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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 SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER 1-2227
CROWN CORK & SEAL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-1526444
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Crown Way, Philadelphia, PA. 19154-4599
(Address of principal executive offices) (Zip Code)
215-698-5100
(Registrant's telephone number, including area code)
Indicated 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 preceeding 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 ___
There were 121,861,898 shares of common stock outstanding as of October 31,
1999.
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<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three months ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 2,140.0 $ 2,291.0
----------- -----------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 1,672.8 1,803.7
Depreciation and amortization 132.0 133.9
Selling and administrative expense 85.3 91.1
Provision for restructuring (7.1) 186.6
Gain on sale of assets (13.7)
Interest expense 91.0 102.2
Interest income (4.9) (12.4)
Translation and exchange adjustments 2.2 7.8
----------- -----------
1,957.6 2,312.9
----------- -----------
Income before income taxes 182.4 (21.9)
Provision for income taxes 57.1 (3.8)
Minority interests, net of equity earnings (7.3) (3.0)
----------- -----------
Net income 118.0 (21.1)
Preferred stock dividends 4.0 4.1
----------- -----------
Net income available to common shareholders $ 114.0 ($ 25.2)
=========== ===========
Earnings per average common share:
Basic $ .93 ($ .20)
=========== ===========
Diluted $ .91 ($ .20)
=========== ===========
Dividends per common share $ .25 $ .25
=========== ===========
Weighted average common shares outstanding:
Basic 122,332,141 123,697,189
Diluted 129,963,348 131,637,480
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 5,931.0 $ 6,428.4
----------- -----------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 4,619.8 5,033.1
Depreciation and amortization 396.0 406.6
Selling and administrative expense 267.3 281.9
Provision for restructuring (7.1) 186.6
Gain on sale of assets (17.4)
Interest expense 275.3 300.1
Interest income (19.7) (32.2)
Translation and exchange adjustments 12.1 15.3
----------- -----------
5,526.3 6,191.4
----------- -----------
Income before income taxes 404.7 237.0
Provision for income taxes 140.5 88.5
Minority interests, net of equity earnings (17.1) (2.2)
----------- -----------
Net income 247.1 146.3
Preferred stock dividends 11.8 13.3
----------- -----------
Net income available to common shareholders $ 235.3 $ 133.0
=========== ===========
Earnings per average common share:
Basic $ 1.92 $ 1.06
=========== ===========
Diluted $ 1.90 $ 1.06
=========== ===========
Dividends per common share $ .75 $ .75
=========== ===========
Weighted average common shares outstanding:
Basic 122,336,218 125,067,335
Diluted 129,970,903 133,954,560
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions except share and per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(Unaudited)
September 30, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 218.6 $ 283.9
Receivables 1,651.2 1,359.2
Inventories 1,362.0 1,421.0
Prepaid expenses and other current assets 97.2 103.6
----------- -----------
Total current assets 3,329.0 3,167.7
----------- -----------
Long-term notes and receivables 27.4 44.2
Investments 142.0 90.6
Goodwill, net of amortization 4,357.8 4,565.4
Property, plant and equipment 3,388.3 3,742.5
Other non-current assets 930.8 858.1
----------- -----------
Total $ 12,175.3 $ 12,468.5
=========== ===========
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 2,297.5 $ 2,331.0
Current portion of long-term debt 65.2 135.0
Accounts payable and accrued liabilities 1,823.0 2,180.7
United States and foreign income taxes 104.7 62.8
----------- -----------
Total current liabilities 4,290.4 4,709.5
----------- -----------
Long-term debt, excluding current maturities 3,397.9 3,188.5
Postretirement and pension liabilities 683.3 707.0
Other non-current liabilities 534.0 609.0
Minority interests 288.9 279.7
Commitments and contingent liabilities
Shareholders' equity 2,980.8 2,974.8
----------- -----------
Total $ 12,175.3 $ 12,468.5
=========== ===========
Book value per common share $ 22.98 $ 22.89
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 247.1 $ 146.3
Depreciation and amortization 396.0 406.6
Gain on sale of assets (9.5)
Provision for restructuring (4.9) 126.9
Change in assets and liabilities, other than debt,
net of businesses acquired (488.2) (613.5)
----------- -----------
Net cash provided by operating activities 140.5 66.3
----------- -----------
Cash flows from investing activities
Capital expenditures (209.5) (342.1)
Acquisition of businesses, net of cash acquired (49.4) (31.0)
Proceeds from sale of property, plant and equipment 27.8 32.8
Proceeds from sale of businesses 43.9 31.8
Other, net (6.3) (18.6)
----------- -----------
Net cash used in investing activities (193.5) (327.1)
----------- -----------
Cash flows from financing activities
Proceeds from long-term debt 358.3 5.4
Payments of long-term debt (197.4) (146.0)
Net change in short-term debt (29.8) 999.6
Stock repurchased (6.9) (461.8)
Dividends paid (103.5) (108.4)
Common stock issued - benefit plans .2 13.8
Minority contributions, net of dividends paid (8.1) (2.3)
----------- -----------
Net cash provided by financing activities 12.8 300.3
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (25.1) (3.6)
----------- -----------
Net change in cash and cash equivalents (65.3) 35.9
Cash and cash equivalents at beginning of period 283.9 205.6
----------- -----------
Cash and cash equivalents at end of period $ 218.6 $ 241.5
=========== ===========
- --------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------
Schedule of non-cash investing activities:
Acquisition of businesses:
Fair value of assets acquired $ 67.6 $ 74.5
Liabilities assumed (18.2) (43.5)
----------- -----------
Cash Paid $ 49.4 $ 31.0
=========== ===========
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Income Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date Stock Stock Capital Earnings Stock Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 | $350.9 $779.0 $1,340.3 $1,250.4 ($167.3) ($578.5) $2,974.8
Net income $118.0 $247.1 | 247.1 247.1
Translation adjustments 79.6 ( 130.9) | (130.9) (130.9)
------ ------ |
Comprehensive income (loss) $197.6 $116.2 |
====== ====== |
Dividends declared: |
Common | (91.7) (91.7)
Preferred | (11.8) (11.8)
Stock repurchased | (5.5) (1.4) (6.9)
Stock issued - benefit plans | .2 .2
- ---------------------------------------------------------|--------------------------------------------------------------------------
Balance at September 30, 1999 | $350.9 $779.0 $1,334.8 $1,394.0 ($168.5) ($709.4) $2,980.8
=========================================================|==========================================================================
| Accumulated
| Other
Comprehensive Income | Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date | Stock Stock Capital Earnings Stock Income Total
- ---------------------------------------------------------|--------------------------------------------------------------------------
Balance at December 31, 1997 | $520.8 $779.0 $1,560.7 $1,327.2 ($137.0) ($521.5) $3,529.2
Net income ($ 21.1) $146.3 | 146.3 146.3
Translation adjustments 125.7 93.9 | 93.9 93.9
------ ------ |
Comprehensive income $104.6 $240.2 |
====== ====== |
Dividends declared: |
Common | (94.3) (94.3)
Preferred | (13.3) (13.3)
Stock repurchased | (169.9) (260.3) (31.6) (461.8)
Stock issued - benefit plans | 11.5 2.3 13.8
- ---------------------------------------------------------|--------------------------------------------------------------------------
Balance at September 30, 1998 | $350.9 $ 779.0 $1,311.9 $1,365.9 ($166.3) ($427.6) $3,213.8
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
Crown Cork & Seal Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions except per share data)
(Unaudited)
A. STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited interim consolidated and condensed financial
statements have been prepared by the Company in accordance with Form
10-Q instructions. In the opinion of management, these consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of Crown Cork & Seal Company, Inc. as of
September 30, 1999, and the results of its operations and cash flows
for the periods ended September 30, 1999 and 1998, respectively. These
results have been determined on the basis of generally accepted
accounting principles and practices consistently applied.
