ball
exercises significant influence over operating and financial affairs. Otherwise,
investments are included at cost. Differences between the carrying amounts of
equity investments and the Company's interest in underlying net assets are
amortized over periods benefited. Significant intercompany transactions are
eliminated. The results of subsidiaries and equity affiliates in Asia and South
America are reflected in the consolidated financial statements on a one-month
lag.
Reclassifications
Certain prior year amounts have been reclassified in order to conform with the
current year presentation.
Use of Estimates
Generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingencies and reported amounts of revenues and expenses.
Actual results could differ from these estimates.
Foreign Currency Translation
Assets and liabilities of foreign operations, where the local currency is the
functional currency, are translated using period-end exchange rates, and
revenues and expenses are translated using average exchange rates during each
period. Translation gains and losses are reported in accumulated other
comprehensive loss as a component of common shareholders' equity.
Revenue Recognition
Sales of products in the packaging segment are recognized primarily upon the
unconditional shipment of products. In the case of long-term contracts within
the aerospace and technologies segment, sales are recognized under the
cost-to-cost, percentage-of-completion method. Certain U.S. government contracts
contain profit incentives based upon performance relative to predetermined
targets or cost performance. Profit incentives are recorded when there is
sufficient information to assess anticipated contract performance. Provision for
estimated contract losses, if any, is made in the period that such losses are
determined.
Temporary Investments
Temporary investments are considered cash equivalents if original maturities are
three months or less.
Derivative Financial Instruments
The company uses derivative financial instruments primarily for the purpose of
hedging exposures to fluctuations in interest rates, foreign currency exchange
rates, raw materials purchasing and the common share repurchase program. Accrual
accounting is applied for financial instruments classified as hedges. Costs of
hedging instruments are deferred as a cost adjustment, or deferred and amortized
as a yield adjustment, over the term of the hedging agreement. Gains and losses
on early terminations of derivative financial instruments related to debt are
deferred and amortized as yield adjustments. Deferred gains and losses related
to exchange rate forwards are recognized as cost adjustments of the related
purchase or sale transaction. If a financial instrument no longer qualifies as
an effective hedge, the instrument is recorded at fair market value.
Inventories
Inventories are stated at the lower of cost or market. The cost for certain U.S.
metal beverage container inventories and substantially all inventories within
the U.S. metal food container business is determined using the last-in,
first-out (LIFO) method of accounting. The cost for remaining inventories is
determined using the first-in, first-out (FIFO) method.
Depreciation and Amortization
Depreciation is provided using the straight-line method in amounts sufficient to
amortize the cost of the properties over their estimated useful lives (buildings
and improvements - 15 to 40 years; machinery and equipment - 5 to 15 years).
Goodwill is amortized using the straight-line method over 40 years. The Company
evaluates long-lived assets, including goodwill and other intangibles, when
significant economic events suggest that they may be impaired or may not be
fully recoverable or the depreciation or amortization period should be
reconsidered. In estimating the useful lives, consideration is given to the
factors in paragraphs 27 through 32 of Accounting Principles Board (APB) No. 17.
As part of the valuation process, the Company considers the fair value and cash
flow measurement techniques described in paragraphs 6 through 10 of Statement of
Financial Accounting Standards (SFAS) No. 121. Undiscounted cash flows serve as
a basis for determination of realizability or impairment.
Taxes on Income
Deferred income taxes reflect the future tax consequences of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each balance sheet date, based upon enacted income tax laws and tax rates.
Income tax expense or benefit is provided based on earnings reported in the
financial statements. The provision for income tax expense or benefit differs
from the amounts of income taxes currently payable because certain items of
income and expense included in the consolidated financial statements are
recognized in different time periods by taxing authorities. Deferred tax assets
and operating loss and tax credit carryforwards are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
any portion of these tax attributes will not be realized.
Employee Stock Ownership Plan
Ball records the cost of its Employee Stock Ownership Plan (ESOP) using the
shares allocated transitional method under which the annual pretax cost of the
ESOP, including preferred dividends, approximates program funding. Compensation
and interest components of ESOP cost are included in net earnings; preferred
dividends, net of related tax benefits, are shown as a reduction from net
earnings. Unearned compensation recorded within the accompanying balance sheet
and related to the ESOP is reduced as the principal of the guaranteed ESOP notes
is amortized.
Earnings Per Share
Earnings per common share are computed by dividing the net earnings attributable
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if the Series B ESOP Convertible Preferred Stock (ESOP
Preferred) was converted into additional outstanding common shares and
outstanding dilutive stock options were exercised. In the diluted computation,
net earnings attributable to common shareholders are adjusted for additional
ESOP contributions which would be required if the ESOP Preferred was converted
to common shares and exclude the tax benefit of deductible common dividends upon
the assumed conversion of the ESOP Preferred.
New Accounting Pronouncements
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," establishes new accounting and
reporting standards for the costs of computer software developed or obtained for
internal use and was effective for Ball in 1999. The adoption of SOP No. 98-1
did not have a significant impact on the Company's results of operations or
financial condition in 1999.
During the fourth quarter of 1998, Ball adopted SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities," in advance of its required 1999
implementation date. SOP No. 98-5 requires that costs of start-up activities and
organizational costs, as defined, be expensed as incurred. In accordance with
this statement, the Company recorded an after-tax charge to earnings of
approximately $3.3 million (11 cents per share), retroactive to January 1, 1998,
representing the cumulative effect of this change in accounting on prior years.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," essentially requires all derivatives to be recorded on the balance
sheet at fair value and establishes new accounting practices for hedge
instruments. In June 1999 SFAS No. 137 was issued to defer the effective date of
SFAS No. 133 by one year. As a result, SFAS No. 133 will not be effective for
Ball until 2001. The effect, if any, of adopting this standard has not yet been
determined.
2. Business Segment Information
Ball's operations are organized along its product lines and include two segments
- - the packaging segment and the aerospace and technologies segment. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. See notes 3 and 4 for information
regarding transactions affecting segment results.
Packaging
The packaging segment includes the manufacture and sale of metal and PET
(polyethylene terephthalate) containers, primarily for use in beverage and food
packaging. The Company's consolidated packaging operations are located in and
serve North America (the U.S. and Canada) and Asia, primarily the People's
Republic of China (PRC). Packaging operations in the U.S. have increased as a
result of the August 1998 acquisition of the North American beverage can
manufacturing business of Reynolds Metals Company. Operations in Asia also have
increased as a result of the early 1997 acquisition of a controlling interest in
Ball Asia Pacific Limited, formerly M.C. Packaging (Hong Kong) Limited. The
results of both operations are included within the packaging segment since their
acquisition dates. Ball also has investments in packaging companies in Brazil
and Thailand which are accounted for under the equity method, and, accordingly,
those results are not included in segment earnings or assets.
Aerospace and Technologies
The aerospace and technologies segment includes civil space systems, defense
systems, commercial space operations, commercial products and technologies,
systems engineering services, advanced antenna and video systems and engineering
technology products.
Financial data segmented by geographic area is provided below.
Summary of Net Sales by Geographic Area
($ in millions) U.S. Other (1) Consolidated
------------ ------------ ------------
1999 $3,128.3 $ 455.9 $ 3,584.2
1998 2,449.5 446.9 2,896.4
1997 1,888.9 499.6 2,388.5
(1) Includes the Company's net sales in the PRC and Canada, neither of which are
significant, intercompany eliminations and other.
Summary of Long-Lived Assets(1) by Geographic Area
($ in millions) U.S. PRC Other (2) Consolidated
------------ ------------ ------------ ------------
1999 $1,701.6 $ 352.0 $ (217.3) $1,836.3
1998 1,763.2 369.3 (163.3) 1,969.2
1997 972.4 465.5 (145.9) 1,292.0
(1) Long-lived assets primarily consist of property, plant and equipment,
goodwill and other intangible assets.
(2) Includes the Company's long-lived assets in Canada, which are not
significant, intercompany eliminations and other.
Major Customers
Packaging segment sales to Miller Brewing Company, a customer since a 1998
acquisition, represented approximately 15 percent of net sales in 1999 and less
than 10 percent in 1998. Sales to PepsiCo, Inc., and affiliates represented
approximately 13 percent of consolidated net sales in 1999, 15 percent of
consolidated net sales in 1998 and 12 percent of consolidated net sales in 1997.
Sales to Coca-Cola and affiliates represented 11 percent of consolidated net
sales in 1999, 10 percent of consolidated net sales in 1998 and less than 10
percent in 1997. Sales to all bottlers of Pepsi-Cola and Coca-Cola branded
beverages comprised approximately 35 percent of consolidated net sales in 1999,
40 percent of consolidated net sales in 1998 and 36 percent of consolidated net
sales in 1997. Sales to various U.S. government agencies by the aerospace and
technologies segment, either as a prime contractor or as a subcontractor,
represented approximately 9 percent, 11 percent and 14 percent of consolidated
net sales in 1999, 1998 and 1997, respectively.
3. Acquisitions
Metal Beverage Container Manufacturing Business
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition) for approximately $745.4 million, before a
refundable incentive loan of $39 million, a working capital adjustment of an
additional $40.1 million and transaction costs. The assets acquired consisted
largely of 16 plants in 12 states and Puerto Rico. The Acquisition has been
accounted for as a purchase, with its results included in the Company's
consolidated financial statements effective with the Acquisition.
In connection with the Acquisition, the Company has provided $51.3 million
in the opening balance sheet for certain costs of integrating the acquired
business, including capacity consolidations. The Company finalized its
integration plan during the third quarter of 1999, which includes the closure of
the acquired Richmond, Virginia, headquarters facility in 1998, the closure of
two plants in the first quarter of 1999 and the closure of a third plant which
was phased out, beginning in the fourth quarter of 1999 and concluding in the
first quarter of 2000. The plants and certain equipment are for sale. Employees
of the closed facilities, primarily manufacturing and support personnel, were
terminated after proper notification. Integration costs included $23.3 million
for severance, supplemental unemployment, medical, relocation and other related
termination benefits; $22.8 million for contractual pension and retirement
obligations; and $5.2 million for other plant closure costs. The decrease of
$5.5 million from the previously reported estimate was the result of finalizing
actuarial calculations of employee benefit termination costs and refining other
exit costs based upon economic factors within the geographic regions where the
plants are located. These changes have been reflected as a reduction of
goodwill. Subsequent increases in actual costs, if any, will be included in
current period earnings, and decreases, if any, will result in a further
reduction of goodwill.
