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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 5, 1998
COMMISSION FILE NUMBER 0-21314
U.S. CAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
06-1094196
(I.R.S. EMPLOYER IDENTIFICATION NO.)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
900 COMMERCE DRIVE
OAK BROOK, ILLINOIS 60523
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(630) 571-2500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
As of July 31,1998, 13,159,760 shares of U.S. Can Corporation's common stock
were outstanding.
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U.S. CAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 5, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
U.S. Can Corporation and Subsidiaries Condensed Consolidated
Balance Sheets as of December 31, 1997 and July 5, 1998..... 3
U.S. Can Corporation and Subsidiaries Condensed Consolidated
Statements of Operations and Comprehensive Income for the
Quarterly and Six-Month Periods Ended July 6, 1997 and July
5, 1998..................................................... 4
U.S. Can Corporation and Subsidiaries Condensed Consolidated
Statements of Cash Flows for the Quarterly Periods Ended
July 6, 1997 and July 5, 1998............................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 18
Quantitative and Qualitative Disclosures About Market
Item 3. Risk........................................................ 20
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
</TABLE>
2
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U.S. CAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000'S OMITTED, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JULY 5,
1997 1998
------------ -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,773 $ 4,731
Accounts receivable, less allowances of $15,134 and
$15,435 in 1997 and 1998, respectively.................. 74,137 94,003
Inventories............................................... 109,458 110,138
Prepaid expenses and other current assets................. 17,503 11,807
Prepaid income taxes...................................... 22,748 22,398
--------- ---------
Total current assets................................. 230,619 243,077
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 5,485 6,324
Buildings................................................. 73,277 73,859
Machinery, equipment and construction in process.......... 427,404 421,708
--------- ---------
506,166 501,891
Less -- Accumulated depreciation and amortization......... (181,869) (196,411)
--------- ---------
Total property, plant and equipment.................. 324,297 305,480
--------- ---------
MACHINERY REPAIR PARTS...................................... 6,396 5,923
INTANGIBLES................................................. 59,578 58,646
OTHER ASSETS................................................ 12,814 17,618
--------- ---------
Total assets......................................... $ 633,704 $ 630,744
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 9,635 $ 7,805
Cash overdrafts........................................... 7,800 7,854
Accounts payable.......................................... 50,686 56,309
Accrued payrolls and benefits............................. 24,358 25,415
Accrued insurance......................................... 6,607 8,998
Restructuring reserves.................................... 31,645 22,622
Other current liabilities................................. 19,117 24,405
--------- ---------
Total current liabilities............................ 149,848 153,408
--------- ---------
SENIOR DEBT................................................. 91,506 73,990
SUBORDINATED DEBT........................................... 275,000 275,000
--------- ---------
Total long-term debt................................. 366,506 348,990
--------- ---------
OTHER LONG-TERM LIABILITIES:
Postretirement benefits................................... 27,387 28,219
Deferred income taxes..................................... 17,973 19,882
Other long-term liabilities............................... 9,677 10,160
--------- ---------
Total other long-term liabilities.................... 55,037 58,261
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized, none issued or outstanding.................. -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 13,097,855 and 13,231,187 shares issued in
1997 and 1998, respectively............................. 131 132
Paid-in capital........................................... 108,003 108,905
Unearned restricted stock................................. (2,558) (1,820)
Treasury common stock, at cost; 44,159 and 71,427 shares
in 1997 and 1998, respectively.......................... (714) (1,123)
Currency translation adjustment........................... (2,193) (2,542)
Retained deficit.......................................... (40,356) (33,467)
--------- ---------
Total stockholders' equity.............................. 62,313 70,085
--------- ---------
Total liabilities and stockholders' equity........... $ 633,704 $ 630,744
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these balance sheets.
3
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U.S. CAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDED SIX MONTH PERIOD ENDED
---------------------------- ----------------------------
JULY 6, 1997 JULY 5, 1998 JULY 6, 1997 JULY 5, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES......................................... $190,592 $183,473 $389,373 $375,836
COST OF SALES..................................... 167,844 160,009 340,860 329,202
-------- -------- -------- --------
Gross income.................................... 22,748 23,464 48,513 46,634
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 8,115 8,274 16,782 16,489
-------- -------- -------- --------
Operating income................................ 14,633 15,190 31,731 30,145
INTEREST EXPENSE ON BORROWINGS.................... 9,187 8,404 18,442 17,140
AMORTIZATION OF DEFERRED FINANCING COSTS.......... 455 384 894 764
OTHER EXPENSE..................................... 460 428 890 867
-------- -------- -------- --------
Income before income taxes...................... 4,531 5,974 11,505 11,374
PROVISION FOR INCOME TAXES........................ 1,716 2,169 4,444 4,487
-------- -------- -------- --------
Income from continuing operations............... 2,815 3,805 7,061 6,887
NET INCOME FROM DISCONTINUED OPERATIONS........... (44) -- 48 --
-------- -------- -------- --------
NET INCOME........................................ 2,771 3,805 7,109 6,887
OTHER COMPONENTS OF COMPREHENSIVE INCOME.......... 550 316 (4,162) (349)
-------- -------- -------- --------
Comprehensive income............................ $ 3,321 $ 4,121 $ 2,947 $ 6,538
======== ======== ======== ========
PER SHARE DATA:
Basic:
Income from continuing operations............ $0.21 $0.29 $0.54 $0.52
Discontinued operations...................... -- -- 0.01 --
-------- -------- -------- --------
Net Income................................... $0.21 $0.29 $0.55 $0.52
======== ======== ======== ========
Weighted average shares outstanding
(000's).................................... 13,034 13,262 13,014 13,212
======== ======== ======== ========
Diluted:
Income from continuing operations............ $0.21 $0.28 $0.54 $0.52
Discontinued operations...................... -- -- -- --
-------- -------- -------- --------
Net Income................................... $0.21 $0.28 $0.54 $0.52
======== ======== ======== ========
Weighted average shares and equivalent shares
outstanding (000's)........................ 13,163 13,401 13,159 13,324
======== ======== ======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
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U.S. CAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JULY 6, JULY 5,
1997 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 7,109 $ 6,887
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 22,309 19,742
Deferred income taxes.................................. 1,043 1,719
Change in operating assets and liabilities, net of effect
of acquired businesses --
Accounts receivable.................................... (16,063) (18,503)
Inventories............................................ 5,413 (802)
Accounts payable....................................... (5,021) 5,623
Accrued payrolls and benefits, insurance and other..... 3,695 6,654
Postretirement benefits................................ 546 832
Other, net............................................. (1,502) 6,394
-------- --------
Net cash provided by operating activities............ 17,529 28,546
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (30,896) (8,379)
Acquisition of businesses, net of cash acquired........... (12,476) --
Change in restricted cash................................. 1,283 29
Machinery repair parts usage (purchases), net............. (89) 473
-------- --------
Net cash used in investing activities.................. (42,178) (7,877)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and exercise of stock options.... 108 724
Net borrowings (payments) under the revolving line of
credit and changes in cash overdrafts.................. 19,964 (12,276)
Borrowings of other long-term debt, including capital
lease obligations...................................... 18,006 --
Payments of other long-term debt, including capital lease
obligations............................................ (10,762) (9,312)
Payments of debt refinancing costs........................ (1,247) (98)
Purchase of treasury stock, net........................... (634) (1,125)
-------- --------
Net cash provided by (used in) financing activities.... 25,435 (22,087)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (2,593) (624)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (1,807) (2,042)
CASH AND CASH EQUIVALENTS, beginning of period.............. 7,966 6,773
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 6,159 $ 4,731
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
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U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 5, 1998
(UNAUDITED)
(1) PRINCIPLES OF REPORTING
The condensed consolidated financial statements include the accounts of
U.S. Can Corporation (the "Corporation"), its wholly owned subsidiary, United
States Can Company ("U.S. Can") and U.S. Can's subsidiaries, most of which are
European companies formed or acquired during 1996 (the "European Subsidiaries").
