Document/Exhibit Description Pages Size
1: 10-Q March 31, 1997 Form 10-Q 21 81K
3: EX-10 Second Amendment to O-I, Inc. Directors Deferred 4 15K
Comp. Plan
2: EX-10 Third Amendment to Owens-Illinois, Inc. Executive 1 7K
Savings Plan
4: EX-12 Computation of Ratio of Earnings to Fixed Charges 1 6K
5: EX-23 Consent of McCarter & English 1 5K
6: EX-27 March 31, 1997 Financial Data Schedule 1 8K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark one) FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended March 31, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Owens-Illinois, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 1-9576 22-2781933
---------------- ----------- -------------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation or
organization)
Owens-Illinois Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 33-13061 34-1559348
---------------- ----------- -------------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation or
organization)
One SeaGate, Toledo, Ohio 43666
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(Address of principal executive offices) (Zip Code)
419-247-5000
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(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrants were required to file
such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Owens-Illinois, Inc. $.01 par value common stock - 122,930,993
shares at April 30, 1997.
Owens-Illinois Group, Inc. $.01 par value common stock - 100
shares at April 30, 1997.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Condensed Consolidated Financial Statements presented herein are unaudited
but, in the opinion of management, reflect all adjustments necessary to
present fairly such information for the periods and at the dates indicated.
Since the following condensed unaudited financial statements have been
prepared in accordance with Article 10 of Regulation S-X, they do not contain
all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing in the
Registrants' Annual Report on Form 10-K for the year ended December 31, 1996.
2
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended March 31, 1997 and 1996
(Millions of dollars, except per share amounts)
1997 1996
Revenues: -------- ------
Net sales $1,056.3 $905.8
Royalties and net technical assistance 6.4 5.8
Equity earnings 8.8 5.3
Interest 7.8 6.5
Other 36.9 13.4
-------- ------
1,116.2 936.8
Costs and expenses:
Manufacturing, shipping, and delivery 844.9 708.9
Research and development 7.8 8.1
Engineering 7.4 6.5
Selling and administrative 51.0 50.7
Interest 85.9 73.5
Other 34.8 14.7
-------- ------
1,031.8 862.4
-------- ------
Earnings before items below 84.4 74.4
Provision for income taxes 23.4 25.9
Minority share owners' interests in earnings
of subsidiaries 6.4 8.9
-------- ------
Net earnings $ 54.6 $ 39.6
======== ======
Net earnings per share of common stock $ 0.44 $ 0.33
======== ======
Average shares outstanding (thousands) 121,813 120,060
======= =======
See accompanying notes.
3
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997, December 31, 1996, and March 31, 1996
(Millions of dollars)
March 31, Dec. 31, March 31,
1997 1996 1996
--------- -------- ---------
Assets
Current assets:
Cash, including time deposits $ 211.3 $ 160.9 $ 105.5
Short-term investments, at cost which
approximates market 78.5 14.4 37.1
Receivables, less allowances for losses
and discounts ($37.7 at March 31, 1997,
$40.6 at December 31, 1996, and $36.7 at
March 31, 1996) 659.0 488.8 468.2
Inventories 626.8 494.6 513.4
Prepaid expenses 125.5 126.4 99.6
-------- -------- --------
Total current assets 1,701.1 1,285.1 1,223.8
Investments and other assets:
Investments and advances 126.5 85.6 88.7
Repair parts inventories 209.3 189.4 168.1
Prepaid pension 639.1 624.5 626.0
Insurance for asbestos-related costs 255.3 271.4 290.3
Deposits, receivables, and other assets 266.7 704.2 238.3
Excess of purchase cost over net assets
acquired, net of accumulated
amortization ($302.6 at March 31,
1997, $293.7 at December 31, 1996,
and $269.9 at March 31, 1996) 1,313.2 1,003.5 1,016.3
-------- -------- --------
Total investments and other assets 2,810.1 2,878.6 2,427.7
Property, plant, and equipment, at cost 3,732.3 3,435.9 3,144.7
Less accumulated depreciation 1,548.4 1,494.3 1,344.4
-------- -------- --------
Net property, plant, and equipment 2,183.9 1,941.6 1,800.3
-------- -------- --------
Total assets $6,695.1 $6,105.3 $5,451.8
======== ======== ========
CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
March 31, Dec. 31, March 31,
1997 1996 1996
--------- -------- ---------
Liabilities and Share Owners' Equity
Current liabilities:
Short-term loans and long-term debt
due within one year $ 161.9 $ 141.5 $ 97.1
Current portion of asbestos-related
liabilities 110.0 110.0 145.0
Accounts payable and other liabilities 779.7 653.4 647.5
-------- -------- --------
Total current liabilities 1,051.6 904.9 889.6
Long-term debt 3,407.7 3,253.2 2,754.6
Deferred taxes 231.4 201.2 135.8
Nonpension postretirement benefits 366.2 371.7 385.3
Asbestos-related liabilities 118.4 138.2 215.2
Other liabilities 528.1 311.7 326.5
Commitments and contingencies
Minority share owners' interests 234.4 194.7 174.7
Share owners' equity:
Preferred stock 21.4 21.4 21.6
Common stock, par value $.01 per share
(122,673,393 shares outstanding at
March 31, 1997; 120,446,348 at
December 31, 1996; and
120,136,398 at March 31, 1996) 1.2 1.2 1.2
Capital in excess of par value 1,074.4 1,047.6 1,044.3
Deficit (203.6) (258.2) (409.7)
Cumulative foreign currency translation
adjustment (136.1) (82.3) (87.3)
-------- -------- --------
Total share owners' equity 757.3 729.7 570.1
-------- -------- --------
Total liabilities and share owners' equity $6,695.1 $6,105.3 $5,451.8
======== ======== ========
See accompanying notes.