As of December 31, 1999, the Company has made payments of $10.5 million
related to severance, supplemental unemployment, relocation and other
termination costs and $3 million related to other plant closure costs. The
carrying value of the fixed assets held for sale is approximately $21.5 million
at December 31, 1999.
The following table summarizes the integration costs associated with the
Acquisition as provided for in the opening balance sheet:
The following is a summary of the net assets acquired which includes the
final purchase accounting adjustments including final asset valuations, purchase
price allocations, estimated integration and capacity consolidation costs and
transaction costs. As part of the acquired asset valuation and purchase price
allocation process, approximately $336.8 million has been assigned to goodwill.
($ in millions)
Total assets $ 937.9
Less liabilities assumed:
Current liabilities 65.7
Long-term liabilities 86.7
-----------
Net assets acquired 785.5
Incentive loan 39.0
Transaction costs 13.9
-----------
Total consideration $ 838.4
===========
The following unaudited pro forma consolidated results of operations have
been prepared as if the Acquisition had occurred as of January 1, 1997. The pro
forma results are not necessarily indicative of the actual results that would
have occurred had the Acquisition been in effect for the periods presented, nor
are they necessarily indicative of the results that may be obtained in the
future:
Pro forma adjustments include increased interest expense related to
incremental borrowings used to finance the Acquisition, the amortization of
goodwill, the change in depreciation expense on plant and equipment based on
estimated useful lives partially offset by increased fair values, and the
elimination of the extraordinary loss on early debt extinguishment. Pro forma
results exclude anticipated synergies.
Other Acquisitions
In early 1997 Ball acquired approximately 75 percent of Ball Asia Pacific
Limited for approximately $179.7 million. During 1998 and 1999, the Company
purchased all of the remaining direct and indirect minority interests in Ball
Asia Pacific Limited. In the third quarter of 1997, the Company acquired certain
PET container assets for approximately $42.7 million from Brunswick Container
Corporation.
4. Headquarters Relocation, Plant Closures, Dispositions and Other Costs
The following table summarizes the transaction gains and losses in connection
with the headquarters relocation, plant closures in the PRC, dispositions and
other non-acquisition-related charges included in the consolidated statement of
earnings.
($ in millions) Pretax Gain
(Loss)
------------------
1998
Headquarters relocation $(17.7)
Plant closings and other costs (56.2)
------------------
$(73.9)
==================
1997
Sale of investment in Datum $ 11.7
Plant closing (3.0)
Disposition and write-down of equity investments 0.3
------------------
$ 9.0
==================
1998
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, which has been completed, the Company recorded a
pretax charge in 1998 of $17.7 million ($10.8 million after tax or 36 cents per
share), primarily for employee-related costs, substantially all of which were
paid by the end of that year.
During the last quarter of 1998, the Company announced the closure of two
of its plants located in the PRC and removed from service manufacturing
equipment at a third plant. The actions were taken largely to address industry
overcapacity and were completed in the first half of 1999. The Company's
preliminary estimates included a $56.2 million, largely noncash, charge in the
fourth quarter of 1998 to write down to net realizable value certain buildings
and equipment by $22.8 million, goodwill by $15.3 million, inventory by
$2.5 million and machinery spare parts by $3.5 million, as well as $12.1 million
for other assets and related costs. The total after-tax effect of the estimated
plant closings and other costs was a loss of $31.4 million ($1.03 per share).
Estimated fair market values of the assets were determined by management and
engineering support staff based on a market approach. The carrying value of the
fixed assets held for sale is approximately $10 million at December 31, 1999. In
1999 the Company entered into an agreement to sell a plant in Hong Kong at a
loss of approximately $2.8 million, which was offset by income of $2.3 million
primarily related to cash collections on certain receivables which were fully
reserved in 1998. The net charge of $0.5 million is included in cost of sales in
the consolidated statement of earnings. Net cash proceeds from the sale of the
building and collection of the receivables were $7.1 million. Further changes to
the estimates, if any, will be reflected as adjustments to the current year's
earnings.
The activity related to the 1998 charge for plant closings and other costs
is summarized below:
1997
In the first half of 1997, the Company sold its interest in the common stock of
Datum Inc. (Datum) for approximately $26.2 million, recording a pretax gain of
$11.7 million. Ball acquired its interest in Datum in connection with the 1995
disposition of its Efratom time and frequency measurement devices business. The
Company owned approximately 32 percent of Datum. Ball's share of Datum's
earnings under the equity method of accounting was $0.5 million and $0.3 million
in 1997 and 1995, respectively, and a loss of $0.2 million in 1996.
In the second quarter of 1997, the Company recorded a pretax charge of
$3 million to close a small PET container manufacturing plant in connection with
the acquisition of certain PET container manufacturing assets. Operations ceased
during that quarter.
In the fourth quarter of 1997, Ball disposed of and wrote down to estimated
net realizable value certain equity investments, resulting in a net pretax gain
of $0.3 million. The Company's equity in the net earnings of these affiliates
was not significant in 1997.
The net after-tax effect of the 1997 transactions was a gain of $5 million
(16 cents per share).
5. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of
$8.8 million and $7.0 million at December 31, 1999, and 1998, respectively.
Trade Accounts Receivable Securitization Agreement
A securitization agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
businesses. In December 1998 the designated pool of receivables was increased to
provide for sales of up to $125 million from the previous amount of $75 million.
Net funds received from the sale of the accounts receivable totaled
$122.5 million at both December 31, 1999, and 1998. Fees incurred in connection
with the sale of accounts receivable totaled $7 million in 1999 and $4 million
in each of 1998 and 1997.
Accounts Receivable in Connection with Long-Term Contracts
Net accounts receivable under long-term contracts, due primarily from agencies
of the U.S. government, were $83.8 million and $76.1 million at December 31,
1999, and 1998, respectively, and include unbilled amounts representing revenue
earned but contractually not yet billable of $40.5 million and $44.2 million,
respectively. The average length of the long-term contracts is approximately
three years and the average length remaining on those contracts at December 31,
1999, was approximately 15 months. Approximately $13.3 million of unbilled
receivables at December 31, 1999, is expected to be collected after one year and
is related to fees and cost withholds that will be paid largely upon completion
of milestones or other contract terms as well as final overhead rate
settlements.
6. Inventories
December 31,
-------------------------------
($ in millions) 1999 1998
------------- --------------
Raw materials and supplies $ 238.0 $ 131.2
Work in process and finished goods 327.9 352.6
------------- --------------
$ 565.9 $ 483.8
============= ==============
Approximately 58 percent and 39 percent of total inventories at December 31,
1999, and 1998, respectively, were valued using the LIFO method of accounting.
Inventories at December 31, 1999, would have been $4.1 million lower than the
reported amount if the FIFO method of accounting, which approximates replacement
cost, had been used for those inventories. At December 31, 1998, LIFO cost
approximated replacement cost.
7. Property, Plant and Equipment
December 31,
-------------------------------
($ in millions) 1999 1998
-------------- -------------
Land $ 61.6 $ 62.2
Buildings 433.6 410.5
Machinery and equipment 1,439.4 1,410.2
-------------- -------------
1,934.6 1,882.9
Accumulated depreciation (813.4) (708.5)
-------------- -------------
$1,121.2 $1,174.4
============== =============
Depreciation expense amounted to $143.8 million, $130.8 million and $110
for the years ended December 31, 1999, 1998 and 1997, respectively.
8. Goodwill and Other Assets
December 31,
-------------------------------
($ in millions) 1999 1998
-------------- -------------
$ 482.9 $ 555.9
Investments in affiliates 81.3 80.9
Other 150.9 158.0
-------------- -------------
$ 715.1 $ 794.8
============== =============
Goodwill is net of accumulated amortization of $41.9 million and
$28.9 million at December 31, 1999, and 1998, respectively. Total amortization
expense amounted to $19.1 million, $14.2 million and $7.5 million for the years
ended December 31, 1999, 1998 and 1997, respectively, of which $13.4 million,
$7.4 million and $4.7 million related to the amortization of goodwill.
9. Debt and Interest Costs
Short-term debt consisted of Asian bank facilities in U.S. dollars and PRC
currencies, all without recourse to Ball Corporation and its North American
subsidiaries. Approximately $57.2 million and $70.6 million were outstanding
under these facilities at December 31, 1999, and 1998, respectively. The
weighted average rate of the outstanding facilities was 6.8 percent at
December 31, 1999, and 7.4 percent at December 31, 1998.
Long-term debt at December 31 consisted of the following:
In connection with the Acquisition in 1998, the Company refinanced
approximately $521.9 million of its existing debt and, as a result, recorded an
after-tax extraordinary charge from the early extinguishment of debt of
approximately $12.1 million (40 cents per share). The Acquisition and the
refinancing, including related costs, were financed with a placement of
$300 million in 7.75% Senior Notes due in 2006, $250 million in 8.25% Senior
Subordinated Notes due in 2008 and approximately $808.2 million from a Senior
Credit Facility. The Senior Credit Facility bears interest at variable rates and
is comprised of four separate facilities: (1) Term Loan A for $350 million due
in 2004, (2) Term Loan B for $200 million due in 2006, (3) a revolving credit
facility which provides the Company with up to $600 million, comprised of a
$150 million, 364-day annually renewable facility and a $450 million long-term
committed facility expiring in 2004 and (4) a $50 million long-term committed
Canadian facility. At December 31, 1999, approximately $585 million was
available under the revolving credit facilities.
All of the Senior Notes and Senior Subordinated Notes were exchanged as of
January 27, 1999. The terms of the new notes are substantially identical in all
respects (including principal amount, interest rate, maturity, ranking and
covenant restrictions) to the terms of the notes for which they were exchanged
except that the new notes are registered under the Securities Act of 1933, as
amended, and therefore are not subject to certain restrictions on transfer
except as described in the Prospectus for the Exchange Offer. The note
agreements provide that if the new notes are assigned investment grade ratings
and the Company is not in default, certain covenant restrictions will be
suspended.
The Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional and joint and several basis
by certain of the Company's domestic wholly owned subsidiaries. All amounts
outstanding under the Senior Credit Facility are secured by (1) a pledge of
100 percent of the stock owned by the Company of its direct and indirect
majority-owned domestic subsidiaries and (2) a pledge of the Company's stock,
owned directly or indirectly, of certain foreign subsidiaries which equals
65 percent of the stock of each such foreign subsidiary. Separate financial
statements for the guarantor subsidiaries and the non-guarantor subsidiaries are
not presented because management has determined that such financial statements
would not be material to investors. Condensed, consolidating financial
information for the Company, segregating the guarantor subsidiaries and
non-guarantor subsidiaries, are provided below.
