10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 18, 1999
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 4, 1999
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 8, 1999
----------------- -----------------------------
Common Stock,
without par value 30,407,533 shares
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended July 4, 1999
INDEX
Page Number
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of
Income for the Three- and Six-Month Periods
Ended July 4, 1999, and June 28, 1998 3
Unaudited Condensed Consolidated Balance Sheet
at July 4, 1999, and December 31, 1998 4
Unaudited Condensed Consolidated Statement of
Cash Flows for the Six-Month Periods
Ended July 4, 1999, and June 28, 1998 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 18
PART II. OTHER INFORMATION 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars except per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
(Millions of dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
July 4, 1999
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 some seasonality in packaging
operations. 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.
Reclassifications.
Certain prior-year amounts have been reclassified in order to conform with the
current year presentation.
New Accounting Standards.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information," establishes standards for
reporting information about operating segments in annual and interim financial
statements. Annual reporting under this pronouncement was effective for Ball in
1998. Interim reporting became effective for Ball in 1999, and that information
is included on page 7 of this report.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
essentially requires all derivatives to be recorded on the balance sheet at fair
value and establishes new accounting practices for hedge instruments. In June
1999 SFAS No. 137 was issued to defer the effective date of SFAS No. 133 by one
year. As a result, SFAS No. 133 will not be effective for Ball until 2001. The
effect, if any, of adopting this standard has not yet been determined.
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," establishes new accounting and
reporting standards for the costs of computer software developed or obtained for
internal use and was adopted by Ball as of January 1, 1999. The adoption of SOP
No. 98-1 has not had a significant impact on the Company's operations or
financial condition.
During the fourth quarter of 1998, Ball adopted Statement of Position (SOP) No.
98-5, "Reporting on the Costs of Start-Up Activities," in advance of its
required 1999 implementation date. SOP No. 98-5 requires that costs of start-up
activities and organizational costs, as defined, be expensed as incurred. In
accordance with this statement, the Company recorded an after-tax charge to
earnings of approximately $3.3 million (11 cents per share), retroactive to
January 1, 1998, representing the cumulative effect of this change in accounting
on prior years. As a result of this change in accounting, certain amounts
previously reported in 1998 have been restated.
Business Segment Information.
Ball's operations are organized along its product lines and include two
segments: (1) packaging and (2) aerospace and technologies. The accounting
policies of the segments are the same as those in the condensed consolidated
financial statements. Prior-year segment information has been restated to
conform to the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
The packaging segment includes the 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 direct and indirect investments, which
are accounted for under the equity method, in packaging companies largely in the
PRC, Brazil and Thailand.
The aerospace and technologies segment includes advanced antenna and video
systems, communication and video products and the aerospace systems area which
is comprised of civil space systems, technology operations, defense systems,
commercial space operations and systems engineering.
Acquisitions.
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition). The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. In connection with the Acquisition, the
Company initially provided $56.8 million in the opening balance sheet as an
estimate of integration-related costs, including capacity consolidations. During
the first quarter of 1999, the Company closed two of the acquired plants and
announced in April 1999 that it intends to close a third plant by the end of
1999. Capacity is expected to be redirected to other Ball plants. Upon
finalization of the integration plan, which is expected in the third quarter of
1999, adjustments to the estimated costs through August 9, 1999, if any, will be
reflected as a change in goodwill. Subsequent to that date, any increases in
actual costs will be included in current period earnings and any decreases will
result in a reduction of goodwill.
Headquarters Relocation, Plant Closures and Other Costs.
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, which has been completed, the Company recorded
pretax charges of $6.3 million ($3.8 million after tax or 13 cents per share)
and $4.0 million ($2.4 million after tax or eight cents per share) in the first
and second quarters of 1998, primarily for employee-related costs.
During the last quarter of 1998, the Company announced the closure of two of its
plants located in the PRC and removed from service manufacturing equipment at a
third plant. The actions were taken largely to address industry overcapacity.
The Company's preliminary estimates included a $52.0 million, largely noncash,
charge in the fourth quarter of 1998 to write down equipment, goodwill and other
assets to net realizable values and $4.2 million of other costs. Any adjustments
to the preliminary estimates will be reflected as an adjustment to current
period earnings.
