REPORT OF INDEPENDENT AUDITORS
Board of Directors
Reynolds Metals Company
We have audited the accompanying combined balance sheets of North
American Can Operations (a component of Reynolds Metals Company) as defined
in Note 1 (the "Operation") as of December 31, 1997 and 1996, and the related
combined statements of income and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Operation's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Operation, as defined in Note 1, at December 31, 1997 and 1996, and the
combined results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Richmond, Virginia
April 28, 1998
NORTH AMERICAN CAN OPERATIONS
(A COMPONENT OF REYNOLDS METALS COMPANY)
COMBINED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
DECEMBER 31
--------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Customer receivables, less allowances of $0.2
(1996-$0.1)...................................... $ 54.5 $ 49.7
Receivables from Reynolds' Latin American
affiliate........................................ 6.2 5.0
Inventories........................................ 115.8 95.5
Deferred taxes..................................... 4.6 7.7
Other.............................................. 3.3 3.1
--------- ---------
Total current assets................................. 184.4 161.0
Property, plant and equipment........................ 741.1 730.3
Less allowances for depreciation and amortization.... 404.5 355.3
--------- ---------
336.6 375.0
Assets held for sale................................. 6.2 8.0
Other assets......................................... 38.9 38.6
--------- ---------
Total assets........................................... $ 566.1 $ 582.6
--------- ---------
--------- ---------
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable................................... $ 26.9 $ 35.3
Accounts payable -- Reynolds plant
locations (net).................................. 43.2 34.9
Accrued compensation and related amounts........... 10.4 12.2
Restructuring liabilities.......................... 4.6 10.1
Other liabilities.................................. 4.6 4.3
--------- ---------
Total current liabilities............................ 89.7 96.8
Long-term debt....................................... 54.4 54.6
Deferred taxes....................................... 38.5 31.7
Restructuring liabilities............................ -- 8.8
Environmental liabilities............................ 8.5 8.8
Owner's equity....................................... 375.0 381.9
Contingent liabilities...............................
--------- ---------
Total liabilities and owner's equity................... $ 566.1 $ 582.6
--------- ---------
--------- ---------
See accompanying notes.
NORTH AMERICAN CAN OPERATIONS
(A COMPONENT OF REYNOLDS METALS COMPANY)
COMBINED STATEMENT OF INCOME
(IN MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
REVENUES
Net sales.................................... $ 1,182.8 $ 1,146.4 $ 1,211.5
Net sales to Reynolds' Latin American
affiliate.................................. 9.9 10.2 33.9
---------- ---------- ----------
1,192.7 1,156.6 1,245.4
COSTS AND EXPENSES
Cost of products sold........................ 1,053.2 1,066.8 1,096.1
Selling, administrative and general.......... 32.1 33.9 36.2
Depreciation and amortization................ 56.7 53.8 53.4
Interest..................................... 2.1 -- 0.9
Operational restructuring costs.............. -- 37.2 15.9
---------- ---------- ----------
1,144.1 1,191.7 1,202.5
EARNINGS
Income (loss) before income taxes............ 48.6 (35.1) 42.9
Taxes on income (credit)..................... 19.9 (13.0) 17.6
---------- ---------- ----------
NET INCOME (LOSS).............................. $ 28.7 $ (22.1) $ 25.3
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
NORTH AMERICAN CAN OPERATIONS
(A COMPONENT OF REYNOLDS METALS COMPANY)
COMBINED STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES:
Net income (loss).................................. $ 28.7 $ (22.1) $ 25.3
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization.................... 56.7 53.8 53.4
Operational restructuring costs.................. -- 37.2 15.9
Operational restructuring payments............... (9.1) (2.5) (1.8)
Deferred taxes................................... 9.9 (4.4) (0.3)
Changes in operating assets and liabilities:
Decrease (increase) in receivables............. (6.0) 21.9 6.5
Decrease (increase) in inventories............. (20.3) 35.4 (33.1)
Increase (decrease) in payables................ (1.6) (26.4) 12.7
Other.......................................... (1.9) 2.6 (3.6)
--------- --------- ---------
Net cash provided by operating activities............ 56.4 95.5 75.0
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment..... (21.3) (67.9) (59.1)
Proceeds from sales of assets...................... 0.7 6.7 --
--------- --------- ---------
Net cash used in investing activities................ (20.6) (61.2) (59.1)
FINANCING ACTIVITIES:
Cash changes in owner's equity..................... (35.6) (34.1) (15.6)
Debt payments...................................... (0.2) (0.2) (0.3)
--------- --------- ---------
Net cash used in financing activities................ (35.8) (34.3) (15.9)
--------- --------- ---------
CASH AT BEGINNING AND END OF PERIOD.................. $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
See accompanying notes.
