EXHIBIT 13.1
Published on December 31, 1996
Exhibit 13.1
Report of Independent Accountants
January 23, 1996, except as to the Subsequent Event note, which is as of
December 30, 1996
To the Board of Directors and Shareholders
Ball Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of (loss) income, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Ball Corporation and its subsidiaries at December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes 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.
As discussed in the Inventories note to consolidated financial statements, the
company changed its method of determining the cost of certain inventories from
first-in, first-out to the last-in, first-out method effective January 1, 1995.
In addition, as discussed in the Other Postretirement and Postemployment
Benefits note to consolidated financial statements, the company adopted
Statements of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and No. 112, "Employers'
Accounting for Postemployment Benefits," effective January 1, 1993.
Price Waterhouse LLP
Indianapolis, Indiana
Consolidated Statement of (Loss) Income
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheet
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows
Ball Corporation and Subsidiaries
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Changes in Shareholders' Equity
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
Subsequent Event
Exit of Commercial Glass Packaging Business
On October 1, 1996, the company sold its remaining interest in Ball-Foster Glass
Container Co., L.L.C. (Ball-Foster), a joint-venture company formed in 1995, to
Compagnie de Saint-Gobain. With this sale, the company no longer participates in
the manufacture of glass containers. Accordingly, the accompanying Consolidated
Financial Statements and notes have been restated from amounts previously
reported to segregate the financial effects of the commercial glass packaging
business as discontinued operations. Also included in 1993 discontinued
operations are the financial effects of the businesses contributed to Alltrista
Corporation, formerly a wholly-owned subsidiary. See the notes, "Dispositions"
and "Spin-Off," for more information regarding these transactions. All amounts
included in the Notes to Consolidated Financial Statements pertain to continuing
operations except where otherwise noted.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Ball Corporation
and majority-owned subsidiaries. Investments in 20-percent through 50-percent
owned affiliated companies, and majority-owned affiliates where control is
temporary, are included under the equity method where the company 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. All significant intercompany transactions are
eliminated.
Foreign Currency Translation
Foreign currency financial statements of foreign operations where the local
currency is the functional currency are translated using period end exchange
rates for assets and liabilities and average exchange rates during each period
for results of operations and cash flows.
Temporary Investments
Temporary investments are considered cash equivalents if original maturities are
three months or less.
Revenue Recognition
Sales and earnings are recognized primarily upon shipment of products, except in
the case of long-term government contracts for which revenue is recognized under
the percentage-of-completion method. Certain of these contracts provide for
fixed and incentive fees which are recorded as they are earned or when incentive
amounts become determinable. Provision for estimated contract losses, if any,
are made in the period that such losses are determined.
Inventories
Inventories are stated at the lower of cost or market. The cost for
substantially all inventories within the U.S. metal food container business is
determined using the last-in, first-out (LIFO) method of accounting. Effective
January 1, 1995, the company adopted the LIFO method for determining the cost of
certain U.S. metal beverage container inventories. The cost for remaining
inventories is determined using the first-in, first-out (FIFO) method.
Depreciation and Amortization
Depreciation is provided on the straight-line method in amounts sufficient to
amortize the cost of the properties over their estimated useful lives (buildings
- - 15 to 40 years; machinery and equipment - 5 to 10 years). Goodwill is
amortized over the periods benefited, generally 40 years.
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.
Financial Instruments
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.
Employee Stock Ownership Plan
The company 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 income;
preferred dividends, net of related tax benefits, are shown as a reduction from
net income. Unearned compensation-ESOP will be reduced as the principal of the
guaranteed ESOP notes is amortized.
Earnings Per Share of Common Stock
Earnings per share computations are based upon net (loss) earnings attributable
to common shareholders and the weighted average number of common shares
outstanding each year. Fully diluted earnings per share computations assume that
the Series B ESOP Convertible Preferred Stock was converted into additional
outstanding common shares and that outstanding dilutive stock options were
exercised. In the fully diluted computation, net (loss) earnings attributable to
common shareholders is adjusted for additional ESOP contributions which would be
required if the Series B ESOP Convertible Preferred Stock was converted to
common shares and excludes the tax benefit of deductible common dividends upon
the assumed conversion of the Series B ESOP Preferred Stock.