Certain information and footnote disclosures, normally included in
financial statements presented in accordance with generally accepted
accounting principles, have been condensed or omitted. The accompanying
Consolidated Financial Statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference in
the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
B. EARNINGS PER SHARE
The following table summarizes the basic and diluted earnings per
common share computations for the periods ended September 30, 1999 and
1998, respectively:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Average Average
Quarter Income Shares EPS Income Shares EPS
------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $118.0 ($21.1)
Less:
Preferred stock dividends (4.0) (4.1)
------ -----
Basic EPS 114.0 122.3 $ .93 (25.2) 123.7 ($.20)
Potentially dilutive securities:
Stock options
Assumed preferred
stock conversion 4.0 7.7 7.9
------ ----- ----- -----
Diluted EPS $118.0 130.0 $ .91 ($25.2) 131.6 ($.20)*
====== ===== ===== =====
1999 1998
--------------------------- ----------------------------
Average Average
Year-To-Date Income Shares EPS Income Shares EPS
------------ --------------------------- ----------------------------
Net income $247.1 $146.3
Less:
Preferred stock dividends (11.8) (13.3)
------ ------
Basic EPS 235.3 122.3 $1.92 133.0 125.1 $1.06
Potentially dilutive securities:
Stock options .2
Assumed preferred
stock conversion 11.8 7.7 8.7
------ ----- ------ -----
Diluted EPS $247.1 130.0 $1.90 $133.0 134.0 $1.06*
====== ===== ====== =====
<FN>
* 1998 Diluted E.P.S. is the same as Basic E.P.S. due to the anti-dilutive
effect from the assumed conversion of preferred stock and the addback
of preferred dividends.
</FN>
</TABLE>
-7-
<PAGE>
Crown Cork & Seal Company, Inc.
Stock options excluded from the computation of diluted earnings per
share because option prices exceeded fair market value amounted to
6,532,773 and 4,931,061 for the third quarters of 1999 and 1998 and
6,104,925 and 1,784,078 for the nine months ended September 30, 1999
and 1998, respectively.
C. INVENTORIES
------------------------------------------------------------
September 30, December 31,
1999 1998
------------------------------------------------------------
Finished goods $ 526.5 $ 576.8
Work in process 193.7 204.2
Raw materials and supplies 641.8 640.0
-------- --------
$1,362.0 $1,421.0
======== ========
D. RESTRUCTURING
During the third quarter of 1999, the Company provided $7.7 ($5.0
after-tax or $.04 per share) for the costs associated with closing
one plant in Europe and the reorganization of certain research and
development functions worldwide. Included in the restructuring charge
were costs of $6.0 to provide for employee severance and related
benefits, and $1.7 for other exit costs, primarily dismantlement costs,
security costs and utility costs.
During 1999, management decided not to close a plant originally
provided for in the September 1998 restructuring program based on a
customer's decision to increase its purchases in that plant's
geographic market. As a result, the reserve of $14.8 ($9.7 after-tax
or $.08 per share) previously established for employee severance
and related benefits and other exit costs related to this plant was
restored to income. Accordingly, the employees at this location will
not be terminated. Additionally, the Company does not expect to
realize approximately $5.3 ($.04 per share) of the after-tax savings
on an annualized basis initially disclosed under the program.
During 1998, the Company provided $179 ($127 after-tax or $.95 per
share) for the costs associated with closing thirteen plants and
reorganizing three additional plants. These actions reflect the
Company's continued commitment to realign its manufacturing facilities
with the objective of enhancing operating efficiencies. Included in the
restructuring charge were costs to provide severance and related
benefits, write-down of assets and other exit costs. The Company
anticipates that this restructuring program will generate after-tax
savings of approximately $64 ($.48 per share) on an annualized basis
when fully implemented. The cost of providing severance and related
benefits was estimated at $99 and covers a reduction of approximately
2,900 employees, 1,900 of whom are involved in direct manufacturing
operations. Employee reductions were completed at the end of the third
quarter of 1999. Included in this restructuring provision was a charge
of $60, reflecting the impairment of property, plant and equipment
principally located in the Americas Division. This charge has been
reflected as a reduction in the carrying values of the related assets.
Write-downs of property, plant and equipment were made where the
carrying values exceed the Company's estimate of proceeds from
abandonment or disposal. These estimates were based principally on
past experience of comparable asset disposals. Disposition of assets
identified for disposal in the 1998 action is expected to be
substantially completed by the end of 1999. Other non-recurring exit
costs are estimated at $20 and are primarily a cash expense,
comprising the costs to effectively close and dispose of the
facilities identified in the 1998 plan. Exit costs include, but are
not limited to, fees related to lease termination and other contract
cancellations, dismantlement costs and brokers' fees for assets to be
sold. These costs are expected to be substantially incurred by the end
of 1999.
-8-
<PAGE>
Crown Cork & Seal Company, Inc.
Remaining balances in the reserves at the completion of the 1998
action represent contracts or agreements whereby payments are extended
over time. This includes agreements with unions and governmental
agencies related to employees as well as with landlords in lease
arrangements. The balance of the restructuring reserves (excluding the
write-down of assets which is reflected as a reduction of the related
asset account) is included within accounts payable and accrued
liabilities. The components of the restructuring reserve and movements
within these components during the first nine months of 1999 were as
follows:
Employee Other Exit
(in millions) Severance Costs Total
--------- ---------- -----
Opening balance.............. $96.9 $30.8 $127.7
Provision ................... 6.0 1.7 7.7
Reversal..................... ( 12.1) ( 2.7) ( 14.8)
Payments made................ ( 58.4) ( 18.2) ( 76.6)
Other movements*............. ( .4) ( .3) ( .7)
----- ----- ------
Closing balance.............. $32.0 $11.3 $ 43.3
===== ===== ======
* includes provisions under purchase accounting for two 1999
acquisitions in Europe as well as translation adjustments.
During the nine months ended September 30, 1999, payments of $58.4
were made related to the termination of approximately 1,900 employees,
approximately 1,100 of whom were involved in direct manufacturing
operations. Payments of $18.2 were made for other exit costs,
including dismantlement costs, equipment removal and various
contractual obligations.
Since inception of the September 1998 restructuring plan, payments of
$68.0 were made related to the termination of approximately 2,600
employees, 1,700 of whom were involved in direct manufacturing
operations. Payments of $12.8 were made for other exit costs,
including dismantlement costs, equipment removal and various
contractual obligations.