Ball's Asian subsidiary and its consolidated affiliates had short-term
uncommitted credit facilities of approximately $113 million, of which
$57.2 million was outstanding at December 31, 1999.
Fixed-term debt in the PRC at year end 1998 included approximately
$48.2 million of floating rate notes issued by the Company's consolidated Asian
affiliates. There were no amounts outstanding under these agreements at
December 31, 1999.
Maturities of all fixed long-term debt obligations outstanding at
December 31, 1999, are $46.8 million, $69.5 million, $69.3 million,
$89.3 million and $102.5 million for the years ending December 31, 2000,
through 2004, respectively, and $762.1 million thereafter.
Ball issues letters of credit in the ordinary course of business to secure
liabilities recorded in connection with the Company's deferred compensation
program, industrial development revenue bonds and insurance arrangements, of
which $64.8 million were outstanding at December 31, 1999. The Company's Asian
subsidiary also issues letters of credit in the ordinary course of business in
connection with supplier arrangements and provides guarantees to secure bank
financing for its affiliates. At year end, approximately $14.2 million of
letters of credit were outstanding associated with these arrangements. Ball also
has provided a completion guarantee representing 50 percent of the $44 million
of debt issued by the Company's Brazilian joint venture to fund the construction
of facilities. ESOP debt represents borrowings by the trust for the
Ball-sponsored ESOP which have been irrevocably guaranteed by the Company.
The U.S. note agreements, bank credit agreement, ESOP debt guarantee and
industrial development revenue bond agreements contain certain restrictions
relating to dividends, investments, guarantees and the incurrence of additional
indebtedness.
A summary of total interest cost paid and accrued follows:
($ in millions) 1999 1998 1997
---------- ---------- ----------
Interest costs $ 109.6 $ 80.9 $ 57.9
Amounts capitalized (2.0) (2.3) (4.4)
---------- ---------- ----------
Interest expense $ 107.6 $ 78.6 $ 53.5
========== ========== ==========
Interest paid during the year $ 111.2 $ 63.3 $ 53.9
========== ========== ==========
Subsidiary Guarantees of Debt
The Company's Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional, and joint and several basis
by certain of the Company's wholly owned domestic subsidiaries. The following is
condensed, consolidating financial information for the Company, segregating the
guarantor subsidiaries and non-guarantor subsidiaries, as of December 31, 1999
and 1998 and for the years ended December 31, 1999, 1998 and 1997 (in millions
of dollars). Certain prior-year amounts have been reclassified in order to
conform with the current year presentation. Separate financial statements for
the guarantor subsidiaries and the non-guarantor subsidiaries are not presented
because management has determined that such financial statements would not be
material to investors.
10. Financial and Derivative Instruments and Risk Management
The Company is subject to various risks and uncertainties due to the competitive
nature of the industries in which it participates, its operations in developing
markets outside the U.S., changing commodity prices and changing capital
markets.
Policies and Procedures
In the ordinary course of business, the Company employs established risk
management policies and procedures to reduce its exposure to commodity price
changes, changes in interest rates, fluctuations in foreign currencies and the
Company's common share repurchase program. The Company's objective in managing
its exposure to commodity price changes is to limit the impact of raw material
price changes on earnings and cash flow through arrangements with customers and
suppliers and, at times, through the use of certain derivative instruments such
as options and forward contracts designated as hedges. The Company's objective
in managing its exposure to interest rate changes is to limit the impact of
interest rate changes on earnings and cash flow and to lower its overall
borrowing costs. To achieve these objectives, the Company primarily uses
interest rate swaps, collars and options to manage the Company's mix of floating
and fixed-rate debt between a minimum and maximum percentage, which is set by
policy. The Company's objective in managing its exposure to foreign currency
fluctuations is to protect foreign cash flow and reduce earnings volatility
associated with foreign exchange rate changes.
Unrealized losses on foreign exchange forward contracts are recorded in the
balance sheet as other current liabilities. Realized gains/losses from hedges
are classified in the income statement consistent with accounting treatment of
the item being hedged. The Company accrues the differential for interest rate
swaps to be paid or received under these agreements as adjustments to interest
expense over the lives of the swaps. Gains and losses upon the early termination
of swap agreements are deferred in long-term liabilities and amortized as an
adjustment to interest expense over the remaining term of the agreement.
Commodity Price Risk
The Company primarily manages the commodity price risk in connection with market
price fluctuations of aluminum by entering into customer sales contracts for
cans and ends which include aluminum-based pricing terms which consider price
fluctuations under its commercial supply contracts for aluminum purchases. The
terms include "band" pricing where there is an upper and lower limit, a fixed
price or only an upper limit to the aluminum component pricing. This matched
pricing affects substantially all of our North American metal beverage packaging
net sales. The Company also, at times, uses certain derivative instruments such
as option and forward contracts to hedge commodity price risk. At December 31,
1999, the Company had aluminum forward contracts with notional amounts of
$163 million hedging the aluminum in the fixed price sales contracts. Forward
contract agreements expire in less than one year and up to two years. The fair
value of these contracts at December 31, 1999, was $2.1 million. At December 31,
1998, the Company did not have any outstanding commodity option or forward
contracts.
Interest Rate Risk
Interest rate instruments held by the Company at December 31, 1999, and 1998,
included pay-floating and pay-fixed interest rate swaps, interest rate collars
and swaption contracts. Pay-fixed swaps effectively convert floating rate
obligations to fixed-rate instruments. Pay-floating swaps effectively convert
fixed-rate obligations to variable-rate instruments. Swap agreements expire in
one to six years.
Interest rate swap agreements outstanding at December 31, 1999, had
notional amounts of $10 million at a floating rate and $475 million at a fixed
rate, or a net fixed position of $465 million. At December 31, 1998, these
agreements had notional amounts of $10 million at a floating rate and
$528 million at a fixed rate, or a net fixed-rate position of $518 million. The
Company also entered into an interest rate collar agreement in 1998 with a
notional amount of $100 million.
The related notional amounts of interest rate swaps and options serve as
the basis for computing the cash flow under these agreements, but do not
represent the Company's exposure through its use of these instruments. Although
these instruments involve varying degrees of credit and interest risk, the
counterparties to the agreements involve financial institutions which are
expected to perform fully under the terms of the agreements.
The fair value of all non-derivative financial instruments approximates
their carrying amounts with the exception of long-term debt. Rates currently
available to the Company for loans with similar terms and maturities are used to
estimate the fair value of long-term debt based on discounted cash flows. The
fair value of derivatives generally reflects the estimated amounts that Ball
would pay or receive upon termination of the contracts at December 31, 1999, and
1998, taking into account any unrealized gains and losses on open contracts.
Exchange Rate Risk
The Company's foreign currency risk exposure results from fluctuating currency
exchange rates, primarily the strengthening of the U.S. dollar against the Hong
Kong dollar, Canadian dollar, Chinese renminbi, Thai baht and Brazilian real.
The Company faces currency exposure that arises from translating the results of
its global operations and maintaining U.S. dollar debt and payables. The Company
uses forward contracts to manage its foreign currency exposures, and, as a
result, gains and losses on these derivative positions offset, in part, the
impact of currency fluctuations on the existing assets and liabilities. At
December 31, 1999, the notional amount of the Company's foreign exchange risk
management contracts, net of notional amounts of contracts with counterparties
against which the Company has the legal right of offset, was $60 million. The
fair value of these contracts as of December 31, 1999, was $(0.8) million.
In January 1999 the Brazilian government changed its monetary policy,
causing the Brazilian real to devalue. The after-tax effect of the currency
devaluation did not have a significant impact on the Company's consolidated
earnings. However, the Brazilian real continues to be volatile, and actual
results may differ based on future events.
In early July 1997, the government of Thailand changed its monetary policy
to no longer peg the Thai baht to the U.S. dollar. As a result, the Company
recorded a loss that year of $3.2 million, or 11 cents per share, comprised
primarily of the unrealized loss attributable to approximately $23 million of
U.S. dollar-denominated debt held by its 40 percent equity affiliate in
Thailand.
Equity
In connection with the Company's common share repurchase program, the Company
sells put options which give the purchaser of those options the right to sell
shares of the Company's common stock to the Company on specified dates at
specified prices upon the exercise of those options. The put option contracts
allow the Company to determine the method of settlement - cash or shares. As
such, the contracts are considered equity instruments, and changes in the fair
value are not recognized in the Company's financial statements. The Company's
objective in selling put options is to lower the average purchase price of
acquired shares in connection with the share repurchase program. During 1999 the
Company received $1.3 million in premiums for these options. The premiums are
shown as a reduction in treasury stock. As of December 31, 1999, there were put
options outstanding for 200,000 shares, with strike prices ranging from $41 to
$46.97 (the weighted average strike price was $44.77).
11. Leases
The Company leases warehousing and manufacturing space and certain manufacturing
equipment, primarily within the packaging segment, and office space, primarily
within the aerospace and technologies segment. Under certain of these lease
arrangements, Ball has the option to purchase the leased facilities and
equipment for a total purchase price at the end of the lease term of
approximately $96.3 million. If the Company elects not to purchase the
facilities and equipment and does not enter into a new lease arrangement, Ball
has guaranteed the lessors a minimum residual value of approximately
$77.2 million and may incur other incremental costs to discontinue or relocate
the business activities associated with these leased assets. These agreements
contain certain restrictions relating to dividends, investments and borrowings.
Total noncancellable operating leases in effect at December 31, 1999, require
rental payments of $40.7 million, $33.8 million, $16.3 million, $10.8 million
and $8.4 million for the years 2000 through 2004, respectively, and
$15.9 million combined for all years thereafter. Lease expense for all operating
leases was $44.8 million, $38.5 million and $34.7 million in 1999, 1998 and
1997, respectively.