The fully diluted loss per share in 1995 has been restated from the amount
previously reported, as the assumed conversion of preferred stock and exercise
of stock options resulted in a dilutive effect on continuing operations. As the
effect on continuing operations is dilutive, the fully diluted weighted average
share amounts are required to be used for discontinued operations, resulting in
a lower loss per share. The fully diluted loss per share in 1993 is the same as
the net loss per common share because the assumed exercise of stock options and
conversion of preferred stock would have been antidilutive on both continuing
and discontinued operations.
Use of Estimates
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.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and SFAS No. 123,
"Accounting for Stock-Based Compensation," which are effective for the company
beginning in 1996. SFAS No. 121 requires a review for impairment of long-lived
assets and certain identifiable intangibles used in the business whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable. The statement also requires that long-lived assets and certain
identifiable intangibles which are held for disposition should be reported at
the lower of carrying amount or fair value less cost to sell. The company does
not expect a financial impact in 1996 from the adoption of this statement.
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 also defines a fair
value-based method of accounting for employee stock options and encourages,
though does not require, companies to adopt that method of accounting for all
employee stock compensation plans. The company will continue to account for its
stock-based employee compensation programs as prescribed by existing generally
accepted accounting principles.
Business Segment Information
The company has two business segments: packaging, and aerospace and
technologies.
Within the packaging segment, effective January 1, 1995, the company
consolidated the results of FTB Packaging, Ltd. (FTB Packaging), the company's
Hong Kong-based metal packaging subsidiary. Also in 1995, the company entered
the PET (polyethylene terephthalate) plastic container business. Costs incurred
in connection with the start-up of that business are included in packaging
segment results. In March 1993 the company acquired Heekin Can, Inc. (Heekin), a
metal food container and specialty products business, which is included in the
consolidated results from its acquisition date. As a result of the company's
sale of its glass business to Ball-Foster in which it acquired a 42-percent
interest, and the subsequent sale of this investment in 1996, the company has
exited the glass packaging business. Accordingly, the results of the glass
business, previously included in the packaging segment, are reported as
discontinued operations. Further information regarding the sale of the glass
business and acquisition of Heekin is provided in the notes, "Dispositions" and
"Acquisitions." The packaging segment includes the data for the following
operations:
Metal - manufacture of metal beverage and food containers, container ends
and specialty products.
Plastic - manufacture of PET plastic containers, primarily for use in
beverage and food packaging.
With regard to the aerospace and technologies segment (formerly aerospace
and communications), the company sold its Efratom time and frequency measurement
business in March 1995. The gain recorded in connection with the sale is
included as part of the aerospace and technologies segment operating earnings,
as are the results of that business through the date of sale. The aerospace and
technologies segment includes the following operations: the aerospace systems
division, comprised of electro-optics and cryogenics, space systems and systems
engineering; and the telecommunication products division.
Packaging segment sales to Anheuser-Busch Companies, Inc. represented
approximately 14 percent, 16 percent and 15 percent of consolidated net sales in
1995, 1994 and 1993, respectively. Sales to Pepsico, Inc. and its affiliates
comprised approximately 10 percent of consolidated net sales in 1993. Sales to
all bottlers of Pepsi-Cola and Coca-Cola branded beverages comprised
approximately 30 to 33 percent of consolidated net sales in each of 1995, 1994
and 1993. Sales to various U.S. government agencies by the aerospace and
technologies segment represented approximately 13 percent, 11 percent and 12
percent of consolidated net sales in 1995, 1994 and 1993, respectively.
Financial data segmented by geographic area is provided below.
Summary of Business by Geographic Area
Dispositions
Ball Glass
On September 15, 1995, the company sold substantially all of the assets of Ball
Glass Container Corporation (Ball Glass), a wholly-owned subsidiary of the
company, to Ball-Foster Glass Container Co., L.L.C. (Ball-Foster) for
approximately $323 million in cash. In 1996, the company received an additional
$15 million in cash in full settlement of the 1995 sale. Concurrent with the
1995 transaction, the company acquired a 42-percent interest in Ball-Foster for
$180.6 million. The remaining 58-percent interest was acquired for $249.4
million by Compagnie de Saint-Gobain (Saint-Gobain). Ball-Foster also acquired
substantially all of the assets of Foster-Forbes, a unit of American National
Can Company, for approximately $680 million in cash.