The foregoing restructuring charges and related cost savings represent
the Company's best estimates, but necessarily make numerous assumptions
with respect to industry performance, general business and economic
conditions, raw materials and product pricing levels, the timing of
implementation of the restructuring and related employee reductions and
facility closings and other matters many of which are outside the
Company's control. The Company's estimates of cost savings, which are
unaudited, are not necessarily indicative of future performance, which
may be significantly more or less favorable than as set forth above and
are subject to the considerations described under "Forward-Looking
Statements" within "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Shareholders are cautioned not to
place undue reliance on the estimates or the underlying assumptions and
should appreciate that such information may not necessarily be updated
to reflect circumstances existing after the date hereof or to reflect
the occurrence of unanticipated events.
E. INVESTMENTS
The increase of $51.4 in investments from $90.6 at December 31, 1998 to
$142.0 at September 30, 1999 reflects the combination of the Company's
operations in South Africa with certain metal packaging businesses
of Nampak Limited to form a new joint venture. Nampak has controlling
interest in the new company.
F. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On August 25, 1999, the Company sold $350.0 of 7 1/8% senior notes due
September 1, 2002. These new debentures represent the final tranche of
a shelf registration dated December 17, 1996. Interest on these notes
is to be paid semiannually on March 1 and September 1, commencing March
1, 2000. Net proceeds from the sale of the notes were used to repay a
portion of the Company's outstanding commercial paper.
-9-
<PAGE>
Crown Cork & Seal Company, Inc.
G. FOREIGN CURRENCY RISK
The Company manages its risk to adverse fluctuations in foreign
exchange rates through the use of a netting strategy which matches
foreign currency assets and liabilities whenever possible and the use
of financial instruments. These financial instruments are foreign
currency contracts, such as swaps and forwards. At September 30, 1999,
the Company had outstanding contracts, primarily in European
currencies, Singapore dollars, Canadian dollars and U.S. dollars (both
buy and sell) for an aggregate notional amount of $1,632.0 compared to
$2,680.5 at December 31, 1998. Based on exchange rates at September 30,
1999 and the maturity dates of the various contracts, the aggregate
contract value of these items approximated fair value at September 30,
1999 and December 31, 1998. Gains and losses resulting from contracts
that are designated and effective as hedges are recognized in the
same period as the underlying hedged transaction.
H. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest, net of amounts capitalized ($1.1 for 1999
and $4.1 for 1998), were $264.0 and $272.6 during the nine months ended
September 30, 1999 and 1998, respectively. Cash payments for income
taxes amounted to $45.8 and $27.1 during the nine months ended
September 30, 1999 and 1998, respectively.
I. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has various commitments to purchase materials and supplies
as part of the ordinary conduct of business. Such commitments are at
prices not in excess of current market.
The Company's basic raw materials for its products are tinplate,
aluminum and resins, all of which are purchased from multiple sources.
The Company is subject to material fluctuations in the cost of these
raw materials and has previously adjusted its selling prices to reflect
these movements. There can be no assurance, however, that the Company
will be able to recover fully any increases or fluctuations in raw
material costs from its customers.
The Company is subject to various lawsuits and claims with respect to
matters such as those pertaining to environmental, product liability,
asbestos and safety and health matters. The ultimate liability cannot
presently be determined as considerable uncertainties exist. It is
possible that results of operations in a particular period could be
materially affected by certain contingencies. Management believes that
based on current available information and after consultation with
counsel that the ultimate disposition of matters that are pending or
asserted will not have a material adverse effect on the consolidated
results, liquidity or financial position of the Company.
-10-
<PAGE>
Crown Cork & Seal Company, Inc.
J. SEGMENT INFORMATION
The Company maintains three operating segments, defined geographically:
Americas, Europe and Asia-Pacific. Each reportable segment is an
operating division within the Company and has a President reporting
directly to the Chief Executive Officer and the Chief Operating
Officer. "Other" represents "Corporate" which includes research,
development and engineering and administrative costs for the U. S.
corporate headquarters. Divisional headquarter costs are maintained
within the operating segments.
The interim segment information is as follows:
<TABLE>
<CAPTION>
Quarter ended September 30,
---------------------------
1999 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ----- -----
<S> <C> <C> <C> <C> <C>
External sales $1,054.6 $1,012.7 $72.7 $2,140.0
Restructuring (13.8) 2.4 $4.3 (7.1)
Segment income 119.3 157.4 5.5 (25.2) 257.0
1998
----
External sales 1,120.4 1,083.6 87.0 2,291.0
Restructuring 93.6 76.7 2.9 13.4 186.6
Segment income 10.7 97.6 ( 1.0) (31.6) 75.7
Nine months ended September 30,
-------------------------------
1999 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ----- -----
External sales $2,906.6 $2,777.5 $246.9 $5,931.0
Restructuring (13.8) 2.4 $4.3 (7.1)
Segment income 298.3 397.4 24.8 (65.5) 655.0
1998
----
External sales 3,146.3 3,028.1 253.8 .2 6,428.4
Restructuring 93.6 76.7 2.9 13.4 186.6
Segment income 188.3 407.3 .7 (76.1) 520.2
</TABLE>
The following table reconciles the Company's segment income to
consolidated pre-tax income:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total segment income $257.0 $ 75.7 $655.0 $520.2
Interest expense 91.0 102.2 275.3 300.1
Interest income (4.9) (12.4) (19.7) (32.2)
Gain on sale of assets (13.7) (17.4)
Translation and exchange adjustments 2.2 7.8 12.1 15.3
------ ----- ------ ------
Consolidated pre-tax income $182.4 ($21.9) $404.7 $237.0
====== ===== ====== ======
</TABLE>
-11-
<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(in millions, except share, per share, employee, shareholder and
statistical data)
INTRODUCTION
The following discussion presents management's analysis of the results
of operations for the three and nine months ended September 30, 1999,
compared to the corresponding periods in 1998 and the changes in
financial condition and liquidity from December 31, 1998. This
discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, along with
the consolidated financial statements and related notes included in and
referred to within this report.
All per share information is computed using average common shares
outstanding, assuming dilution.
RESTRUCTURING
During the third quarter of 1999, the Company provided $7.7 ($5.0
after-tax or $.04 per share) for the costs associated with closing
one plant in Europe and the reorganization of certain research and
development functions worldwide. Included in the restructuring charge
were costs of $6.0 to provide for employee severance and related
benefits, and $1.7 for other exit costs, primarily dismantlement costs
security costs and utility costs. The Company successfully completed
the restructuring program announced in September 1998. With the
conclusion of the program in 1999, the Company reversed $14.8 ($9.7
after-tax or $.08 per share) of the amount provided in 1998. Overall
in the quarter, the Company recorded a net pre-tax credit of $7.1
($4.7 after-tax or $.04 per share).