Inventories.
Inventories consisted of the following:
Goodwill and Other Assets.
The composition of other assets was as follows:
Debt and Guarantees of Subsidiaries.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its existing debt. The Acquisition and the refinancing,
including related costs, were financed with a placement of $300.0 million in
7.75% Senior Notes due in 2006, $250.0 million in 8.25% Senior Subordinated
Notes due in 2008 and approximately $808.2 million from a Senior Credit
Facility. The Senior Credit Facility bears interest at variable rates and is
comprised of three separate facilities: (1) a term loan for $350.0 million
due in 2004,(2) a second term loan for $200.0 million due in 2006 and (3) a
revolving credit facility which provides the Company with up to $600.0 million,
of which $450.0 million matures in 2004. At July 4, 1999, approximately
$355 million was available under the revolving 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 subsidiaries and contain certain covenants
and restrictions including, among other things, limits on the incurrence of
additional indebtedness and increases in dividends. However, the note agreements
provide that if the new notes are assigned investment grade ratings and the
Company is not in default, certain covenant restrictions will be suspended. All
amounts outstanding under the Senior Credit Facility are secured by (1) a pledge
of 100 percent of the stock owned by the Company of its direct and indirect
majority-owned domestic subsidiaries and (2) a pledge of 65 percent of the stock
owned directly and indirectly by the Company of certain foreign subsidiaries.
Exhibit 20.1 contains condensed, consolidating financial information for the
Company segregating the guarantor subsidiaries and non-guarantor subsidiaries.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
businesses. In December 1998 the designated pool of receivables was increased to
provide for sales of receivables up to $125 million from the previous amount of
$75 million. Net funds received from the sale of the accounts receivable totaled
$122.5 million and $65.9 million at July 4, 1999, and June 28, 1998,
respectively. Fees incurred in connection with the sale of accounts receivable,
which are included in other expenses, totaled $1.6 million and $3.3 million for
the first three and six months of 1999, respectively, and $1.0 million and
$1.9 million for the same periods in 1998, respectively.
The Company was not in default of any loan agreement at July 4, 1999, and has
met all payment obligations. However, 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 $50.8 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,
1999, and has requested a further waiver in respect of the noncompliance during
the second quarter.
Shareholders' Equity.
The composition of the accumulated other comprehensive loss at July 4, 1999, and
December 31, 1998, is primarily the cumulative effect of foreign currency
translation and additional minimum pension liability. Total comprehensive income
for the second quarter and first half of 1999 was $33.6 million and
$51.3 million, respectively, and $17.1 million and $18.6 million for the
comparative periods of 1998, 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 1,561,044 shares at July 4, 1999, and 1,586,916 shares at December 31,
1998.
Earnings Per Share.
The following table provides additional information on the computation of
earnings per share amounts:
Contingencies.
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government is disputing the Company's claim to recoverability (by means
of allocation to government contracts) of reimbursed costs associated with
Ball's ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government will not reimburse the
Company for disputed ESOP expenses incurred or accrued after 1995. A deferred
payment agreement for the costs reimbursed through 1995 was entered into between
the government and Ball. On October 10, 1995, the Company filed its complaint
before the Armed Services Board of Contract Appeals (ASBCA) seeking final
adjudication of this matter. Trial before the ASBCA was conducted in January
1997. Since that time, the Defense Contract Audit Agency (DCAA) has issued a
Draft Audit Report disallowing a portion of the Company's ESOP costs for 1994
through 1997 on the asserted basis that the Company's dividend contributions to
the ESOP do not constitute allowable deferred compensation. The Draft Audit
Report takes the position that the disallowance is not covered by the pending
decision by the ASBCA. However, more recently, Ball's Corporate Administrative
Contracting Officer has resolved the DCAA's disallowance in Ball's favor and has
incorporated this favorable resolution into a Memorandum of Agreement with Ball
to close out cost claims for years 1994 through 1997. While the outcome of the
trial or the audit is not yet known, the Company's information at this time does
not indicate that this matter will have a material, adverse effect upon the
financial condition, results of operations or competitive position of the
Company.