12. Taxes on Income
The amounts of earnings (losses) before income taxes by national jurisdiction
follow:
($ in millions) 1999 1998 1997
---------- ---------- ----------
U.S. $161.5 $ 89.6 $ 82.4
Foreign 9.7 (62.3) 3.5
---------- ---------- ----------
$ 171.2 $ 27.3 $ 85.9
========== ========== ===========
The provision for income tax expense (benefit) was as follows:
($ in millions) 1999 1998 1997
---------- ---------- ----------
Current
U.S. $ 23.5 $ 7.6 $ 9.3
State and local 2.2 2.8 2.2
Foreign 4.9 6.0 3.4
---------- ---------- ----------
Total current 30.6 16.4 14.9
---------- ---------- ----------
Deferred
U.S. 28.7 (8.1) 10.6
State and local 4.6 (1.6) 2.2
Foreign 1.0 2.1 4.3
---------- ---------- ----------
Total deferred 34.3 (7.6) 17.1
---------- ---------- ----------
Provision for income taxes $ 64.9 $ 8.8 $ 32.0
========== ========== ==========
The provision for income taxes recorded within the consolidated statement
of earnings differs from the amount of income tax expense determined by applying
the U.S. statutory federal income tax rate to pretax earnings as a result of the
following:
($ in millions) 1999 1998 1997
---------- ---------- ----------
Statutory U.S. federal income tax $ 59.9 $ 9.6 $ 30.1
Increase (decrease) due to:
Company-owned life insurance (2.1) (5.2) (6.2)
Research and development tax
credits (3.0) (2.9) (2.5)
Tax effects of foreign operations
and royalty income 2.9 9.4 8.0
State and local income taxes, net 4.4 0.8 2.9
Other, net 2.8 (2.9) (0.3)
---------- ---------- ----------
Provision for income tax expense $ 64.9 $ 8.8 $ 32.0
========== ========== ==========
Effective income tax rate expressed
as a percentage of pretax earnings 37.9% 32.2% 37.2%
========== ========== ==========
Effective in 1999 the Company elected to treat certain investments in the
PRC as partnerships for U.S. tax purposes, resulting in an estimated capital
loss, for tax purposes, of $65 million with a potential tax benefit of
$25 million. As a result of the Company's existing net capital loss position,
and considering currently determinable carryback and carryforward opportunities,
a tax valuation allowance of $21.6 million has been recognized. At December 31,
1999, the Company has alternative minimum tax credits of $12.8 million which may
be carried forward indefinitely.
Provision has not been made for additional U.S. or foreign taxes on
undistributed earnings of controlled foreign corporations where such earnings
will continue to be reinvested. It is not practicable to estimate the additional
taxes, including applicable foreign withholding taxes, that might become payable
upon the eventual remittance of the foreign earnings for which no provision has
been made.
The significant components of deferred tax assets and liabilities at
December 31 were:
($ in millions) 1999 1998
------------ ------------
Deferred tax assets:
Deferred compensation $ (28.3) $ (23.7)
Accrued employee benefits (62.2) (58.0)
Plant closure costs (31.6) (37.6)
Other (48.0) (58.0)
------------ ------------
Total deferred tax assets (170.1) (177.3)
------------ ------------
Deferred tax liabilities:
Depreciation 121.6 114.9
Other 36.2 20.6
------------ ------------
Total deferred tax liabilities 157.8 135.5
------------ ------------
Net deferred tax asset $ (12.3) $ (41.8)
============ ============
Net income tax payments were $29.6 million, $20.5 million and $4.2 million
for 1999, 1998 and 1997, respectively.
13. Pension and Other Postretirement and Postemployment Benefits
The Company's noncontributory pension plans cover substantially all U.S. and
Canadian employees meeting certain eligibility requirements. The defined benefit
plans for salaried employees provide pension benefits based on employee
compensation and years of service. In addition, the plan covering salaried
employees in Canada includes a defined contribution feature. Plans for hourly
employees provide benefits based on fixed rates for each year of service. Ball's
policy is to fund the plans on a current basis to the extent deductible under
existing tax laws and regulations and in amounts sufficient to satisfy statutory
funding requirements. Plan assets consist primarily of common stocks and fixed
income securities.
The Company sponsors defined benefit and defined contribution
postretirement health care and life insurance plans for substantially all U.S.
and Canadian employees. Employees may also qualify for long-term disability,
medical and life insurance continuation and other postemployment benefits upon
termination of active employment prior to retirement. All of the Ball-sponsored
plans are unfunded and, with the exception of life insurance benefits, are
self-insured.
In Canada, the Company provides supplemental medical and other benefits in
conjunction with Canadian Provincial health care plans. Most U.S. salaried
employees who retired prior to 1993 are covered by noncontributory defined
benefit medical plans with capped lifetime benefits. Ball provides a fixed
subsidy toward each retiree's future purchase of medical insurance for U.S.
salaried and substantially all nonunion hourly employees retiring after
January 1, 1993. Life insurance benefits are noncontributory. Ball has no
commitments to increase benefits provided by any of the postretirement benefit
plans.
An analysis of the change in benefit accruals for 1999 and 1998 follows:
Amounts recognized in the balance sheet consist of:
Components of net periodic benefit cost were:
Weighted average assumptions at December 31 were:
The expected long-term rates of return on assets are calculated by applying
the expected rate of return to a market related value of plan assets at the
beginning of the year, adjusted for the weighted average expected contributions
and benefit payments. The market related value of plan assets used to calculate
the expected return on plan assets was $382.8 million, $329.5 million and
$300.4 million for 1999, 1998 and 1997, respectively.
For pension plans, accumulated gains and losses in excess of a 10 percent
corridor, the prior service cost and the transition asset are being amortized on
a straight-line basis from the date recognized over the average remaining
service period of active participants. For other postretirement benefits, the
10 percent corridor is not used for accumulated actuarial gains and losses, and
they are amortized over 10 years.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $136.4 million, $135.3 million and $105.2 million,
respectively, as of December 31, 1999.
For the U.S. and Canadian plans at December 31, 1999, net health care cost
trend rates of 6 percent and 7.5 percent, respectively, were used for pre-65
benefits and 5.5 percent and 7.5 percent, respectively, were used for post-65
benefits for 2000. Trend rates for U.S. plans were assumed to decrease to
5.5 percent by 2001 for pre-65 benefits and for post-65 benefits remain at
5.5 percent in subsequent years. Trend rates for Canadian plans for pre-65 and
post-65 benefits were assumed to decrease to 3.5 percent by 2004 and remain at
this level in subsequent years.
Assumed health care cost trend rates can have a significant effect on the
amounts reported for the health care plan. A one percentage point change in
assumed health care cost trend rates would increase or decrease the total of
service and interest cost by approximately $0.2 million and the postretirement
benefit obligation by approximately $3.4 million.
The additional minimum pension liability, less related intangible asset,
was recognized net of tax benefits as a component of shareholders' equity within
accumulated other comprehensive loss.
Other Benefit Plans
Effective January 1, 1996, substantially all employees within the Company's
aerospace and technologies segment who participate in Ball's 401(k) salary
conversion plan receive a performance-based matching cash contribution of up to
4 percent of base salary. Ball did not record any compensation related to this
match in 1999, but did record $1.6 million and $4.1 million in compensation
expense in 1998 and 1997, respectively. In addition, substantially all U.S.
salaried employees and certain U.S. nonunion hourly employees who participate in
Ball's 401(k) salary conversion plan automatically participate in the Company's
ESOP through an employer matching contribution. Cash contributions to the ESOP
trust, including preferred dividends, are used to service the ESOP debt and were
$11.6 million in 1999, $10.7 million in 1998 and $10.6 million in 1997. Interest
paid by the ESOP trust for its borrowings was $2.6 million, $3.3 million and
$3.6 million for 1999, 1998 and 1997, respectively.
14. Shareholders' Equity
At December 31, 1999, the Company had 120 million shares of common stock and
15 million shares of preferred stock authorized, both without par value.
Preferred stock includes 600,000 authorized but unissued shares designated as
Series A Junior Participating Preferred Stock and 2,100,000 authorized shares
designated as Series B ESOP Convertible Preferred Stock (ESOP Preferred).
The ESOP Preferred has a stated value and liquidation preference of $36.75
per share and cumulative annual dividends of $2.76 per share. The ESOP Preferred
shares are entitled to 1.3 votes per share and are voted with common shares as a
single class upon matters submitted to a vote of Ball's shareholders. Each ESOP
Preferred share has a guaranteed value of $36.75 and is convertible into
1.1552 shares of Ball Corporation common stock.
Under the Company's successor Shareholder Rights Plan, effective August
1997, one Preferred Stock Purchase Right (Right) is attached to each outstanding
share of Ball Corporation common stock. Subject to adjustment, each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $130 per Right. If a person or group acquires 15 percent or
more of the Company's outstanding common stock (or upon occurrence of certain
other events), the Rights (other than those held by the acquiring person) become
exercisable and generally entitle the holder to purchase shares of Ball
Corporation common stock at a 50 percent discount. The Rights, which expire in
2006, are redeemable by the Company at a redemption price of one cent per Right
and trade with the common stock. Exercise of such Rights would cause substantial
dilution to a person or group attempting to acquire control of the Company
without the approval of Ball's board of directors. The Rights would not
interfere with any merger or other business combinations approved by the board
of directors.
Common shares were reserved at December 31, 1999, for future issuance under
the employee stock purchase, stock option, dividend reinvestment and restricted
stock plans, as well as to meet conversion requirements of the ESOP Preferred.
In connection with the employee stock purchase plan, the Company
contributes 20 percent of up to $500 of each participating employee's monthly
payroll deduction toward the purchase of the Company's common stock. Company
contributions for this plan were approximately $1.8 million in 1999,
$1.6 million in 1998 and $1.5 million in 1997.
Accumulated Other Comprehensive Loss
The activity related to accumulated other comprehensive loss was as follows:
Minimum Accumulated
Foreign Pension Other
Currency Liability Comprehensive
($ in millions) Translation (net of tax) Loss
------------- ------------- -------------
December 31, 1996 $ (18.3) $ (2.4) $ (20.7)
1997 Change (2.6) 0.5 (2.1)
------------- ------------- -------------
December 31, 1997 (20.9) (1.9) (22.8)
1998 Change (7.7) (1.2) (8.9)
------------- ------------- -------------
December 31, 1998 (28.6) (3.1) (31.7)
1999 Change 4.0 1.0 5.0
------------- ------------- -------------
December 31, 1999 $ (24.6) $ (2.1) $ (26.7)
============= ============= =============
The minimum pension liability component of other comprehensive earnings
(loss) is presented net of related tax expense (benefit) of $0.7 million,
$(0.4) million and $0.4 million for the years ended December 31, 1999, 1998 and
1997, respectively. No tax benefit has been provided on the foreign currency
translation loss component for any period, as the undistributed earnings of the
Company's foreign investments will continue to be reinvested.
