10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 16, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
--------------------
Commission file number 1-7349
BALL CORPORATION
State of Indiana 35-0160610
10 Longs Peak Drive, P.O. Box 5000
Broomfield, CO 80021-2510
303/469-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 6, 2000
- ------------------ --------------------------------
Common Stock, 29,114,736 shares
without par value
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended July 2, 2000
INDEX
Page Number
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements
of Earnings for the Three- and Six-Month Periods
Ended July 2, 2000, and July 4, 1999 3
Unaudited Condensed Consolidated Balance Sheets at
July 2, 2000, and December 31, 1999 4
Unaudited Condensed Consolidated Statements of
Cash Flows for the Six-Month Periods Ended
July 2, 2000, and July 4, 1999 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
July 2, 2000
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying condensed 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) and have been
prepared by the Company without audit. Certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. 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 contingent assets and liabilities at
the date of the financial statements, and reported amounts of revenues and
expenses during the reporting period. Future events could affect these
estimates. However, the Company believes that the financial statements reflect
all adjustments which are of a normal recurring nature and are necessary for a
fair statement of the results for the interim period.
Results of operations for the periods shown are not necessarily indicative of
results for the year, particularly in view of the seasonality in the packaging
segment. It is suggested that these unaudited condensed consolidated financial
statements and accompanying notes be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
annual report.
Certain prior-year amounts have been reclassified in order to conform with the
current-year presentation.
2. New Accounting Standards
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. SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement 133," was issued in June 2000. Both SFAS No. 133
and SFAS No. 138, a partial amendment of SFAS No. 133, will be effective for
Ball in 2001. The effect of adopting these standards has not yet been
determined.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of Accounting Principles Board Opinion No. 25,"
clarifies certain issues related to the accounting for stock compensation and is
effective for Ball as of the beginning of the third quarter of 2000. Currently,
this interpretation is not expected to have an effect on Ball's reported
results.
Staff Accounting Bulletin (SAB) No. 101, which was issued by the U.S. Securities
and Exchange Commission, provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements. SAB 101, as amended by SAB
Nos. 101A and 101B, will be effective for Ball in the fourth quarter of 2000.
The effect of adopting these guidelines has not yet been determined.
3. Business Segment Information
Ball's operations are organized along its product lines in two segments - the
packaging segment and the aerospace and technologies segment. The accounting
policies of the segments are the same as those in the unaudited condensed
consolidated financial statements.
The packaging segment includes the lines of businesses that manufacture 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). Ball also has investments in packaging
companies located in the PRC, Brazil and Thailand which are accounted for using
the equity method.
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 products
and technology.
4. Business Consolidation Costs and Other
The Company recorded an $83.4 million pretax charge ($55 million after tax,
minority interests and equity earnings impacts) the second quarter for packaging
business consolidation and investment exit activities. The charge includes costs
associated with the permanent closure of one beverage can facility in the U.S.
and one in the PRC, the elimination of food and beverage can manufacturing
capacity at two locations in Canada, the consolidation of general line
production capacity in the PRC and the write-down to net realizable value of
certain equity investments (primarily an investment in a Russian beverage can
manufacturing joint venture). The actions to be taken, which are expected to
completed by the spring of 2001, are largely the result of improved operating
efficiencies throughout Ball's packaging business and are consistent with the
Company's strategy to keep manufacturing costs low.
Also during the quarter, the Company favorably resolved certain state and
federal tax matters related to prior years' transactions. As a result, the
second quarter tax benefit was increased by $2.3 million.
The following table summarizes the impact on the consolidated statement of
earnings of the business consolidation costs charge and the favorable tax
settlements for both the quarter and six months ended July 2, 2000:
The $83.4 million charge included (1) approximately $43.9 million for the
write-down of fixed assets held for sale and related machinery spare parts
inventory to estimated net realizable value, including estimated costs to sell,
(2) $9 million for severance, supplemental unemployment and other related
benefits, substantially all of which is related to the termination of 321
manufacturing and administrative employees in the U.S. and Canada, (3) $14.3
million for contractual pension and retirement obligations transferred to the
appropriate liability accounts, (4) $5.4 million for the write-down of goodwill
associated with the closed PRC plant, (5) $8.2 million for the write-down of
equity investments and (6) $2.6 million for other assets and consolidation
costs. Approximately $21 million of the charge requires cash payments, offset by
$26 million of tax benefits. Of the fixed asset write down of $43.9 million,
$34.3 million relates to Canada and the PRC. The carrying value of the remaining
fixed assets held for sale was $3.8 million at July 2, 2000. Subsequent changes
to the estimated costs of business consolidations, if any, will be included in
current-period earnings.