All significant intercompany balances and transactions have been eliminated. The
consolidated group including the Corporation is hereinafter referred to as the
Company. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim reporting. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements, which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation, have not been audited by independent public accountants.
Operating results for any interim period are not necessarily indicative of
results that may be expected for the full year.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission; however, management believes that the
disclosures contained herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the previously filed financial statements and footnotes
included in the Corporation's Amendment No. 1 to Annual Report on Form 10-K/A-1
for the year ended December 31, 1997.
Generally, quarterly accounting periods are based upon two four-week
periods and one five-week period. Management believes that this technique
provides a more consistent view of accounting data resulting in greater
comparability than the calendar month basis would provide.
(2) SPECIAL CHARGES AND DISCONTINUED OPERATIONS
In the third quarter of 1997, the Company established a pre-tax
restructuring provision of $35 million for plant closings and overhead cost
reductions. In the fourth quarter of 1997, the Company, at the direction of its
Board of Directors, employed the assistance of external business consultants to
review operations and explore other avenues for enhancing shareholder value. As
a result of this review, the Company established another pre-tax restructuring
provision of $14.7 million primarily to include further personnel reductions and
the reduction of asset value associated with equipment used in the businesses
the Company has exited or is in the process of exiting.
The key elements of the restructuring include closure of the Racine,
Wisconsin aerosol assembly plant, the Midwest Litho center in Alsip, Illinois,
the Sparrows Point litho center in Baltimore, Maryland, and the California
Specialty plant in Vernalis, California; a write down to estimated proceeds for
the sale of the Orlando, Florida machine shop and the Baltimore, Maryland
specialty and paint can distribution business; and organizational changes
designed to reduce general overhead. In July 1997, a major aerosol can customer
and principal customer of the Racine plant awarded all of its global aerosol
business to a single supplier which is a U.S. Can competitor. Approximately $35
million of annual sales were affected due to the loss of this customer. Closure
of the two litho plants and the Racine assembly plant is due to the loss of this
business and increased efficiencies at other plants. The Racine plant ceased
production on April 24, 1998. The Sparrows Point plant ceased production in
mid-February 1998. The transfer of the custom and specialty business from the
California Specialty plant to other existing operations was completed in July
1998. In addition, U.S. Can has reached an agreement-in-principle to sell its
Orlando, Florida machine engineering center. The Company expects this sale to be
completed during the third quarter of 1998.
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U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The restructuring provisions include $28.7 million for the non-cash write
off of assets related to the facilities to be closed or sold, $12.8 million for
severance and related termination benefits for approximately 95 salaried and 260
hourly employees (the majority of which have been terminated as of July 5,
1998), and $5.9 million for other related closure costs such as building
restoration, equipment disassembly and future lease payments. In addition to
these charges, the Company provided an additional $2.2 million related to the
continuing carrying costs (principally contractual lease payments) related to
the closed Saddle Brook, New Jersey facility which it has not been able to
sublet as originally planned. The write off of the assets included in the charge
primarily relates to fixed assets ($22.9 million) which cannot be transferred or
used in the Company's other operations and unamortized goodwill related to the
closed operations. As of July 5, 1998, approximately $6.0 million of the cash
severance and other closure costs has been spent with the majority of the
remaining costs expected to be spent later in 1998.
In November 1997, as part of the business and operational realignments, the
Company sold its steel pail business which was conducted entirely from its North
Brunswick, New Jersey facility, for $1.4 million in cash and notes, plus the
assumption of certain liabilities and future payments. 1997 revenues of the
steel pail business up to the point of sale were $19.2 million. In addition, the
Company is actively seeking to sell its commercial Metal Services business which
it began reflecting as a discontinued operation late in 1997. Metal Services
includes two plants in Chicago, Illinois, one plant each in Trenton, New Jersey
and Brookfield, Ohio and the closed Midwest Litho plant. 1997 revenues from
these operations were $116 million (excluding intra-Company sales which are
expected to be continued by the buyer and including third-party sales from the
closed Midwest Litho plant, which have been transferred to other Metal Services
plants). Comparable revenue generated from these facilities in the first half of
1998 was $55 million. Pending offers which had existed in late 1997 and early
1998 were rejected by the Company or were otherwise terminated before a sale was
completed. As of August 15, 1998, additional offers are being negotiated, some
of which are subject to draft purchase agreements. While a contract for the sale
of Metal Services has yet to be signed, management of the Company expects that
the current negotiations will result in the sale of this business prior to
December 31, 1998. The Company's historical financial statements have been
restated to reflect these businesses as discontinued operations.