From time to time, the Company is subject to routine litigation incident to its
business. Additionally, the U.S. Environmental Protection Agency has designated
Ball as a potentially responsible party, along with numerous other companies,
for the cleanup of several hazardous waste sites. However, the Company's
information at this time does not indicate that these matters will have a
material, adverse effect upon the financial condition, results of operations,
capital expenditures or competitive position 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.
ACQUISITIONS
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition). The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. In connection with the Acquisition, the
Company initially provided $56.8 million in the opening balance sheet as an
estimate of integration-related costs, including capacity consolidations. During
the first quarter of 1999, the Company closed two of the acquired plants and
announced in April 1999 that it intends to close a third plant. Capacity is
expected to be redirected to other Ball plants. Upon finalization of the
integration plan, which is expected in the third quarter of 1999, adjustments to
the estimated costs through August 9, 1999, if any, will be reflected as a
change in goodwill. Subsequent to that date, any increases in actual costs will
be included in current period earnings and any decreases in estimates will
result in a reduction of goodwill.
RESULTS OF OPERATIONS
Consolidated Sales and Earnings
Ball's operations are organized along its product lines and include two
segments: (1) the packaging segment and (2) the aerospace and technologies
segment. The following table summarizes the results of these two segments:
Packaging Segment
The packaging segment includes the businesses that manufacture metal and PET
(polyethylene terephthalate) containers, primarily for use in beverage and food
packaging. The Company's packaging operations are located in and serve North
America (the U.S. and Canada) and Asia, primarily the People's Republic of China
(PRC). Packaging operations in North America have increased as a result of the
plants acquired in 1998 as part of the Acquisition.
North American metal beverage container sales, which represented approximately
72 percent of segment sales in both the second quarter and first half of 1999,
nearly doubled in comparison to the same periods in 1998. The increase was
primarily due to the additional sales from the acquired plants as well as the
legacy plants running at full capacity, partially offset by lower aluminum
commodity prices. The Company's metal beverage container shipments were up
slightly over what Ball's legacy and acquired plants shipped in the first half
of 1998, while overall industry shipments were comparable for the two periods.
During the first quarter, two of the acquired plants were closed, with certain
related production requirements redirected to other Ball plants. Earnings
attributable to North American metal beverage containers also improved in 1999
as a result of the higher sales combined with lower production costs per unit.
North American metal food container sales, which comprised approximately
13 percent of segment sales in the both the second quarter and first half of
1999, increased slightly over the same periods in 1998. This increase was the
result of stronger sales in seasonal and nonseasonal lines. Increased production
volumes and manufacturing efficiency gains resulted in lower production costs
per unit, which, along with the increase in sales, provided improved earnings
over the same periods of 1998.
Plastic container sales for the first half of 1999 increased approximately
5 percent compared to 1998, with second quarter sales increasing modestly. The
increase in sales was largely due to additional soft drink volume from a
recently expanded facility. The sales mix continues to be weighted primarily
toward carbonated soft drinks and water. Despite increased resin prices, the
1999 second quarter and first half results of plastic container operations were
significantly improved over the same periods in 1998, a combination of increased
sales, improved production efficiencies and manufacturing cost control.
Internationally, results in the PRC, although not yet at desired levels, were at
record levels for the second quarter due largely to increased demand for
beverage cans. The closure of two plants in the PRC during the first quarter of
1999 contributed to lower sales during that period. Earnings were improved due
largely to numerous cost-cutting and productivity improvement programs which
have been put in place there.
Aerospace and Technologies Segment
The larger aerospace systems operation had sales and earnings well above the
second quarter and first half of 1998 as a result of increased program activity.
Sales and earnings results in other areas were lower due largely to costs to
develop antennas which employ Ball technology for wireless personal
communications systems. The related sales had not yet been realized to offset
the costs, which were planned as part of the Company's strategy to extend into
commercial markets key technologies it has developed in governmental business.
Backlog at the end of the second quarter was approximately $343 million compared
to $296 million at December 31, 1998, and $352 million at the end of the 1998
second quarter. Year-to-year comparisons of backlog are not necessarily
indicative of the trend of future operations.