5
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Three months ended March 31, 1997 and 1996
(Millions of dollars)
1997 1996
-------- --------
Cash flows from operating activities:
Net earnings $ 54.6 $ 39.6
Non-cash charges:
Depreciation 67.7 52.8
Amortization of deferred costs 14.3 12.9
Other 1.1 6.2
Change in non-current operating assets (12.4) (19.5)
Asbestos-related payments (19.8) (20.2)
Asbestos-related insurance proceeds 16.1 33.2
Reduction of non-current liabilities (.1) (.8)
Change in components of working capital (69.5) (49.2)
-------- --------
Cash provided by operating activities 52.0 55.0
Cash flows from investing activities:
Additions to property, plant, and equipment (76.6) (77.1)
Acquisitions, net of cash acquired (104.7)
Net cash proceeds from divestitures 46.4 1.2
-------- --------
Cash utilized in investing activities (134.9) (75.9)
Cash flows from financing activities:
Additions to long-term debt 117.3 23.0
Repayments of long-term debt (5.5) (25.5)
Increase in short-term loans 1.3 22.2
Issuance of subsidiary's stock 1.5
Issuance of common stock 26.8 1.3
-------- --------
Cash provided by financing activities 139.9 22.5
Effect of exchange rate fluctuations on cash (6.6) (5.5)
-------- --------
Increase (decrease) in cash 50.4 (3.9)
Cash at beginning of period 160.9 109.4
-------- --------
Cash at end of period $ 211.3 $ 105.5
======== ========
See accompanying notes.
6
OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars
1. Acquisition of AVIR S.p.A.
At December 31, 1996, deposits, receivables, and other assets includes
approximately $440 million of escrow funding in connection with the
acquisition of AVIR S.p.A. ("AVIR"), the largest manufacturer of glass
containers in Italy. On February 3, 1997, the Company completed the
acquisition of 79% of AVIR. In addition to purchasing this controlling
interest pursuant to an acquisition agreement, the Company also initiated a
tender offer during the second quarter of 1997 for the 21% of the shares of
AVIR that are publicly held. Based upon current exchange rates, the amount
required to purchase all of the publicly held shares is approximately $110
million, which is included in Other liabilities in the March 31, 1997
Condensed Consolidated Balance Sheet. Total consideration for 100% of the
AVIR shares is currently expected to be approximately $571 million.
The acquisition of 79% of AVIR was financed through additional borrowings
under the Company's Bank Credit Agreement (see Note 4), which was amended in
November 1996 to provide additional borrowing capacity for the acquisition of
100% of AVIR.
The acquisition is being accounted for under the purchase method of
accounting. The total purchase cost of approximately $571 million will be
allocated to the tangible and identifiable intangible assets and liabilities
of AVIR based upon their respective fair values. The Company believes that a
portion of the $241.5 million unallocated excess of purchase cost over net
assets acquired will ultimately be allocated to property, plant, and equipment
and certain identifiable intangible assets. Such allocations will be based
upon valuations which have not been finalized. Accordingly, the allocation of
the purchase consideration included in the accompanying Condensed Consolidated
Balance Sheet at March 31, 1997, is preliminary. The accompanying Condensed
Consolidated Results of Operations include two months of AVIR operations.
