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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _____
Commission File Number: 333-53603-03
GRAHAM PACKAGING HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2553000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Pleasant Valley Road
York, Pennsylvania
(Address of principal executive offices)
17402
(zip code)
(717) 849-8500
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: None
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 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[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no established public trading market for any of the general or
limited partnership interests in the registrant. The aggregate market value
of the voting securities held by non-affiliates of the registrant as of
February 28, 2001 was $-0-. As of February 28, 2001, the general partnership
interests in the registrant were owned by BCP /Graham Holdings L.L.C. and
Graham Packaging Corporation, and the limited partnership interests in the
registrant were owned by BMP/Graham Holdings Corporation and certain members
of the family of Donald C. Graham and entities controlled by them. See Item
12, "Security Ownership of Certain Beneficial Owners and Management."
_______________
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
Page
Number
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 34
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 37
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . 37
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 38
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 44
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . 57
Item 8. Financial Statements and Supplementary Data . . . . . 60
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 101
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Item 10. Advisory Committee Members, Directors and
Executive Officers of the Registrant . . . . . . . . 101
Item 11. Executive Compensation . . . . . . . . . . . . . . . 105
3
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . 111
Item 13. Certain Relationships and Related Transactions . . . 113
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . 122
4
PART I
Item 1. Business
Unless the context otherwise requires, all references herein to the
"Company," with respect to periods prior to the recapitalization described
below (the "Recapitalization"), refer to the business historically conducted
by Graham Packaging Holdings Company ("Holdings") (which served as the
operating entity for the business prior to the Recapitalization) and one of
its predecessors (Graham Container Corporation), together with Holdings'
subsidiaries and certain affiliates, and, with respect to periods subsequent
to the Recapitalization, refer to Holdings and its subsidiaries. Since the
Recapitalization, Graham Packaging Company, L.P. (the "Operating Company")
has been a wholly owned subsidiary of Holdings. All references to the
"Recapitalization" herein shall mean the collective reference to the
Recapitalization of Holdings and related transactions as described under "The
Recapitalization" below, including the initial borrowings under the Senior
Credit Agreement (as defined below), the Offerings (as defined below) and the
related uses of proceeds. References to "Continuing Graham Entities" herein
refer to Graham Packaging Corporation ("Graham GP Corp."), Graham Family
Growth Partnership or affiliates thereof or other entities controlled by
Donald C. Graham and his family, and references to "Graham Entities" refer to
the Continuing Graham Entities, Graham Engineering Corporation ("Graham
Engineering") and the other partners of Holdings (consisting of Donald C.
Graham and certain entities controlled by Mr. Graham and his family). Since
July 27, 1998, the Company's operations have included the operations of
Graham Emballages Plastiques S.A.; Graham Packaging U.K. Ltd.; Graham
Plastpak Plastik Ambalaj A.S. and Graham Packaging Deutschland GmbH, as a
result of the acquisition of selected plants of Crown Cork & Seal. Since
July 1, 1999 the Company's operations have included the operations of Graham
Packaging Argentina S.A. as a result of the acquisition of selected companies
in Argentina. Since July 6, 1999 the Company's operations have included the
operations of PlasPET Florida, Ltd. as a result of an investment made in a
limited partnership. All references to "Management" herein shall mean the
management of the Company at the time in question, unless the context
indicates otherwise. In addition, unless otherwise indicated, all sources
for all industry data and statistics contained herein are estimates contained
in or derived from internal or industry sources believed by the Company to be
reliable.