On October 1, 1996, the company sold its remaining interest in Ball-Foster
to Saint-Gobain for $190 million in cash. Effective with this transaction, the
company no longer participates in the glass packaging business. Accordingly, the
financial effects of the glass business have been reported separately as
discontinued operations.
The following table provides summary income statement data related to
discontinued glass operations.
Included in glass results for 1995 is a charge of $111.1 million ($76.7
million after tax, or $2.55 per share) in connection with the sale of the assets
of Ball Glass to Ball-Foster. The net loss attributable the glass business in
1993 includes a charge of $51.4 million ($31.4 million after tax, or $1.09 per
share) in connection with the company's plan to eliminate excess manufacturing
capacity through plant closures and consolidations. These restructuring
activities were substantially completed in 1995. See the note, "Restructuring
and Other Charges," for additional information.
Interest expense allocated to glass operations was based on the average net
assets of discontinued operations and Ball Corporation's weighted average
interest rate for general borrowings. Debt specifically identified with the
company's other operations was excluded in determining the weighted average
interest rate. The net (loss) income from discontinued glass operations includes
allocated general and administrative expenses directly related to the glass
business of approximately $5.7 million, $3.2 million and $2.6 million for 1995,
1994 and 1993, respectively.
Net assets of discontinued operations have not been reduced for pension and
other postretirement liabilities attributable to employees of the glass
business. The composition of the net assets of the glass packaging business is
summarized below:
December 31,
----------------------------
(dollars in millions) 1995 1994
------------ -------------
Net current assets $ 17.9 $141.5
Net noncurrent assets, including minority interest 182.9 246.5
------------ -------------
Net assets of discontinued glass operations $200.8 $388.0
============ =============
Efratom
In March 1995 the company sold its Efratom time and frequency measurement
business to Datum Inc. (Datum) for cash of $15.0 million and approximately 1.3
million shares of Datum common stock with a market value of $14.0 million at the
date of the sale. In conjunction with the sale of Efratom, the company recorded
a gain of $11.8 million ($7.7 million after tax or 25 cents per share). The
company records its 32-percent share of Datum's earnings under the equity
method; the investment is included in investments in affiliates in the
Consolidated Balance Sheet.
Spin-Off
In March 1993 the company's board of directors declared a dividend and approved
the distribution of 100 percent of the stock of Alltrista Corporation
(Alltrista), then a wholly-owned subsidiary of the company, to the holders of
company common stock of record on April 2, 1993. Shareholders received one share
of Alltrista common stock for each four shares of Ball common stock held on that
date. The dividend distribution of $34.5 million represented the net assets of
$32.2 million, which included bank indebtedness of $75.0 million, along with
transaction costs of $2.3 million. Following the distribution, Alltrista
operated as an independent, publicly-owned corporation.
Alltrista's 1993 net sales and net income were $67.4 million and $2.1
million, respectively, through the date of distribution. Alltrista's net income
included interest expense allocated based on assumed indebtedness of $75.0
million at Ball Corporation's weighted average interest rate for general
borrowings, and allocated general and administrative expenses of $1.2 million.
Acquisition
In March 1993 the company acquired Heekin Can, Inc., a manufacturer of metal
food, pet food and aerosol containers, through a tax-free exchange of shares
accounted for as a purchase. Each outstanding share of common stock of Heekin
was exchanged for 0.769 shares of common stock of the company. The consideration
amounted to approximately $91.3 million, consisting of 2,514,630 newly issued
shares of the company's common stock which were exchanged for 3,270,000 issued
and outstanding shares of Heekin common stock valued at $27.00 per share, and
transaction costs of approximately $3.0 million. In connection with the
acquisition, the company also assumed $121.9 million of Heekin indebtedness, of
which $108.8 million was refinanced following the acquisition. The purchase
price has been assigned, based upon estimated fair values, to acquired assets of
$326.8 million, including goodwill of $47.0 million, and assumed liabilities of
$235.5 million.