In aggregate, the Company provided for a $16.0 million ($12.4 million after
income taxes) loss on the sale of these two businesses, primarily representing
the excess of recorded carrying value over the estimated aggregate net proceeds
for the net assets to be sold in the dispositions. As of July 5, 1998, the net
assets of Metal Services, excluding the discontinued operations reserve,
included net current assets of approximately $21.9 million and net other assets
of approximately $24.5 million.
As part of its previously announced strategic planning process, the Company
is evaluating the composition of its various manufacturing facilities in light
of current and expected market conditions and demand.
(3) ACQUISITIONS
In January 1997, the Company acquired certain assets from Owens-Illinois
Closure Inc. ("O-I") for cash consideration of $10 million, subject to
adjustment based upon the actual value of the inventory acquired and potential
contingent payments of up to $1.5 million based upon realization of certain new
business which O-I was seeking at the time of the acquisition. The assets
acquired by the Company include machinery, equipment, inventory and raw
materials of O-I's Erie, Pennsylvania metal business. The purchase price
resulted in goodwill of $7.1 million.
In March 1998, one of the European Subsidiaries acquired a 36.5% equity
interest in Formametal S.A., an aerosol can manufacturer located in Argentina,
for $4.6 million, payable over a 15-month period. In connection with this
investment, Formametal has agreed to purchase approximately $2.6 million to $3.0
million of manufacturing equipment from the Company, and the Company has agreed
to provide certain
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U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
technical and engineering assistance to Formametal. The Company has also
provided a guaranty in an amount not to exceed $2.0 million, to secure the
repayment of certain indebtedness of Formametal. This investment is being
accounted for on the equity method.
(4) INVENTORIES
All domestic inventories, except machine shop inventory, are stated at cost
determined by the last-in, first-out ("LIFO") cost method, not in excess of
market. Inventories of approximately $16.4 million at December 31, 1997, and
$19.2 million at July 5, 1998, at the European Subsidiaries and machine shop
inventory are stated at cost determined by the first-in, first-out ("FIFO") cost
method, not in excess of market. Inventory costs include material, labor and
factory overhead. FIFO cost of LIFO inventories approximated their LIFO value at
December 31, 1997 and at July 5, 1998.
Inventories reported in the accompanying balance sheets were classified as
follows (000's omitted):
<TABLE>
<CAPTION>
DECEMBER 31, JULY 5,
1997 1998
------------ -------
<S> <C> <C>
Raw materials........................................... $ 33,746 $ 33,335
Work in process......................................... 42,763 46,380
Finished goods.......................................... 28,037 25,744
Machine shop inventory.................................. 4,912 4,679
-------- --------
$109,458 $110,138
======== ========
</TABLE>
(5) DEBT OBLIGATIONS
The primary debt obligations of the Company at December 31, 1997 and July
5, 1998 consisted of the following (000's omitted):
<TABLE>
<CAPTION>
DECEMBER 31, JULY 5,
1997 1998
------------ -------
<S> <C> <C>
Senior Debt --
Revolving line of credit.............................. $ 32,600 $ 20,400
Secured equipment notes............................... 4,825 1,710
Capital lease obligations............................. 30,050 27,131
Secured term loan..................................... 24,840 23,849
Industrial revenue bonds.............................. 7,500 7,500
Mortgages and other................................... 1,326 1,205
-------- --------
101,141 81,795
Less -- Current maturities.............................. (9,635) (7,805)
-------- --------
Total senior debt................................ 91,506 73,990
Senior subordinated 10 1/8% notes....................... 275,000 275,000
-------- --------
Total long-term debt............................. $366,506 $348,990
======== ========
</TABLE>
In April 1997, U.S. Can entered into an Amended and Restated Credit
Agreement with a group of banks (the "Credit Agreement"), which currently
provides an $80 million revolving credit facility (the "Revolving Credit
Facility"). Obligations under the Credit Agreement are secured by U.S. Can's
domestic accounts receivable and inventories. Funds available under the Credit
Facility may be used for general corporate purposes (including ongoing working
capital needs and funds for permitted acquisitions). The Credit Agreement has a
five-year maturity and permits the Company to borrow funds in U.S. Dollars,
British Pounds or French Francs.
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U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The loans under the Credit Agreement bear interest at a floating rate equal
to, at the election of U.S. Can, one of the following: (i) the Base Rate (as
defined in the Credit Agreement) per annum, or (ii) based on the current pricing
ratio, a reserve-adjusted Eurodollar rate plus the then applicable margin, for
specified interest periods (selected by U.S. Can) of one, two, three or six
months. The weighted average interest rate of the loans outstanding under the
Credit Agreement was 6.7% and 6.5% at December 31, 1997 and July 5, 1998,
respectively.
As of December 31, 1997, U.S. Can had borrowings of $32.6 million
outstanding under the Credit Agreement, $12.5 million in letters of credit had
been issued pursuant thereto, and $64.9 million of unused credit remained
available. In April 1998, the Revolving Credit Facility was reduced to $80
million. As of July 5, 1998, U.S. Can had borrowings of $20.4 million
outstanding under the Credit Agreement, $12.3 million in letters of credit had
been issued pursuant thereto, and $47.3 million of unused credit remained
available.
Capital lease obligations mature in varying amounts through 2007 and bear
interest at various rates between 4.57% and 15.8%. Other debt, consisting of
various governmental loans and real estate mortgages at interest rates between
3.25% and 8.75%, matures at various times through 2025, the proceeds of which
were used to finance the expansion of several manufacturing facilities.
In December 1996, one of the European Subsidiaries entered into (and U.S.
Can guaranteed) a $28 million secured term loan to finance the acquisition of
land, building and equipment comprising the Merthyr Tydfil, Wales aerosol can
production facility. This credit facility is secured by the real and personal
property of the Merthyr Tydfil operation. The loan is denominated in U.S.
Dollars. During 1997, in connection with the transaction, the Company entered
into foreign exchange contracts which allow the Company to exchange a fixed
amount of U.K. Pounds for U.S. Dollars at certain dates which coincide with the
repayment of principal and interest on the loan. The forward contracts are
intended to hedge against fluctuations in currency rates.
In October 1996, the Corporation issued $275.0 million principal amount of
10 1/8% Senior Subordinated Notes due 2006 in a private placement. These notes
were exchanged in March 1997 for similar notes which are publicly registered.