Additional details about the restructuring activities are provided in
Note D to the Consolidated Financial Statements included in Item 1 of
this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
NET INCOME AND EARNINGS PER SHARE
Net income available to common shareholders for the quarter ended
September 30, 1999 was $114.0, an increase of $139.2 when compared to
the prior year loss of $25.2. Earnings per common share increased to
$.91 from a loss of $.20 per share a year earlier. Included within cost
of sales were two charges of a non-recurring nature in the third
quarter of 1999. A charge of $3.5 pre-tax ($2.1 net of tax or $.02 per
share) was recorded for the earthquake damage sustained at our Izmit,
Turkey beverage can plant. This charge represents the portion of damage
costs not expected to be recovered through our insurance carriers.
Additionally, in the third quarter we incurred a charge of $6.0 pre-tax
($3.9 net of tax or $.03 per share) related to the disposition of
Golden Aluminum Company. The charge relates to working capital amounts
not expected to be recovered in the liquidation process. Excluding the
two charges noted above and also excluding the gain on sale of assets
and the provision (credit) for restructuring, the Company's net income
from continuing operations was $108.5 in the third quarter of 1999 and
represents an increase of $6.8 or 6.7% over net income from continuing
operations in the third quarter of 1998. Earnings per share, when
adjusted to a continuing operations basis, was $.87 in the third
quarter of 1999, an increase of $.07 or 8.8% compared to the same
period in 1998.
For the nine months ended September 30, 1999, net income available to
common shareholders was $235.3 or $1.90 per common share compared with
net income of $133.0 or $1.06 per common share for the same period in
1998. Excluding the effects of non-recurring items in 1999 and 1998,
net income available to common shareholders was $227.1 or $1.84 per
common share as compared with $259.9 or $2.04 per common share for the
same period in 1998, a decrease of $32.8 or 12.6%. Earnings per common
share reflects a 3% decline in average common shares outstanding,
resulting primarily from the March 1998 repurchase of shares from
Compagnie Generale d'Industrie et de Participations (CGIP).
-12-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
NET SALES
Net sales in the third quarter decreased $151.0 or 6.6% to $2,140.0
from $2,291.0 in 1998 due primarily to the pass-through of lower raw
material costs, business divestitures, foreign currency translation,
and lower worldwide beverage can volumes. Net sales for the nine months
ended September 30, 1999 decreased $497.4 or 7.7% to $5,931.0 from
$6,428.4 for the same period in 1998. Excluding the effects of lower
raw material costs, business divestitures and foreign currency
translation, net sales in the third quarter of 1999 would have been
2.7% lower than in the third quarter of 1998. Sales from U.S.
operations decreased by 5.6% and 7.7% and those in non-U.S. markets
decreased 7.2% and 7.8% for the quarter and nine months ended September
30, 1999, respectively. U.S. sales accounted for approximately 40.9%
and 40.4% of consolidated net sales in the third quarter of 1999 and
1998, respectively. U.S. sales represented 40.5% of consolidated sales
for both nine month periods ended September 30, 1999 and 1998. Sales of
beverage cans and ends as a percentage of consolidated net sales
represented 28.9% in the third quarter of 1999 compared to 30.2% in the
third quarter of 1998 while sales of food cans and ends decreased in
the third quarter to 34.0% from 34.6% in the third quarter of 1998.
Sales of plastic closures and plastic containers represented 14.6% of
consolidated net sales in the third quarter of 1999 versus 14.2% for
the same period of 1998.
An analysis of comparative net sales by operating division follows:
<TABLE>
<CAPTION>
Net Sales Percentage Change
----------------------------------------------- -------------------
Third Quarter Nine Months Ended Third Nine
1999 1998 1999 1998 Quarter Months
---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Divisions:
Americas $1,054.6 $1,120.4 $2,906.6 $3,146.3 ( 5.9%) ( 7.6%)
European 1,012.7 1,083.6 2,777.5 3,028.1 ( 6.5%) ( 8.3%)
Asia-Pacific 72.7 87.0 246.9 253.8 (16.4%) ( 2.7%)
Other .2
-------- -------- -------- --------
$2,140.0 $2,291.0 $5,931.0 $6,428.4 ( 6.6%) ( 7.7%)
======== ======== ======== ========
</TABLE>
Net sales in the Americas Division decreased by $65.8 and $239.7 for
the three and nine months ended September 30, 1999 as compared with the
same periods in 1998. The decrease in the third quarter was primarily
due to (i) the pass-through of certain lower raw material costs which
amounted to $25, (ii) unfavorable foreign currency translation and
(iii) sales unit volume decreases in beverage cans and food cans
partially offset by sales unit volume increases in plastic closures and
plastic containers. Beverage can volumes were down 3.1% throughout the
division as a result of the Company's decision to selectively prune its
account base following restructuring activities and weak economic
conditions in South America following Brazil's January currency
devaluation.
Net sales in the European Division decreased $70.9 and $250.6 for the
three and nine months ended September, 1999. The decrease in the third
quarter was due to (i) the general weakening of most European
currencies against the U.S. dollar with the impact of translation
reducing net sales by $43 in the quarter, (ii) the sale of the majority
of our South African operations which accounted for $18 of third
quarter 1998 net sales, (iii) the pass-through of certain lower raw
material costs amounting to $8 and (iv) decreased sales unit volumes in
aerosol cans and non-beverage plastic closures. Food can sales unit
volumes increased 11.6% in the quarter on the back of an exceptional
tomato pack in Italy and a strong vegetable pack in France. Strong
beverage can (up 5.0% overall in the division) demand in Spain and
Greece coupled with increased sales unit volumes of beer cans in the UK
and Germany offset beverage can disruptions in Turkey due to the
earthquake.
-13-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Net sales in the Asia-Pacific Division decreased $14.3 and $6.9 for the
three and nine months ended September 30, 1999 compared to the prior
year. The decrease in the third quarter sales is primarily the result
of decreased beverage can sales in China as all Chinese operations
suffered from anti-American sentiment resulting from the Chinese
embassy bombing in Kosovo as well as the lingering effects from the
European health scare crisis affecting one of our major customers. Our
operations in Thailand continued to experience strong demand for
seafood cans, plastic beverage closures and beverage cans. Increased
beverage can volume was also reported in Singapore.
COST OF PRODUCTS SOLD
Cost of products sold, excluding depreciation and amortization, was
$1,672.8 for the quarter ended September 30, 1999, a decrease of $130.9
or 7.3% compared to $1,803.7 for the same period in 1998. For the nine
months ended September 30, 1998, cost of products sold amounted to
$4,619.8, a decrease of $413.3 or 8.2% compared to $5,033.1 for the
same period in 1998. The decrease reflects (i) lower raw material
costs, (ii) the effect of foreign currency translation, (iii) cost
savings from restructuring programs and (iv) lower sales unit volumes
of food cans and beverage cans in North America offset by increased
sales unit volumes of food cans and beverage cans in Europe.