5
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Report on Form 10-K, including statements regarding the future financial
position, economic performance and results of operations of the Company (as
defined above), as well as the Company's business strategy, budgets and
projected costs and plans and objectives of management for future operations,
and the information referred to under "Quantitative and Qualitative
Disclosures About Market Risk" (Part II, Item 7A), are forward-looking
statements. In addition, forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "estimate", "anticipate", "believe", or "continue" or the
negative thereof or variations thereon or similar terminology. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, the Company can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the issuers' expectations
include, without limitation, the Company's exposure to fluctuations in resin
prices and its dependence on resin supplies, competition in the Company's
markets, including the impact of possible new technologies, the high degree
of leverage and substantial debt service obligations of the Operating Company
and Holdings, the restrictive covenants contained in instruments governing
indebtedness of the Company, a decline in the domestic motor oil business,
risks associated with the Company's international operations, the Company's
dependence on significant customers and the risk that customers will not
purchase the Company's products in the amounts expected by the Company under
their requirements contracts, the Company's dependence on key management and
its labor force and the material adverse effect that could result from the
loss of their services, risks associated with environmental regulation, risks
associated with possible future acquisitions, and the possibility that the
Company may not be able to achieve success in developing and expanding its
business, including the Company's hot-fill PET plastic container business.
See "--Certain Risks of the Business." All forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the cautionary statements set forth in this
paragraph.
General
Holdings was formed under the name "Sonoco Graham Company" on
April 3, 1989 as a Pennsylvania limited partnership and changed its name to
"Graham Packaging Company" on March 28, 1991. The Operating Company was
6
formed under the name "Graham Packaging Holdings I, L.P." on September 21,
1994 as a Delaware limited partnership. The predecessor to Holdings,
controlled by the Continuing Graham Entities, was formed in the mid-1970's as
a regional domestic custom plastic container supplier, using the proprietary
Graham Rotational Wheel.
Upon the Recapitalization, substantially all of the assets and
liabilities of Holdings were contributed to the Operating Company, and
subsequent to the Recapitalization, the primary business activity of Holdings
has consisted of its direct and indirect ownership of 100% of the partnership
interests in the Operating Company. Upon the Recapitalization, the Operating
Company and Holdings changed their names to "Graham Packaging Company, L.P."
and "Graham Packaging Holdings Company," respectively.
The principal executive offices of the Company are located at 2401
Pleasant Valley Road, York, Pennsylvania 17402, Telephone (717) 849-8500.
The Company is managed in three operating segments: North America,
which includes the United States and Canada; Europe; and Latin America. Each
operating segment includes three major service lines: Food and Beverage,
Household and Personal Care, and Automotive.
The Company is a worldwide leader in the design, manufacture and sale
of customized blow molded plastic containers for the branded food and
beverage, household and personal care, and automotive lubricants markets with
60 plants throughout North America, Europe and Latin America. The Company's
primary focus is to operate in select markets that will position it to
benefit from the growing conversion to high performance plastic packaging
from more commodity packaging. The Company targets branded consumer product
manufacturers for whom customized packaging design is a critical component in
their efforts to differentiate their products to consumers. The Company
initially pursues these attractive product areas with one or two major
consumer product companies in each category that the Company expects will
lead the conversion to plastic packaging for that category. The Company
utilizes its innovative design, engineering and technological capabilities to
deliver highly customized, high performance products to its customers in
these areas in order to distinguish and increase sales of their branded
products. The Company collaborates with its customers through joint
initiatives in product design and cost reduction, and innovative operational
arrangements, which include on-site manufacturing facilities.
Since the beginning of 1998, the Company has grown its net sales at a
compounded annual growth rate of over 16% as a result of its aggressive
7
capital investment and focus on the high growth food and beverage market
which is growing rapidly due to the accelerating conversion trend from glass,
paper and metal containers to plastic packaging. With leading positions in
each of its core businesses, the Company believes it is well positioned to
continue to benefit from the plastic conversion trend that is still emerging
on a global basis and offers the Company opportunities for attractive margins
and returns on investment.
The Company has an extensive blue-chip customer base that includes
many of the world's largest branded consumer products companies.
Approximately one-third of its manufacturing plants are located on-site at
its customers' manufacturing facilities, which the company believes provides
a competitive advantage in maintaining and growing customer relationships.