The following table summarizes the activity related to the business
consolidation costs:
(1) Other costs largely consist of $5.4 million for the write-down of goodwill.
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 resulted in a $56.2 million, largely noncash, charge in
1998, primarily for the write down to net realizable value of fixed assets,
goodwill and other assets. The carrying value of the remaining fixed assets held
for sale was $3.5 million at July 2, 2000.
5. Acquisition
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). In connection with the Acquisition, the
Company provided $51.3 million in the opening balance sheet for the costs of
integrating the acquired business, which included the closure of a headquarters
facility and three plants. The $51.3 million included $22.8 million which was
transferred to pension and other postretirement benefit liability accounts. The
plants and certain equipment are for sale. Employees of the closed facilities,
primarily comprised of manufacturing and support personnel, have been terminated
with certain benefits continuing in accordance with contractual provisions. The
carrying value of the fixed assets held for sale was approximately $21.1 million
at July 2, 2000. Subsequent increases in actual costs, if any, will be included
in current-period earnings, and decreases, if any, will result in a further
reduction of goodwill.
The following table summarizes the year-to-date activity related to the
remaining integration costs associated with the Acquisition:
($ in millions) Employee Other Exit
Severance Costs Total
----------- ----------- -----------
Balance at December 31, 1999 $ 12.8 $ 2.2 $ 15.0
Payments made (3.1) (0.4) (3.5)
Reclassification of prior-period payments - 1.6 1.6
----------- ----------- -----------
Balance at July 2, 2000 $ 9.7 $ 3.4 $ 13.1
=========== =========== ===========
6. Inventories
($ in millions) July 2, December 31,
2000 1999
---------------- ----------------
Raw materials and supplies $ 185.0 $ 238.0
Work in process and finished goods 403.2 327.9
---------------- ----------------
$ 588.2 $ 565.9
================ ================
7. Property, Plant and Equipment
($ in millions) July 2, December 31,
2000 1999
---------------- ----------------
Land $ 58.6 $ 61.6
Buildings 433.2 433.6
Machinery and equipment 1,412.9 1,439.4
---------------- ----------------
1,904.7 1,934.6
Accumulated depreciation (864.9) (813.4)
---------------- ----------------
$ 1,039.8 $ 1,121.2
================ ================
Depreciation expense amounted to $70.8 million and $70.4 million for the
six-month periods ended July 2, 2000, and July 4, 1999, respectively.
8. Goodwill and Other Assets
($ in millions) July 2, December 31,
2000 1999
---------------- ----------------
Goodwill $ 453.5 $ 482.9
Investments in affiliates 66.4 81.3
Prepaid pension costs and other 141.1 150.9
---------------- ----------------
$ 661.0 $ 715.1
================ ================
Goodwill is net of accumulated amortization of $48.3 million at July 2, 2000,
and $41.9 million at December 31, 1999. Total amortization expense, including
goodwill amortization, amounted to $8.5 million and $10.9 million for the
six-month periods ended July 2, 2000, and July 4, 1999, respectively. Goodwill
amortization for the same periods was $6.3 million and $6.9 million,
respectively.
9. Debt and Receivables Sales Agreement
Debt includes $300 million of 7.75% Senior Notes due in 2006, $250 million of
8.25% Senior Subordinated Notes due in 2008 and borrowings under a Senior Credit
Facility, which bear interest at variable rates. At July 2, 2000, approximately
$497 million was available under the revolving credit facility portion of the
Senior Credit Facility.
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 and contain
certain covenants and restrictions including, among other things, limits on the
incurrence of additional indebtedness and limits on the amount of restricted
payments, such as dividends. Exhibit 20.1 contains condensed, consolidating
financial information for the Company, segregating the guarantor subsidiaries
and non-guarantor subsidiaries. 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.