Selling and Administrative Expenses
Higher consolidated selling and administrative expenses in 1999 compared to 1998
were due partially to the additional costs associated with the acquired plants,
including salaries and interim administrative support. Also contributing to the
increase were higher incentive compensation costs and a nonrecurring charge in
the second quarter for $4.7 million associated with an executive stock option
grant which vested in April when the Company's closing stock price reached
specified levels. The offset to the charge was recorded as common stock.
Interest and Taxes
Consolidated interest expense for the second quarter and first half of 1999 was
$27.3 million and $55.5 million, respectively, compared to $13.4 million and
$26.1 million for the same periods in 1998, respectively. The increase is
primarily attributable to the additional debt associated with the Acquisition.
Ball's lower consolidated effective income tax rate for the second quarter and
first half of 1999, as compared to the same periods in 1998, is primarily due to
increased U.S. earnings and the reduced tax effects of foreign operations,
partially offset by the final phase-in effects of the previously reported 1996
legislated changes in the tax treatment of the costs of company-owned life
insurance. Increased research and development tax credits also contributed to
the reduced rate in 1999.
Results of Equity Affiliates and Minority Interests
Equity earnings in affiliates are largely attributable to those from investments
in the PRC, Thailand and Brazil and were a loss of $0.4 million compared to
income of $0.5 million for the first half of 1998. Results in Brazil were
hampered by the Brazilian government's change in its monetary policy in January
1999, which caused the Brazilian real to devalue.
Minority interests' share of income was $0.5 million for the first half of 1999
compared to their share of losses of $4.0 million for the same period in 1998.
The variance is the result of improved earnings combined with the increase in
Ball's direct and indirect ownership in M.C. Packaging (Hong Kong) Limited
during the latter part of 1998.
Other Items
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, which has been completed, the Company recorded a
charge in the first quarter and first half of 1998 of $4.0 million ($2.4 million
after tax or eight cents per share) and $10.3 million ($6.3 million after tax or
21 cents per share), respectively, primarily for employee-related costs.
During 1998 Ball adopted Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities," in advance of its required 1999 implementation
date. SOP No. 98-5 requires that costs of start-up activities and organizational
costs, as defined, be expensed as incurred. In accordance with this statement,
the Company recorded an after-tax charge to earnings of approximately
$3.3 million (11 cents per share), retroactive to January 1, 1998, representing
the cumulative effect of this change in accounting on prior years.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 1999 of $7.2 million decreased compared to 1998,
due largely to seasonal working capital requirements, partially offset by
improved earnings. Capital spending of $44.4 million in the first six months of
1999 was below depreciation of $81.2 million. Total 1999 capital spending is
expected to be approximately $130 million.
Total debt increased to $1,419.6 million at July 4, 1999, compared to
$1,356.6 million at December 31, 1998, primarily due to the normal increase in
inventories to meet seasonal and peak period demands. The debt-to-total
capitalization ratio of 67.4 percent at July 4, 1999, was comparable to
67.7 percent at December 31, 1998.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its existing debt. The Acquisition and the refinancing,
including related costs, were financed with a placement of $300.0 million in
7.75% Senior Notes due in 2006, $250.0 million in 8.25% Senior Subordinated
Notes due in 2008 and approximately $808.2 million from a Senior Credit
Facility. The Senior Credit Facility bears interest at variable rates and is
comprised of three separate facilities: (1) a term loan for $350.0 million
due in 2004, (2) a second term loan for $200.0 million due in 2006 and
(3) a revolving credit facility which provides the Company with up to
$600.0 million, of which $450.0 million matures in 2004. At July 4, 1999,
approximately $355 million was available under the revolving 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 subsidiaries and contain certain covenants
and restrictions including, among other things, limits on the incurrence of
additional indebtedness and increases in dividends. However, the note agreements
provide that if the new notes are assigned investment grade ratings and the
Company is not in default, certain covenant restrictions will be suspended. All
amounts outstanding under the Senior Credit Facility are secured by (1) a pledge
of 100 percent of the stock owned by the Company of its direct and indirect
majority-owned domestic subsidiaries and (2) a pledge of 65 percent of the stock
owned directly and indirectly by the Company of certain foreign subsidiaries.