These exchange notes (the "10 1/8% Notes") are unsecured and are subordinated to
all other senior debt of the Corporation and its subsidiaries. The 10 1/8% Notes
are fully and unconditionally guaranteed on an unsecured senior subordinated
basis by U.S. Can. On or after October 15, 2001, the Corporation may, at its
option, redeem all or some of the 10 1/8% Notes at declining redemption premiums
which begin at approximately 105.1% in 2001. Upon certain changes of control of
the Corporation, the Note holders could require that the Corporation repurchase
all or some of the 10 1/8% Notes at a 101% premium. Net proceeds from the
issuance of the 10 1/8% Notes were $268.1 million. Approximately $158.4 million
of the net proceeds was used to pay down amounts outstanding under the Company's
previous credit agreement and $109.7 million was used to redeem all of U.S.
Can's 13 1/2% Senior Subordinated Notes due 2002 and remaining interest thereon
on January 15, 1997.
The Credit Agreement and certain of the Company's other debt agreements
contain various financial and other restrictive covenants, as well as
cross-default provisions. The financial covenants include, but are not limited
to, limitations on annual capital expenditures and certain ratios of borrowings
to earnings before interest, taxes, depreciation and amortization ("EBITDA"),
senior debt to EBITDA and interest coverage. The covenants also restrict the
Corporation's and U.S. Can's ability to distribute dividends, to incur
additional indebtedness, to dispose of assets and to make investments, and to
enter into acquisitions, mergers and transactions with affiliates. The Company
was in compliance with all terms and restrictive covenants of the Credit
Agreement and its other debt agreements as of July 5, 1998.
9
<PAGE> 10
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest on borrowings of approximately $17.1 million and
$18.0 million for the six-month periods ended July 6, 1997 and July 5, 1998,
respectively.
The Company paid approximately $2.6 million and $1.0 million of income
taxes for the six-month periods ended July 6, 1997 and July 5, 1998,
respectively.
(7) LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings arising in the
ordinary course of business consistent with past experiences. Management does
not believe that any of these proceedings will have a material adverse effect on
the business or financial condition of the Company either individually or in the
aggregate. In addition, the Company is involved in the following matters.
The groundwater in San Leandro, California, formerly a site of one of the
Company's can assembly facilities, is contaminated at shallow and intermediate
depths, and the area of concern partially extends to the groundwater below the
facility formerly owned by the Company. The Company has agreed to indemnify the
purchaser of this site against environmental claims related to the Company's
ownership of the property. In April 1996, the California Department of Toxic
Substances Control ("CDTSC") issued an order to certain past and present owners
of this facility, including U.S. Can, directing such owners to conduct
remediation activities at this site. No specific form of remediation was
indicated. The CDTSC, U.S. Can and its consultants met in May 1998 to discuss
the property at the former U.S. Can site. U.S. Can's consultant presented a
model explaining the origin of contaminants found beneath the site. The CDTSC
does not believe this model adequately explains the contamination found at the
site. If the CDTSC's concerns can be adequately addressed, the CDTSC has stated
it is likely no further action would be required. If not, the CDTSC will require
additional testing of the groundwater and development of a feasibility study.
There can be no assurance that the Company will not incur material costs and
expenses in connection with the CDTSC order and remediation at the site.
An Administrative Law Judge of the National Labor Relations Board ("NLRB")
has issued a decision ordering the Company to pay $1.5 million in back pay, plus
interest, for a violation of certain sections of the National Labor Relations
Act as a result of the Company's closure of certain facilities in 1991 and
failure to offer inter-plant job opportunities to affected employees. The
Company is attempting to appeal to the full NLRB on the grounds, among others,
that the Company is entitled to a credit against this award for certain pension
payments.
As a potentially responsible party ("PRP") at various Superfund sites in
the U.S., the Company is or may be legally responsible, jointly and severally
with the other members of the PRP group, for the cost of remediation of these
sites. Based on currently available data (including EPA data, internal records
and other sources believed to be reliable), the Company believes its
contribution, and/or the contributions of its predecessors, to these sites was
de minimis. Based on the information currently available, management does not
believe that its aggregate remediation costs or potential liabilities in
connection with these sites will have a material adverse effect on the Company's
financial condition or results of operations. However, there can be no assurance
that the other PRP's will pay their proportionate share of the remediation costs
at these sites and, as a result, future costs or liabilities incurred by the
Company could be material.
(8) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" was issued in February 1997 and adopted by the Company as of December 31,
1997. This new pronouncement established revised reporting standards for
earnings per share and has been applied to all periods presented herein. Diluted
earnings per share for the Company includes the impact of assumed exercise of
dilutive stock options.
10
<PAGE> 11
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SFAS No. 130, "Reporting Comprehensive Income" was issued in July 1997 and
adopted by the Company in the first quarter of 1998. This new pronouncement
established standards for the reporting and display of comprehensive income and
its components which, for the Company, include cumulative translation
adjustments and minimum pension liability adjustments.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" was also issued in July 1997 and introduces a new model for segment
reporting, called the "management approach." This approach is based on the way
that the chief operating decision maker organizes segments within the company
for making operating decisions and assessing performance. Management of the
Company is evaluating this new pronouncement to determine its impact upon
current reporting. Adoption of this new standard is scheduled for late 1998.
Statement of Position No. 98-5, "Reporting on the Costs of Start-up
Activities" was released in April, 1998, and requires companies to write off all
unamortized costs related to start up activities and to expense such future
costs as incurred. The Company is required to adopt this new accounting rule by
early 1999. Management does not expect that adoption of this rule will have a
material effect on the Company's results of operations or financial position.
SFAS 133, "Accounting for Derivative Instruments and for Hedging
Activities" was issued in June 1998. This new pronouncement requires that
certain derivative instruments be recognized in balance sheets at fair value and
for changes in their fair value to be recognized in operations. Additional
guidance is also provided to determine when hedge accounting treatment is
appropriate whereby hedging gains and losses are offset by losses and gains
related directly to the hedged item. While this standard must be adopted by
fiscal 2000, its impact on the Company's consolidated financial statements is
not expected to be material as the Company has not historically used significant
derivative or hedge instruments.