The Company was not in default of any loan agreement at July 2, 2000, and has
met all payment obligations. Latapack-Ball Embalagens Ltda. (Latapack-Ball), the
Company's 50 percent-owned equity affiliate in Brazil, was in noncompliance with
certain financial provisions, including current and debt-to-equity ratios, under
a fixed-term loan agreement of which $40.6 million was outstanding at the
quarter end. Latapack-Ball has received waivers from the lender in respect of
the noncompliance covering the periods prior to April 1, 2000, and has requested
a further waiver in respect of the noncompliance during the second quarter.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
operations, up to $125 million. Net funds received from the sale of the accounts
receivable totaled $122.5 million at July 2, 2000, and July 4, 1999. Fees
incurred in connection with the sale of accounts receivable, which are included
in other expenses, totaled $2.1 million and $4.1 million for the second quarter
and six months of 2000, respectively, and $1.6 million and $3.3 million for the
same periods in 1999, respectively.
10. Shareholders' Equity
The composition of the accumulated other comprehensive loss at July 2, 2000, and
December 31, 1999, is primarily the cumulative effect of foreign currency
translation and additional minimum pension liability. Total comprehensive (loss)
income was $(17.1) million and $1.6 million for the second quarter and first six
months of 2000, respectively, and $33.6 million and $51.3 million for the
comparative periods of 1999, respectively. The difference between net income and
comprehensive income for each period represents the effects of foreign currency
translation.
Issued and outstanding shares of the Series B ESOP Convertible Preferred Stock
were 1,493,789 shares at July 2, 2000, and 1,530,411 shares at December 31,
1999.
11. Earnings Per Share
The following table provides additional information on the computation of
earnings per share amounts:
(1) The diluted loss per share in the second quarter of 2000 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.
12. 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.
As previously reported, on April 3, 2000, the Armed Services Board of Contract
Appeals sustained the Company's claim to recoverability of costs associated with
Ball's ESOP for fiscal years beginning in 1989. The time frame for the U.S.
government to file motions for reconsideration has expired. The period to appeal
the decision also expired in August prior to filing this report. Therefore, not
only has this matter been resolved without a material adverse effect upon the
liquidity, results of operations or financial condition of the Company, but it
will have a positive effect on the earnings of the Company in the third quarter
of 2000, as the Company expects to recognize and has recovered previously
disallowed costs of approximately $7 million (approximately $4 million after tax
or $0.13 per diluted share) related to the ESOP matter.
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
unaudited condensed 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.
RESULTS OF OPERATIONS
Consolidated Sales and Earnings
Ball's operations are organized along its product lines in two segments: (1)
packaging and (2) aerospace and technologies. The following table summarizes the
results of these two segments:
Packaging Segment
The packaging segment includes metal and PET (polyethylene terephthalate)
container products, primarily used 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 People's Republic of China (PRC). Packaging
segment sales in the second quarter and first six months of 2000 remained
comparable to the same periods in 1999. Segment operating margins for the first
quarter increased to 9.7 percent for the second quarter of 2000 and 9 percent
for the first six months from 9.5 percent and 8.4 percent for the same periods
in 1999. The operating margins, excluding the business consolidations charge in
2000, reflected improved production efficiencies and cost reductions, including
the effects of the consolidation actions taken in 1999 and 1998.
North American metal beverage container sales, which represented approximately
71 percent of segment sales in the first six months of 2000, decreased 2 percent
in comparison to the first six months of 1999. The decrease was primarily due to
lower soft drink container shipments, partially offset by higher aluminum prices
passed through to certain customers. At the end of the quarter, the Company
ceased production at one of its beverage can manufacturing facilities due to
industry overcapacity and unacceptable pricing in the Southeastern U.S. In
addition, a production line in Richmond, British Columbia, Canada, is expected
to cease production by the end of 2000, for which a provision was made as part
of the second quarter business consolidations charge. During the first quarter
of 2000, Ball closed an acquired aluminum beverage can plant in Tampa and began
operation of a new, high-speed production line in its other Tampa plant.
North American metal food container sales, which comprised approximately 15
percent of segment sales in the first six months of 2000, increased
approximately 14 percent over the same period in 1999. This increase was the
result of volume gains with several customers, including ConAgra Grocery
Products Company (ConAgra), a new customer in the Eastern U.S.
During the early part of the second quarter of 2000, Ball and ConAgra formed a
joint venture company, Ball Western Can Company (Ball Western), to acquire and
manage certain ConAgra can manufacturing assets in California. Ball receives
management fees and shares in other earnings under the terms of the agreement
and accounts for its 50 percent-owned investment under the equity method.