The aggregate purchase cost and its preliminary allocation to the historical
assets and liabilities of AVIR are as follows (in millions of dollars):
Property, plant and equipment $254.5
Other non-current assets 49.0
Cash and short-term investments 131.2
Other net working capital acquired 72.3
Excess of purchase cost over net assets acquired 241.5
------
748.5
Other long-term liabilities (96.9)
Debt assumed (80.5)
------
Aggregate purchase cost $571.1
======
7
2. Pro Forma Results of Operations
Had the acquisition of AVIR described in Note 1 occurred at the beginning of
the three-month period beginning January 1, 1996, unaudited pro forma
consolidated net sales, net earnings, and net earnings per share of common
stock would have been as follows (in millions of dollars, except per share
amounts):
Three Months ended March 31, 1996
--------------------------------------
Effect of Pro Forma
As AVIR Results of
Reported Acquisition Operations
-------- ----------- ----------
Net sales $905.8 $121.2 $1,027.0
====== ====== ========
Net earnings (loss) $ 39.6 $ (0.1) $ 39.5
====== ====== ========
Net earnings per share of common stock $ 0.33 $ 0.00 $ 0.33
====== ====== ========
The Company believes that a portion of the $241.5 million unallocated excess
of purchase cost over the net assets acquired in the AVIR acquisition will
ultimately be allocated to property, plant, and equipment and certain
identifiable intangible assets. The detailed allocation of such excess has
not been finalized. The pro forma net earnings amounts reflect amortization
of such excess over 30 years.
Certain of the glass container products produced by AVIR are subject to
seasonal demand; shipments of such products have typically been greater in the
second and third quarters of the year compared to the first and fourth
quarters. Net sales of AVIR for the full year 1996 were approximately $600
million.
The pro forma data does not purport to represent what the results of
operations would actually have been if the AVIR acquisition had in fact
occurred on the date indicated, or to project results of operations for any
future period.
3. Inventories
Major classes of inventory are as follows:
March 31, Dec. 31, March 31,
1997 1996 1996
--------- -------- ---------
Finished goods $500.0 $374.5 $402.5
Work in process 7.2 4.2 4.9
Raw materials 83.7 81.2 73.4
Operating supplies 35.9 34.7 32.6
------ ------ ------
$626.8 $494.6 $513.4
====== ====== ======
8
4. Long-Term Debt
The following table summarizes the long-term debt of the Company:
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March 31, Dec. 31, March 31,
1997 1996 1996
Bank Credit Agreement: --------- -------- ---------
Revolving Loans $1,110.0 $1,105.0 $ 460.0
Bid Rate Loans 90.0 137.0
Senior Debentures, 11%,
due 1999 to 2003 1,000.0 1,000.0 1,000.0
Senior Subordinated Notes:
10-1/4%, due 1999 250.0 250.0 250.0
10-1/2%, due 2002 150.0 150.0 150.0
10%, due 2002 250.0 250.0 250.0
9-3/4%, due 2004 200.0 200.0 200.0
9.95%, due 2004 100.0 100.0 100.0
Other 308.4 232.9 230.0
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3,458.4 3,287.9 2,777.0
Less amounts due within one year 50.7 34.7 22.4
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Long-term debt $3,407.7 $3,253.2 $2,754.6
=============================================================================
In November 1996, the Company entered into an agreement with a group of banks
("Bank Credit Agreement" or "Agreement") which provides Revolving Loan
Commitments under which the Company may borrow up to $1.8 billion through
December 31, 2001. The Agreement includes an Overdraft Account facility
providing for aggregate borrowings up to $50 million which reduce the amount
available for borrowing under the Revolving Loan Commitments. In addition,
the terms of the Bank Credit Agreement permit the Company to request Bid Rate
Loans from banks participating in the Agreement and to issue Commercial Paper
notes to other purchasers. Borrowings outstanding under Bid Rate Loans and
Commercial Paper notes are limited to $450 million in the aggregate and reduce
the amount available for borrowing under the Revolving Loan Commitments. The
Revolving Loan Commitments also provide for the issuance of letters of credit
totaling up to $300 million.
At March 31, 1997, the Company had unused credit available under the Bank
Credit Agreement of $408.2 million.
Revolving loans bear interest, at the Company's option, at the prime rate or a
Eurodollar deposit-based rate plus a margin linked to the Company's
Consolidated Leverage Ratio, as defined in the Agreement. The margin is
currently .425% and is limited to a range of .275% to .625%. Overdraft
Account loans bear interest at the prime rate minus the facility fee
percentage, defined below. The weighted average interest rate on borrowings
outstanding under the Bank Credit Agreement at March 31, 1997, was 5.97%.
While no compensating balances are required by the Agreement, the Company must
pay a facility fee on the Revolving Loan Commitments. The facility fee,
currently .20%, is limited to a range of .125% to .375%, based on changes in
the Company's Consolidated Leverage Ratio.
9
The capital stock and intercompany debt obligations of most of the Company's
domestic subsidiaries are pledged as collateral for borrowings under the
Agreement and certain other obligations. While these pledges do not directly
encumber the operating assets owned by these subsidiaries, the Agreement
restricts the creation of liens on them. The Agreement also requires the
maintenance of certain financial ratios, restricts the incurrence of
indebtedness and other contingent financial obligations, and restricts certain
types of business activities and investments.