(9) SUBSIDIARY GUARANTOR INFORMATION
The 10 1/8% Notes are guaranteed on a full, unconditional, unsecured,
senior subordinated, joint and several basis by each of the Corporation's
Subsidiary Guarantors. As of and through July 5, 1998, U.S. Can, wholly owned by
the Corporation, was the only Subsidiary Guarantor. Separate financial
statements of U.S. Can are not presented because management of the Company has
determined that they are not material to investors.
The following condensed consolidating financial data illustrates the
composition of the Corporation (the "Parent"), U.S. Can (the "Subsidiary
Guarantor"), and the European Subsidiaries (the "Non-Guarantor Subsidiaries"),
as of December 31, 1997 and July 5, 1998, and for the six-month periods ended
July 6, 1997 and July 5, 1998. Investments in subsidiaries are accounted for by
the Parent and the Subsidiary Guarantor under the equity method for purposes of
the supplemental consolidating presentation. Earnings of subsidiaries are,
therefore, reflected in their parent's investment accounts and earnings.
11
<PAGE> 12
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN
U.S. CAN CAN COMPANY SUBSIDIARIES U.S. CAN
CORPORATION (SUBSIDIARY (NON-GUARANTOR CORPORATION
(PARENT) GUARANTOR) SUBSIDIARIES) ELIMINATIONS CONSOLIDATED
----------- ------------- -------------- ------------ ------------
(000'S OMITTED)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...... $ -- $ 415 $ 6,358 $ -- $ 6,773
Accounts receivable............ -- 53,559 20,578 -- 74,137
Inventories.................... -- 93,028 16,430 -- 109,458
Prepaid expenses and other
assets...................... -- 13,904 3,599 -- 17,503
Prepaid income taxes........... -- 22,748 -- -- 22,748
-------- -------- -------- --------- --------
Total current assets... -- 183,654 46,965 -- 230,619
-------- -------- -------- --------- --------
NET PROPERTY, PLANT AND
EQUIPMENT...................... -- 256,464 67,833 -- 324,297
INTANGIBLE ASSETS................ -- 59,578 -- -- 59,578
OTHER ASSETS..................... 7,347 10,240 1,623 -- 19,210
INVESTMENT IN SUBSIDIARIES....... 335,962 48,646 -- (384,608) --
-------- -------- -------- --------- --------
Total assets........... $343,309 $558,582 $116,421 $(384,608) $633,704
======== ======== ======== ========= ========
CURRENT LIABILITIES:
Current maturities of long-term
debt........................ $ -- $ 6,817 $ 2,818 $ -- $ 9,635
Accounts payable............... -- 42,155 16,331 -- 58,486
Other current liabilities...... -- 73,480 8,247 -- 81,727
-------- -------- -------- --------- --------
Total current
liabilities.......... -- 122,452 27,396 -- 149,848
-------- -------- -------- --------- --------
SENIOR DEBT...................... -- 61,850 29,656 -- 91,506
SUBORDINATED DEBT................ 275,000 -- -- -- 275,000
OTHER LONG-TERM LIABILITIES...... -- 52,031 3,006 -- 55,037
INTERCOMPANY ADVANCES............ 5,996 (13,713) 7,717 -- --
STOCKHOLDERS' EQUITY............. 62,313 335,962 48,646 (384,608) 62,313
-------- -------- -------- --------- --------
Total liabilities and
equity............... $343,309 $558,582 $116,421 $(384,608) $633,704
======== ======== ======== ========= ========
</TABLE>
12
<PAGE> 13
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 5, 1998
(000'S OMITTED)
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN
U.S. CAN CAN COMPANY SUBSIDIARIES U.S. CAN
CORPORATION (SUBSIDIARY (NON-GUARANTOR CORPORATION
(PARENT) GUARANTOR) SUBSIDIARIES) ELIMINATIONS CONSOLIDATED
----------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........ $ -- $ 129 $ 4,602 $ -- $ 4,731
Accounts receivable.............. -- 66,340 27,663 -- 94,003
Inventories...................... -- 90,967 19,171 -- 110,138
Prepaid expenses and other
assets........................ -- 9,748 2,059 -- 11,807
Prepaid income taxes............. -- 22,398 -- -- 22,398
-------- -------- -------- --------- --------
Total current assets........ -- 189,582 53,495 -- 243,077
-------- -------- -------- --------- --------
NET PROPERTY, PLANT AND
EQUIPMENT........................ -- 237,120 68,360 -- 305,480
INTANGIBLE ASSETS.................. -- 58,646 -- -- 58,646
OTHER ASSETS....................... 6,931 10,456 6,154 -- 23,541
INVESTMENT IN SUBSIDIARIES......... 339,041 51,775 -- (390,816) --
-------- -------- -------- --------- --------
Total assets................ $345,972 $547,579 $128,009 $(390,816) $630,744
======== ======== ======== ========= ========
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ -- $ 5,116 $ 2,689 $ -- $ 7,805
Accounts payable................. -- 44,510 19,653 -- 64,163
Other current liabilities........ -- 70,454 10,986 -- 81,440
-------- -------- -------- --------- --------
Total current liabilities... -- 120,080 33,328 -- 153,408
-------- -------- -------- --------- --------
SENIOR DEBT........................ 46,037 27,953 -- 73,990
SUBORDINATED DEBT.................. 275,000 -- -- -- 275,000
OTHER LONG-TERM LIABILITIES........ -- 53,020 5,241 -- 58,261
INTERCOMPANY ADVANCES.............. 887 (10,599) 9,712 -- --
STOCKHOLDERS' EQUITY............... 70,085 339,041 51,775 (390,816) 70,085
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity..... $345,972 $547,579 $128,009 $(390,816) $630,744
======== ======== ======== ========= ========
</TABLE>
13
<PAGE> 14
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 6, 1997
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN
U.S. CAN CAN COMPANY SUBSIDIARIES U.S. CAN
CORPORATION (SUBSIDIARY (NON-GUARANTOR CORPORATION
(PARENT) GUARANTOR) SUBSIDIARIES) ELIMINATIONS CONSOLIDATED
----------- ------------- -------------- ------------ ------------
(000'S OMITTED)
<S> <C> <C> <C> <C> <C>
NET SALES........................... $ -- $335,598 $53,775 $ -- $389,373
COST OF SALES....................... -- 291,897 48,963 -- 340,860
------ -------- ------- ------- --------
Gross Income...................... -- 43,701 4,812 -- 48,513
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... -- 14,691 2,091 -- 16,782
------ -------- ------- ------- --------
Operating Income.................. -- 29,010 2,721 -- 31,731
INTEREST EXPENSE ON BORROWINGS...... -- 17,689 753 -- 18,442
AMORTIZATION OF DEFERRED FINANCING
COSTS............................. -- 894 -- -- 894
OTHER EXPENSES...................... -- 890 -- -- 890
EQUITY EARNINGS FROM SUBSIDIARY..... 7,109 1,676 -- (8,785) --
PROVISION FOR INCOME TAXES.......... -- 4,152 292 -- 4,444