The majority of the Company's sales are made pursuant to long-term customer
contracts, which include resin pass-through provisions that mitigate the
effect of resin price movements on the Company's profitability. The
Company's containers are made from various plastic resins, including
polyethylene terephthalate, or PET, high-density polyethylene, or HDPE, and
polypropylene, or PP. In 2000, the Company's top 20 customers comprised over
77% of its net sales and have been its customers for an average of 15 years.
The combination of leading technology, product innovation, efficient
manufacturing operations and strong customer relationships, including on-site
facilities, has enabled the Company to consistently generate strong growth,
margins and returns on invested capital.
Food and Beverage. The Company produces containers for shelf-stable,
refrigerated and frozen juices, non-carbonated juice drinks, teas, isotonics,
yogurt and nutritional drinks, soups, toppings, sauces, jellies and jams.
The Company's business focuses on major consumer products companies that
emphasize distinctive, high-performance packaging in their selected business
lines that are undergoing rapid conversion to plastic from other packaging
materials. Management believes, based on internal estimates, that the
Company has the leading domestic market position for plastic containers for
juice, frozen concentrate, pasta sauce and yogurt drinks and the leading
position in Europe for plastic containers for yogurt drinks. Management
believes that this leadership position creates significant opportunity for
the Company to participate in the anticipated conversion to plastic in the
wider nutritional drink market. The Company is one of only three domestic
market participants that are leading large-scale product conversions to hot-
fill PET containers.
8
Over the last three fiscal years, the Company's food and beverage
sales have grown at a compound annual growth rate of over 38%, benefiting
primarily from the rapid market conversion to plastic containers. As a
result of technological innovations, PET containers can be used in "hot-fill"
food and beverage applications where the container must withstand filling
temperatures of over 180 degrees Fahrenheit in an efficient and cost-
effective manner. The Company has been a leader in the conversion of multi-
serve juices that has occurred during the last few years, and it helped to
initiate the conversion of containers for single-serve juice drinks, frozen
juice concentrate and wide-mouth PET containers for sauces, jellies and jams.
The highly customized hot-fill PET containers allow for the shipment and
display of food and beverage products in a non-refrigerated state, in
addition to possessing the structural integrity to withstand extreme filling
conditions. The Company's oxygen barrier PET container coating and multi-
layer barrier technologies also extend the shelf life and protect the quality
and flavor of its customers' products.
With over $230 million of capital invested in the hot-fill PET food
and beverage business since the beginning of 1997, the Company has been a
major participant in this rapidly growing area. Given the strength of its
existing customer base, recent capital investments and technological and
design capabilities, the Company believes it is well positioned to benefit
from the estimated 60% of the domestic hot-fill food and beverage market that
has yet to convert to plastic. In addition, management believes that
significant conversion opportunities exist in hot-fill product lines that
have just begun to convert to plastic, and from international conversion
opportunities.
The Company's largest customers in the food and beverage business
include Clement-Pappas & Company, Inc. ("Clement-Pappas"), Group Danone
("Danone"), Hershey Foods Corporation ("Hersheys"), Hi-Country Foods
Corporation ("Hi-Country"), The Minute Maid Company ("Minute Maid"),
Northland Cranberries, Inc. ("Northland Cranberries"), Ocean Spray
Cranberries, Inc. ("Ocean Spray"), The Quaker Oats Company ("Quaker Oats"),
Tree Top Inc. ("Tree Top"), Tropicana Products, Inc. ("Tropicana") and Welch
Foods, Inc. ("Welch's"). For the years ended December 31, 1998, 1999 and
2000 the Company generated approximately 37.6%, 45.1% and 48.9%,
respectively, of its net sales from the food and beverage business.