Stock Options and Restricted Shares
The Company has several stock option plans under which options to purchase
shares of common stock have been granted to officers and key employees of Ball
at the market value of the stock at the date of grant. Payment must be made at
the time of exercise in cash or with shares of stock owned by the option holder,
which are valued at fair market value on the date exercised. Options terminate
10 years from date of grant. Tier A options are exercisable in four equal
installments commencing one year from date of grant, with the exception of
certain Tier A options granted in 1998, which become exercisable after the
Company's common stock price reaches specified prices for 10 consecutive days,
or at the end of five years, whichever comes first. Tier B options vested at the
date of grant, and were exercisable after the Company's common stock price
closed at or above a target price of $50 per share for 10 consecutive days,
which occurred in April 1999. Approximately $4.7 million was recorded as
compensation expense in the second quarter of 1999 in connection with the Tier B
options becoming exercisable, and common stock was increased accordingly. The
target stock price was adjusted based on a compounded annual growth rate of
7.5 percent for individuals retiring prior to the options becoming exercisable.
The Company also granted 130,000 shares of restricted stock to certain
management employees during 1998 at a price of $35 per share. Restrictions on
these shares lapse in tranches based on the Company achieving certain standards
of performance or at the end of seven years, whichever comes first.
A summary of stock option activity for the years ended December 31 follows:
Additional information regarding options outstanding at December 31, 1999,
follows:
These options cannot be traded in any equity market. However, based on the
Black-Scholes option pricing model, adapted for use in valuing compensatory
stock options in accordance with SFAS No. 123, Tier A options granted in 1999,
1998 and 1997 have estimated weighted average fair values at the date of grant
of $17.32 per share, $10.73 per share and $7.06 per share, respectively. Under
the same methodology, Tier B options granted during 1997 have an estimated
weighted average fair value at the date of grant of $8.54 per share. The actual
value an employee may realize will depend on the excess of the stock price over
the exercise price on the date the option is exercised. Consequently, there is
no assurance that the value realized by an employee will be at or near the value
estimated. The fair values were estimated using the following weighted average
assumptions:
1999 Grants 1998 Grants 1997 Grants
----------- ----------- -----------
Expected dividend yield 1.52% 1.31% 2.33%
Expected stock price volatility 29.80% 25.34% 23.32%
Risk-free interest rate 5.34% 5.21% 6.75%
Expected life of options 5.5 years 5.3 years 5.12 years
Ball accounts for its stock-based employee compensation programs using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." If Ball had elected to recognize compensation based upon
the calculated fair value of the options granted after 1994, pro forma net
earnings and earnings per share would have been:
15. Earnings per Share
The following table provides additional information on the computation of
earnings per share amounts.
The following options have been excluded from the computation of the
diluted earnings per share calculation since they were anti-dilutive (i.e., the
exercise price exceeded the average common stock price for the year):
16. Research and Development
Research and development costs are expensed as incurred in connection with the
Company's internal programs for the development of products and processes. Costs
incurred in connection with these programs amounted to $14 million,
$23.7 million and $22.2 million for the years 1999, 1998 and 1997, respectively.
17. Contingencies
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government is disputing the Company's claim to recoverability (by
means of allocation to government contracts) of reimbursed costs associated with
Ball's ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government will not reimburse the
Company for disputed ESOP expenses incurred or accrued after 1995. A deferred
payment agreement for the costs reimbursed through 1995 was entered into between
the government and Ball. On October 10, 1995, the Company filed its complaint
before the Armed Services Board of Contract Appeals (ASBCA) seeking final
adjudication of this matter. Trial before the ASBCA was conducted in January
1997. Since that time, the Defense Contract Audit Agency (DCAA) has issued a
Draft Audit Report disallowing a portion of the Company's ESOP costs for 1994
through 1997 on the asserted basis that the Company's dividend contributions to
the ESOP do not constitute allowable deferred compensation. The Draft Audit
Report takes the position that the disallowance is not covered by the pending
decision by the ASBCA. However, more recently, Ball's Corporate Administrative
Contracting Officer has resolved the DCAA's disallowance in Ball's favor and has
incorporated this favorable resolution into a Memorandum of Agreement with Ball
to close out cost claims for years 1994 through 1997. While the outcome of the
trial is not yet known, the Company's information at this time does not indicate
that this matter will have a material adverse effect upon the liquidity, results
of operations or financial condition of the Company.
From time to time, the Company is subject to routine litigation incident to
its business. Additionally, the U.S. Environmental Protection Agency has
designated Ball as a potentially responsible party, along with numerous other
companies, for the cleanup of several hazardous waste sites. However, the
Company's information at this time does not indicate that these matters will
have a material adverse effect upon the liquidity, results of operations or
financial condition of the Company.
18. Quarterly Results of Operations (Unaudited)
The Company's fiscal quarters end on the Sunday nearest the calendar quarter
end. The fiscal years end on December 31.
1999 Quarterly Information
Fluctuations in sales and earnings for the quarters in 1999 reflected the normal
seasonality of the business as well as the number of days in each fiscal
quarter.
1998 Quarterly Information
In the first quarter, Ball announced that it would relocate its corporate
headquarters to Broomfield, Colorado. The relocation resulted in total charges
of $17.7 million which were recorded over the course of the year. During the
third quarter, the Company acquired certain assets of the North American
beverage can manufacturing business of Reynolds Metals Company, which
significantly increased Ball's metal beverage container operations in the U.S.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its debt and, as a result, recorded an after-tax extraordinary
loss from early debt extinguishment of approximately $12.1 million (40 cents per
share). In the fourth quarter, Ball announced its intention to close two of the
acquired plants as well as two plants in the PRC. The closure of the acquired
plants is being accounted for as part of the Acquisition without a charge to
earnings. In connection with the PRC plant closures and related costs, the
Company recorded a pretax charge of approximately $56.2 million ($31.4 million
after tax or $1.03 per share). Also during the fourth quarter, Ball adopted SOP
No. 98-5, "Reporting on the Costs of Start-Up Activities," in advance of its
required 1999 implementation date and, as a result, recorded an after-tax charge
to earnings of approximately $3.3 million (11 cents per share), retroactive to
January 1, 1998, representing the cumulative effect on prior years of this
change in accounting.
(1) Gross profit is shown after depreciation and amortization of $137.4 million
and $136.7 million for the years ended December 31, 1999, and 1998,
respectively.
Earnings per share calculations for each quarter are based on the weighted
average shares outstanding for that period. As a result, the sum of the
quarterly amounts may not equal the annual earnings per share amount. The
diluted loss per share in the fourth quarter of 1998 is the same as the net loss
per common share because the assumed exercise of stock options and conversion of
the ESOP Preferred stock would have been antidilutive.
Report of Management on Financial Statements
The consolidated financial statements contained in this annual report to
shareholders are the responsibility of management. These financial statements
have been prepared in conformity with generally accepted accounting principles
and, necessarily, include certain amounts based on management's informed
judgments and estimates. Future events could affect these judgments and
estimates.
In fulfilling its responsibility for the integrity of financial
information, management maintains and relies upon a system of internal control
which is designated to provide reasonable assurance that assets are safeguarded
from unauthorized use or disposition, that transactions are executed in
accordance with management's authorization and that transactions are properly
recorded to permit the preparation of reliable financial statements in all
material respects. To assure the continuing effectiveness of the system of
internal controls and to maintain a climate in which such controls can be
effective, management establishes and communicates appropriate written policies
and procedures; carefully selects, trains and develops qualified personnel;
maintains an organizational structure that provides clearly defined lines of
responsibility, appropriate delegation of authority and segregation of duties;
and maintains a continuous program of internal audits with appropriate
management follow-up. Company policies concerning use of corporate assets and
conflicts of interest, which require employees to maintain the highest ethical
and legal standards in their conduct of the Company's business, are important
elements of the internal control system.
The board of directors oversees management's administration of Company
financial reporting practices, internal controls and the preparation of the
consolidated financial statements through its audit committee, which is composed
entirely of independent directors. The audit committee meets periodically with
representatives of management, Company internal audit and PricewaterhouseCoopers
LLP to review the scope and results of audit work, the adequacy of internal
controls and the quality of financial reporting. PricewaterhouseCoopers LLP and
Company internal audit have direct access to the audit committee and the
opportunity to meet the committee without management present to assure a free
discussion of the results of their work and audit findings.
George A. Sissel R. David Hoover
Chairman and Chief Executive Officer Vice Chairman, President and Chief
Financial Officer
Report of Independent Accountants
To the Board of Directors and Shareholders
Ball Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of cash flows and of shareholders' equity
and comprehensive earnings present fairly, in all material respects, the
financial position of Ball Corporation and its subsidiaries at December 31,
1999, and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
January 26, 2000
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Ball Corporation and Subsidiaries
Management's discussion and analysis should be read in conjunction with the
consolidated financial statements and the accompanying notes. Ball Corporation
and subsidiaries are referred to collectively as "Ball" or the "Company" in the
following discussion and analysis.
Overview
Ball significantly increased its North American metal beverage container product
line when it acquired substantially all of the assets of the North American
beverage container operations of Reynolds Metals Company (Acquisition) in the
second half of 1998. In connection with the Acquisition, the Company refinanced
the majority of its outstanding debt, which resulted in an extraordinary charge
in connection with the early extinguishment of that debt. As part of Ball's
comprehensive program to improve earnings, cash flows and operating
efficiencies, the Company closed two of the acquired plants and is in the
process of closing a third. Two plants in the PRC also were closed, and
manufacturing equipment was removed from service at a third plant. Also during
1998 the Company relocated its corporate headquarters to an existing
company-owned building in Colorado.
During 1997 the Company consolidated operations within its North American
metal packaging product lines to reduce costs and increase efficiency,
permanently discontinuing manufacturing operations at three food container
facilities and a Canadian metal beverage container manufacturing facility and
eliminating certain administrative positions within these operations. Ball also
entered the polyethylene terephthalate (PET) plastic container business,
beginning in 1995 with the construction of a pilot line and research and
development center, and currently operates four multi-line manufacturing
facilities.
Acquisitions
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company for approximately $745.4 million, before a refundable
incentive loan of $39 million, a working capital adjustment of an additional
$40.1 million and transaction costs. The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. The Acquisition has been accounted for
as a purchase, with its results included in the Company's consolidated financial
statements effective with the Acquisition.