The Senior Debentures rank pari passu with the obligations of the Company
under the Bank Credit Agreement and other senior indebtedness, and senior in
right of payment to all existing and future subordinated debt of the Company.
The Senior Debentures are guaranteed on a senior basis by Group and most of
the Company's domestic subsidiaries and secured by a pledge of the capital
stock of, and intercompany indebtedness of, Group and such subsidiaries.
Under the terms of the Bank Credit Agreement and the various Indentures
related to the Company's senior and subordinated notes and debentures,
dividend payments with respect to the Company's Preferred or Common Stock are
limited. The Company is also limited with regard to payments for redemption
of shares of its Common Stock.
5. Proposed Refinancing Plan
The Company intends to implement a refinancing plan (the "Refinancing Plan")
designed to reduce interest expense, reduce the amount and extend the
maturities of the Company's outstanding long-term debt, and improve financial
flexibility. The Refinancing Plan contemplates that the Company will use the
proceeds from the offering of an estimated 14,750,000 shares (16,962,500
shares if the underwriters' overallotment option is exercised in full) of the
Company's common stock (the "Equity Offering"), the offering of $250.0 million
aggregate principal amount of Senior Notes due 2004 and $250.0 million
aggregate principal amount of Senior Notes due 2007 (collectively, the "Senior
Note Offerings" and, together with the Equity Offering, the "Offerings"), and
borrowings under its Bank Credit Agreement which the Company expects to amend
prior to the closing of the Offerings to, among other things, increase the
borrowing capacity thereunder from $1.8 billion to up to $3.0 billion (the
"Amended Credit Facility"), to (a) repurchase the $1.0 billion aggregate
principal amount of the Company's currently outstanding 11% Senior Debentures
due 2003 (the "Senior Debentures") pursuant to the terms of a tender offer
(the "Tender Offer") occurring concurrently with the Offerings and (b) redeem
$950.0 million aggregate principal amount of the Company's Senior Subordinated
Notes (the "Senior Subordinated Notes"), $250.0 million aggregate principal
amount of which are currently redeemable at the option of the Company as of
the date hereof and the remaining $700.0 million aggregate principal amount of
which become redeemable at the option of the Company at various times in 1997
beginning on June 15, 1997. In conjunction with the Tender Offer, the Company
is soliciting consents of the registered holders of the Senior Debentures to
certain proposed amendments to the related Indenture.
Consummation of the Senior Note Offerings is conditioned upon the prior
consummation of the Equity Offering and the release of the collateral
10
securing, and the guarantees of, the Company's obligations under the Bank
Credit Agreement and the Senior Debentures. Consummation of the Senior Note
Offerings is not a condition to the consummation of the Equity Offering. The
Company intends to use the net proceeds from the Offerings and borrowings
currently available under the Bank Credit Agreement or the Amended Credit
Facility, if available at such time, to consummate the Tender Offer. If the
Company does not enter into the Amended Credit Facility, upon consummation of
the Offerings the Company will have sufficient funds to consummate the Tender
Offer only. If the Senior Note Offerings are not consummated, the Company
will have sufficient funds to consummate the Tender Offer only if additional
borrowings are available under the Amended Credit Facility or the Company
identifies additional sources of funds. The Company expects to redeem the
Senior Subordinated Notes with borrowings under the Amended Credit Facility.
The redemption of the Senior Subordinated Notes will be made at the discretion
of the Company, depending on prevailing market and economic conditions, when
and as the Senior Subordinated Notes become redeemable. Although the Company
anticipates that the Amended Credit Facility will be effective prior to the
consummation of the Offerings and that the additional borrowing capacity will
be available to the Company at such time, there can be no assurance that such
will be the case or that the Company will have adequate funds available to
redeem the Senior Subordinated Notes as they become redeemable.
On April 24, 1997, the Company filed with the Securities and Exchange
Commission preliminary Prospectus Supplements with respect to the Offerings.
On April 25, 1997, the Company commenced the Tender Offer.
Implementation of each of the elements of the Refinancing Plan will be
determined based on a number of factors and, therefore, the Refinancing Plan
as described above may not be completed as presently proposed.
6. Cash Flow Information
Interest paid in cash aggregated $49.5 million for the first quarter of 1997
and $42.2 million for the first quarter of 1996. Income taxes paid in cash
totaled $5.3 million for the first quarter of 1997 and $9.9 million for the
first quarter of 1996.