NORTH AMERICAN CAN OPERATIONS
(A COMPONENT OF REYNOLDS METALS COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THE TABLES, DOLLARS ARE MILLIONS)
1. BASIS OF PRESENTATION
North American Can Operations is a component of Reynolds Metals Company
("Reynolds") that primarily produces aluminum beverage cans and ends. The
North American Can Operations (the "Operation") consist of 15 can and end
plants in the U.S. and a can plant in Puerto Rico.
The accompanying special-purpose combined financial statements have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a registration statement
of Ball Corporation. They have been prepared on a historical cost basis from
the books and records of the Operation and Reynolds on the basis of
established accounting methods, practices, procedures and policies (see Note
2) and the accounting judgments and estimation methodologies used by the
Operation and Reynolds.
The combined statement of income includes all items of revenue and income
generated by the Operation, all items of expense directly incurred by it and
expenses charged or allocated to it by Reynolds in the normal course of
business. In addition, certain Reynolds corporate expenses were allocated by
Reynolds to the Operation for the sole purpose of preparing these
special-purpose combined financial statements. For additional information
concerning expenses charged or allocated to the Operation by Reynolds, see
Note 3.
The Operation's results have been included in Reynolds' combined U.S.
federal and applicable state income tax returns. The amount of taxes payable
or receivable due to/from Reynolds for 1997, 1996 and 1995 is included as a
component of Owner's Equity and equals the current provision for taxes (see
Note 7). The provision for income taxes, the related assets and liabilities
and the disclosures in the footnotes are presented as if the Operation had
filed separate tax returns and are in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
The debt of the Operation consists of obligations that are specifically
identifiable with associated capital expenditures of the Operation. No other
debt of Reynolds (or related interest expense) has been allocated to the
Operation.
Because of the special purpose of the Operation's combined financial
statements and the significant related party transactions (as described in
Note 3), these special-purpose combined financial statements may not
necessarily be indicative of the combined financial position, results of
operations or cash flows that would have resulted if the Operation had been
operated as a separate entity. Management believes that the accounting
judgments, estimations and allocations made in preparing these
special-purpose combined financial statements were reasonable.
2. ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
These special-purpose combined financial statements include the accounts
of the Operation after eliminating profits and losses on transactions within
the Operation.
REVENUE RECOGNITION
Revenues are recognized when products are shipped and ownership risk and
title pass to the customer.
2. ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Inventory costs
were determined by the first-in, first-out method and principally consist of
finished goods.
DEPRECIATION AND AMORTIZATION
The straight-line method is used to depreciate plant and equipment over
their estimated useful lives (buildings -- 10 to 40 years, machinery and
equipment -- 5 to 20 years).
ENVIRONMENTAL EXPENDITURES
Remediation costs are accrued when it is probable that such efforts will
be required and the related costs can be reasonably estimated.
STATEMENT OF CASH FLOWS
Reynolds utilizes a centralized cash management system for all of its
domestic operations, including the Operation. Cash receipts are transferred
to Reynolds while the cash disbursements are made by Reynolds on behalf of
the Operation, each on a current basis. The net cash generated by the
Operation in the combined statement of cash flows is reflected as a change in
the Owner's Equity account.
USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect assets and liabilities, contingent
assets and liabilities, and revenues and expenses. Actual results could
differ from those estimates.