NET EARNINGS FROM DISCONTINUED
OPERATIONS........................ -- 48 -- -- 48
------ -------- ------- ------- --------
NET INCOME.......................... $7,109 $ 7,109 $ 1,676 $(8,785) $ 7,109
====== ======== ======= ======= ========
</TABLE>
14
<PAGE> 15
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 5, 1998
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN
U.S. CAN CAN COMPANY SUBSIDIARIES U.S. CAN
CORPORATION (SUBSIDIARY (NON-GUARANTOR CORPORATION
(PARENT) GUARANTOR) SUBSIDIARIES) ELIMINATIONS CONSOLIDATED
----------- ------------- -------------- ------------ ------------
(000'S OMITTED)
<S> <C> <C> <C> <C> <C>
NET SALES.......................... $ -- $315,305 $60,531 $ -- $375,836
COST OF SALES...................... -- 275,121 54,081 -- 329,202
------ -------- ------- ------- --------
Gross Income..................... -- 40,184 6,450 -- 46,634
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... -- 14,197 2,292 -- 16,489
------ -------- ------- ------- --------
Operating Income................. -- 25,987 4,158 -- 30,145
INTEREST EXPENSE ON BORROWINGS..... -- 15,833 1,307 -- 17,140
AMORTIZATION OF DEFERRED FINANCING
COSTS............................ -- 764 -- -- 764
OTHER EXPENSES..................... -- 867 -- -- 867
EQUITY EARNINGS FROM SUBSIDIARY.... 6,887 2,007 -- (8,894) --
PROVISION FOR INCOME TAXES......... -- 3,643 844 -- 4,487
------ -------- ------- ------- --------
NET INCOME......................... $6,887 $ 6,887 $ 2,007 ($8,894) $ 6,887
====== ======== ======= ======= ========
</TABLE>
15
<PAGE> 16
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 6, 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN
U.S. CAN CAN COMPANY SUBSIDIARIES U.S. CAN
CORPORATION (SUBSIDIARY (NON-GUARANTOR CORPORATION
(PARENT) GUARANTOR) SUBSIDIARIES) ELIMINATIONS CONSOLIDATED
----------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.... $ -- $ 15,302 $ 2,227 $ -- $ 17,529
------- -------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. -- (24,203) (6,693) -- (30,896)
Acquisition of businesses, net of
cash............................... -- (12,476) -- -- (12,476)
Changes in restricted cash............ -- 1,283 -- -- 1,283
Investment in subsidiaries............ 1,823 -- -- (1,823) --
Machinery repair parts usage, net..... -- (89) -- -- (89)
------- -------- ------- ------- --------
Net cash used in investing
activities......................... 1,823 (35,485) (6,693) (1,823) (42,178)
------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in intercompany advances....... (1,297) 17,557 (16,260) -- --
Issuance of common stock and exercise
of stock options................... 108 -- -- -- 108
Net borrowings under the revolving
line of credit and changes in cash
overdrafts......................... -- 19,964 -- -- 19,964
Borrowings of other long-term debt,
including capital lease
obligations........................ -- 31 17,975 -- 18,006
Payments of other long-term debt,
including capital lease
obligations........................ -- (9,858) (904) -- (10,762)
Payments of debt refinancing costs.... -- (1,247) -- -- (1,247)
Capital contribution from parent...... -- (1,823) -- 1,823 --
Purchase of treasury stock, net....... (634) -- -- -- (634)
------- -------- ------- ------- --------
Net cash provided from
financing activities........ (1,823) 24,624 811 1,823 25,435
------- -------- ------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH.................................. -- -- (2,593) -- (2,593)
------- -------- ------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS... -- 4,441 (6,248) -- (1,807)
CASH AND CASH EQUIVALENTS, beginning of
period................................ -- 628 7,338 -- 7,966
------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period................................ $ -- $ 5,069 $ 1,090 $ -- $ 6,159
======= ======== ======= ======= ========
</TABLE>
16
<PAGE> 17
U.S. CAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 5, 1998
(000'S OMITTED)
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN
U.S. CAN CAN COMPANY SUBSIDIARIES U.S. CAN
CORPORATION (SUBSIDIARY (NON-GUARANTOR CORPORATION
(PARENT) GUARANTOR) SUBSIDIARIES) ELIMINATIONS CONSOLIDATED
----------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:......................... $ -- $ 26,429 $ 2,117 $ -- $ 28,546
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................ -- (5,811) (2,568) -- (8,379)
Acquisition of businesses, net of
cash............................. -- -- -- -- --
Changes in restricted cash.......... -- 29 -- -- 29
Machinery repair parts usage, net... -- 263 210 -- 473
------- -------- ------- ------- --------
Net cash used in investing
activities.................. -- (5,519) (2,358) -- (7,877)
------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in intercompany advances..... 401 (3,638) 3,237 -- --
Issuance of common stock and
exercise of stock options........ 724 -- -- -- 724
Net borrowings under the revolving
lines of credit and changes in
cash overdrafts.................. -- (12,146) (130) -- (12,276)
Borrowings of other long-term debt,
including capital lease
obligations...................... -- -- -- -- --
Payments of other long-term debt,
including capital lease
obligations...................... -- (5,314) (3,998) -- (9,312)
Payments of debt refinancing
costs............................ -- (98) -- -- (98)
Purchase of treasury stock, net..... (1,125) -- -- -- (1,125)
------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities........ -- (21,196) (891) -- (22,087)
------- -------- ------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH................................ -- -- (624) -- (624)
------- -------- ------- ------- --------
DECREASE IN CASH AND CASH
EQUIVALENTS......................... -- (286) (1,756) -- (2,042)
CASH AND CASH EQUIVALENTS, beginning
of period........................... -- 415 6,358 -- 6,773
------- -------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ -- $ 129 $ 4,602 $ -- $ 4,731
======= ======== ======= ======= ========
</TABLE>
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following narrative discusses the results of operations, liquidity and
capital resources for the Company on a consolidated basis. This section should
be read in conjunction with the Corporation's Amendment No. 1 to Annual Report
on Form 10-K/A-1 for the fiscal year ended December 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained therein.