Accounts Receivable
Sale of Trade Accounts Receivable
In September 1993, as an alternative source of competitively priced financing,
the company entered into an agreement to sell, on a revolving basis without
recourse, an undivided percentage ownership interest in a designated pool of up
to $75.0 million of packaging trade accounts receivable. The current agreement
expires in December 1996 and includes an optional one year extension. The
company's retained credit exposure on receivables sold is limited to $8.5
million.
At December 31, 1995 and 1994, the $66.5 million of trade receivables sold
was reflected as a reduction of accounts receivable in the accompanying
Consolidated Balance Sheet. Costs of the program are based on certain variable
interest indices and are included in the caption, "general and administrative
expenses." Costs recorded in 1995, 1994 and 1993 amounted to $4.3 million, $3.0
million and $.6 million, respectively.
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 $59.9 million and $47.6 million at December 31,
1995 and 1994, respectively, and include gross unbilled amounts representing
revenue earned but not yet billable of $24.9 million and $12.4 million,
respectively. Approximately $6.7 million of gross unbilled receivables at
December 31, 1995, is expected to be collected after one year.
Inventories
Inventories at December 31 consisted of the following:
(dollars in millions) 1995 1994
------------- -------------
Raw materials and supplies $ 82.8 $102.0
Work in process and finished goods 235.7 150.1
------------- -------------
$318.5 $252.1
============= =============
Effective January 1, 1995, the company adopted the LIFO method of
accounting for determining the cost of certain U.S. metal beverage container
inventories as a preferable method for matching the cost of the products sold
with the revenues generated. The impact of this change in accounting was an
increase in cost of sales and corresponding decrease in operating earnings of
$17.1 million ($10.4 million after tax or 35 cents per share). The company is
unable to determine the cumulative impact of this change on prior periods.
With the adoption of LIFO accounting for U.S. metal beverage container
inventories, approximately 75 percent of total U.S. product inventories at
December 31, 1995, were valued using this method. Inventories, at December 31,
1995, would have been $17.1 million higher than the reported amounts if the FIFO
method, which approximates replacement cost, had been used for all inventories.
Company-Owned Life Insurance
The company has purchased insurance on the lives of certain groups of employees.
Premiums have been approximately $20 million annually. Amounts in the
Consolidated Statement of Cash Flows represent net cash flows from this program
including policy loans of $113.2 million, $23.4 million and $37.2 million in
1995, 1994 and 1993, respectively. Loans outstanding of $233.0 million and
$120.7 million at December 31, 1995 and 1994, respectively, are reflected as a
reduction in the net cash value in the Consolidated Balance Sheet. The policies
are issued by Great-West Life Assurance Company and The Hartford Life Insurance
Company. Legislation enacted in 1996 limits the amount of interest on policy
loans which can be deducted for federal income tax purposes. The limits affect
insurance programs initiated after June 1986, and phase-in over a three-year
period. The company has taken action to limit the impact of this new legislation
on its financial results.
Restructuring and Other Charges
Capacity Reductions
In late 1995, as part of the company's ongoing assessment of industry trends and
conditions upon its packaging business, a decision was made to curtail certain
manufacturing capacity and write down certain unproductive manufacturing
equipment to net realizable value resulting in a charge of $10.9 million ($6.6
million after tax or 22 cents per share) in the fourth quarter of 1995. The
charge included $7.5 million for asset write-downs to net realizable value and
$3.4 million for employment termination costs, benefits and other costs. The
estimated net future pretax cash outflows related to this charge is $.7 million.
These curtailments are expected to be completed during 1996.
1993 Restructuring Plan
In 1993 plans were developed to undertake a number of actions which included
elimination of excess manufacturing capacity through plant closures and
consolidations, administrative consolidations and the discontinuance of two
aerospace and technologies segment product lines. In connection with these
plans, pretax restructuring and other charges of $108.7 million were recorded in
the second half of 1993. Charges of $51.4 million ($31.4 million or $1.09 per
share) related to glass packaging operations and are included in discontinued
operations. The remaining $57.3 million ($34.9 million after tax or $1.22 per
share) is included in continuing operations. A summary of these charges follows:
Employment termination costs and benefits include the effects of work force
reductions and pension curtailment losses relating to the metal packaging and
glass packaging operations of $14.2 million. Other includes incremental costs
associated with the phaseout and disposal of facilities and discontinued product
lines with aerospace and technologies.