As a percentage of net sales, cost of products sold was 78.2% and 77.9%
in the three months and nine months ended September 30, 1999 as
compared to 78.7% and 78.3% in the same periods of 1998. Excluding the
two non-recurring charges totaling $9.5 noted above, cost of products
sold as a percentage to net sales would have been 77.7% in both the
three and nine month periods ended September 30, 1999. The improvement
in gross margin as a percentage of net sales is due primarily to the
benefits derived from the Company's continuing cost containment and
restructuring programs, offset to some extent by competitive influences
on selling prices across many product lines.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for the quarter ended September 30,
1999 were $85.3, a decrease of $5.8 or 6.4% from the third quarter of
1998. As a percentage of net sales, selling and administrative
expenses, excluding depreciation, was 4.0% in both the third quarter of
1999 and the third quarter of 1998. The decrease in 1999 costs,
primarily administrative expenses, is directly related to the
continuing rationalization of these costs throughout the Company and to
a lesser extent, the effects of foreign currency translation.
OPERATING INCOME
For the quarter ended September 30, 1999, consolidated operating income
increased 239.5% to $257.0 from $75.7 at September 30, 1998. For the
nine months ended September 30, 1999, consolidated operating income
increased 25.9% to $655.0 from $520.2 for the same period a year
earlier. Consolidated operating income for the quarter and nine months
ended September 30, 1999 included a net pre-tax restructuring credit of
$7.1 as compared to a pre-tax restructuring charge of $186.6 for the
same period in 1998.
-14-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
An analysis of operating income, excluding restructuring charges
(credits), by operating division follows:
<TABLE>
<CAPTION>
Operating Income Percentage Change
-------------------------------------- -------------------
Third Quarter Nine Months Ended Third Nine
1999 1998 1999 1998 Quarter Months
---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Divisions:
Americas $105.5 $104.3 $284.5 $281.9 1.2% .9%
European 159.8 174.3 399.8 484.0 (8.3%) (17.4%)
Asia-Pacific 5.5 1.9 24.8 3.6 189.5%
Other (20.9) (18.2) (61.2) (62.7) (14.8%) 2.4%
------ ------ ------ ------
$249.9 $262.3 $647.9 $706.8 (4.7%) (8.3%)
====== ====== ====== ======
</TABLE>
As a percentage of net sales, Americas Division operating income was
10.0% in the third quarter of 1999 as compared to 9.3% for the same
period in 1998. The increase in third quarter 1999 operating margins
was primarily due to (i) cost savings from the 1998 restructuring
program and (ii) unit volume gains in plastic bottles and plastic
closures, which offset sales unit volume declines of food cans and
beverage cans.
European Division operating income as a percentage of net sales was
15.8% in the third quarter of 1999 as compared to 16.1% for the
comparable period of 1998. The decrease in third quarter operating
margins was primarily due to (i) sales unit volume decreases of
aerosol cans and non-beverage plastic closures, (ii) continued
weakness across several product lines in Eastern Europe, and (iii) the
effect of competitive pricing across several product lines which
offset sales unit volume increases of food cans and beverage cans.
Weaker demand, particularly in the food can sector, has led to excess
capacity within the industry, and the resulting price competition has
adversely affected the Division's profitability. We have been able to
partially offset this pricing situation through restructuring
activities and production efficiencies gained from capital expenditure
and other programs. Additional factors which have reduced reported
profits this year include the stronger shipments of food cans in the
more price competitive markets as well as the strengthening of U.S
dollar against many European currencies. We expect the food can
sector will remain challenging in the near term.
In the third quarter of 1999, operating income in the Asia-Pacific
Division was 7.6% of net sales as compared to 2.2% for the same period
in 1998. The increase in 1999 margins was due primarily to (i) sales
unit volume increases of food cans, beverage cans and plastic beverage
closures in Thailand and (ii) increased sales unit volumes of beverage
cans in Singapore, which offset (i) sales unit volume decreases of
beverage cans in China and (ii) competitive selling pressures across
many product lines throughout the region.
NET INTEREST EXPENSE / INCOME
Net interest expense was $86.1 in the third quarter, a decrease of $3.7
or 4.1% compared to third quarter 1998 net interest expense of $89.8.
The decrease in net interest expense is due primarily to generally
lower interest rates, debt reduction and lower raw material costs which
have helped to reduce the early seasonal build-up of working capital.
TAXES ON INCOME
The effective tax rate for the nine months ended September 30, 1999 was
34.7% as compared to 37.3% for the same period in 1998. Excluding
restructuring and other charges and gain on sale of assets, the
effective tax rates were 34.5% and 35.0% for the nine months ended
September 30, 1999 and 1998, respectively. The marginal decrease in the
effective tax rate is primarily attributable to greater earnings in
lower tax rate jurisdictions.
-15-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
MINORITY INTERESTS, NET OF EQUITY IN EARNINGS OF AFFILIATES
The charge for minority interests, net of equity earnings, increased by
$4.3 in the third quarter of 1999 over 1998. This increase was due to
improved results in the Company's consolidated joint ventures in China,
Greece and Thailand.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATIONS
Net cash of $140.5 was provided by operating activities during the nine
months ended September 30, 1999 as compared to cash provided of $66.3
for the same period in 1998. Lower working capital was employed, a
result of lower raw material costs in 1999 compared to 1998 as well as
better working capital management which offset the decrease in net
income from continuing operations.
INVESTING ACTIVITIES
Investing activities used cash of $193.5 during the nine months ended
September 30, 1999 compared with cash used of $327.1 for the same
period in 1998. Capital expenditures for the first nine months of 1999
were $209.5, a decrease of $132.6 as compared to capital expenditures
of $342.1 during the same period in 1998. The Company intends to limit
1999 capital spending to approximately $300.0 in 1999 as compared to
1998 capital expenditures of $487.0.
FINANCING ACTIVITIES
Financing activities provided cash of $12.8 during the nine months
ended September 30, 1999 compared with cash provided of $300.3 during
the same period of 1998. Lower raw material costs have held down the
cost of pre-season working capital build-ups in 1999 and, as such, the
increase in commercial paper borrowings in the first nine months of
1999 is lower than in the first nine months of 1998.
On August 25, 1999, the Company sold $350 of public debt securities.
The notes mature on September 1, 2002 and bear interest at 7.125%. The
credit rating on the notes was reaffirmed by Standard & Poor's at BBB.
Proceeds were used to refinance a portion of our outstanding
commercial paper debt as the Company increases the mix of fixed to
floating rate debt.
Total debt, net of cash and cash equivalents, at September 30, 1999 was
$5,542.0 and represents an increase of $171.4 above the December 31,
1998 level of $5,370.6 and a decrease of $294.2 from the September 1998
level of 5,836.2. Total debt, net of cash and cash equivalents, as a
percentage to total capitalization was 62.9% at September 30, 1999 as
compared to 62.3% at December 31, 1998 and 62.6% at September 30, 1998.
Total capitalization is defined by the Company as total debt (net of
cash and cash equivalents), minority interests and shareholders'
equity.
The increase in total debt, net of cash and cash equivalents, from
December 31, 1998 is due primarily to the funding of working capital
requirements on a short-term basis through the issuance of commercial
paper. The increase in total debt as a percentage to total
capitalization was also affected by a reduction in shareholders' equity
due to negative currency translation adjustments for the nine months
ended September 30, 1999.