In connection with the Acquisition, the Company has provided $51.3 million
in the opening balance sheet for certain costs of integrating the acquired
business, including capacity consolidations. The Company finalized its
integration plan during the third quarter of 1999, which includes the closure of
the acquired Richmond, Virginia, headquarters facility in 1998, the closure of
two plants in the first quarter of 1999 and the closure of a third plant which
was phased out, beginning in the fourth quarter of 1999 and concluding in the
first quarter of 2000. Integration costs included $23.3 million for severance,
supplemental unemployment, medical, relocation and other related termination
benefits; $22.8 million for contractual pension and retirement obligations; and
$5.2 million for other plant closure costs. The decrease of $5.5 million from
the previously reported estimate, which was the result of finalizing actuarial
calculations of employee benefit termination costs and refining other exit
costs, has been reflected as a reduction of goodwill. Subsequent increases in
actual costs, if any, will be included in current period earnings, and
decreases, if any, will result in a further reduction of goodwill.
As of December 31, 1999, the Company has made payments of $10.5 million
related to severance, supplemental unemployment, relocation and other
termination costs and $3 million related to other plant closure costs. The
carrying value of the fixed assets held for sale is approximately $21.5 million
at December 31, 1999.
In early 1997 Ball acquired approximately 75 percent of Ball Asia Pacific
Limited, formerly M.C. Packaging (Hong Kong) Limited, for approximately
$179.7 million. During 1998 and 1999, the Company purchased all of the remaining
direct and indirect minority interests in Ball Asia Pacific Limited. In the
third quarter of 1997, the Company acquired certain PET container assets for
approximately $42.7 million from Brunswick Container Corporation.
Dispositions and Other Transactions
In connection with an announcement in December 1998 to close two plants and take
other actions in the PRC, the Company recorded a pretax charge of $56.2 million
($31.4 million after tax or $1.03 per share) as a preliminary estimate of the
related costs to write down to net realizable value certain buildings and
equipment by $22.8 million, goodwill by $15.3 million, inventory by $2.5 million
and machinery spare parts by $3.5 million, as well as $12.1 million for other
assets and related costs. The carrying value of the fixed assets held for sale
is approximately $10 million at December 31, 1999. Also during 1998 the Company
relocated its corporate headquarters to an existing company-owned building in
Broomfield, Colorado, resulting in a pretax charge of $17.7 million
($10.8 million after tax or 36 cents per share).
In the second quarter of 1997, the Company recorded a pretax charge of
$3 million ($1.8 million after tax or six cents per share) for the closure of a
small PET container manufacturing facility.
Ball sold its equity investment in Datum Inc. (Datum), a time and frequency
measurement device business, in the first half of 1997 for cash of approximately
$26.2 million, resulting in a pretax gain of $11.7 million ($7.1 million after
tax or 23 cents per share). Ball's share of Datum's earnings under the equity
method of accounting was $0.5 million in 1997.
In the fourth quarter of 1997, Ball disposed of or wrote down to estimated
net realizable value certain equity investments, resulting in a net pretax gain
of $0.3 million. The Company's equity in the net earnings of these affiliates
was not significant in 1997.
Consolidated Sales and Earnings
Ball's operations are organized along its product lines and include two segments
- - the packaging segment and the aerospace and technologies segment. The
following table summarizes the results of these two segments:
Packaging Segment
The packaging segment includes the manufacture and sale of metal and PET
containers for use in beverage and food packaging. The Company's packaging
operations are located in and serve North America (the U.S. and Canada) and Asia
(primarily the PRC). Packaging operations in the U.S. have increased as a result
of a 1998 acquisition, while operations in Asia have also increased as a result
of the early 1997 acquisition of a controlling interest in Ball Asia Pacific
Limited.
Packaging segment sales were up significantly in 1999 compared to 1998
largely as a result of the incremental business from the Acquisition in the
second half of 1998. Segment operating margins increased to 8.6 percent in 1999
from 6.5 percent in 1998 and 5.4 percent in 1997, excluding the effects of plant
closures and disposition costs. The improvement in margins reflects the
increased volume in each line of business, improved production efficiencies and
reduced fixed and variable costs in connection with plant closures in the U.S.
and the PRC.
North American metal beverage can sales, which represented approximately
70 percent of segment sales in 1999, increased approximately 40 percent compared
to 1998, which was higher than 1997 net sales by approximately 45 percent. The
increase in 1999 compared to 1998 primarily was due to the additional sales
volume from the acquired plants, as well as Ball's original plants running at
full capacity, partially offset by the effect on revenues of lower aluminum
commodity prices. The higher sales in 1998 compared to 1997 reflected new
customer commitments and strong soft drink industry demand. Ball's beverage can
shipments increased approximately 42 percent in 1999, primarily as a result of
the Acquisition. Based on publicly available industry information, the Company
estimates that shipments for the metal beverage container product line were
approximately 35 percent of total U.S. and Canadian shipments.
North American metal food container sales, which comprised approximately
16 percent of segment sales in 1999, increased approximately 4 percent over 1998
and 5 percent over 1997. This increase was the result of stronger sales in
seasonal and nonseasonal lines with the Alaskan salmon catch and the harvest and
pack conditions in the Midwest both being better during 1999. For the first
time, shipments from the metal food container product line exceeded five billion
units, which the Company estimates to be approximately 16 percent of total U.S.
and Canadian metal food container shipments in 1999, based on publicly available
industry information.
Sales in the plastic (PET) container product line have increased steadily
over the three-year period with 1999 exceeding 1998 by approximately 7 percent,
which exceeded 1997 by approximately 43 percent. The increase in 1999 over 1998
largely was due to additional volume from a recently expanded facility while the
increase in 1998 over 1997 included additional sales from new business acquired
in the third quarter of 1997 as well as higher production capacity due to the
first full year of operations of an East Coast plant. While the sales mix in the
plastic container product line continues to be weighted primarily toward
carbonated soft drinks and water, the Company is developing plastic beer bottles
using a multi-layer technology and is introducing this beverage package in
limited markets.
Sales within the international packaging product line in 1999 were
comprised of the sales within the PRC as well as revenues from technical
services to licensees. Sales for this product line decreased approximately
5 percent in 1999 compared to 1998 and approximately 14 percent from 1997. The
closure of two plants in the PRC during the first quarter of 1999 contributed to
the lower sales for the year. Sales within the PRC have been negatively affected
by a soft metal beverage container market combined with industry overcapacity.
Aerospace and Technologies Segment
Sales in the aerospace and technologies segment increased in 1999 in comparison
to 1998 as a result of increased program activity. Earnings results were lower
due largely to costs to develop antennas which employ Ball technology for
wireless personal communications systems. The related sales have not yet been
realized to offset these costs, which were planned as part of the Company's
strategy to extend into commercial markets key technologies it has developed in
governmental business.
The sales reduction in the aerospace and technologies segment from 1997 to
1998 reflects, in large part, reduced activity in connection with certain
government programs and the unusually strong demand in the first half of 1997
for certain telecommunications equipment and related products. Demand for those
products in 1998 returned to more normal levels. The operating earnings decrease
in 1998 reflected the effect of lower sales in 1998 and, by comparison, the
inclusion in the first half of 1997 of one-time early delivery incentives earned
in connection with telecommunications products.
Sales to the U.S. government, either as a prime contractor or as a
subcontractor, represented approximately 86 percent, 90 percent and 87 percent
of segment sales in 1999, 1998 and 1997, respectively. Major industry trends
have not changed significantly, with Department of Defense and NASA budgets
remaining relatively flat. However, there is a growing worldwide market for
commercial space activities. Consolidation in the industry continues, and there
is strong competition for business. Backlog for the aerospace and technologies
segment at December 31, 1999, and 1998, was approximately $346 million and
$296 million, respectively. Year-to-year comparisons of backlog are not
necessarily indicative of the trend of future operations.
Interest and Taxes
Interest expense increased to $107.6 million in 1999, compared to $78.6 million
in 1998 and $53.5 million in 1997. The increase in total interest cost in 1999
compared to 1998 was largely attributable to the additional debt associated with
the 1998 Acquisition for a full year.
Ball's consolidated effective income tax rate was 37.9 percent in 1999,
compared to 32.2 percent in 1998 and 37.2 percent in 1997. The higher tax rate
for 1999 compared to 1998 is primarily related to the phase-in effects of the
previously reported 1996 legislated changes in the tax treatment of the costs of
company-owned life insurance, the impact of a full year of goodwill amortization
related to the book and tax basis differences of the assets and liabilities in
the Acquisition and the favorable settlement in 1998 of various issues with
taxing authorities, all of which were partially offset by the net tax effects of
foreign operations. The lower tax rate for 1998 compared to 1997 is largely
attributed to the 1998 settlement of various issues with taxing authorities.
Results of Equity Affiliates
Equity earnings in affiliates are largely attributable to equity investments in
the PRC, Thailand and Brazil. Equity in losses of affiliates was $0.2 million in
1999 compared to equity in earnings of $5.6 million in 1998 and equity in losses
of $0.7 million in 1997. Results in Thailand for 1999 were hampered by slow
domestic sales coupled with the disruption of that business' export sales. The
improved results in 1998 compared to 1997 reflect the effects of the
strengthening of the Thai baht and reduced start-up costs compared to 1997 when
operations of certain affiliates in Brazil, Thailand and the PRC began.
Other Items
Combined selling and administrative and receivable securitization fees and
product development expenses were $154.5 million, $133.2 million and
$118.6 million for 1999, 1998 and 1997, respectively. Higher consolidated
selling and administrative expenses in 1999 and 1998 (for a partial year)
compared to 1997 were due partially to the additional costs associated with the
plants acquired in August 1998, including salaries and interim administrative
support. Also contributing to the increase were higher incentive compensation
costs and, in 1999, a nonrecurring $4.7 million charge in the second quarter
associated with an executive stock option grant which vested in April when the
Company's closing stock price reached specified levels. Common stock was
increased accordingly.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its existing debt and, as a result, recorded a pretax charge
for early extinguishment of the debt of approximately $19.9 million
($12.1 million after tax or 40 cents per share).
Also, in 1998 the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities," in advance of its required 1999 implementation date. SOP
No. 98-5 requires that costs of start-up activities and organizational costs, as
defined, be expensed as incurred. In accordance with this statement, the Company
recorded an after-tax charge to earnings of approximately $3.3 million (11 cents
per share), retroactive to January 1, 1998, representing the cumulative effect
of this change in accounting on prior years.
Financial Position, Liquidity and Capital Resources
Cash flows from operating activities were $306 million in 1999 compared to
$387.1 million in 1998 and $143.5 million in 1997. The decrease in 1999 from
1998 was largely due to improved operating results and higher collections on
receivables offset by higher inventories, primarily due to purchases of aluminum
late in 1999 in anticipation of a price increase. The increase in 1998 compared
to 1997 resulted primarily from improved operating results in North America and
a reduction in the cash used for working capital.