Additional charges were recorded in 1995 and 1994 for costs associated with
the 1993 decision to exit the visual image generating systems (VIGS) business.
Total charges included in restructuring and other for the VIGS business were
$8.0 million, $4.0 million and $10.2 million in 1995, 1994 and 1993,
respectively.
Amounts related to the 1993 restructuring plan included in the accompanying
Consolidated Balance Sheet at December 31 and the changes in those reserves
follow:
Property, plant and equipment and inventory are classified in the
respective asset categories at net realizable value within the Consolidated
Balance Sheet. Employment costs and termination benefits due to work force
reductions are reflected in current liabilities. Of the total restructuring and
other reserves outstanding at December 31, 1995, $10.8 million will not impact
future cash flows apart from related tax benefits. The balance of the reserves,
$11.2 million, represents future pretax cash outflows, which are expected to be
expended in 1996.
Debt and Interest Costs
Short-Term Debt
The following table summarizes short-term financing facilities and the related
amounts outstanding at December 31:
Long-Term Debt
Long-term debt at December 31 consisted of the following:
In January 1996 the company issued long-term senior unsecured notes to
several insurance companies for $150 million with a weighted average interest
rate of 6.7 percent, and maturities from 1997 through 2008. The maturities
related to these notes for the years ending December 31, 1997 through 2000, are
$2.9 million each year. Maturities of fixed long-term debt obligations
outstanding at December 31, 1995, are $57.0 million, $46.0 million, $51.0
million and $50.6 million for the years ending December 31, 1997 through 2000,
respectively.
The company had revolving credit agreements at December 31, 1995, totaling
$300 million consisting of a five-year facility for $150 million and 364-day
facilities of $150 million in the aggregate. The revolving credit agreements
provide for various borrowing rates including borrowing rates based on the
London Interbank Offered Rate (LIBOR). The company pays a facility fee on the
committed facilities.
The note, bank credit and industrial development revenue bond agreements,
and guaranteed ESOP notes contain similar restrictions relating to dividends,
investments, working capital requirements, guarantees and other borrowings.
Under the most restrictive covenant in any agreement, approximately $94 million
was available for payment of dividends and purchases of treasury stock at
December 31, 1995.
ESOP debt represents borrowings by the trust for the company-sponsored ESOP
which have been irrevocably guaranteed by the company. Letters of credit are
issued in the ordinary course of business by Ball Corporation of which $31.8
million were outstanding at December 31, 1995, primarily in connection with
insurance arrangements. In addition, FTB Packaging 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 in the People's
Republic of China. At year end, FTB Packaging had outstanding letters of credit
and guarantees of approximately $16.0 million and $31.0 million, respectively.
A summary of total interest cost paid and accrued follows:
(dollars in millions) 1995 1994 1993
------------ ------------- -------------
Interest costs $29.2 $29.1 $32.2
Amounts capitalized (3.5) (2.2) (1.7)
------------ ------------- -------------
Interest expense 25.7 26.9 30.5
------------ ------------- -------------
Gross amount paid during year (1) $42.6 $37.6 $47.1
============ ============= =============
(1) Includes $12.1 million, $14.1 million and $15.4 million for 1995, 1994 and
1993, respectively, allocated to the glass packaging business included in
discontinued operations.
Financial and Derivative Instruments and Risk Management
In the ordinary course of business, the company is subject to various risks and
uncertainties due, in part, to the highly competitive nature of the industries
in which the company participates, its operations in developing markets outside
the U.S., volatile costs of commodity materials used in the manufacture of its
products, and changing capital markets. Where possible and practicable, the
company attempts to minimize these risks and uncertainties.
The company uses various techniques to minimize its exposure to significant
changes in the cost of commodity materials, primarily aluminum, through
arrangements with suppliers and, at times, through the use of certain derivative
instruments, designated as hedges. Financial derivatives, including interest
rate swaps and options and forward exchange contracts, are used when
circumstances warrant to manage the company's interest rate and foreign exchange
exposure. Interest rate derivatives are used principally to manage the company's
mix of floating- and fixed-rate debt within parameters that are consistent with
its long-term financial strategy.