RECENT ACCOUNTING DEVELOPMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, an
amendment of SFAS No. 133-Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 137 has deferred the effective date of
SFAS No. 133 from January 1, 2000 to January 1, 2001. SFAS No. 133
requires that the Company value all outstanding derivative instruments
at fair value and record those instruments on the balance sheet. The
standard also significantly changes the requirements for hedge
accounting. The Company continues to evaluate the requirements of the
standard and is preparing an implementation plan.
-16-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
MARKET RISK
Since December 31, 1998, the notional value of outstanding foreign
exchange contracts has been reduced by approximately 39%. This decrease
is due primarily to the introduction of the Euro.
The following discussions related to the Year 2000 and Euro conversion
are updated from the discussions included in the Company's annual
report on Form 10-K for the year ended December 31, 1998.
YEAR 2000
Computers and computer dependent equipment are used throughout the
Company's operations. Certain computerized systems in use today were
designed using two digits rather than four digits to define the
applicable year, which could result in the systems recognizing a date
containing "00" as the year 1900 rather than the year 2000. This could
lead to miscalculations or system failures and is generally referred to
as the "Year 2000" or "Y2K" issue.
In order to address the Y2K issue, the Company established a steering
committee that reports to senior executive management and the Board of
Directors of the Company. The steering committee is responsible for the
formulation of the Company's Y2K global plan and oversight of strategy,
risk assessment, coordination and reporting. Project offices have also
been established within each division to roll out, monitor and manage
implementation of the Company's global plan.
The Company's global plan is divided into several major phases:
Inventory and Assessment, Remediation Analysis, Implementation, and
Contingency Planning.
Iventory and Assessment - The inventory phase was substantially
completed in June 1998 including the identification of internal
mission-critical business systems and vendor and other third party
relationships. The Company substantially completed its internal risk
assessment of potentially Y2K impacted information technology ("IT")
and non-IT equipment and facilities during October 1998. In that
regard, the Company has identified Y2K issues with various mid-range IT
systems, personal computers, servers, telephone systems and embedded
systems in manufacturing and related equipment. The assessment of the
Company's third-party risks involved the identification of critical
vendors, Y2K confirmation correspondence, evaluations and selected
vendor reviews. The Company has completed the identification of its
vendor relationships and has received approximately 92% of its
requested Y2K confirmation letters. Certain top-critical vendors are
being subjected to follow-up including interviews, on-site visits and
other available means. If, in the Company's judgement, a vendor
presents a significant risk of Year 2000 business disruption,
alternative vendors are qualified and secured. In addition, the Company
currently has an inadequate Y2K survey response from utility suppliers
and is in the process of evaluating its risk profile with respect to
utility service. Accordingly, the Company has performed alternate
follow-up procedures and strategies to support its risk evaluation and
contingency planning efforts.
These assessments and reviews are expected to be ongoing through the
remainder of the year. Despite these efforts, the Company can provide
no assurance that critical suppliers of important goods and services
(including, but not limited to, utility service and communications)
will complete their Y2K compliance plans in a timely manner.
-17-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Remediation Analysis - The Company substantially completed this project
phase in February 1999. During this stage of the project, remediation
strategies were evaluated and planned to correct identified Y2K
non-compliance. Correction strategies included vendor-supported
upgrades, system or asset replacements, correction of non-compliant
code and systems consolidation.
Implementation - This phase involves the correction and testing of
identified internal Y2K risks in conjunction with the remediation
analysis phase. The Company's implementation plan established
priorities for remediation or replacement. The business systems
considered most critical to ongoing operations have been given the
highest priority. Such mission-critical systems include business and
operating systems such as sales order billing, production planning,
procurement and disbursements, logistics and embedded systems in
manufacturing and related equipment that, if shutdown or interrupted,
could have a material adverse impact on the Company. All other systems
include business support systems such as personal computer technology,
internal data transmission and voice communication that, if shutdown or
interrupted, may have a less material impact on the Company's
operations.
Mission Critical IT Systems - Approximately 90% of the Company's
locations that contain mission-critical IT systems require some form of
correction. Approximately 99% of mission-critical business systems have
been completed with the remaining systems currently being made ready
for Year 2000. The Company has achieved implementation of Y2K-capable
mission-critical systems covering 98% of its operating revenues. The
Company plans to complete the remaining mission-critical
implementations during the fourth quarter of 1999.
The Company's mission-critical system testing methods include obtaining
hardware and software certifications from critical vendors and
consultants and performing Y2K compliance tests including data exchange
with critical vendors and customers. Testing of critical systems is
expected to be completed on an ongoing basis throughout the remainder
of the year.
Embedded Systems - During 1998, the Company performed a comprehensive
evaluation of embedded systems within its manufacturing and facilities
infrastructure. This evaluation covered approximately 27,000
inventoried systems and over 1,000 machinery and systems manufacturers.
Assessment results indicated a very low non-compliant rate.
Accordingly, while the Company cannot rule out some potential impact,
overall risk in this area is believed to be low. Unit replacements or
reprogramming will occur as part of the Company's normal maintenance
program in 1999. Such costs are not expected to be significant
The Company has conducted detailed testing of certain manufacturing
processes. The results of these tests confirm the current risk
assessment.
Personal Computer Technology - The Company is currently implementing
replacement or correction methods to address Y2K non-compliance in both
hardware and software. Modest portions of these corrections pertain to
mission-critical systems. The Company considers its overall risk in
this area to be low.
Telephone Exchange Systems - The Company has substantially completed
its assessment of telephone exchange systems within its facilities.
Approximately 20% of these systems will be upgraded during 1999.
Notwithstanding these efforts, the Company believes that certain
countries in which it operates may be subject to broader regional
communication system failures. Accordingly, an extended assessment of
this risk has been conducted to both evaluate the reliability of the
initial assessment and identify contingency options. Contingency plans
resulting from this assessment are being implemented.
-18-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Contingency Planning - The Company is developing contingency plans to
address potential disruptions that may result from unresolved Y2K
issues. Because Y2K is a date-driven risk, the Company has identified
and is implementing prevention plans for its core operations to
mitigate disruption, especially in January 2000. This contingency plan
will also be used to address potential disruption caused by the leap
year day (February 29, 2000). Prevention plans may include temporary
deactivation of certain systems and equipment just prior to January 1,
2000, targeted supply-chain management measures to ensure supply of
certain key commodities as well as customer supply initiatives. For
instance, facility and manufacturing supplies may be procured in 1999
to support production requirements in early 2000. Additionally, in
order to address any isolated or wide spread disruptions, the Company
is implementing help-desk and supplemental manufacturing support
through the critical rollover period. Risks of a less controllable
nature, such as utility service outages and communication system
failure are being addressed in contingency planning. The Company
completed its prevention and contingency plan development and design in
June 1999. The Company has substantially completed the rollout of the
contingency plan. Implementation and testing of the contingency plan
is underway.
The Company's Y2K global plan could be adversely affected if any of the
Company's factors or assumptions are incorrect or if its ongoing review
discovers unanticipated problems. The Company cannot give assurance
that its global plan will be completed on schedule or that it will not
uncover Y2K issues that could create a material impact on its
performance.