Capital expenditures, excluding effects of business acquisitions and
dispositions, were $107 million, $84.2 million and $97.7 million in 1999, 1998
and 1997, respectively. Higher spending in 1999 compared to 1998 was primarily
related to the Acquisition. Spending in 1997 included amounts to complete two
new metal packaging plants in the PRC, as well as spending within Ball Asia
Pacific Limited. In 2000 total capital spending and investments are anticipated
to be approximately $150 million.
Debt at December 31, 1999, decreased $159.9 million to $1,196.7 million
from $1,356.6 million at year end 1998, while cash and temporary investments
increased slightly. The reduction in debt was due largely to improved earnings
and cash collections on receivables, partially offset by increased aluminum raw
material inventories. Consolidated debt-to-total capitalization improved to
62.7 percent at December 31, 1999, from 67.7 percent at year end 1998.
In connection with the Acquisition in 1998, the Company refinanced
approximately $521.9 million of its existing debt and, as a result, recorded an
after-tax extraordinary charge from the early extinguishment of debt of
approximately $12.1 million (40 cents per share). The Acquisition and the
refinancing, including related costs, were financed with a placement of
$300 million in 7.75% Senior Notes due in 2006, $250 million in 8.25% Senior
Subordinated Notes due in 2008 and approximately $808.2 million from a Senior
Credit Facility. The Senior Credit Facility bears interest at variable rates and
is comprised of four separate facilities: (1) Term Loan A for $350 million due
in 2004, (2) Term Loan B for $200 million due in 2006, (3) a revolving credit
facility which provides the Company with up to $650 million, comprised of a
$150 million, 364-day annually renewable facility and a $450 million long-term
committed facility expiring in 2004 and (4) a $50 million long-term committed
Canadian facility. At December 31, 1999, approximately $585 million was
available under the revolving credit facilities.
All of the Senior Notes and Senior Subordinated Notes were exchanged as of
January 27, 1999. The terms of the new notes are substantially identical in all
respects (including principal amount, interest rate, maturity, ranking and
covenant restrictions) to the terms of the notes for which they were exchanged
except that the new notes are registered under the Securities Act of 1933, as
amended, and therefore are not subject to certain restrictions on transfer
except as described in the Prospectus for the Exchange Offer. The note
agreements provide that if the new notes are assigned investment grade ratings
and the Company is not in default, certain covenant restrictions will be
suspended.
The Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional and joint and several basis
by certain of the Company's domestic wholly owned subsidiaries. All amounts
outstanding under the Senior Credit Facility are secured by (1) a pledge of
100 percent of the stock owned by the Company of its direct and indirect
majority-owned domestic subsidiaries and (2) a pledge of the Company's stock,
owned directly or indirectly, of certain foreign subsidiaries which equals
65 percent of the stock of each such foreign subsidiary. Separate financial
statements for the guarantor subsidiaries and the non-guarantor subsidiaries are
not presented because management has determined that such financial statements
would not be material to investors. Condensed, consolidating financial
information for the Company, segregating the guarantor subsidiaries and
non-guarantor subsidiaries, will be provided as a separate exhibit to the
Company's Form 10-K for the year ended December 31, 1999.
Ball's Asian subsidiary and its consolidated affiliates had short-term
uncommitted credit facilities of approximately $113 million, of which
$57.2 million was outstanding at December 31, 1999.
The U.S. note agreements, bank credit agreement, ESOP debt guarantee and
industrial development revenue bond agreements contain certain restrictions
relating to dividends, investments, guarantees and the incurrence of additional
indebtedness.
A securitization agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
businesses. In December 1998 the designated pool of receivables was increased to
provide for sales of up to $125 million from the previous amount of $75 million.
Net funds received from the sale of the accounts receivable totaled
$122.5 million at both December 31, 1999, and 1998. Fees incurred in connection
with the sale of accounts receivable totaled $7 million in 1999 and $4 million
in each of 1998 and 1997.
Cash dividends paid on common stock in 1999, 1998 and 1997 were 60 cents
per share each year.
Financial and Derivative Instruments and Risk Management
The Company is subject to various risks and uncertainties due to the competitive
nature of the industries in which it participates, its operations in developing
markets outside the U.S., changing commodity prices and changing capital
markets.
Policies and Procedures
In the ordinary course of business, the Company employs established risk
management policies and procedures to reduce its exposure to commodity price
changes, changes in interest rates, fluctuations in foreign currencies and the
Company's common share repurchase program. The Company's objective in managing
its exposure to commodity price changes is to limit the impact of raw material
price changes on earnings and cash flow through arrangements with customers and
suppliers and, at times, through the use of certain derivative instruments such
as options and forward contracts designated as hedges. The Company's objective
in managing its exposure to interest rate changes is to limit the impact of
interest rate changes on earnings and cash flow and to lower its overall
borrowing costs. To achieve these objectives, the Company primarily uses
interest rate swaps, collars and options to manage the Company's mix of floating
and fixed-rate debt between a minimum and maximum percentage, which is set by
policy. The Company's objective in managing its exposure to foreign currency
fluctuations is to protect foreign cash flow and reduce earnings volatility
associated with foreign exchange rate changes.
Unrealized losses on foreign exchange forward contracts are recorded in the
balance sheet as other current liabilities. Realized gains/losses from hedges
are classified in the income statement consistent with accounting treatment of
the item being hedged. The Company accrues the differential for interest rate
swaps to be paid or received under these agreements as adjustments to interest
expense over the lives of the swaps. Gains and losses upon the early termination
of swap agreements are deferred in long-term liabilities and amortized as an
adjustment to interest expense over the remaining term of the agreement.
The Company has estimated its market risk exposure using sensitivity
analysis. Market risk exposure has been defined as the changes in fair value of
a derivative instrument assuming a hypothetical 10 percent adverse change in
market prices or rates. The results of the sensitivity analysis are summarized
below. Actual changes in market prices or rates may differ from hypothetical
changes.
Commodity Price Risk
The Company primarily manages the commodity price risk in connection with market
price fluctuations of aluminum by entering into customer sales contracts for
cans and ends which include aluminum-based pricing terms which consider price
fluctuations under its commercial supply contracts for aluminum purchases. The
terms include "band" pricing where there is an upper and lower limit, a fixed
price or only an upper limit to the aluminum component pricing. This matched
pricing affects substantially all of the Company's North American metal beverage
packaging net sales. The Company also, at times, uses certain derivative
instruments such as option and forward contracts to hedge commodity price risk.
At December 31, 1999, the Company had aluminum forward contracts with notional
amounts of $163 million hedging the aluminum in the fixed price sales contracts.
Forward contract agreements expire in less than one year and up to two years.
The fair value of these contracts at December 31, 1999, was $2.1 million. At
December 31, 1998, the Company did not have any outstanding commodity option or
forward contracts.
Considering the Company's commodity price exposures and the effects of
derivative instruments, a hypothetical 10 percent change in commodity prices
would not have a material impact on earnings, cash flow or financial position
over a one-year period. Actual changes in market prices may differ from
hypothetical changes.
Interest Rate Risk
Interest rate instruments held by the Company at December 31, 1999, and 1998,
included pay-floating and pay-fixed interest rate swaps, interest rate collars
and swaption contracts. Pay-fixed swaps effectively convert floating rate
obligations to fixed-rate instruments. Pay-floating swaps effectively convert
fixed-rate obligations to variable-rate instruments. Swap agreements expire in
one to six years.
Interest rate swap agreements outstanding at December 31, 1999, had
notional amounts of $10 million at a floating rate and $475 million at a fixed
rate, or a net fixed position of $465 million. At December 31, 1998, these
agreements had notional amounts of $10 million at a floating rate and
$528 million at a fixed rate, or a net fixed-rate position of $518 million. The
Company also entered into an interest rate collar agreement in 1998 with a
notional amount of $100 million.
The related notional amounts of interest rate swaps and options serve as
the basis for computing the cash flow under these agreements, but do not
represent the Company's exposure through its use of these instruments. Although
these instruments involve varying degrees of credit and interest risk, the
counterparties to the agreements involve financial institutions which are
expected to perform fully under the terms of the agreements.
Based on the Company's interest rate exposure at December 31, 1999, assumed
floating rate debt levels throughout 2000 and the effects of derivative
instruments, a 10 percent change in interest rates could have an estimated
$1.9 million after-tax impact on earnings over a one-year period. Actual results
may vary based on actual changes in market prices and rates. The estimated
impact over a one-year period was $2 million after tax as of December 31, 1998.
The fair value of all non-derivative financial instruments approximates
their carrying amounts with the exception of long-term debt. Rates currently
available to the Company for loans with similar terms and maturities are used to
estimate the fair value of long-term debt based on discounted cash flows. The
fair value of derivatives generally reflects the estimated amounts that Ball
would pay or receive upon termination of the contracts at December 31, 1999, and
1998, taking into account any unrealized gains and losses on open contracts.
Exchange Rate Risk
The Company's foreign currency risk exposure results from fluctuating currency
exchange rates, primarily the strengthening of the U.S. dollar against the Hong
Kong dollar, Canadian dollar, Chinese renminbi, Thai baht and Brazilian real.
The Company faces currency exposure that arises from translating the results of
its global operations and maintaining U.S. dollar debt and payables. The Company
uses forward contracts to manage its foreign currency exposures, and, as a
result, gains and losses on these derivative positions offset, in part, the
impact of currency fluctuations on the existing assets and liabilities. At
December 31, 1999, the notional amount of the Company's foreign exchange risk
management contracts, net of notional amounts of contracts with counterparties
against which the Company has the legal right of offset, was $60 million. The
fair value of these contracts as of December 31, 1999, was $(0.8) million.
Considering the Company's derivative financial instruments outstanding at
December 31, 1999, and the currency exposures, a hypothetical 10 percent
unfavorable change in the exchange rates, compared to the U.S. dollar, could
have an estimated $2 million after-tax detrimental impact on earnings over a
one-year period. Actual changes in market prices or rates may differ from
hypothetical changes. The estimated impact over a one-year period was $3 million
after tax as of December 31, 1998.
In January 1999, the Brazilian government changed its monetary policy,
causing the Brazilian real to devalue. The after-tax effect of the currency
devaluation did not have a significant impact on the Company's consolidated
earnings. However, the Brazilian real continues to be volatile, and actual
results may differ based on future events.