Derivative instruments generally are not held for trading purposes.
Under interest rate swap agreements, the company agrees to exchange with
the counter parties the difference between the fixed-rate and floating-rate
interest amounts calculated on the notional amounts. Interest rate swap
agreements outstanding at December 31, 1995, had notional amounts of $117
million at a fixed rate and $25 million at a floating rate, or a net fixed-rate
position of $92 million. Fixed-rate agreements with notional amounts of $50
million included an interest rate floor. These swap agreements effectively
change the rate upon which interest expense is determined from a floating rate
to a fixed rate of interest. Interest rate swap agreements had notional amounts
of $75 million at a fixed rate and $109 million at a floating rate, or a net
floating-rate position of $34 million at December 31, 1994.
The related notional amounts of interest rate swaps and options serve as
the basis for computing the cash flow due 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
counter parties to the agreements involve financial institutions which are
expected to perform fully under the terms of the agreements.
The fair value of all nonderivative 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 the
company would pay or receive upon termination of the contracts at December 31,
taking into account any unrealized gains or losses of open contracts.
Leases
Noncancellable operating leases in effect at December 31, 1995, require rental
payments of $16.0 million, $12.6 million, $7.9 million, $6.0 million and $4.2
million for the years 1996 through 2000, respectively, and $18.2 million for
years thereafter. Lease expense for all operating leases was $18.1 million,
$14.1 million and $15.5 million in 1995, 1994 and 1993, respectively.
Taxes on Income
The amounts of income (loss) from continuing operations before income taxes by
national jurisdiction follow:
(dollars in millions) 1995 1994 1993
------------- ------------- -------------
Domestic $60.6 $80.7 $7.2
Foreign 16.3 15.2 (7.3)
------------- ------------- -------------
$76.9 $95.9 $(0.1)
============= ============= =============
The provision for income tax expense (benefit) for continuing operations
was comprised as follows:
(dollars in millions) 1995 1994 1993
------------- ------------- -------------
Current
U.S. $ 13.1 $21.3 $ 18.0
State and local 4.4 5.1 (0.4)
Foreign 2.2 0.9 0.6
------------- ------------- -------------
Total current 19.7 27.3 18.2
------------- ------------- -------------
Deferred
U.S. 3.2 1.8 (16.6)
State and local (0.3) (0.5) (0.8)
Foreign 3.8 5.8 (2.8)
------------- ------------- -------------
Total deferred 6.7 7.1 (20.2)
------------- ------------- -------------
Provision for income tax
expense (benefit) $ 26.4 $34.4 $ (2.0)
============= ============= =============
Provision is not 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 provision for income tax expense (benefit) recorded within the
Consolidated Statement of (Loss) Income differs from the amount of income tax
expense (benefit) determined by applying the U.S. statutory federal income tax
rate to pretax income (loss) from continuing operations as a result of the
following:
The significant components of deferred tax (assets) liabilities at
December 31 were:
(dollars in millions) 1995 1994
------------- -------------
Deferred tax assets:
Deferred compensation $ (18.9) $ (16.6)
Accrued employee benefits (39.2) (42.3)
Restructuring and other reserves (16.4) (13.6)
Other (36.1) (24.6)
------------- -------------
Total deferred tax assets (110.6) (97.1)
------------- -------------
Deferred tax liabilities:
Depreciation 99.8 100.8
Other 12.6 15.9
------------- -------------
Total deferred tax liabilities 112.4 116.7
------------- -------------
Net deferred tax liabilities $ 1.8 $ 19.6
============= =============
Total income tax payments, including amounts accrued in prior years, were
$26.5 million, $18.5 million and $34.7 million for 1995, 1994 and 1993,
respectively.
Pension 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. Plans for hourly employees provide benefits
based on fixed rates for each year of service. The company'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 fixed income securities and
common stocks.