3. RELATED PARTY TRANSACTIONS
REYNOLDS' LATIN AMERICAN AFFILIATE
The Operation sells cans to a Reynolds' affiliate that produces and
markets cans in Latin America. The Operation sells cans to the affiliate, as
necessary, to cover production shortages.
NET INVENTORY PURCHASES FROM REYNOLDS
Reynolds has been a primary supplier of aluminum sheet to the Operation.
The Operation also sells aluminum scrap to Reynolds (which is accounted for
as a credit to aluminum sheet purchases). The following is a summary of these
transactions (which were made at market prices) for each of the last three
years.
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
Aluminum sheet purchases............................ $ 539.5 $ 517.7 $ 468.6
Aluminum scrap sales................................ (31.3) (30.8) (38.5)
--------- --------- ---------
Total............................................. $ 508.2 $ 486.9 $ 430.1
--------- --------- ---------
--------- --------- ---------
3. RELATED PARTY TRANSACTIONS (CONTINUED)
OPERATING EXPENSES
The expenses charged or allocated to the Operation by Reynolds in the
normal course of business consist of the following:
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
Employee benefits:
Pensions......................................... $ 7.8 $ 6.6 $ 6.4
Other postretirement benefits.................... 4.0 5.1 5.8
Insurance -- principally medical for
active personnel............................... 17.0 17.8 16.0
Workers' compensation............................ 4.0 3.9 3.3
Information system usage......................... 2.1 2.4 2.1
Other.............................................. 3.0 2.5 3.0
--------- --------- ---------
$ 37.9 $ 38.3 $ 36.6
--------- --------- ---------
--------- --------- ---------
Reynolds maintains several noncontributory defined benefit pension plans
(including the Operation, Reynolds and certain consolidated subsidiaries of
Reynolds) that cover substantially all of the Operation's employees. Plans
covering salaried employees provide pension benefits based on a formula. The
formula considers length of service and earnings during years of service.
Plans covering hourly employees generally provide a specific amount of
benefits for each year of service.
Reynolds also maintains postretirement benefits plans (including the
Operation, Reynolds and certain consolidated subsidiaries of Reynolds) that
provide most of the Operation's retired employees with health care and life
insurance benefits. Substantially all employees may become eligible for these
benefits if they work for the Operation until retirement age.
The Operation recognizes employee benefit costs based on allocations from
Reynolds. These allocations were determined in a fair and equitable manner
and have been consistently applied to the Operation and to Reynolds' other
operations. Information system usage is charged based on actual computer time
used by the Operation.
ALLOCATION OF CORPORATE SELLING, ADMINISTRATIVE AND GENERAL EXPENSES
In addition to the operating expenses discussed above, certain Reynolds
corporate expenses were allocated to the Operation by Reynolds for the sole
purpose of preparing these special-purpose combined financial statements.
These expenses were allocated to the Operation based on the relationship of
the aggregate of the Operation's net sales, fixed assets and equity
investments compared to that of Reynolds. These expenses amounted to $13.7
million in 1997 ($12.1 million in 1996 and $17.3 million in 1995).
ACCOUNTS PAYABLE
Accounts Payable -- Reynolds plant locations (net) reflects the net
liability to Reynolds for purchases of aluminum sheet less the receivable
from Reynolds for sales of scrap. The net liability assumes normal payment
terms existed between Reynolds and the Operation. All other related party
transactions are accounted for as changes to the Owner's Equity account.
4. OPERATIONAL RESTRUCTURING COSTS
The operational restructuring costs for 1996 and 1995 resulted from the
closings and modernizations of certain domestic can plants of the Operation.
Two plants were closed as their capacities were in excess of
4. OPERATIONAL RESTRUCTURING COSTS (CONTINUED)
the Operation's customer needs. Productivity gains from modernizations within
the Operation's can-making system and slower overall growth in the domestic
can market lead to this rationalization. The significant components of these
costs were as follows:
YEARS ENDED DECEMBER 31
-----------------------
1996 1995
---------- -----------
Employee termination costs................................. $ 30.3 $ 2.4
Asset revaluations......................................... 5.2 10.2
Other...................................................... 1.7 3.3
---------- -----------
$ 37.2 $ 15.9
---------- -----------
---------- -----------
The employee termination costs represent approximately 475 personnel
(principally hourly employees). Included in the employee termination amount
for 1996 is $18.9 million related to pension and other post-retirement
liabilities. As these liabilities will be funded over time by Reynolds, the
amounts are included as a component of Owner's Equity in the combined balance
sheet. Most of the remaining cash requirements were paid as of the end of
1997, with the balance ($4.6 million) to be paid in 1998.