The Company believes that the most reasonably likely worst-case
scenario for the Company with respect to the Y2K problem is the
failure of a critical vendor, such as a utility supplier, to provide
required goods or services after December 31, 1999. Such a failure
could result in temporary production outages and lost sales and
profits. The Company believes that because of the high degree of
geographic dispersion of its operations (with approximately 223 plants
in 49 countries), it is unlikely that an isolated third-party failure
would have a material adverse effect on the Company's results of
operations, financial condition, or cash flow. The Company also
believes that the formulation of contingency plans should reduce the
severity and length of any such possible disruptions and losses.
Nevertheless, because the Company's Y2K compliance is dependent upon
key third party Y2K readiness, there can be no assurance that the
Company's Y2K compliance efforts will prevent a Y2K problem outside
its direct control from adversely affecting the results of its
operations, financial condition or cash flow. In addition, although
not anticipated, any failure by the Company to correct critical
internal computer systems before Year 2000 could have such an adverse
effect.
Year 2000 Project Expenditures - The Company estimates that it will
spend approximately $20-$22 (pre-tax) for its Y2K compliance
efforts. To date, the Company has spent approximately $16, of which $8
has been expensed. The Company anticipates that funding for its Y2K
compliance program will be from operating cash flows. These cost
estimates do not include labor costs of employees allocated to the Y2K
compliance effort, as it is not practicable to accumulate such costs.
available information and does not necessarily include all potential
costs related to ongoing assessment and remediation or any execution
of contingency plans brought about by internal or external Y2K issues
or cost estimate changes related to replacement systems or code
remediation efforts. Actual results could differ from these estimates.
-19-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member nations ("the
participating countries") of the European Union ("EU") established
fixed conversion rates between their existing sovereign currencies (
the "legacy currencies") and the Euro. For a period of three years, the
transition period, both the Euro and the individual participants'
currencies will remain in circulation. Parties may pay for goods and
services using either the Euro or the participating country's sovereign
currency. Conversion rates will be computed through a "triangulation"
process which will convert one sovereign currency into an amount
denominated in the Euro and then convert the Euro-denominated amount
into the second legacy currency. After January 1, 2002, the Euro will
be the sole legal tender for these countries. During the transition
period, the adoption of the Euro will affect a multitude of financial
systems and business applications as the commerce of these nations will
be transacted in the Euro as well as the legacy currencies.
The Company is currently addressing Euro-related issues and their
impact on information systems, currency exchange rate risk, employment
and benefits, taxation, contracts, competition and pricing. Under the
action plan developed by the Company, teams have been formed to address
selling prices and costs, personnel and communications, finance,
administration and information technology. The Company has incurred and
expects to continue to incur expenses for the internal technology and
operations staff to implement its Euro conversion plan. These costs,
although not expected to be material, will be incurred through 2003 to
cover the costs of preparing for and making operational changes to
accommodate the introduction of the Euro. The costs for this conversion
involve updated technology and are being addressed in conjunction with
Year 2000 remediation.
At September 30, 1999, approximately 64% of the contract notional value
on outstanding foreign exchange contracts involve the Euro, primarily
with sterling. Conversion to the Euro has reduced the amount of the
Company's exposure to exchange rate risk, due to the netting effect of
having assets and liabilities denominated in a single currency as
opposed to the various legacy currencies. The number of contracts
outstanding at the end of the quarter as compared to the end of 1998
has been reduced by approximately 20% with a corresponding
reduction in notional value of approximately $1,050. This reduction in
outstanding foreign exchange contracts has generated approximately $.7
of transaction savings. Because there will be less diversity in the
Company's exposure to foreign currencies, movements of the Euro's value
in U.S. dollars could have a more pronounced effect, whether positive
or negative.
Although all key suppliers have committed that they will be
Euro-compliant, the Company can give no assurance that third parties on
whom it depends will have the systems necessary to process
Euro-denominated transactions. Moreover, disruption of activity in the
European markets because of the conversion could adversely affect the
Company's businesses in those markets, resulting in lost revenues and
increased costs.
As part of the conversion process the Company is developing contingency
plans. The contingency plans will include assessing and communicating
the impact of any delays. These plans will also address likely problems
in the aftermath of conversion with a view to maximizing the Company's
ability to avoid any disruption.
The Company does not expect the conversion to the Euro to have a
material adverse effect upon its results of operations, financial
condition or cash flow. However, the Company cannot guarantee that,
with respect to the Euro conversion, all problems, including long-term
competitive implications of the conversion, will be foreseen and
corrected, that no material disruption of the Company's business will
occur, or that there will be no delays in the dates targeted by the
Company for the Euro conversion process.
-20-
<PAGE>
Crown Cork & Seal Company, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
FORWARD LOOKING STATEMENTS
Statements included herein in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", including, but not
limited to, in the "Year 2000" and "Euro Conversion" sections, and in
the discussion of the restructuring plans in Note D to the Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q and
also in Part I, Item 1: "Business" and Item 3: "Legal Proceedings" and
in Part II, Item 7: "Management's Discussion and Analysis of Financial
Condition and Results of Operations", within the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, which
are not historical facts (including any statements concerning plans and
objectives of management for future operations or economic performance,
or assumptions related thereto), are "forward-looking statements"
within the meaning of the federal securities laws. In addition, the
Company and its representatives may from time to time make other oral
or written statements which are also "forward-looking statements."
These forward-looking statements are made based upon management's
expectations and beliefs concerning future events affecting the Company
and therefore involve a number of risks and uncertainties. Management
cautions that forward-looking statements are not guarantees and that
actual results could differ materially from those expressed or implied
in the forward-looking statements.
While the Company periodically reassesses material trends and
uncertainties affecting the Company's results of operations and
financial condition in connection with the preparation of Management's
Discussion and Analysis of Financial Condition and Results of
Operations and certain other sections contained in the Company's
quarterly, annual or other reports filed with the Securities and
Exchange Commission ("SEC"), the Company does not intend to review or
revise any particular forward-looking statement in light of future
events.
A discussion of important factors that could cause the actual results
of operations or financial condition of the Company to differ from
expectations has been set forth in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 within Part II, Item 7;
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Forward Looking Statements"
and is incorporated herein by reference. Some of the factors are also
discussed elsewhere in this Form 10-Q and in prior Company filings with
the SEC. In addition, other factors have been or may be discussed from
time to time in the Company's SEC filings.
-21-
<PAGE>
Crown Cork & Seal Company, Inc.
PART II - OTHER INFORMATION
ITEM 4. OTHER INFORMATION
On October 29, 1999, the Company announced that James L. Pate, Chairman
and Chief Executive Officer of Pennzoil-Quaker State Company, was
elected to its Board of Directors. Coincidentally, the Company
announced that Josephine C. Mandeville, who has served on the Board
since 1991, had resigned.
On October 29, 1999, the Company's Board of Directors declared cash
dividends of $.25 per share on the Compan's common stock and $.4712
per share on the Company's 4.5% convertible preferred stock. Both
dividends are payable on November 20, 1999 to shareholders of record on
November 4, 1999.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
1. Form of Underwriting Agreement (incorporated herein by
reference to Exhibit 1.1 of the Company's Registration
Statement on Form S-3, dated November 26, 1996,
amended December 5 and December 10, 1996
(File No. 333-16869)).