7. Contingencies
The Company is one of a number of defendants (typically 10 to 20) in a
substantial number of lawsuits filed in numerous state and federal courts by
persons alleging bodily injury (including death) as a result of exposure to
dust from asbestos fibers. From 1948 to 1958, one of the Company's former
business units commercially produced and sold a high-temperature, clay-based
insulating material containing asbestos. The insulation material was used in
limited industrial applications such as shipyards, power plants and chemical
plants. During its ten years in the high-temperature insulation business, the
Company's aggregate sales of insulation material containing asbestos were less
than $40 million. The Company exited the insulation business in April 1958.
The traditional asbestos personal injury lawsuits and claims relating to such
production and sale of asbestos material typically allege various theories of
liability, including negligence, gross negligence and strict liability and
11
seek compensatory and punitive damages in various amounts (herein referred to
as "asbestos claims"). As of March 31, 1997, the Company estimates that it is
a named defendant in asbestos claims involving approximately 16,000 plaintiffs
and claimants.
The Company's indemnity payments for these claims have varied on a per claim
basis, and are expected to continue to vary considerably over time. They are
affected by a multitude of factors, including the type and severity of the
disease sustained by the claimant; the occupation of the claimant; the extent
of the claimant's exposure to asbestos-containing insulation products
manufactured or sold by the Company; the extent of the claimant's exposure to
asbestos-containing products manufactured or sold by other producers; the
number and financial resources of other defendants and the nature and extent
of indemnity or contribution claims that may be asserted by or against such
other defendants; the jurisdiction of suit; the presence or absence of other
possible causes of the claimant's illness; the availability of legal defenses
such as the statute of limitations or state of the art; and whether the claim
was resolved on an individual basis or as part of a group settlement.
The Company's indemnity payments may also be affected by co-defendant
bankruptcy and class action filings. Since 1982 a number of former producers
of asbestos-containing products have filed for reorganization under Chapter 11
of the United States Bankruptcy Code ("Co-Defendant Bankruptcies"). Pending
lawsuits are generally stayed as to these entities, but continue against the
Company and other defendants. Certain other defendants, and certain
plaintiffs, have also sought to resolve all asbestos claims on a global basis
by filing petitions to certify nationwide litigation or settlement class
actions ("Class Actions"), certain of which the Company believes are not
supported by existing case law. The precise impact on the Company of these
Co-Defendant Bankruptcies and Class Actions is not determinable. However, the
Company believes that the Co-Defendant Bankruptcies probably have adversely
affected, and may adversely affect in the future, the Company's share of the
total liability to plaintiffs in previously settled or otherwise determined
lawsuits and claims and that the dissemination of class notices in the Class
Actions may have increased the number of claims and lawsuits against the
Company or accelerated the filing of such claims.
The Company is also one of a number of defendants in (i) bodily injury
lawsuits involving plaintiffs who allege that they are or were maritime
workers ("Maritime Claims"), (ii) a lawsuit on behalf of individuals in
Pennsylvania who have no asbestos-related impairment, but nevertheless seek
the costs of future medical monitoring ("Medical Monitoring Claims") and (iii)
lawsuits brought by public or private property owners alleging damages to
their various properties ("Property Damage Claims"). Certain of these
Maritime Claims, Medical Monitoring Claims and Property Damage Claims seek
class action treatment. Based on its past experience, the Company presently
believes that the probable ultimate disposition of these Maritime Claims,
Medical Monitoring Claims and Property Damage Claims will not involve any
material additional liability and does not include them in the description
herein of asbestos claims or in the total number of pending asbestos claims
above.
12
In April 1986, the Company and Aetna Life & Casualty Company ("Aetna") agreed
to a final settlement fully resolving asbestos bodily injury and property
damage insurance coverage litigation between them (which followed the entry of
partial summary judgment in favor of the Company in such litigation). The
Company has processed claims which have effectively exhausted its coverage
under the Aetna agreement. In 1984, the Company initiated similar litigation
in New Jersey against the Company's insurers, including its wholly-owned
captive insurer Owens Insurance Limited ("OIL"), and certain other parties for
the years 1977 through 1985 in which the Company sought damages and a
declaration of coverage for both asbestos bodily injury and property damage
claims under insurance policies in effect during those years (Owens-Illinois,
Inc. v. United Insurance Co., et al, Superior Court of New Jersey, Middlesex
County, November 30, 1984).
In December 1994, the Company partially settled for approximately $100 million
its coverage claim against OIL to the extent of reinsurance provided to OIL by
certain reinsurance companies representing approximately 19% of total United
Insurance coverage limits. Subsequently, the Company reached separate
settlements for approximately $140 million with various other reinsurers, and
with OIL to the extent of reinsurance provided by such settling reinsurance
companies. These settlements also included all of the reinsurers who had
participated actively as litigating parties in the United Insurance case.