The asset revaluations were for assets to be sold (property, plant and
equipment) as a result of the restructuring of operations. These assets were
revalued to their estimated recoverable value.
5. PROPERTY, PLANT AND EQUIPMENT (AT COST)
DECEMBER 31
--------------------
1997 1996
--------- ---------
Land and land improvements........................... $ 19.2 $ 19.2
Buildings............................................ 93.2 85.8
Machinery and equipment.............................. 621.5 588.0
Construction in progress............................. 7.2 37.3
--------- ---------
741.1 730.3
Less allowances for depreciation and amortization.... 404.5 355.3
--------- ---------
Net property, plant and equipment.................... $ 336.6 $ 375.0
--------- ---------
--------- ---------
6. FINANCING ARRANGEMENTS
The Operation's debt at December 31, 1997 consists of $49.2 million of
industrial and environmental control revenue bonds (including $41.2 million
at the Puerto Rico can plant) and a mortgage of $5.4 million (which includes
$0.2 million in Other current liabilities in the Combined Balance Sheet).
The industrial and environmental control revenue bonds bear interest at a
variable rate (averaging approximately 3.8% at December 31, 1997). These
bonds require principal repayments in a lump sum in 2013 ($41.2 million) and
2015 ($8.0 million). Letters of credit issued to Reynolds by banks support
these bonds. The mortgage bears interest at a fixed rate of 10%. The mortgage
requires principal repayments through 2009 (approximately $0.2 to $0.3
million a year for the next five years).
Interest expense incurred was $2.6 million in 1997 ($2.8 million in 1996
and $3.0 million in 1995). Interest capitalized amounted to $0.5 million in
1997 ($2.8 million in 1996 and $2.1 million in 1995).
6. FINANCING ARRANGEMENTS (CONTINUED)
The financing arrangements contain compliance requirements, such as
maintaining and operating the associated facilities in good repair during
their useful lives. Upon the occurrence of certain events, including
cessation of operation of the Puerto Rican plant, the maturities of the
Operation's debt could be accelerated. These requirements do not inhibit
operations or the use of fixed assets. At December 31, 1997, the Operation
met all such compliance requirements.
The fair value of the Operation's debt was approximately equal to book
value at the end of 1997 and 1996.
7. TAXES ON INCOME
The significant components of the provision for taxes on income (credit)
were:
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
Current:
Federal............................................ $ 9.1 $ (8.0) $ 14.9
State.............................................. 0.9 (0.6) 3.0
--------- --------- ---------
Total current...................................... 10.0 (8.6) 17.9
--------- --------- ---------
Deferred:
Federal............................................ 7.4 (2.8) (0.2)
State.............................................. 2.5 (1.6) (0.1)
--------- --------- ---------
Total deferred..................................... 9.9 (4.4) (0.3)
--------- --------- ---------
Total................................................ $ 19.9 $ (13.0) $ 17.6
--------- --------- ---------
--------- --------- ---------
The effective income tax rate varied from the statutory rate as follows:
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
Federal statutory rate........................ 35% (35)% 35%
State income taxes............................ 4 (4) 4
Goodwill and other............................ 2 2 2
--- --- ---
Effective rate................................ 41% (37)% 41%
--- --- ---
--- --- ---
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. At
December 31, 1997, the Operation had $7.9 million (1996 -- $14.9 million) of
deferred tax
7. TAXES ON INCOME (CONTINUED)
assets and $41.8 million (1996 -- $38.9 million) of deferred tax liabilities.