The cost of pension benefits, including prior service cost, is recognized
over the estimated service periods of employees based upon respective pension
plan benefit provisions. The composition of pension expense for salaried and
hourly employee pension plans, excluding curtailments and settlements, follows:
A net curtailment loss of $18.6 million was recognized in conjunction with
the sale of the glass business in 1995 which is included as part of the net loss
on the disposition attributable to discontinued operations. A net curtailment
and settlement loss of $12.3 million was recognized in 1993 in conjunction with
the decision to close certain packaging operations and in connection with the
Alltrista spin-off.
The funded status of the plans at December 31, which includes amounts
attributable to the glass packaging business, follows:
Where two discount rates are provided in the table above, the higher rate
in each case pertains to the company's Canadian pension plans.
The additional minimum liability for plans having unfunded accumulated
benefit obligations was $17.7 million and $39.1 million at December 31, 1995 and
1994, respectively. The 1995 and 1994 additional minimum liabilities were
partially offset by intangible assets of $5.0 million and $28.4 million,
respectively. The remainder, $7.8 million in 1995 and $6.7 million in 1994, net
of tax benefits, was recognized as a component of shareholders' equity.
In May 1996, Ball-Foster agreed to assume the pension liabilities for
former hourly glass employees. The projected benefit obligation associated with
the assumed pension liabilities was approximately $118.1 million at the date of
transfer. Plan assets of $103.7 million, including $18.8 million which the
company funded in 1996, were transferred to the new plan assumed by Ball-Foster.
Other Postretirement and Postemployment Benefits
The company sponsors various defined benefit and defined contribution
postretirement benefit plans which provide retirement health care and life
insurance benefits to substantially all employees. In addition, employees may
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 company-sponsored plans are unfunded and, with the
exception of life insurance benefits, are self-insured.
Effective January 1, 1993, the company adopted two accounting standards for
these benefit costs, SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." Under SFAS No. 106, postretirement benefits are
accrued on an actuarial basis over the period from the date of hire to the date
of full eligibility for employees and covered dependents who are expected to
qualify for such benefits. Similarly, SFAS No. 112 requires accrual accounting
so that other postemployment benefits are accrued when it is determined that a
liability has been incurred.
Postretirement Medical and Life Insurance Benefits
Postretirement health care benefits are provided to substantially all of the
company's U.S. and Canadian employees. In Canada, the company provides
supplemental medical and other benefits in conjunction with the Canadian
national health care plan. Most U.S. salaried employees who retired prior to
1993 are covered by noncontributory defined benefit medical plans with capped
lifetime benefits. The company 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. Hourly employees
within the U.S. metal food container business are covered by noncontributory
defined benefit medical plans with caps on the annual cost per capita to the
company. Life insurance benefits are noncontributory. The company has no
commitments to increase monetary benefits provided by any of the postretirement
benefit plans.
Contributions to multi-employer health and welfare plans, which are not
included in periodic postretirement benefit cost, were $3.0 million in 1995 for
the period through September 15, $4.0 million in 1994 and $3.8 million in 1993,
and were related to union employees within the discontinued glass packaging
business.
In connection with the adoption of SFAS No. 106, the company elected
immediate recognition of the previously unrecognized transition obligation
through a pretax, noncash charge to earnings as of January 1, 1993, in the
amount of $46.0 million ($28.5 million after tax). Since Heekin had adopted SFAS
No. 106 prior to being acquired, its obligation for postretirement benefits was
assumed by the company and was not included in the cumulative effect of adopting
the new accounting standard. The accumulated postretirement benefit obligation
(APBO) represents, at the date of adoption, the full liability for
postretirement benefits expected to be paid with respect to retirees and fully
eligible active employees, and a pro rata portion of the benefits expected to be
paid with respect to active employees not yet fully eligible.
The company recorded curtailment and settlement gains in 1995 in connection
with the sale of the glass business of $8.4 million which is included as part of
the net loss on the disposition attributable to discontinued operations. Net
periodic postretirement benefit cost, excluding curtailments and settlements,
included $1.0 million, $1.9 million and $1.8 million for 1995, 1994 and 1993,
respectively, related to the discontinued
glass packaging business, and was comprised of the following components:
The health care cost trend rates used to value the APBO are assumed to
decline to 5.0 percent after the year 2002. A one percentage point increase in
these rates would increase the APBO by $5.1 million at December 31, 1995, and
would have increased the service and interest components of net periodic
postretirement benefit cost by $.5 million in 1995.