Following the settlements described above, a settlement agreement (the "OIL
Settlement") was reached with OIL. The OIL Settlement, which was endorsed by
three mediators and approved by OIL's independent directors, called for the
payment of remaining non-settled reinsurance at 78.5% of applicable
reinsurance limits, increasing to 81% on approximately March 1, 1996 and
accruing interest thereafter at 10% per annum.
In December 1995, the presiding judge in the United Insurance case entered a
Consent Judgment settling the United Insurance case as to all remaining issues
and all parties with the single exception of a broker malpractice claim
asserted by the Company, which remains pending. In the Consent Judgment
Order, the presiding judge specifically found that the OIL Settlement is a
good faith and non-collusive settlement and that it is fair and reasonable as
to OIL and all of OIL's non-settling reinsurers.
In November 1995, before all the settlements described above were finalized, a
reinsurer of OIL during the years affected by the United Insurance case
brought a separate suit against OIL seeking a declaratory judgment that it had
no reinsurance obligation to OIL due to alleged OIL fraud and also to OIL
not having joined non-party reinsurers as parties in the United Insurance case
as alleged to be required under New Jersey's "entire controversy" doctrine
(Employer's Mutual vs Owens-Insurance Limited, Superior Court of New Jersey,
Morris County, December 1995). The Company was not a named party to this
cause of action but was subsequently joined in it as a necessary party
defendant.
Subsequent to the entry of the Consent Judgment Order in the United Insurance
case described above, OIL gave notice of the OIL Settlement to all nonsettling
reinsurers affected by the United Insurance case, informing all such
13
reinsurers of the terms of the OIL Settlement and demanding timely payment
from such reinsurers pursuant to such terms. Certain previously nonsettling
reinsurers made the payments called for under the OIL Settlement or otherwise
settled their obligations thereunder. Other nonsettling solvent reinsurers,
all of which are parties to the Employers Mutual case described above, did
not, however, make the payments called for under the OIL Settlement by the
date specified therein.
In June 1996, the Superior Court of New Jersey, Morris County granted OIL
summary judgment on the "entire controversy" doctrine claim in the Employers
Mutual case. A petition for interlocutory appeal of this summary judgment by
certain nonsettling OIL reinsurers was rejected first by the Appellate
Division of the New Jersey Superior Court and thereafter by the New Jersey
Supreme Court.
As a result of payments and commitments that have been made by reinsurers
pursuant to the OIL Settlement and the earlier settlement agreements described
above in the United Insurance case and certain other available insurance, the
Company has to date confirmed coverage for its asbestos-related costs of
approximately $296.8 million. Of the total amount confirmed to date, $254.7
million had been received through March 31, 1997; and the balance of
approximately $42.1 million will be received throughout 1997 and the next
several years. The remainder of the insurance asset of approximately $213.2
million relates principally to the reinsurers who have not yet paid their
reinsurance obligations under the OIL Settlement. This $213.2 million asset
valuation at March 31, 1997 also reflects 1994 and 1995 reductions of $100
million and $40 million, respectively, in the insurance asset valuation of
$650 million established in 1993, which had been made to reflect settlement
activity and litigation developments in the United Insurance case.
The Company believes, based on the rulings of the trial court, the Appellate
Division and the New Jersey Supreme Court in the United Insurance case, as
well as its understanding of the facts and legal precedents (including
specifically the legal precedent requiring that reinsurers "follow the
fortunes" of and adhere to any good faith, fair and reasonable settlement
entered into by the primary carrier which such reinsurers had agreed to
reinsure) and based on advice of counsel, McCarter & English, that it is
probable substantial additional payments will be received to cover the
Company's asbestos-related claim losses, in addition to the amounts already
received or to be received as a result of the settlements described above.
As a result of the Co-Defendant Bankruptcies, the Class Actions, and the
continuing efforts in various federal and state courts to resolve asbestos
lawsuits and claims in nontraditional manners, as well as the continued
filings of new lawsuits and claims, the Company believes that its ultimate
asbestos-related contingent liability (i.e., its indemnity or other claim
disposition costs plus related litigation expenses) is difficult to estimate
with certainty. However, the Company has continually monitored the trends of
matters which may affect its ultimate liability and continually analyzes the
trends, developments and variables affecting or likely to affect the
resolution of pending and future asbestos claims against the Company.
14
Based on all the factors and matters relating to the Company's asbestos-
related litigation and claims, the Company believes that its asbestos-related
costs and liabilities will not exceed by a material amount the sum of the
available insurance reimbursement the Company believes it has and will have
principally as a result of the United Insurance case, and the OIL Settlement,
as described above, and the amount of previous charges for asbestos-related
costs.
Other litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine and involve compensatory,
punitive or treble damage claims as well as other types of relief. The
ultimate legal and financial liability of the Company in respect to the
lawsuits and proceedings referred to above, in addition to other pending
litigation, cannot be estimated with certainty. However, the Company
believes, based on its examination and review of such matters and experience
to date, that such ultimate liability will not be material in relation to the
Company's Consolidated Financial Statements.
8. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS No. 128"),
which is required to be adopted for periods ending after December 15, 1997.
The adoption of FAS No. 128 by the Company is expected to result in no change
in primary earnings per share for the first quarters ended March 31, 1997 and
1996. The impact of FAS No. 128 on the calculation of fully diluted earnings
per share for these quarters is not expected to be material.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - First Quarter 1997 compared with First Quarter 1996
The Company recorded net earnings of $54.6 million for the first quarter of
1997 compared to $39.6 million for the first quarter of 1996. The first
quarter of 1997 includes amounts relating to: (1) the recently acquired AVIR
operations (see Note 1 to the financial statements) and (2) certain assets of
Anchor Glass Container Corporation acquired on February 5, 1997 ("Anchor
Assets"). Excluding the effects of the 1997 unusual items discussed below,
the Company's first quarter 1997 net earnings of $47.0 million increased $7.4
million, or 18.7%, over first quarter 1996 net earnings of $39.6 million.
Consolidated segment operating profit, excluding the 1997 unusual items, was
$151.5 million for the first quarter of 1997, an increase of $15.4 million, or
11.3%, compared to the same 1996 period. The increase is attributable to
higher operating profit for both the Glass Containers segment and the Plastics
and Closures segment, along with lower other retained costs. Interest
expense, net of interest income, increased $11.1 million due in part to debt
incurred or assumed in connection with acquisitions. The Company's estimated
effective tax rate, excluding the effect of the Kimble Glass gain discussed
below, was 34.4% in the first quarter of 1997, compared to 34.8% estimated for
the first quarter of 1996 and the actual rate of 32.4% for the full year 1996.
Capsule segment results (in millions of dollars) for the first quarter of 1997
and 1996 were as follows:
----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating Profit
----------------------------------------------------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Glass Containers $ 775.6 $ 641.8 $ 101.1 $ 98.7
Plastics and Closures 280.4 263.6 51.7 43.8
Eliminations and other
retained costs (a) .3 .4 .9 (6.4)
----------------------------------------------------------------------------
Consolidated total $1,056.3 $ 905.8 $ 153.7 $ 136.1
============================================================================
(a) Operating profit for 1997 includes: (1) a gain of $16.3 million on the
sale of the remaining 49% interest in Kimble Glass, and (2) charges of $14.1
million principally for the estimated cost of guaranteed lease obligations of
a previously divested business.
Consolidated net sales for the first quarter of 1997 increased $150.5 million,
or 16.6%, over the prior year. Net sales of the Glass Containers segment
increased $133.8 million, or 20.8%, over 1996. The combined U.S. dollar sales
of the segment's foreign affiliates increased over the prior year, reflecting
the recent acquisition of AVIR (which contributed approximately $85 million to
first quarter 1997 U.S. dollar sales) and increased unit shipments in Colombia
and the United Kingdom. Domestically, the increase in glass container unit
shipments to U.S. brewers more than offset lower shipments of food containers.
16
Excluding the additional business gained through the acquisition of the Anchor
Assets, domestic unit shipments increased slightly from the previous year.
Net sales of the Plastics and Closures segment increased $16.8 million, or
6.4%, over the prior year. Higher shipments of plastic containers for
personal care items such as shampoos, lotions, and liquid shower soaps along
with increased demand for prescription containers contributed to the increase.
Consolidated operating profit for the first quarter of 1997, excluding the
1997 unusual items, increased $15.4 million, or 11.3%, to $151.5 million from
first quarter 1996 operating profit of $136.1 million. The operating profit
of the Glass Containers segment increased $2.4 million to $101.1 million,
compared to $98.7 million in the first quarter of 1996. The combined U.S.
dollar operating profit of the segment's foreign affiliates increased slightly
from the first quarter of 1996. AVIR contributed approximately $11 million to
first quarter 1997 U.S. dollar operating profit. Improved results at the
segment's affiliates in Poland and Venezuela partially offset the effects of
continuing soft market conditions in Brazil, and reduced export shipments from
Hungary, which adversely affected results of affiliates located in those
countries. Domestically, operating profit of the Glass Containers segment
increased slightly from the first quarter of 1996. The operating profit of
the Plastics and Closures segment increased $7.9 million, or 18.0%, compared
to the first quarter of 1996. The increase resulted from improved
manufacturing performance and higher unit shipments of plastic containers and
prescription containers. Other retained costs, excluding the 1997 unusual
items discussed below, were $1.3 million for the first quarter of 1997
compared to $6.4 million for the first quarter of 1996, reflecting lower
employee benefit costs and higher net financial services income.