The significant components of deferred tax assets and liabilities reflected
in the combined balance sheet are as follows:
DECEMBER 31
-----------------------------------------------------
1997 1996
-------------------------- -------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
ASSET LIABILITY ASSET LIABILITY
----------- ------------- ----------- ------------
Tax over book depreciation........... $ -- $ 41.8 $ -- $ 38.9
Environmental and restructuring
costs.............................. 1.8 (3.3) 4.0 (7.2)
Other................................ 2.8 -- 3.7 --
------- ------- ------ -------
Total................................ $ 4.6 $ 38.5 $ 7.7 $ 31.7
------- ------- ------ -------
------- ------- ------ -------
Included in the Operation is a corporation (Latas de Aluminio Reynolds,
Inc.) which for all years joined in the filing of a U.S. federal consolidated
income tax return with Reynolds and its affiliated group members. Each entity
included in a consolidated return is severally liable for any resultant tax
reflected on such consolidated return.
8. CONTINGENT LIABILITIES
LEGAL
Various suits, claims and actions are pending against the Operation. In
the opinion of management, after consultation with legal counsel, disposition
of these suits, claims and actions, either individually or in the aggregate,
will not have a material adverse effect on the Operation's competitive or
financial position or its expected ongoing results of operations.
ENVIRONMENTAL
The Operation is involved in various environmental improvement activities
resulting from past operations including where Reynolds has been designated
as a potentially responsible party ("PRP"), with others, at various
Environmental Protection Agency-designated Superfund sites.
Amounts have been recorded (on an undiscounted basis) which, in
management's best estimate, will be sufficient to satisfy anticipated costs
of known remediation requirements. At December 31, 1997, the accrual for
environmental remediation costs was $8.4 million. This amount is expected to
be spent over the next 10 to 15 years with the majority to be spent by the
year 2002.
Estimated environmental remediation costs are developed after
considering, among other things, the following:
- currently available technological solutions
- alternative cleanup methods
- risk-based assessments of the contamination
- estimated proportionate share of remediation costs (if applicable)
The Operation may also use external consultants, and consider, when
available, estimates by other PRPs and governmental agencies and information
regarding the financial viability of other PRPs. Based on information
currently available, the Operation believes it is unlikely that it will incur
substantial additional costs as a result of failure by other PRPs to satisfy
their responsibilities for remediation costs.
8. CONTINGENT LIABILITIES (CONTINUED)
Estimated costs for future environmental compliance and remediation are
necessarily imprecise because of factors such as:
- continuing evolution of environmental laws and regulatory requirements
- availability and application of technology
- identification of presently unknown remediation requirements
- cost allocations among PRPs
Further, it is not possible to predict the amount or timing of future
costs of environmental remediation that may subsequently be determined. Based
on information presently available, such future costs are not expected to
have a material adverse effect on the Operation's competitive or financial
position or its expected ongoing results of operations.
9. OTHER
MAJOR CUSTOMERS
The Operation has two major customers. Sales to Philip Morris Companies,
Inc. ("PM") represented 45% of customer net sales in 1997 (47% in 1996 and
41% in 1995). The combined sales to Coca-Cola bottlers (as a group)
represented 20% of customer net sales in 1997 (19% in 1996 and 20% in 1995).
At December 31, 1997, receivables from PM and the Coca-Cola bottlers (as a
group) were 21% and 10%, respectively, as a percentage of total customer
receivables.
RESEARCH AND DEVELOPMENT
The Operation incurred $6.1 million in research and development costs in
1997 ($7.2 million in 1996 and $6.6 million in 1995).
CONSIGNMENT INVENTORIES
The Operation holds certain materials (principally aluminum sheet
inventory) at its facilities on consignment from Reynolds and certain outside
vendors. At December 31, 1997, the total value of aluminum sheet inventory on
consignment was $23.9 million ($14.4 million at December 31, 1996). Under
these consignment agreements, the Operation takes title to the materials at
the time they are placed into the production process. Additionally, any
consignment inventory held in excess of certain periods of time (whether used
or not) becomes the Operation's inventory. Aluminum sheet inventory on
consignment from Reynolds at December 31, 1997 totaled $18.1 million ($10.9
million at December 31, 1996).