The Company's consolidated operations in Asia had short-term uncommitted credit
facilities of approximately $142 million at the end of the second quarter, of
which $63 million was outstanding at July 4, 1999.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
businesses. In December 1998 the designated pool of receivables was increased to
provide for sales of receivables up to $125 million from the previous amount of
$75 million. Net funds received from the sale of the accounts receivable totaled
$122.5 million and $65.9 million at July 4, 1999, and June 28, 1998,
respectively. Fees incurred in connection with the sale of accounts receivable,
which are included in other expenses, totaled $1.6 million and $3.3 million for
the first three and six months of 1999, respectively, and $1.0 million and
$1.9 million for the same periods in 1998, respectively.
The Company was not in default of any loan agreement at July 4, 1999, and has
met all payment obligations. However, 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 $50.8 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,
1999, and has requested a further waiver in respect of the noncompliance during
the second quarter.
CONTINGENCIES
Year 2000 Systems Review
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year and, as a result, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or system failures causing disruptions in their operations. This
is commonly known as the Year 2000 issue and can arise at any point in the
Company's supply, manufacturing, processing, distribution and financial chains.
Over the course of the past several years, systems installations, upgrades and
enhancements were performed by the Company in the ordinary course of business
with attention given to Year 2000 matters. As a result, when the formal Year
2000 program was instituted in 1996, many of the Year 2000 matters potentially
affecting the Company had either been resolved or were near resolution. The
program currently in effect was instituted to make the remaining software and
systems Year 2000 compliant in time to minimize any significant negative effects
on operations and is divided into five major phases: (1) project initiation,
(2) awareness, (3) assessment, (4) remediation and (5) testing. The program
covers information systems infrastructure, financial and administrative systems,
process control and manufacturing operating systems and the compliance profiles
of significant vendors, lenders and customers. As of April 1999, the Company
estimated that the program was nearly complete with regard to critical systems,
and completion of the entire project is on target for the latter half of 1999.
International operations, for the most part, are following the U.S. program, and
international joint venture operations are being assessed.
Because most of the Company's efforts were initiated to address specific
business requirements or to stay technologically current, it is difficult to
quantify costs incurred solely in conjunction with the Year 2000 project.
However, certain incremental costs of approximately $3 million have been
identified, including contractor assistance, the purchase of software to manage
the project and software to check personal computer hardware and software
compliance. All such costs are being funded through operating cash flows.
Ball relies on third-party suppliers for raw materials, water, utilities,
transportation, banking and other key services. The inability of principal
suppliers, including utilities, to be Year 2000 ready could result in delays in
product or service deliveries from such suppliers and disrupt the Company's
ability to supply its products or services. Ball's continuing review program
includes efforts to evaluate the status of suppliers' and customers' efforts,
including, but not limited to, questionnaires as a means of identifying risk.
The replies indicate that most suppliers, vendors and customers are working on
this matter but they will not provide any assurance that they will be Year 2000
compliant.
A worst-case scenario for the Company with respect to the Year 2000 issue could
be the failure of either a critical vendor or the Company's manufacturing and
information systems. Such failures could result in production outages and lost
sales and profits.
The Company is developing contingency plans intended to mitigate the possible
disruption of business operations that may result from external third-party Year
2000 issues. Such plans may include accelerating raw material delivery
schedules, increasing finished goods inventory levels, securing alternate
sources of supply, adjusting facility shutdown and start-up schedules and other
appropriate measures. The Company is currently prioritizing critical systems and
intends to have its contingency plans in place by the end of 1999. The
contingency plans and related cost estimates will be refined as additional
information becomes available. The related cost estimates of Year 2000
compliance and the Company's contingency plans will be refined as additional
information becomes available.
Due to the general uncertainty inherent in the Year 2000 issue, resulting in
part from the uncertainty of the Year 2000 readiness of the third-party
suppliers and customers, the Company is unable to determine whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. However, the Company
believes that, with the recent implementation of new business systems and
completion of the program as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The discussion of the Company's efforts and management's expectations relating
to Year 2000 compliance contains forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of associated incremental
costs could be adversely impacted by, among other things, the availability and
cost of programming and testing resources, the ability of suppliers and
customers to bring their systems into Year 2000 compliance and unanticipated
problems identified in the ongoing compliance review.
The information contained herein regarding the Company's efforts to deal with
the Year 2000 problem applies to all of the Company's products and services.
Such statements are intended as Year 2000 Statements and Year 2000 Readiness
Disclosures and are subject to the Year 2000 Information Readiness Disclosure
Act.
Other
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government is disputing the Company's claim to recoverability (by means
of allocation to government contracts) of reimbursed costs associated with
Ball's ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government will not reimburse the
Company for disputed ESOP expenses incurred or accrued after 1995. A deferred
payment agreement for the costs reimbursed through 1995 was entered into between
the government and Ball. On October 10, 1995, the Company filed its complaint
before the Armed Services Board of Contract Appeals (ASBCA) seeking final
adjudication of this matter. Trial before the ASBCA was conducted in January
1997. Since that time, the Defense Contract Audit Agency (DCAA) has issued a
Draft Audit Report disallowing a portion of the Company's ESOP costs for 1994
through 1997 on the asserted basis that the Company's dividend contributions to
the ESOP do not constitute allowable deferred compensation. The Draft Audit
Report takes the position that the disallowance is not covered by the pending
decision by the ASBCA. However, more recently, Ball's Corporate Administrative
Contracting Officer has resolved the DCAA's disallowance in Ball's favor and has
incorporated this favorable resolution into a Memorandum of Agreement with Ball
to close out cost claims for years 1994 through 1997. While the outcome of the
trial or the audit is not yet known, the Company's information at this time does
not indicate that this matter will have a material, adverse effect upon the
financial condition, results of operations or competitive position of the
Company.
From time to time, the Company is subject to routine litigation incident to its
business. Additionally, the U.S. Environmental Protection Agency has designated
Ball as a potentially responsible party, along with numerous other companies,
for the cleanup of several hazardous waste sites. However, the Company's
information at this time does not indicate that these matters will have a
material, adverse effect upon the financial condition, results of operations,
capital expenditures or competitive position 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 and fluctuations in foreign currencies. The
Company's objective in managing its exposure to commodity price changes is to
limit the impact of commodity price changes on earnings and cash flow through
arrangements with suppliers and, at times, through the use of certain derivative
instruments 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
currency exchange rate changes.
The Company has estimated its market risk exposure using sensitivity analysis.
Market risk exposure has been defined as the change 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 4,
1999, did not differ materially from the amounts reported as of December 31,
1998. 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; the weather; fuel
costs and availability; regulatory action; federal and state legislation;
interest rates; labor strikes; boycotts; litigation involving antitrust,
intellectual property, consumer and other issues; maintenance and capital
expenditures; local economic conditions; the authorization and control over the
availability of government contracts and the nature and continuation of those
contracts and related services provided thereunder; the success or lack of
success of the satellite launches and business of EarthWatch; the devaluation of
international currencies; the ability to obtain adequate credit resources for
foreseeable financing requirements of the Company's businesses; the inability of
the Company to achieve year 2000 compliance; the ability of the Company to
acquire other businesses. If the Company's assumptions and estimates are
incorrect, or if it is unable to achieve its goals, then the Company's actual
performance could vary materially from those goals expressed or implied in the
forward-looking statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March of 1992, William Hallahan, an employee of the Company's metal 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 for the
State of New York. The testimony was concluded in April 1996. On January 14,
1997, the administrative law judge (ALJ) filed a memorandum of the 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 made those findings and the case was again appealed by the Company. On or
about June 24, 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 has appealed the case to
the full Workers' Compensation Board and, alternatively, into the Appellate
Division of the State of New York in the judicial system. Both parties have
filed briefs with the full Workers' Compensation Board. Based on the information
available at this time, the Company believes that this matter will not result in
any material adverse effect on the Company. The Company also previously reported
that Mr. Hallahan is suing several defendants for damages as the result of his
leukemia. Two defendants have filed third-party complaints against the Company
for contribution. These proceedings are still pending. Based on the information
available, the Company is unable to express an opinion as to the actual exposure
of the Company for contribution to the defendants.
The Company previously reported that it had been named as a defendant in four
lawsuits which are referred to as follows: Daniels v. Akzo Nobel Chemicals, Inc.
(voluntarily dismissed); Williams v Akzo Nobel Chemicals, Inc.; Steich v. Akzo,
et al (voluntarily dismissed); and Adams v. Akzo, et al. These cases allege that
certain defendants, including the Company, disposed of hazardous waste at a
facility operated by Gibraltar Chemical Resources, Inc., located in Winona,
Smith County, Texas. The lawsuits further allege that the companies and
individuals who managed the Gibraltar facility failed to appropriately manage
the waste disposed of at the facility and released hazardous substances into the
environment, allegedly causing the plaintiffs' property damage and personal
injury in an unspecified amount. Based on the information available at the
present time, the Company believes that this matter will not result in any
material adverse effect on the Company.
The Company previously reported that on or about March 19, 1999, the Lemelson
Medical, Education and Research Foundation, Limited Partnership (Lemelson), gave
notice to the Company that the Company allegedly infringed certain patents owned
by that entity which were alleged to cover machine vision and automatic
identification equipment. Lemelson alleged that the patented machine vision
methods cover production, inspection and production control operations including
inspection for flaws or defects in conformance with specifications and
standards. Automatic identification allegedly covers bar code recognition.
Lemelson claims that it also has patents pending that broadly cover something
referred to as flexible manufacturing. Lemelson offered the Company a license
under all patents, and patents pending, owned or controlled by Lemelson with
certain irrelevant exceptions. Through the purchase of the North American
beverage can manufacturing business of Reynolds Metals Company, the Company has
also been granted an option for a license which the Company has accepted by
paying a license fee to Lemelson. Pursuant to a confidential license agreement,
this matter has now been concluded. Based on the information available at the
present time, the Company believes this matter will not result in any material
adverse effect on the Company.
The Company previously reported, on or about June 14, 1990, the El Monte plant
of Ball-InCon Glass Packaging Corp., a then wholly owned subsidiary of the
Company [renamed Ball Glass Container Corporation (Ball Glass)], the assets of
which were contributed in September 1995 into a joint venture with Compagnie de
Saint-Gobain (Saint-Gobain), now known as Ball-Foster Glass Container Co.,
L.L.C., and wholly owned by Saint Gobain, received a general notification letter
and information request from the EPA, Region IX, notifying Ball Glass that it
may have a potential liability as defined in Section 107(a) of the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) with respect to
the San Gabriel Valley areas 1-4 Superfund Sites located in Los Angeles County,
California. Ball Glass tendered the matter to the Company to handle pursuant to
the sale agreement with Saint-Gobain. The Company is participating in a PRP
group to deal with this matter.
The environmental consulting firm retained by the PRP group submitted to the EPA
its Feasibility Study Technical Memorandum 1 concerning the site. Five potential
remedial action plans were identified in the study ranging from no action to an
extensive groundwater remediation project for both shallow and deep aquifers.
The cost of such remedies were estimated to range from minimal costs for no
action to between $10.5 to 25 million for the three groundwater pump and treat
options proposed. The PRP group negotiated with the EPA over the remedy
selections for the Record of Decision and formed an allocation committee for
making final allocation of remediation costs between group members. In late June
1999, the EPA announced that it chose the pump and treat remedy which is
estimated to cost approximately $25 million. The PRP group is commencing the
final allocation process but has not made any final allocation. Based on the
information available to the Company at the present time, the Company is unable
to express an opinion as to the actual exposure of the Company for this matter.
However, Commercial Union, the Company's general liability insurer, is defending
this governmental action and is paying the cost of defense including attorneys'
fees.
Item 2. Changes in Securities
There were no events required to be reported under Item 2 for the quarter ending
July 4, 1999.
Item 3. Defaults Upon Senior Securities
There were no events required to be reported under Item 3 for the quarter ending
July 4, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the Annual Meeting of Shareholders on April 28, 1999. Matters
voted upon by proxy were: the election of three directors for three-year terms
expiring in 2002 and the ratification of the appointment of
PricewaterhouseCoopers LLP as independent accountants for 1999. 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 4, 1999.
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 4, 1999.
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/ R. David Hoover
-------------------------------
R. David Hoover
Vice Chairman and
Chief Financial Officer
Date: August 18, 1999
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
July 4, 1999
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