Plastic container sales, which comprised approximately 8 percent of segment
sales in the first six months of 2000, increased approximately 6 percent
compared to the same period in 1999. The increase was primarily due to the
pass-through of increased resin prices. The sales mix continues to be weighted
primarily toward carbonated soft drink and water containers. Plastic beer
containers manufactured by Ball, which utilize a multi-layer technology, are
currently being tested by several Ball customers.
Sales were down approximately 8 percent in the PRC. Operating earnings were also
lower compared to 1999. The 1999 second quarter was particularly strong with
volumes decreasing later in the year.
Aerospace and Technologies Segment
The aerospace and technologies segment had lower sales and earnings in the
second quarter and first six months of 2000 as a result of several programs
reaching completion, as well as the timing of funding and start-up of new
programs. Backlog at the end of the second quarter was approximately
$337 million, which was comparable to backlog at the end of 1999. Year-to-year
comparisons of backlog are not necessarily indicative of the trend of future
operations.
Selling and Administrative Expenses
Lower consolidated selling and administrative expenses in the second quarter of
2000 compared to 1999 were primarily due to a $4.7 million charge in April 1999
associated with an executive stock option grant which vested when the Company's
closing stock price reached specified levels. Excluding this stock compensation
charge, expenses were marginally higher in the first six months of 2000 compared
to 1999 due in large part to higher estimated employee benefit cost accruals.
Interest and Taxes
Consolidated interest expense for the second quarter and first half of 2000 was
$23.8 million and $47.2 million, respectively, compared to $27.3 million and
$55.5 million for the same periods in 1999, respectively. The decrease is
primarily attributable to a lower level of average borrowings during the period,
as well as increased capitalization of interest, largely in connection with the
Tampa plant expansion, and a higher percentage of debt at lower fixed rates in
2000 compared to 1999, partially as a result of fixing certain previously
floating rate debt through the use of derivative instruments.
The lower second quarter effective income tax rate reflects the impact of
currently unrealized capital losses in connection with the write-down of equity
investments and nondeductible goodwill included in the second quarter charge for
business consolidation costs and investment exit activities. These amounts were
partially offset by the favorable resolution during the quarter of certain prior
years' federal and state tax matters.
Excluding the tax effect of business consolidation costs and favorable tax
settlements in the second quarter, Ball's effective income tax rate was
comparable to the prior year. The effects of the foregoing are illustrated
below:
Results of Equity Affiliates and Minority Interests
Minority interests' share of losses was $2.4 million for the first six months of
2000, compared to their share of income of $0.5 million for the same period in
1999. The loss in 2000 reflects the minority share of the charge for business
consolidations in the PRC recorded in the second quarter.
Equity in the earnings of affiliates is largely attributable to that from
investments in the PRC, Thailand and Brazil. Results were a loss of $3.4 million
in the first six months of 2000, compared to a loss of $0.4 million for the same
period in 1999. Results in Brazil were hampered by the effects of a weakened
Brazilian real and slower sales, while lower results in the PRC reflect the
continued effects of excess capacity in the industry, coupled with higher metal
costs relative to last year.
Other Items
The Company recorded an $83.4 million pretax charge ($55 million after tax,
minority interests and equity earnings impacts) in the second quarter for
packaging business consolidation and investment exit activities. The charge
includes costs associated with the permanent closure of one beverage can
facility in the U.S. and one in the PRC, the elimination of food and beverage
can manufacturing capacity at two locations in Canada, the consolidation of
general line production capacity in the PRC and the write-down to net realizable
value of certain equity investments (primarily an investment in a Russian
beverage can manufacturing joint venture). The actions to be taken, which are
expected to completed by the spring of 2001, are largely the result of improved
operating efficiencies throughout Ball's packaging business and are consistent
with the Company's strategy to keep manufacturing costs low. The carrying value
of the remaining fixed assets held for sale was $3.8 million at July 2, 2000.
Additional details about the business consolidation and investment exit
activities are provided in Note 4 to the consolidated financial statements
included in Item 1 of this Quarterly Report on Form 10-Q.
During the quarter the Company favorably resolved certain state and federal tax
matters related to prior years' transactions. The second quarter tax benefit was
increased by $2.3 million.