4. Terms Agreement, dated August 25, 1999
27. Financial Data Schedule
b) Reports on Form 8-K
On August 25, 1999, the Registrant filed a Current Report on
Form 8-K, dated August 25, 1999:
Item 5. Other Events - announced that the Company had sold
$350 million of 7 1/8% senior notes due September 1, 2002.
-22-
<PAGE>
Crown Cork & Seal Company, Inc.
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.
Crown Cork & Seal Company, Inc.
-------------------------------
Registrant
By: /s/ Timothy J. Donahue
-------------------------------
Timothy J. Donahue
Senior Vice President and Corporate Controller
Date: November 5, 1999
-------------------
-23-
CROWN CORK & SEAL COMPANY, INC.
Debt Securities Exhibit 4
TERMS AGREEMENT
---------------
August 25, 1999
Crown Cork & Seal Company, Inc.
One Crown Way
Philadelphia, Pennsylvania 19154-4599
Attention: Mr. Craig R.L. Calle
Senior Vice President
- Finance and Treasurer
Ladies and Gentlemen:
We understand that Crown Cork & Seal Company, Inc., a
Pennsylvania corporation (the "Company"), proposes to issue and sell
$350,000,000 principal amount of its 7 1/8% Notes due 2002 (the "Notes" or the
"Offered Debt Securities"). We offer to purchase, on and subject to the terms
and conditions of the Underwriting Agreement (the "Underwriting Agreement")
filed as an exhibit to the registration statement of the Issuers on Form S-3
(No. 333-16869) and incorporated by reference herein, the Offered Debt
Securities on the following terms:
I. CROWN CORK & SEAL COMPANY, INC.
A. 7 1/8% Notes due 2002
---------------------
Principal Amount: $350,000,000
Interest: 7 1/8% per annum, from August 30, 1999, payable
semiannually on March 1 and September 1 of each
year, commencing March 1, 2000, to holders of record
on the preceding February 15 or August 15, as the
case may be.
Maturity: September 1, 2002
Currency: US$
Denominations: $1,000
Form: Represented by Global Notes in registered form, and
beneficial interests in such will trade in DTC's
Same-Day Funds Settlement System.
Optional Redemption: None.
Sinking Fund: None.
Delayed Delivery Contracts: None.
Other: Sections 4.01 and 10.12 of the Indenture shall be
applicable.
Purchase Price: 99.384% of principal amount, plus accrued interest,
if any, from August 30, 1999.
Expected Reoffering Price: 99.784% of principal amount, subject to change by
the undersigned.
<PAGE>
2
The Closing will be held at 9:00 a.m., New York City time on
August 30, 1999, at the offices of Cravath, Swaine & Moore, with immediate
payment to be made by wire transfer of same day funds.
The Address for Service of Notices is:
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, NY 10048
and
Crown Cork & Seal Company, Inc.
One Crown Way
Philadelphia, PA 19154-4599
The respective principal amounts of the Offered Debt
Securities to be purchased by each of the Underwriters are set forth opposite
their names in Schedule A hereto.
It is understood that we may, with your consent, amend this
offer to add additional Underwriters and reduce the aggregate principal amount
to be purchased by the Underwriters listed in Schedule A hereto by the aggregate
principal amount to be purchased by such additional Underwriters.
All the provisions of the Underwriting Agreement, attached as
Exhibit A hereto, are incorporated herein by reference. We are in receipt of a
draft of the letter required to be delivered by PricewaterhouseCoopers pursuant
to Section 5(a) of the Underwriting Agreement and understand that we will
receive executed copies of such letters no later than August 30, 1999.
The Offered Debt Securities will be made available for
checking at the office of The Bank of New York, New York, New York at least 24
hours prior to the Closing Date.
<PAGE>
3
Please signify your acceptance of our offer by signing the
enclosed response to us in the space provided and returning it to us.
Very truly yours,
SALOMON SMITH BARNEY INC.
CHASE SECURITIES INC.
J.P. MORGAN SECURITIES INC.
BANC OF AMERICA SECURITIES LLC
GOLDMAN, SACHS & CO.
By SALOMON SMITH BARNEY INC.
By /s/ Jane A. Bieneman
-----------------------
Name: Jane A. Bieneman
Title: Vice President
Acting severally on behalf of
themselves as Underwriters
<PAGE>
Schedule A
PRINCIPAL
AMOUNT OF
UNDERWRITERS NOTES
------------ ---------
Salomon Smith Barney Inc. .................... $175,000,000
Chase Securities Inc. ........................ 52,500,000
J.P. Morgan Securities Inc. .................. 52,500,000
Banc of America Securities LLC ................ 35,000,000
Goldman Sachs & Co. .......................... 35,000,000
Total ......................................... $350,000,000
<PAGE>
August 25, 1999
To: Salomon Smith Barney Inc.
Chase Securities Inc.
J.P. Morgan Securities Inc.
Banc of America Securities LLC
Goldman, Sachs & Co.
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, NY 10048
We accept the offer contained in your letter dated August 25,
1999 (including the provisions of the Underwriting Agreement (as defined
below)), relating to $350,000,000 principal amount of our Debt Securities,
subject to the terms and conditions of the Underwriting Agreement. We also
confirm that, to the best of our knowledge after reasonable investigation, (i)
the representations and warranties of the undersigned in the Underwriting
Agreement (the "Underwriting Agreement") filed as an exhibit to the
undersigned's registration statement on Form S-3 (Nos. 333-16869) (the
"Registration Statement") are true and correct in all material respects, (ii) no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Securities and Exchange Commission and (iii) subsequent to
the dates of the most recent financial statements in the Prospectus (as defined
in the Underwriting Agreement) (exclusive of any supplement thereto), there has
been no material adverse change in the financial position or results of
operations of Crown Cork & Seal Company, Inc.
Very truly yours,
CROWN CORK & SEAL COMPANY, INC.
By /s/ Craig R.L. Calle
----------------------------
Name: Craig R.L. Calle
Title: Senior Vice President -
Finance and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, consolidated statements of income and the
notes thereto on pages 2 thru 11 of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 219
<SECURITIES> 0
<RECEIVABLES> 1687
<ALLOWANCES> 36
<INVENTORY> 1362
<CURRENT-ASSETS> 3329
<PP&E> 5574
<DEPRECIATION> 2186
<TOTAL-ASSETS> 12175
<CURRENT-LIABILITIES> 4290
<BONDS> 3398
0
351
<COMMON> 779
<OTHER-SE> 1851
<TOTAL-LIABILITY-AND-EQUITY> 12175
<SALES> 5931
<TOTAL-REVENUES> 5931
<CGS> 4620
<TOTAL-COSTS> 5009
<OTHER-EXPENSES> 12
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 275
<INCOME-PRETAX> 405
<INCOME-TAX> 141
<INCOME-CONTINUING> 247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 247
<EPS-BASIC> 1.92
<EPS-DILUTED> 1.90
</TABLE>