In early July 1997, the government of Thailand changed its monetary policy
to no longer peg the Thai baht to the U.S. dollar. As a result, the Company
recorded a loss that year of $3.2 million, or 11 cents per share, comprised
primarily of the unrealized loss attributable to approximately $23 million of
U.S. dollar-denominated debt held by its 40 percent equity affiliate in
Thailand.
Equity
In connection with the Company's share repurchase program, the Company sells put
options which give the purchaser of those options the right to sell shares of
the Company's common stock to the Company on specified dates at specified prices
upon the exercise of those options. The put option contracts allow the Company
to determine the method of settlement - cash or shares. As such, the contracts
are considered equity instruments, and changes in the fair value are not
recognized in the Company's financial statements. The Company's objective in
selling put options is to lower the average purchase price of acquired shares in
connection with the share repurchase program. During 1999 the Company received
$1.3 million in premiums for these options. The premiums are shown as a
reduction in treasury stock. As of December 31, 1999, there were put options
outstanding for 200,000 shares, with strike prices ranging from $41 to $46.97
(the weighted average strike price was $44.77).
New Accounting Pronouncements
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," establishes new accounting and
reporting standards for the costs of computer software developed or obtained for
internal use and was effective for Ball in 1999. The adoption of SOP No. 98-1
did not have a significant impact on the Company's results on operations or
financial condition in 1999.
During the fourth quarter of 1998, Ball adopted SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities," in advance of its required 1999
implementation date. SOP No. 98-5 requires that costs of start-up activities and
organizational costs, as defined, be expensed as incurred. In accordance with
this statement, the Company recorded an after-tax charge to earnings of
approximately $3.3 million (11 cents per share), retroactive to January 1, 1998,
representing the cumulative effect of this change in accounting on prior years.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," essentially requires all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting practices for hedge instruments. In June 1999 SFAS No. 137 was
issued to defer the effective date of SFAS No. 133 by one year. As a result,
SFAS No. 133 will not be effective for Ball until 2001. The effect, if any, of
adopting this standard has not yet been determined.
Contingencies
Year 2000 Systems Review
Prior to January 1, 2000, many computer systems and other equipment with
embedded chips or processors used only two digits to represent the year and, as
a result, there was concern that the computer systems would be unable to process
accurately certain data before, during or after the year 2000. This was commonly
known as the Year 2000 issue which could have arisen at any point in the
company's supply, manufacturing, processing, distribution and financial chains.
As of February 2000, the Company can report that there have been no material
adverse consequences or significant interruptions of normal operations as a
result of Year 2000 problems.
Over the course of the past several years, systems installations, upgrades
and enhancements were performed by the Company in the ordinary course of
business with attention given to Year 2000 matters. As a result, when the formal
Year 2000 program was instituted in 1996, many of the Year 2000 matters
potentially affecting the Company had either been resolved or were near
resolution. The formal program was instituted to make the remaining software and
systems Year 2000 compliant in time to minimize significant negative effects on
operations and was divided into five major phases: (1) project initiation,
(2) awareness, (3) assessment, (4) remediation and (5) testing and
implementation.
The program also was divided into two major efforts: (1) corporate and the
packaging segment (both North America and international) and (2) the aerospace
and technologies segment. Within these two areas, the Company identified certain
information technology systems as significant, which included manufacturing
applications, financial systems, human resources systems, environmental control
systems and quality systems, among others. All phases, including testing, were
completed for all identified significant systems by December 31, 1999.
The Company's foreign technology licensees and 50 percent or less joint
ventures were provided with Ball's formal compliance program and encouraged to
follow the North American procedures.
Because most of the Company's efforts were initiated to address specific
business requirements or to stay technologically current, it was difficult to
quantify costs incurred solely in conjunction with the Year 2000 project.
However, certain incremental costs of approximately $3 million were incurred and
identified, including contractor assistance, the purchase of software to manage
the project and software to check personal computer hardware and software
compliance.
Ball relies on third-party suppliers for raw materials, water, utilities,
transportation, banking and other key services. The possibility of principal
suppliers, including utilities, experiencing Year 2000-related problems could
result in delays in product or service deliveries from such suppliers and
disrupt the Company's ability to supply its products or services. To assess the
risks associated with both customers and vendors not being ready, Ball assigned
each supplier a level of importance (critical, important or not important). The
Company provided "critical" and "important" third parties with questionnaires,
all of which either responded or were interviewed by telephone as of
December 31, 1999. "Critical" third parties were defined as those who are
sole-source suppliers or who most likely would have an impact on Ball's ability
to conduct business if interruptions of supplies occurred for less than
10 days. "Important" third parties were defined as those which would only have
an impact on the Company's ability to conduct business if interruptions of
supplies or services exceeded 10 days.
Based on these procedures, as well as the Company's meetings with its
larger customers, there was no indication that the third parties would not be
Year 2000 compliant. However, neither the U.S. government nor the PRC government
confirmed Year 2000 readiness.
Prior to January 1, 2000, Ball was unable to determine the effect on the
Company of the uncertainty inherent in the Year 2000 issue associated with the
readiness of suppliers and customers. However, as of February 2000, the Company
has not experienced any significant disruptions or adverse consequences related
to supplier or customer preparedness.
The Company developed contingency plans intended to mitigate the possible
disruption of business operations that could result from third-party Year 2000
issues. Such plans include accelerating raw material delivery schedules,
increasing finished goods inventory levels, securing alternate sources of
supply, adjusting facility shutdown and start-up schedules and other appropriate
measures. The Company's contingency planning was completed by the end of 1999.
While it has not been necessary to implement the plans, they can be implemented
should they be required in the future.
A worst-case scenario for the Company with respect to the Year 2000 issue
could have been the failure of either a critical vendor or the Company's
manufacturing and information systems. Such failures could have resulted in
production outages and lost sales and profits. As of February 2000, there have
been no such failures.
The discussion of the Company's efforts and management's expectations
relating to Year 2000 compliance contains forward-looking statements. The
Company's ability to achieve Year 2000 compliance and the level of associated
incremental costs could be adversely impacted by, among other things, the
possibility of suppliers and customers experiencing Year 2000-related
disruptions, the U.S., PRC and other governments' readiness and unanticipated
problems identified in the ongoing compliance program. However, as of February
2000, the Company does not believe that it will experience any material or
significant interruptions in its normal operations as the result of Year 2000
compliance issues. The Company will continue to monitor and assess its systems
and, where necessary, remediate Year 2000 compliance problems.
The information contained herein regarding the Company's efforts to deal
with the Year 2000 problem applies to all of the Company's products and
services. Such statements are intended as Year 2000 Statements and Year 2000
Readiness Disclosures and are subject to the Year 2000 Information Readiness
Disclosure Act.
Other
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government is disputing the Company's claim to recoverability (by
means of allocation to government contracts) of reimbursed costs associated with
Ball's ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government will not reimburse the
Company for disputed ESOP expenses incurred or accrued after 1995. A deferred
payment agreement for the costs reimbursed through 1995 was entered into between
the government and Ball. On October 10, 1995, the Company filed its complaint
before the Armed Services Board of Contract Appeals (ASBCA) seeking final
adjudication of this matter. Trial before the ASBCA was conducted in January
1997. Since that time, the Defense Contract Audit Agency (DCAA) has issued a
Draft Audit Report disallowing a portion of the Company's ESOP costs for 1994
through 1997 on the asserted basis that the Company's dividend contributions to
the ESOP do not constitute allowable deferred compensation. The Draft Audit
Report takes the position that the disallowance is not covered by the pending
decision by the ASBCA. However, more recently, Ball's Corporate Administrative
Contracting Officer has resolved the DCAA's disallowance in Ball's favor and has
incorporated this favorable resolution into a Memorandum of Agreement with Ball
to close out cost claims for years 1994 through 1997. While the outcome of the
trial is not yet known, the Company's information at this time does not indicate
that this matter will have a material adverse effect upon the liquidity, results
of operations or financial condition of the Company.
From time to time, the Company is subject to routine litigation incident to
its business. Additionally, the U.S. Environmental Protection Agency has
designated Ball as a potentially responsible party, along with numerous other
companies, for the cleanup of several hazardous waste sites. However, the
Company's information at this time does not indicate that these matters will
have a material adverse effect upon the liquidity, results of operations or
financial condition of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting period. Future
events could affect these estimates.
The U.S. economy and the Company have experienced minor general inflation
during the past several years. Management believes that evaluation of Ball's
performance during the periods covered by these consolidated financial
statements should be based upon historical financial statements.
Forward-Looking Statements
The Company has made certain forward-looking statements in this annual report
relating to market growth, increases in market shares, total shareholder return,
improved earnings, positive cash flow, technology upgrades and international
market expansion, among others. These forward-looking statements represent the
Company's goals and are based on certain assumptions and estimates regarding the
worldwide economy, specific industry technological innovations, industry
competitive activity, interest rates, capital expenditures, pricing, currency
movements, product introductions, and the development of certain domestic and
international markets. Some factors that could cause the Company's actual
results or outcomes to differ materially from those discussed in the
forward-looking statements include, but are not limited to, fluctuation in
customer growth and demand; the weather; fuel costs and availability; regulatory
action; federal and state legislation; interest rates; labor strikes; boycotts;
litigation involving antitrust, intellectual property, consumer and other
issues; maintenance and capital expenditures; local economic conditions; the
authorization and control over the availability of government contracts and the
nature and continuation of those contracts and related services provided
thereunder; the success or lack of success of satellite launches and the
businesses and governments associated with the launches; the devaluation of
international currencies; the ability to obtain adequate credit resources for
foreseeable financing requirements of the Company's businesses; the inability of
the Company to achieve Year 2000 readiness; and, the ability of the Company to
acquire other businesses. If the Company's assumptions and estimates are
incorrect, or if it is unable to achieve its goals, then the Company's actual
performance could vary materially from those goals expressed or implied in the
forward-looking statements.
(1) Includes the effect of a change in 1995 to the LIFO method of accounting of
$17.1 million ($10.4 million after tax or 35 cents per share).
(2) See the notes to the Consolidated Financial Statements.
(3) Change in stock price plus dividend yield assuming reinvestment of
dividends.
(4) In 1995, the assumed conversion of preferred stock and exercise of stock
options resulted in a dilutive effect on continuing operations.
Accordingly, the diluted loss per share amounts are required to be used for
discontinued operations, resulting in a lower total loss per share than the
loss per common share.
(5) Includes amounts attributed to discontinued operations.
Quarterly Stock Prices and Dividends
Quarterly prices for the Company's common stock, as reported on the composite
tape, and quarterly dividends in 1999 and 1998 were: