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 September 30, 1998 --------------- Commission File Number 1-8036 ------ THE WEST COMPANY, INCORPORATED ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1210010 ------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 Gordon Drive, PO Box 645, Lionville, PA 19341-0645 ------------------------------------- ---------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code 610-594-2900 -------------- N/A ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- September 30, 1998 -- 17,004,827 ----------------------------------------------------------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Page 2 Index Form 10-Q for the Quarter Ended September 30, 1998 Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Income for the Three and Nine Months ended September 30, 1998 and September 30, 1997 3 Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1998 and September 30, 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II - Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 Index to Exhibits F-1 Page 4 Item 1. Financial Statements The West Company, Incorporated and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sept. 30, 1998 Sept. 30,1997 Sept. 30, 1998 Sept. 30, 1997 ---------------- ------------- --------------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Net sales $113,900 100% $105,200 100% $ 334,900 100% $343,000 100% Cost of goods sold 80,500 71 76,000 72 235,400 70 244,800 71 --------------------------------------------------------------------------------------------------- Gross profit 33,400 29 29,200 28 99,500 30 98,200 29 Selling, general and administrative expenses 17,300 15 16,300 15 52,500 16 53,400 16 Restructuring charge 4,000 3 - - 4,000 1 - - Acquired research and development - - - - 28,200 8 - - Other (income), net (300) - (900) - (1,700) - (1,400) - --------------------------------------------------------------------------------------------------- Operating profit 12,400 11 13,800 13 16,500 5 46,200 13 Interest expense 1,800 2 1,400 1 4,900 1 4,200 1 --------------------------------------------------------------------------------------------------- Income before income taxes and minority interests 10,600 9 12,400 12 11,600 4 42,000 12 Provision for (recovery of) income taxes 4,100 4 (4,600)(4) 15,300 5 6,700 2 Minority interests - - - - 100 - 100 - --------------------------------------------------------------------------------------------------- Income (loss) from consolidated operations 6,500 5% 17,000 16% (3,800) (1)% 35,200 10% --- --- --- ---- Equity in net income of affiliated companies - 300 500 600 --------------------------------------------------------------------------------------------------- Net income (loss) $ 6,500 $ 17,300 $ (3,300) $ 35,800 --------------------------------------------------------------------------------------------------- Page 5 Net income (loss) per share: Basic $ 0.38 $ 1.05 $ (0.20) $ 2.18 Assuming dilution $ 0.38 $ 1.05 $ (0.20) $ 2.17 --------------------------------------------------------------------------------------------------- Average shares outstanding 17,003 16,481 16,867 16,447 Average shares outstanding assuming dilution 17,078 16,594 16,867 16,513 </TABLE> See accompanying notes to interim financial statements. Page 6 The West Company, Incorporated and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> Unaudited Audited ASSETS Sept. 30, 1998 Dec. 31, 1997 --------------- ------------- <S> <C> <C> Current assets: Cash, including equivalents $ 50,000 $ 52,300 Accounts receivable, less allowance 71,200 60,400 Inventories 44,800 38,300 Current deferred income tax benefits 9,500 9,400 Other current assets 10,800 10,300 --------------------------------------------------------------------------- Total current assets 186,300 170,700 --------------------------------------------------------------------------- Net property, plant and equipment 213,800 202,200 Investments in affiliated companies 14,300 22,700 Goodwill 71,100 51,600 Intangibles and other assets 36,200 30,700 --------------------------------------------------------------------------- Total Assets $521,700 $ 477,900 --------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 600 $ 700 Notes payable 17,200 900 Accounts payable 16,200 18,600 Accrued expenses: Salaries, wages, benefits 18,900 13,400 Income taxes payable 11,500 5,400 Other current liabilities 27,100 19,000 --------------------------------------------------------------------------- Total current liabilities 91,500 58,000 --------------------------------------------------------------------------- Long-term debt, excluding current portion 94,900 87,400 Deferred income taxes 30,600 30,100 Other long-term liabilities 25,300 24,700 Shareholders' equity 279,400 277,700 --------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $521,700 $477,900 --------------------------------------------------------------------------- Page 7 See accompanying notes to interim financial statements. </TABLE> Page 8 The West Company Incorporated and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) <TABLE> <CAPTION> Nine Months Ended Sept. 30, 1998 Sept. 30, 1997 ---------------- ------------------- <S> <C> <C> Cash flows from operating activities: Net income, plus net non-cash items $ 45,800 $ 46,200 Changes in assets and liabilities (3,000) 10,400 ----------------------------------------------------------------------------------------- Net cash provided by operating activities 42,800 56,600 ----------------------------------------------------------------------------------------- Cash flows from investing activities: Property, plant and equipment acquired (27,900) (23,500) Proceeds from sale of assets 900 200 Payments for acquisitions, net of cash acquired (19,500) - Customer advances, net of repayments 900 - ----------------------------------------------------------------------------------------- Net cash used in investing activities (45,600) (23,300) ----------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings under revolving credit agreement 5,800 - Repayment of long-term debt (1,900) (1,100) Notes payable, net 700 (100) Dividend payments (7,500) (6,900) Sale of common stock, net 2,000 2,400 ----------------------------------------------------------------------------------------- Net cash used in financing activities (900) (5,700) ----------------------------------------------------------------------------------------- Effect of exchange rates on cash 1,500 (1,800) ----------------------------------------------------------------------------------------- Net (decrease) increase in cash, including equivalents $ (2,200) $25,800 ----------------------------------------------------------------------------------------- See accompanying notes to interim financial statements. </TABLE> Page 9 The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) The interim consolidated financial statements for the period ended September 30, 1998 should be read in conjunction with the consolidated financial statements and notes thereto of The West Company, Incorporated appearing in the Company's 1997 Annual Report on Form 10-K. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Interim results are based on the Company's accounts without audit. 1. Interim Period Accounting Policy --------------------------------- In the opinion of management, the unaudited Condensed Consolidated Balance Sheet as of September 30, 1998 and the related unaudited Consolidated Statement of Operations for the three and nine month period then ended, and the unaudited Condensed Consolidated Statement of Cash Flows for the nine month period then ended and for the comparative period in 1997 contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position as of September 30, 1998 and the results of operations and cash flows for the respective periods. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating Expenses ------------------ To better relate costs to benefits received or activity in an interim period, certain operating expenses have been annualized for interim reporting purposes. Such expenses include depreciation due to use of the half year convention, certain employee benefit costs, annual quantity discounts, and advertising. Income Taxes ------------- The tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results except that the 1998 charge for acquired research and development, the 1997 German tax reorganization, and taxes applicable to operating results in Brazil are recorded on a basis discrete to the period, and prior year adjustments, if any, are recorded as identified. Net Loss Per Share --------------------- For the nine months ended September 30, 1998, because of the reported net loss, the incremental shares from potential issuance of common stock under the Company's stock option and award plan are not included in average shares assuming dilution. Page 10 The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) 2. Inventories at September 30, 1998 and December 31, 1997 are summarized as follows: <TABLE> <CAPTION> <S> <C> <C> (in thousands) 1998 1997 -------- -------- Finished goods $ 15,600 $ 15,800 Work in process 13,900 8,100 Raw materials 15,300 14,400 -------- -------- $ 44,800 $ 38,300 -------- -------- -------- -------- </TABLE> 3. The carrying value of property, plant and equipment at September 30, 1998 and December 31, 1997 is determined as follows: (in thousands) 1998 1997 -------- -------- Property, plant and equipment $466,700 $428,600 Less accumulated depreciation 252,900 226,400 -------- -------- Net property, plant and equipment $213,800 $202,200 -------- -------- -------- -------- 4. In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which establishes standards for the disclosure of comprehensive income and its components. Comprehensive income is the total of net income and other revenue, expenses, gains and losses for the period, which are excluded from net income under generally accepted accounting principles. For the three and nine months ended September 30, 1998 and 1997, the Company's comprehensive income (loss) is as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended 9/30/98 9/30/97 9/30/98 9/30/97 (in thousands) ------- ------- ------- ------- <S> <C> <C> <C> <C> Net income (loss) $6,500 $ 17,300 $(3,300) $35,800 Foreign currency translation adjustments 4,100 (900) 1,400 (9,000) -------- -------- -------- -------- Page 11 Comprehensive income The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) (loss) $10,600 $16,400 $(1,900) $26,800 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". As required by the standard, the Company will begin reporting under SFAS No. 131 in its 1998 Annual Report. On June 16, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity". The statement will be effective for the Company in the year 2000. The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The impact that this accounting standard will have on the Company's financial position and results of operations cannot be determined at this time. On March 4, 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement establishes standards for determining the internal and external costs of developing software for internal use which must be capitalized and amortized over the useful life of the software. The Company adopted this Statement, but the effect was not material on the quarter or year-to-date financial statements. 5. Common stock issued at September 30, 1998 was 17,165,141 shares, of which 160,314 shares were held in treasury. A dividend of $.15 per common share was paid in the third quarter of 1998, and a dividend of $.16 per share payable on November 4, 1998 to holders of record on October 21, 1998 was declared on August 11, 1998. 6. The Company has accrued the estimated cost of environmental compliance expenses related to soil or ground water contamination at current and former manufacturing facilities. The ultimate cost to be incurred by the Company and the timing of such payments cannot be fully determined. However, based Page 12 The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) on consultants' estimates of the costs of remediation in accordance with applicable regulatory requirements, the Company believes the accrued liability of $1.3 million at September 30, 1998 is sufficient to cover the future costs of these remedial actions, which will be carried out over the next two to five years. The Company has not anticipated any possible recovery from insurance or other sources. 7. At September 30, 1998 the cumulative number of employees terminated in accordance with the restructuring plan announced on March 29, 1996 was 225 and total payout of severance and benefits was $7.0 million. Restructuring activities, except for the sale of one building and certain excess equipment and payout of remaining severance, have been completed. On September 8, 1998, the Company recorded a pre-tax charge of $4.0 million. The charge is related to employee reductions associated with identified manufacturing and other efficiencies. The charge covers severance and benefits for 92 employees and other related charges. At September 30, 1998, the total payout of severance and benefits associated with this charge was $0.2 million. 8. On March 31, 1998, the Company acquired for approximately BPS 20 million ($33.5 million at March 31, 1998) the remaining 70% interest in DanBioSyst U.K. Ltd. ("DBS"), making DBS a wholly-owned subsidiary. This transaction is accounted for by the purchase method, and was financed with cash of $9.4 million, 320,406 shares of restricted common stock valued at $8.7 million, and short-term notes of $15.4 million. The preliminary allocation of the purchase price follows: (in thousands) Current assets $1,300 Equipment and leasehold improvements 800 In-process research & development 28,200 Other intangibles 400 Goodwill 2,800 Estimated in-process research and development was written off at the date of acquisition. Operating results of DBS were consolidated beginning on April 1, 1998. On July 1, 1998 the Company acquired Betraine, Ltd. for BPS 7.2 million ($11.8 million at July 1, 1998) Betraine manufactures precision injection molded plastic components for the healthcare and consumer products industries. The Page 13 The West Company, Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) acquisition is accounted for as a purchase and results were consolidated as of July 1, 1998. The acquisition was financed from existing cash. The assets and liabilities have been consolidated based on a preliminary allocation of the purchase price; final allocation is expected by year end 1998. The excess of the purchase price over the net assets acquired will be amortized over 20 years. 9. On September 9, 1998 the Company commenced a "Dutch Auction" self-tender for up to 2,000,000 shares at a price range of not less than $27.00 per share and not more than $31.00 per share. The self-tender period expired on October 7, and on October 8 the Company announced that it would purchase approximately 2,000,000 shares at a price of $30.00 per share in accordance with the terms of the tender offer. The shares purchased represent approximately 11.8% of the shares outstanding immediately prior to the offer. The Company financed the purchase of the shares with funds borrowed under available lines of credit. Page 14 Item 2. Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. ---------------------- Results of Operations for the Three and Nine Month Periods --------------------------------------------------------- Ended September 30, 1998 Versus Comparable 1997 Periods -------------------------------------------------- Net Sales ---------- Net sales for the third quarter of 1998 were $113.9 million, an 8% increase compared with net sales of $105.2 million for the same quarter in 1997. Service sales to both healthcare and consumer product markets in the U.S. increased sharply over 1997 because of strong demand for contract packaging and manufacturing services. Product sales to healthcare customers were flat in North and South American markets, but 11% higher in European markets due to a combination of increased demand and the acquisition of Betraine, Ltd. on July 1, 1998. In addition product sales to consumer markets were 12% higher due largely to the introduction of Procter & Gamble's new Crest Multicare product and the acquisition of Betraine, Ltd. The total sales of companies acquired in 1998 included in the third quarter 1998 consolidated sales was $2.7 million. The impact on reported sales of foreign currency exchange rates was marginally favorable in the quarter as the U.S. dollar was stronger versus Asian currencies but weaker against European currencies. Net sales for the first nine months of 1998 were $334.9 million, a 2% decrease compared with $343.0 million for the first nine months of 1997. Product sales to U.S. healthcare and consumer markets were lower, a result of reduced sales to several key healthcare market customers, in part due to reductions in customers' inventory levels, and a combination of lower resin prices and loss of business at two accounts to competitors, respectively. Stronger sales in Europe due to demand and acquisitions (Betraine and DanBioSyst U.K. Ltd) partially offset this reduction. Other international markets had lower sales. Also, the stronger U.S. dollar reduced reported sales by $4.0 million. Gross Profit ------------- Gross profit margins improved for the third quarter and for the nine months. The gross profit margin for the third quarter was 29.2% of net sales compared with 27.7% for the same period in 1997. The gross profit margin for the nine month period was 29.7% up from 28.6% in 1997. Page 15 The Company continues to benefit from efficiencies and Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. (Continued) ----------------------------------- cost saving programs. In addition, margins on sales of contract services have improved due to mix, and margins on product sales to consumer markets has improved in part due to resin price decreases passed through to customers. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative (SG&A) expenses increased $1.0 million compared with the third quarter 1998, but declined as a percentage of sales from 15.4% in the third quarter 1997 to 15.2% in 1998. The impact of the stronger U.S. dollar and higher income on pension plan assets did not offset increased selling costs for contract services and the consolidation of SG&A expenses associated with companies acquired in 1998. In the nine month comparisons, SG&A expenses in 1998 decreased by $0.9 million compared with 1997 and rose slightly as a percentage of net sales. Higher income on pension plan assets, lower cost for other employee benefits and the impact of the stronger U.S. dollar more than offset SG&A expenses recorded by companies acquired in 1998. Restructuring Charge -------------------- The information contained in Note 7 to the Consolidated Financial Statements, which is incorporated herein by reference, describes the Company's charge to earnings in the third quarter of 1998, related to staff reductions, which are expected to reduce the headcount by about 1%. Acquired Research and Development --------------------------------- The information contained in Note 8 to the Consolidated Financial Statements, which is incorporated herein by reference, describes the Company's acquisition of DanBioSyst and the allocation of the purchase price based on an appraisal. Acquired in-process research and development expense of $28.2 million was expensed, as required, at the time of purchase. Other (income) expense ---------------------- In the third quarter, provision for losses on certain investments and disputed claims of former employees and losses on sale of fixed assets, reduced third quarter other income by $0.6 million. However, interest income was higher in the third quarter and for the nine month period reflecting higher average temporary cash investments during the periods. The interest income declined in the third quarter due to the cashpurchase of Betraine on July 1, Page 16 Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. (Continued) ----------------------------------- 1998. Interest Expense and Equity in Affiliates -------------------------------------------- Interest expense increased in the third quarter and nine month period comparisons, due to additional debt associated with the DanBioSyst acquisition. Equity in net income of affiliated companies was lower in both the quarter and nine months compared with the same periods in 1997. Lower income at Daikyo Seiko, Ltd., a Japanese company in which the Company owns a 25% equity stake, resulted from a sharp decline in third quarter sales, which drastically decreased margins and offset prior year-to-date comparative increases. Income at Mexican affiliates, in which the Company has a 49% equity stake, were also lower in part due to unfavorable currency exchange impacts. Taxes ----- The effective tax rate for the 1998 nine month period was 38.5%, excluding the charge for the acquired research and development. This rate is significantly higher than the full year 1997 effective tax rate of 23.2% which was affected by two, third- quarter 1997 events: a tax reorganization of the Company's German subsidiaries and repatriation of cash dividends from certain subsidiaries. These two events resulted in a full year net tax benefit of $7.9 million to the Company in 1997; excluding this benefit, the 1997 effective tax rate was 37%. The expected increase in the 1998 tax rate reflects the geographic mix of earnings. Net Income ---------- Net income for the third quarter 1998 was $6.5 million , or $.38 per share. Results include an after-tax restructuring charge of $2.5 million, associated mainly with staff reductions. In the third quarter of 1997, the Company reported net income of $17.3 million, or $1.05 per share, which included a net tax benefit of $9.4 million, or $.57 per share, associated mainly with the legal reorganization of German subsidiaries. Excluding these unusual items in both periods, net income increased by 13% in the quarter to $.53 per share from $.48 per share. The Company reported a net loss for the nine-month period of $3.3 million, or $.20 per share. Results include the $28.2 million charge relating to the in-process research and development associated with the acquisition of DanBioSyst and a net restructuring charge of $2.5 million. Page 17 Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. (Continued) ----------------------------------- In 1997, the year-to-date net income was $35.8 million, or $2.18 per share, which included a net tax benefit of $9.4 million related mainly to the tax reorganization of the Company's German subsidiaries. Excluding these unusual items in both periods, 1998 net income for the nine months increased by 4% to $1.62 per share from $1.60 per share in 1997. Financial Position ------------------- Working capital at September 30, 1998 was $94.8 million compared with $112.7 million at December 31, 1997. The working capital ratio at September 30, 1998 was 2.0 to 1. Cash provided by operations, was adequate to fund capital expenditures and make dividend payments of $.45 per share. The cash portion of acquisitions was financed using available cash and borrowings totalling $6.9 million. The borrowings were used for a portion of the cash required for the DanBioSyst acquisition, (see disclosure on the acquisition in Note 8 to the Consolidated Financial Statements). In addition, sellers received a portion of the purchase price, $15.4 million, in short-term notes and 320,406 shares of common stock. The acquisition price of Betraine was all cash (see disclosure on the acquisition in Note 8 to the Consolidated Financial Statements). Total debt as a percentage of total invested capital was 28.7% at September 30, 1998, compared with 24.2% at December 31, 1997. At September 30, 1998, the Company had available unused lines of credit of $114.9 million. Net borrowings of $5.8 million under a short-term line of credit were classified as long-term because of the Company s intent to renew the borrowings using available long-term credit facilities. On October 8, 1998, the Company acquired 2,000,000 shares of Common Stock at $30.00 per share at the close of a "Dutch Auction" tender offer. The Company funded the stock purchase using available lines of credit, but is currently negotiating long-term financing. Available lines of credit and cash flow from operations are adequate, in the opinion of management, to meet future cash requirements. Page 18 YEAR 2000 --------- Background ---------- Many computer systems were designed and developed using two digits, rather than four, to specify the year. As a result, such systems will recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations. Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. (Continued) ----------------------------------- The Company's Year 2000 Program ------------------------------- With the assistance of an independent consultant, the Company has developed a comprehensive, centrally maintained, corporate-wide Year 2000 project plan designed to manage and carry out activities to address the Year 2000 issue. The Company's plan is being implemented by a Project Team consisting of two-full-time staff members, representatives from staff functions, and at least one project manager from each of the Company's locations. The plan calls for the Company to have completed modifications necessary to address the Year 2000 issue by June 30, 1999. The progress of the Company's Year 2000 efforts is reviewed monthly by senior management and reports are provided to the Company's Audit Committee and Board of Directors on a periodic basis throughout the year. The Company has completed a risk assessment of the impact of the Year 2000. The assessment identified and prioritized critical business processes and plant locations to be targeted for remediation, replacement or other corrective action. The Company has also substantially completed an inventory of all application software, hardware, operating systems software, desktop software and computer-controlled manufacturing and facility equipment from all Company locations worldwide to identify potential Year 2000 problems. The Company has made significant progress in remediating or replacing critical information systems which support business functions. Due to multiple geographical locations, discrete computer systems exist in the U.S., Europe, South America and Asia/ Pacific regions. The U.S. (other than Paco Pharmaceutical Services) and European-based manufacturing, financial-reporting and payroll systems have been completed, and other systems, including Paco, are at various stages of completion, but are on- schedule to be completed during the first half of 1999. Desktop inventory and assessment audits are expected to be completed by the end of the year, with corrective action expected to be completed by July 1, 1999. The assessment of research and development, manufacturing processes and facility management systems is well underway at all plant locations. Remediation and replacement, as necessary, of all critical software-dependent systems are expected to be completed by June 30, 1999. The Company is relying on a combination of testing, replacement and certification letters from Page 19 Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------- Results of Operations. (Continued) ----------------------------------- equipment and system vendors as part of its Year 2000 program. The Company has received Year 2000 compliance certifications from all of its major raw-materials suppliers and major service providers to ensure that delivery of required supplies and services continues uninterrupted. Based on the progress to date, no contingency plans are expected to be needed, and therefore none have been developed. However, because the Company's Year 2000 program schedule is expected to be substantially complete by June 30, 1999, the Company believes adequate time will be available to address deficiencies without a material impact on manufacturing and operations, customer service and other critical business functions. Nonetheless, if such deficiencies are not addressed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. Internal and external resources are being used to remediate or replace non-compliant technology, and to appropriately test Year 2000 modifications. The program and related expenditures are being funded through operating cash flows. The project to address Year 2000 began in April 1997. The pretax costs incurred to date for this effort were approximately $3.7 million and $1.0 million in 1998 and 1997, respectively. Generally, compliance software is being implemented for its improved functionally. As a result $3.3 million and $1.0 million have been capitalized in 1998 and 1997, respectively. The Company does not separately track the cost and time that its own internal employees spend on the Y2K project. Such costs are principally the related payroll costs for its management information systems group. The Company expects costs of approximately $5.0 million will be incurred in 1999 to substantially complete the effort. The cost of the Year 2000 project and the date on which the Company believes it will substantially complete modifications are based on management s best estimates. Such estimates were derived using project-management software and information from individual project team members. The estimates are based on numerous assumptions of future events, including the continued Page 20 availability of certain resources and other factors. Because none of these estimates can be guaranteed, actual time and cost to complete modifications could differ materially from those anticipated. Specific factors that might cause such differences include, but are not limited to, the reliability and timely receipt of vendor certifications, the appropriateness and effectiveness of testing and validation methods, the availability and cost of trained personnel and the timely availability of replacement hardware and software and similar uncertainties. Item 3. Quantitative and Qualitative Disclosure about Market Risk ------------------------------------------------------ Not applicable. This requirement will become effective for the Company filings including annual financial statements for 1998. Page 21 Part II - Other Information Item 1. Legal Proceedings ----------------- None. Item 6. Exhibits and Reports on Form 8-K ----------------------------------- (a) See Index to Exhibits on pages F-1 and F-2 of this Report. (b) No reports on Form 8-K have been filed for the quarter ended September 30, 1998. 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. THE WEST COMPANY, INCORPORATED ----------------------------------- (Registrant) November 16, 1998 /s/ Steven A. Ellers ------------- --------------------------------- Date (Signature) Steven A. Ellers Senior Vice President, Finance and Administration (Chief Financial Officer) Page 23 INDEX TO EXHIBITS Exhibit Number (3) (a) Amended Articles of Incorporation of the Company. (3) (b) Amended By-Laws of the Company. (4) (a) Form of stock certificate for common stock incorporated by reference to Exhibit (3) (b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 1-8036). (4) (b) Flip-In Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1990, incorporated by reference to Exhibit 1 to the Company's Form 8-A Registration Statement (File No. 1-8036). (4) (c) Flip-Over Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 16, 1990, incorporated by reference to Exhibit 2 to the Company's Form 8-A Registration Statement (File No. 1-8036). (9) None. (11) Not Applicable. (12) Not Applicable. (15) None. (16) Not applicable. (18) None. (19) None. (22) None. (23) None. (24) None. (27) Financial Data Schedule (99) None. F-1 Page 24