In connection with an acquisition in 1998, the Company provided $51.3 million in
the opening balance sheet for the costs of integrating the acquired business,
which included the closure of a headquarters facility and three plants. The
employees have been terminated, and the plants and certain equipment are for
sale. During the first quarter of 2000, the Company made payments of $3.5
million and reclassified prior-period payments totaling $1.6 million. The
carrying value of the fixed assets held for sale was approximately $21.1 million
at July 2, 2000.
During the fourth 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 resulted in a $56.2 million, largely noncash,
charge in 1998, primarily for the write-down to net realizable value of fixed
assets, goodwill and other assets. The carrying value of the remaining fixed
assets held for sale was $3.5 million at July 2, 2000.
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. SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement 133," was issued in June 2000. Both SFAS No. 133
and SFAS No. 138, a partial amendment of SFAS No. 133, will be effective for
Ball in 2001. The effect of adopting these standards has not yet been
determined.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of Accounting Principles Board Opinion No. 25,"
clarifies certain issues related to the accounting for stock compensation and is
effective for Ball as of the beginning of the third quarter of 2000. Currently,
this interpretation is not expected to have an effect on Ball's reported
results.
Staff Accounting Bulletin (SAB) No. 101, which was issued by the U.S. Securities
and Exchange Commission, provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements. SAB 101, as amended by SAB
Nos. 101A and 101B, will be effective for Ball in the fourth quarter of 2000.
The effect of adopting these guidelines has not yet been determined.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The $40.2 million of cash used in operations for the first half of 2000
reflected seasonally increased working capital offset by improved earnings,
excluding the largely noncash charge taken in the second quarter for business
consolidation costs. Capital spending of $46.2 million in the first six months
of 2000 was well below depreciation of $70.8 million. Capital spending is
expected to be approximately $115 million for the year.
Total debt increased to $1,268.1 million at July 2, 2000, compared to $1,196.7
million at December 31, 1999, primarily due to seasonal financing for the normal
increase in accounts receivable and inventories. The debt-to-total
capitalization ratio of 65.1 percent at July 2, 2000, rose from 62.7 percent at
December 31, 1999, due to seasonal working capital requirements.
Debt includes $300 million of 7.75% Senior Notes due in 2006, $250 million of
8.25% Senior Subordinated Notes due in 2008 and borrowings under a Senior Credit
Facility, which bear interest at variable rates. At July 2, 2000, approximately
$497 million was available under the revolving credit facility portion of the
Senior Credit Facility.
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 and contain
certain covenants and restrictions including, among other things, limits on the
incurrence of additional indebtedness and limits on the amount of restricted
payments, such as dividends. Exhibit 20.1 contains condensed, consolidating
financial information for the Company, segregating the guarantor subsidiaries
and non-guarantor subsidiaries. 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.
Ball Asia Pacific Holdings Limited and its consolidated subsidiaries had
short-term uncommitted credit facilities of approximately $139 million at the
end of the second quarter, of which $63.3 million was outstanding at July 2,
2000.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
operations, up to $125 million. Net funds received from the sale of the accounts
receivable totaled $122.5 million at July 2, 2000, and July 4, 1999. Fees
incurred in connection with the sale of accounts receivable, which are included
in other expenses, totaled $2.1 million and $4.1 million for the second quarter
and six months of 2000, respectively, and $1.6 million and $3.3 million for the
same periods in 1999, respectively.
The Company was not in default of any loan agreement at July 2, 2000, and has
met all payment obligations. Latapack-Ball Embalagens Ltda. (Latapack-Ball), the
Company's 50 percent-owned equity affiliate in Brazil, was in noncompliance with
certain financial provisions, including current and debt-to-equity ratios, under
a fixed-term loan agreement of which $40.6 million was outstanding at the
quarter end. Latapack-Ball has received waivers from the lender in respect of
the noncompliance covering the periods prior to April 1, 2000, and has requested
a further waiver in respect of the noncompliance during the second quarter.
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.
As previously reported, on April 3, 2000, the Armed Services Board of Contract
Appeals sustained the Company's claim to recoverability of costs associated with
Ball's ESOP for fiscal years beginning in 1989. The time frame for the U.S.
government to file motions for reconsideration has expired. The period to appeal
the decision also expired in August prior to filing this report. Therefore, not
only has this matter been resolved without a material adverse effect upon the
liquidity, results of operations or financial condition of the Company, but it
will have a positive effect on the earnings of the Company in the third quarter
of 2000, as the Company expects to recognize and has recovered previously
disallowed costs of approximately $7 million (approximately $4 million after tax
or $0.13 per diluted share) related to the ESOP matter.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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.
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 the 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 analyses as of July 2,
2000, did not differ materially from the amounts reported as of December 31,
1999. Actual changes in market prices or rates may differ from hypothetical
changes.
FORWARD-LOOKING STATEMENTS
The Company has made or implied certain forward-looking statements in this
report. 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; insufficient
production capacity; the weather; fuel costs and availability; shortages in and
pricing of raw materials; competition in pricing and the possible decrease in,
or loss of, sales resulting therefrom; loss of profitability and plant closures;
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; international business
risks such as the devaluation of international currencies; the ability to obtain
adequate credit resources for foreseeable financing requirements of the
Company's businesses and to satisfy the resulting credit obligations; and
unsuccessful acquisitions, joint ventures or divestitures. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 3, 2000, Pechiney Plastic Packaging, Inc., and Pechiney Emballage
Flexible Europe (Pechiney) filed a lawsuit against Kortec, Inc.; Crown Cork &
Seal Company, Inc.; Crown Cork & Seal Technologies Corporation and Ball Plastic
Container Corp. in the U.S. District Court for the District of Massachusetts.
Pechiney alleges that the defendants have infringed two of its patents with
respect to methods and apparatus for injection molding and injection blow
molding multi-layer plastic containers. Pechiney seeks an injunction and
damages. Kortec is a supplier to Ball Plastic Container Corp. of equipment for
use in manufacturing multi-layered plastic bottles. Kortec has agreed to defend
Ball Plastic Container Corp. against the claims for infringement of patents
arising out of the purchase and use of such equipment purchased from Kortec and
has assumed the defense of the action. Based upon the information, or lack
thereof, available to the Company at the present time, the Company is unable to
express an opinion as to the actual exposure of the Company; however, the
Company does not believe that this matter will have a material adverse affect
upon the liquidity, results of operations or financial condition of the Company.
As previously reported, in March of 1992, William Hallahan, an employee at the
Company's metal beverage container plant in Saratoga Springs, New York, filed a
workers' compensation claim alleging that he suffers from a form of leukemia
that was caused by his exposure to certain chemicals used in the plant. The
Company denied the charge, and hearings on the matter were held before the
Workers' Compensation Board of the State of New York. The testimony was
concluded in April 1996. On January 14, 1997, the Administrative Law Judge (ALJ)
filed his Memorandum of Decision finding in favor of the claimant. The decision
was appealed, and the Workers' Compensation Board remanded the case back to the
ALJ for further findings. The ALJ entered a decision against the Company on
January 8, 1998, as corrected on February 2, 1998, and February 4, 1998. The
Company appealed all of the decisions to the Appeals Bureau of the Workers'
Compensation Board on February 6, 1998. In June 1999 a three-judge panel of the
Workers' Compensation Board reversed the decision of the ALJ and found that
substantial evidence does not show a causal relationship between the claimant's
workplace and his disease in order to support a causal link and conclude that he
developed an occupational disease. The Board then closed the case. The claimant
appealed the case to the full Workers' Compensation Board. On May 30, 2000, Ball
received notice from the State of New York Workers' Compensation Board that the
appeal was denied. On June 28, 2000, the claimant filed documents indicating an
appeal would be filed with the Appellate Division of the New York State Judicial
System. The Company is opposing any further appeal. Based upon the information
available to the Company at the present time, the Company does not believe that
this matter will have a material adverse effect upon the liquidity, results of
operations or financial condition of the Company.
As previously reported, on September 21, 1998, the Daiei, Inc., (Daiei), a
Japanese corporation with its principal place of business in Tokyo, Japan, sued
the Company in U.S. District Court, Southern District of Indiana, Evansville
Division. Daiei alleges it is engaged in the retail sale of consumer goods and
food products at stores throughout Japan. Daiei alleges that it purchased
defective beer cans filled with beer from Evansville Brewing Company, Inc. (EBC)
between April 5, 1995, and July 20, 1995. Daiei further alleges that the metal
containers were defectively assembled and sealed by EBC at its production
facility in Evansville, Indiana, upon a machine which was inspected by
representatives of Ball. Daiei further alleges that Ball breached its warranty
to provide metal containers that performed in a commercially reasonable manner
and that Ball's representatives were negligent in the repair of the sealing
equipment owned by EBC. Daiei seeks damages for the lost containers and product
in the amount of approximately $6 million. The Company has retained counsel and
is defending this case. The parties are engaged in the discovery process, and a
Motion to Dismiss was filed by the Company on several legal grounds. On March
31, 2000, the Court dismissed Daiei's negligence claim, but denied the Company's
Motion to Dismiss Daiei's claim for breach of express warranties and breach of
implied warranties. Based upon the information available to the Company at the
present time, the Company does not believe that this matter will have a material
adverse effect upon the liquidity, results of operations or financial condition
of the Company.
On January 27, 1999, Plastic Solutions of Texas, Inc. (PST) and Kurt H. Ruppman,
Sr. (Ruppman) filed a Statement of Claim with the American Arbitration
Association alleging the Company breached a contract between the Company and PST
and Ruppman relating to the grant of a license under certain patents and
technology owned by PST and Ruppman relating to the use of cryogenics in the
manufacture of hot fill PET bottles. The Company has denied the allegations of
the complaint. An arbitration hearing commenced on March 7, 2000, and has
continued on a periodic basis since, but both parties have completed their case
in chief. The parties are in the rebuttal phase of the case. Based upon the
information, or lack thereof, available to the Company at the present time, the
Company is unable to express an opinion to the actual exposure of the Company;
however, the Company does not believe that this matter will have a material
adverse effect upon the liquidity, results of operations or financial condition
of the Company.
In 1998, various consumers filed toxic tort litigation in the Superior Court for
Los Angeles County (Trial Court) against various water companies operating in
the San Gabriel Valley Basin. The water companies petitioned the Trial Court to
remove this action to the California Public Utilities Commission. The Trial
Court agreed. The plaintiffs appealed this decision to the California Court of
Appeals which reversed the Trial Court. One non-regulated utility has appealed
this decision to the California Supreme Court. Pending completion of the
appellate process, the Trial Court stayed further action in this litigation
except that the plaintiffs were permitted to add additional defendants. The
Trial Court consolidated the six separate lawsuits in the Northeast District
(Pasadena) and designated the case of Adler, et al. v. Southern California Water
Company, et al., as the lead case. In late March 1999, Ball-Foster Glass
Container Co., L.L.C., which the Company no longer owns, received a summons and
amended complaint based on its ownership of the El Monte glass plant.
Ball-Foster Glass tendered the lawsuit to the Company for defense and indemnity.
The Company has in turn tendered this lawsuit to its liability carrier,
Commercial Union, for defense and indemnity. Commercial Union has accepted
defense subject to reservation of rights. Plaintiffs appear to be proceeding to
join all companies which are alleged to be Potentially Responsible Parties in
the various operable units in the San Gabriel Valley Superfund Site. Based on
the information, or lack thereof, available to the Company at the present time,
the Company is unable to express an opinion as to the actual exposure of the
Company; however, the Company does not believe that this matter will have a
material adverse affect upon the liquidity, results of operations or financial
condition of the Company.
Item 2. Changes in Securities
There were no events required to be reported under Item 2 for the quarter ending
July 2, 2000.
Item 3. Defaults Upon Senior Securities
There were no events required to be reported under Item 3 for the quarter ending
July 2, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the Annual Meeting of Shareholders on April 26, 2000. Matters
voted upon by proxy were (1) the election of four directors for three-year terms
expiring in 2003 and (2) the ratification of the appointment of
PricewaterhouseCoopers LLP as independent accountants for 2000. The results of
the vote were as follows:
Item 5. Other Information
There were no events required to be reported under Item 5 for the quarter ending
July 2, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
20.1 Subsidiary Guarantees of Debt
27.1 Financial Data Schedule
99.1 Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995, as amended.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ending July 2, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ball Corporation
(Registrant)
By: /s/ Raymond J. Seabrook
------------------------------
Raymond J. Seabrook
Senior Vice President and
Chief Financial Officer
Date: August 16, 2000
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
July 2, 2000
EXHIBIT INDEX
Description Exhibit
----------- -------
Subsidiary Guarantees of Debt (Filed herewith.) EX-20.1
Financial Data Schedule (Filed herewith.) EX-27.1
Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995, as amended. (Filed herewith.) EX-99.1