The status of the company's unfunded postretirement benefit obligation at
December 31, which includes amounts attributable to the glass packaging
business, follows:
Other Postemployment Benefits
Effective January 1, 1993, the company adopted SFAS No. 112 and recorded a
pretax charge of $10.0 million ($6.2 million after tax) to recognize the
cumulative effect on prior years. The annual charge in connection with related
benefits was $2.6 million, $2.2 million and $2.1 million in 1995, 1994 and 1993,
respectively, including $.8 million, $.9 million and $.6 million, for 1995, 1994
and 1993, respectively, attributable to the glass business and included in
discontinued operations.
Other Benefit Plans
Substantially all U.S. salaried employees and certain U.S. nonunion hourly
employees who participate in the company's 401(k) salary conversion plan and
meet eligibility requirements automatically participate in the company's ESOP.
Cash contributions to the ESOP trust, including preferred dividends, are used to
service the ESOP debt and were $10.2 million, $9.5 million and $8.8 million for
1995, 1994 and 1993, respectively. Total interest paid by the ESOP trust for its
borrowings was $4.7 million, $5.1 million and $5.4 million for 1995, 1994 and
1993, respectively.
Shareholders' Equity
At December 31, 1995, 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 (Series B ESOP Preferred). There
were 1,786,852 shares of Series B ESOP Preferred outstanding at December 31,
1995.
The Series B ESOP Preferred has a stated value and liquidation preference
of $36.75 per share and cumulative annual dividends of $2.76 per share. The
Series B 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 the
company's shareholders. Effective April 2, 1993, in accordance with the
antidilution provisions, the conversion price of the Series B ESOP Preferred was
adjusted to $31.813 per share from $36.75 per share and the conversion ratio was
adjusted to 1.1552 shares of company common stock for each share of Series B
ESOP Preferred. These adjustments had no impact on the stated value and
liquidation preference of $36.75 per share.
Under the company's Shareholder Rights Plan, adopted in 1986, one Preferred
Stock Purchase Right is attached to each outstanding share of common stock of
the company. If a person or group acquires 20 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 common stock of the company
at a 50-percent discount. The rights, which expire in August 1996, are
redeemable by the company at a redemption price of five cents 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 the company's board of directors. The rights would not
interfere with any merger or other business combinations approved by the board
of directors. In January 1996 the board of directors adopted a new shareholder
rights plan effective upon termination of the current plan in August 1996. The
new plan is similar to the existing plan, with the exception that under the new
plan, the percentage of the company's outstanding common stock acquired by a
person or group which cause the rights to become exercisable is reduced to 15
percent, and the redemption price is reduced to one cent per right. The new plan
expires in the year 2006.
Common shares were reserved at December 31, 1995, 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 Series B 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. Company contributions for this plan for continuing operations
were approximately $1.6 million in each of 1995, 1994 and 1993.
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 the
company and its subsidiaries at not less than the market value of the stock at
the date of grant. Payment must be 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 exercise date. Options terminate ten years from date of grant and are
exercisable in four equal installments commencing one year from date of grant.
Several option plans provide for, among other things, the discretionary grant of
stock appreciation rights in tandem with options and certain antidilution
provisions.
A summary of stock option activity for the years ended December 31 follows:
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 $13.4 million, $12.5
million and $15.7 million for the years 1995, 1994 and 1993, respectively.
Contingencies
On July 27, 1994, Onex Corporation (Onex) initiated arbitration before the
International Chamber of Commerce, alleging that the company was in breach of a
joint venture agreement dated September 15, 1988. Onex's demand represented a
claim against the company for approximately $30 million. The company denied the
allegations of Onex's complaint. On August 1, 1995, the Arbitral Tribunal
decided the case in favor of Ball Corporation. The parties had previously agreed
to be bound by the decision of the Tribunal.
From time to time, the company is subject to routine litigation incidental
to its business. Additionally, the U.S. Environmental Protection Agency has
designated the company 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 financial condition, results of operations,
capital expenditures or competitive position of the company.
Quarterly Results of Operations (Unaudited)
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.