RESULTS OF OPERATIONS
In November 1997, as part of certain business and operational realignments,
the Company sold its steel pail business which was conducted entirely from its
North Brunswick, New Jersey facility, for $1.4 million in cash and notes, plus
the assumption of certain liabilities and future payments. 1997 revenues of the
steel pail business up to the point of sale were $19.2 million. In addition, the
Company continues to actively work towards the sale of its commercial Metal
Services business which it began reflecting as a discontinued operation late in
1997. Metal Services includes two plants in Chicago, Illinois, one plant each in
Trenton, New Jersey and Brookfield, Ohio and the closed Midwest Litho plant.
1997 revenues from these operations were $116 million (excluding intra-Company
sales which are expected to be continued by the buyer and including third-party
sales from the closed Midwest Litho plant, which have been transferred to other
Metal Services plants). Comparable revenues generated from these facilities in
the second quarter and first half of 1998 were $27 million and $55 million,
respectively. The Company anticipates that the sale of Metal Services will be
completed in 1998. The Company's historical financial statements have been
restated to reflect these businesses as discontinued operations. The following
comparisons incorporate these restatements.
QUARTER ENDED JULY 5, 1998, AS COMPARED TO QUARTER ENDED JULY 6, 1997
Net Sales
Net sales for the quarterly period ended July 5, 1998, totaled $183.5
million, a 3.7% decrease versus the corresponding period in 1997. The loss of a
major aerosol customer, which occurred in the third quarter of 1997, accounted
for a change in excess of 4.0% in period to period consolidated sales. European
sales for the second quarter of 1998 increased 15.7% versus the same period in
1997, representing a 2.2% increase in consolidated sales. The European sales
increase is primarily due to stronger activity in the Schwedt, Germany and
Voghera, Italy operations versus the second quarter of last year.
Gross Income
Gross income of $23.5 million for the second quarter of 1998 is up $0.7
million, or 3.1%, versus the second quarter of 1997. Gross margin increased to
12.8% of net sales for the period from 11.9% in the comparable period of 1997.
Second quarter margins reflect improved domestic aerosol demand and operating
benefits resulting from the 1997 restructuring program. The Company's Wales
operation continued its qualification process with its major customer in the
second quarter, which had an adverse effect on gross margin. Early in the third
quarter of 1998, the Wales plant successfully completed commercial
qualification, which is expected to favorably impact results of this operation
going forward.
Operating Income
Operating income in the second quarter of 1998 of $15.2 million or 8.3% of
net sales, compares favorably to $14.6 million or 7.7% of net sales reported in
the second quarter of 1997, as a result of improved gross margins. Selling,
general and administrative expense were flat quarter to quarter with the second
quarter of 1998 reflecting temporary redundancy of expense relating to timing of
management changes.
Interest and Other Expenses
Interest expense in the second quarter of 1998 was down $0.8 million versus
the second quarter of 1997. Strong operating cash flow, and continued focus on
working capital and capital expenditures, has resulted in
18
<PAGE> 19
long-term debt (including current maturities) decreasing $41.6 million since the
second quarter of last year, and $19.3 million since fiscal year end 1997.
Net Income
Second quarter net income of $3.8 million or $0.28 diluted earnings per
share compares favorably to 1997 second quarter net income of $2.8 million or
$0.21 diluted earnings per share. Improved gross margins positively affected net
earnings for the 1998 period.
SIX-MONTH PERIOD ENDED JULY 5, 1998 VS. SIX-MONTH PERIOD ENDED JULY 6, 1997
Net Sales
Net sales for the six-month period ended July 5, 1998, totaled $375.8
million, a decrease of 3.5% versus the corresponding period in 1997. The loss of
a major aerosol customer, which occurred in the third quarter of 1997, accounted
for 4.0% of the change in period to period consolidated sales. European sales
for the first half of 1998 increased 12.6% versus the same period in 1997,
representing a 2.0% increase in consolidated sales.
Gross Income
Gross income of $46.6 million for the first half of 1998 is down $1.9
million, or 3.9%, versus the same period of 1997. Gross margin of 12.4% of net
sales for the 1998 period is slightly lower than the six-month period of 1997,
at 12.5%. Improved second quarter 1998 margins, resulting from improved domestic
aerosol demand and the operating benefits of the 1997 restructuring program
beginning to materialize, have favorably impacted six-month comparative results.
Early in the third quarter of 1998, the Wales plant successfully completed
commercial qualification, which is expected to favorably impact results of this
operation going forward.
Operating Income
Operating income for the six-month period of 1998 of $30.1 million or 8.0%
of net sales, is slightly below operating income of $31.7 million or 8.1% of net
sales reported in the corresponding period of 1997. Stronger gross margins in
the second quarter and operating benefits resulting from the 1997 restructuring
program have served to improve 1998 year to date operating income comparisons to
prior year, versus similar comparisons at the end of the first quarter.
Interest and Other Expenses
Interest expense for the six-month period ended July 5, 1998 of $17.1
million is down $1.3 million or 7.1% versus the corresponding period of 1997.
Continued focus on working capital and capital expenditures, and strong
operating cash flow has resulted in long-term debt (including current
maturities) decreasing $41.6 million since the second quarter of last year, and
$19.3 million since fiscal year end 1997.
Net Income
First half net income of $6.9 million or $0.52 diluted earnings per share,
is down $0.2 million versus the corresponding period of 1997. 1997 first half
diluted earnings per share was $0.54.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998, the Company met its liquidity needs through
internally generated cash flow and borrowings under its credit lines. During
this six-month period, principal liquidity needs included operations (including
restructuring-related expenditures), debt amortization, capital expenditures and
the Company's minority investment in Formametal. Cash flow from operations was
$28.5 million in the first half of 1998, compared to $17.5 million in the first
half of 1997. Increased cash from operations resulted from improved working
capital management starting in 1997 and continuing through the first half of
1998.