The first quarter 1997 results include the following unusual items: (1) a gain
of $16.3 million ($16.3 million after tax) on the sale of the Company's
remaining 49% interest in Kimble Glass, and (2) charges of $14.1 million ($8.7
million after tax) principally for the estimated cost of guaranteed lease
obligations of a previously divested business.
Capital Resources and Liquidity
The Company's total debt at March 31, 1997 was $3.57 billion, compared to
$3.39 billion at December 31, 1996 and $2.85 billion at March 31, 1996.
At March 31, 1997, the Company had available credit totaling $1.8 billion
under the Bank Credit Agreement expiring in December 2001, of which $408.2
million had not been utilized. At December 31, 1996, the Company had $628.7
million of credit which had not been utilized under the Agreement. The
increased utilization and corresponding higher debt balances at March 31, 1997
resulted in large part from the requirement to commit available credit
sufficient to pay for the remaining 21% of AVIR shares upon the closing of the
Company's tender offer for such shares and expenditures related to the
acquisition of the Anchor Assets. Utilization was also higher as a result of
borrowings for capital expenditures and asbestos-related payments, partially
offset by proceeds received from the sale of the Company's remaining 49% in
Kimble Glass and cash provided by operations, including cash received for
settlement of a portion of the insurance asset for asbestos-related costs.
17
Cash provided by operating activities was $52.0 million for the first three
months of 1997 compared to $55.0 million for the first three months of 1996.
In the twelve-month period commencing April 1, 1997, the Company anticipates
that cash flow from its operations and from utilization of available credit
under the Bank Credit Agreement will be sufficient to fund its operating and
seasonal working capital needs, debt service and other obligations. The
Company faces additional demands upon its liquidity for asbestos-related
payments. Based on the Company's expectations regarding favorable trends
which should lower its aggregate payments for lawsuits and claims and its
expectation of the collection of its insurance coverage and reimbursement for
such lawsuits, and also based on the Company's expected operating cash flow,
the Company believes that the payment of any deferred amounts of previously
settled or otherwise determined lawsuits and claims, and the resolution of
presently pending and anticipated future lawsuits and claims associated with
asbestos, will not have a material adverse effect upon the Company's liquidity
on a short-term or long-term basis.
Assuming consummation of the Refinancing Plan as currently contemplated (see
Note 5 to the financial statements), the Company expects that the utilization
of available credit under the Amended Credit Facility, combined with cash
flows from operations, will be sufficient to fund its operating and seasonal
working capital needs, debt service including relatively modest scheduled
principal payments, completion of the AVIR acquisition and other obligations
through 2001 (the term of the Amended Credit Facility). If the Refinancing
Plan is not consummated as currently contemplated and additional borrowing
capacity is not available under the Amended Credit Facility, cash flows from
operations may not be sufficient to repay the Company's Senior Subordinated
Notes as they become due and payable commencing early 1999. There can be no
assurance that the Company will be able to refinance existing indebtedness or
otherwise raise funds in a timely manner or that the proceeds therefrom will
be sufficient to repay such indebtedness.
18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
(a) Contingencies. Note 7 to the Condensed Consolidated Financial
Statements, "Contingencies," that is included in Part I of this Report, is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10.1 Third Amendment to Owens-Illinois, Inc. Executive
Savings Plan
Exhibit 10.2 Second Amendment to Owens-Illinois, Inc.
Directors Deferred Compensation Plan
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23 Consent of McCarter & English
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
(1) On March 3, 1997, the Registrants filed a Form 8-K/A,
Amendment No. 1, amending the Current Report on Form 8-K
dated December 16, 1996 (filed on December 31, 1996).
Such Amendment included the information required under
Items 7(a), 7(b) and 7(c) of Form 8-K.
(2) On March 31, 1997, the Registrants filed a Form 8-K which
included the Refinancing Agreement, dated as of November
19, 1996, among Owens-Illinois, Inc., et al.
No other reports on Form 8-K were filed by the Registrants
during the first quarter of 1997.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
OWENS-ILLINOIS, INC.
Date May 9, 1997 By /s/ Lee A. Wesselmann
----------- --------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
OWENS-ILLINOIS GROUP, INC.
Date May 9, 1997 By /s/ Lee A. Wesselmann
----------- --------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
20
INDEX TO EXHIBITS
Exhibits
10.1 Third Amendment to Owens-Illinois, Inc. Executive Savings Plan
10.2 Second Amendment to Owens-Illinois, Inc. Directors Deferred
Compensation Plan
12 Computation of Ratio of Earnings to Fixed Charges
23 Consent of McCarter & English
27 Financial Data Schedule
Dates Referenced Herein and Documents Incorporated by Reference
3 Subsequent Filings that Reference this Filing
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