19
<PAGE> 20
Additionally, first half 1998 capital expenditures and business acquisitions
were significantly less than in the first half 1997.
The Company expects total capital expenditures in 1998 to be approximately
$20 to $23 million and has spent $8.4 million in the first half of 1998,
compared to $30.9 million in the first half of 1997. The Company's capital
investments have historically yielded reduced operating costs and improved the
Company's profit margins, and management believes that the strategic deployment
of capital will enable the Company to improve its overall profitability by
leveraging the economies of scale inherent in the manufacture of containers.
In March 1998, one of the European Subsidiaries acquired a 36.5% equity
interest in Formametal, an aerosol can manufacturer located in Argentina, for
$4.6 million, payable over a 15-month period. In connection with this
investment, Formametal has agreed to purchase approximately $2.6 million to $3.0
million of manufacturing equipment from the Company, and the Company has agreed
to provide certain technical and engineering assistance to Formametal. The
Company has also provided a guaranty in an amount not to exceed $2.0 million, to
secure the repayment of certain indebtedness of Formametal. This investment is
being accounted for on the equity method.
In January 1997, the Company acquired certain assets from Owens-Illinois
Closure Inc. ("O-I") for cash consideration of $10 million, subject to
adjustment based upon the actual value of the inventory acquired and potential
contingent payments of up to $1.5 million based upon realization of certain new
business which O-I was seeking at the time of the acquisition. The assets
acquired by the Company include machinery, equipment, inventory and raw
materials of O-I's Erie, Pennsylvania metal business. The purchase price
resulted in goodwill of $7.1 million.
As of July 5, 1998, U.S. Can had borrowings of $20.4 million outstanding
under the Credit Agreement, $12.3 million in letters of credit had been issued
pursuant thereto, and $47.3 million of unused credit remained available
thereunder. As of July 5, 1998, U.S. Can was in compliance with the Credit
Agreement and its other long-term debt agreements.
Management believes that cash flow from operations, amounts available under
its credit facilities and proceeds from sales of assets should provide
sufficient funds for the Company's short-term and long-term capital expenditure
and debt amortization requirements, and other cash needs in the ordinary course
of business. The Company believes it will be able to refinance the Revolving
Credit Facility on or prior to maturity. If future strategic acquisition
opportunities arise, the Company would expect to finance them though some
combination of cash, stock and/or debt financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
20
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant's Annual Meeting of Stockholders was held on April 24, 1998.
The following persons were nominated and elected to serve as Directors of the
registrant for a term of three years or until their successors have been duly
elected and qualified:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
Calvin W. Aurand, Jr. ................................... 12,464,978 3,628
Carl Ferenbach........................................... 12,442,591 26,015
Francisco A. Soler....................................... 12,414,723 53,883
</TABLE>
In addition, the registrant's appointment of Arthur Andersen LLP to serve
as its independent auditor for fiscal year 1998 was ratified in accordance with
the following vote:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
--- ------- --------
<S> <C> <C>
12,464,831 2,662 1,113
</TABLE>
ITEM 5. OTHER INFORMATION.
Paul W. Jones has been elected by the Board of Directors as President and
Chief Executive Officer of the Company, effective April 1, 1998. Mr. Jones was
elected as a director on April 24, 1998 and became Chairman of the Board on July
1, 1998. Mr. Jones, 49 years old, had been President and Chief Executive Officer
of Greenfield Industries, Inc., a major tool manufacturer located in Augusta,
Georgia, which he joined in 1989. Prior to that, in a 19-year career with
General Electric Company, he held general manager positions in three G.E.
divisions.
Timothy W. Stonich, former Executive Vice President -- Finance, Chief
Financial Officer and Secretary of U.S. Can, resigned from U.S. Can effective
April 6, 1998, to pursue other personal and business interests.
On July 6, 1998, William J. Smith, founder of U.S. Can, resigned from the
Company's Board of Directors. Mr. Smith retired April 1, 1998 from his position
as President and Chief Executive Officer.
On July 10, 1998, the Company announced a corporate reorganization, with
each business operation responsible for marketing, market strategy,
manufacturing, sales and overall business leadership. The Company also created a
Business Support organization which will focus on overall quality assurance,
manufacturing systems and programs, plant rationalizations and restructuring,
and manufacturing technology and strategy for each of the business units. The
Company believes that the reorganization will allow it to respond more
efficiently to customer expectations and to position it for future growth.
On August 10, 1998, John L. Workman joined the Company as Executive Vice
President and Chief Financial Officer. Prior to joining the Company, Mr. Workman
was employed by Montgomery Ward Holding Corporation since 1984 in a variety of
positions, including Vice President, Finance, Chief Financial Officer, and most
recently as Executive Vice President and Chief Restructuring Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT BY REFERENCE
NUMBER DESCRIPTION OF DOCUMENT (IF APPLICABLE)
- ------- ----------------------- ---------------
<C> <S> <C>
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
(b) U.S. Can Corporation filed no reports on Form 8-K during the quarterly
period ended July 5, 1998.
21
<PAGE> 22
SIGNATURES
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.
U.S. CAN CORPORATION
Date: August 19, 1998 By: /s/ JOHN L. WORKMAN
------------------------------------
John L. Workman
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the undersigned, in his capacity as the principal
financial officer of the registrant.
Date: August 19, 1998 By: /s/ JOHN L. WORKMAN
------------------------------------
John L. Workman
Executive Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-05-1998
<CASH> 4,731
<SECURITIES> 0
<RECEIVABLES> 109,438
<ALLOWANCES> 15,435
<INVENTORY> 110,138
<CURRENT-ASSETS> 243,077
<PP&E> 501,891
<DEPRECIATION> 196,411
<TOTAL-ASSETS> 630,744
<CURRENT-LIABILITIES> 153,408
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 69,953
<TOTAL-LIABILITY-AND-EQUITY> 630,744
<SALES> 375,836
<TOTAL-REVENUES> 375,836
<CGS> 329,202
<TOTAL-COSTS> 329,202
<OTHER-EXPENSES> 1,631
<LOSS-PROVISION> 280
<INTEREST-EXPENSE> 17,140
<INCOME-PRETAX> 11,374
<INCOME-TAX> 4,487
<INCOME-CONTINUING> 6,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,887
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