Household and Personal Care. In the household and personal care
business, the Company is a leading supplier of plastic containers for
products such as liquid fabric care, dish care, hard-surface cleaners, hair
care and body wash. The Company continues to benefit as products such as
9
liquid fabric care detergents, hard-surface cleaners and liquid automatic
dishwashing detergents, which are packaged in plastic containers, capture an
increasing share from powdered detergents and cleaners, which are
predominantly packaged in paper-based containers. The Company also expects
rapid growth in demand for household and personal care plastic containers
internationally to be a key contributor to its business. The Company's
largest customers in this sector include Colgate-Palmolive Company ("Colgate-
Palmolive"), The Dial Corp. ("Dial"), Henkel KGaA ("Henkel"), Johnson &
Johnson ("J&J"), L'Oreal S.A. ("L'Oreal"), The Procter and Gamble Company
("Procter & Gamble") and Unilever NV ("Unilever"). For the years ended
December 31, 1998, 1999 and 2000 the Company generated approximately 30.3%,
25.9% and 25.3%, respectively, of its net sales from the household and
personal care business.
Automotive. Management believes, based on internal estimates, that
the Company is the number one supplier of one quart/one liter HDPE motor oil
containers in the United States, Canada, and Brazil, supplying most of the
motor oil producers in these countries, with an approximate 74% market share
in the United States, based on 2000 unit sales. The Company has been
producing motor oil containers since the conversion to plastic began 23 years
ago and has expanded its market share and maintained margins by partnering
with its customers to improve product quality and reduce costs through design
improvement, reduced container weight and manufacturing efficiencies. The
Company's joint product design and cost efficiency initiatives with its
customers have also strengthened its service and customer relationships.
The Company has expanded operations into portions of Latin America to
take advantage of the growth resulting from the ongoing conversion from
composite cans to plastic containers for motor oil as well as the increasing
number of motor vehicles per person in that region. Management anticipates
similar growth opportunities for the Company in other economically developing
markets where the use of motorized vehicles is rapidly growing, including
Asia and other regions in Latin America. The Company also manufactures
containers for other automotive products, such as antifreeze and automatic
transmission fluids.
The Company is a supplier of such containers to many of the top
domestic producers of motor oil, including Ashland, Inc. ("Ashland", producer
of Valvoline motor oil), Castrol Inc. ("Castrol"), Chevron Corporation
("Chevron"), Equilon Enterprises LLC ("Equilon", an alliance between Texaco
Inc., "Texaco", and Shell Oil Company, "Shell"), Pennzoil-Quaker State
Company ("Pennzoil-Quaker State", the result of the merger between Pennzoil
Products Company, "Pennzoil", and The Quaker State Corporation, "Quaker
10
State"), and Sun Company, Inc. ("Sun Company"). For the years ended December
31, 1998, 1999, and 2000 the Company generated approximately 32.1%, 29.0% and
25.8%, respectively, of its net sales from the automotive container business.
Additional information regarding business segments is provided in
Note 20 of the Notes to Financial Statements.
Products and Raw Materials
PET containers, which are transparent, are utilized for products
where glasslike clarity is valued and shelf stability is required, such as
carbonated soft drinks, juice, juice drinks and teas. HDPE containers, which
are nontransparent, are utilized to package products such as motor oil,
fabric care, dish care and personal care products, certain food products,
chilled juices and frozen juice concentrates.
PET and HDPE resins constitute the primary raw materials used to make
the Company's products. These materials are available from a number of
suppliers, and the Company is not dependent upon any single supplier. The
Company maintains, as management believes, an adequate inventory to meet
demands, but there is no assurance that this will be true in the future. The
Company's gross profit has historically been substantially unaffected by
fluctuations in resin prices because industry practice permits substantially
all changes in resin prices to be passed through to customers through
appropriate changes in product pricing. However, a sustained increase in
resin prices, to the extent that those costs are not passed on to the end-
consumer, would make plastic containers less economical for the Company's
customers, and could result in a slower pace of conversions to plastic
containers.
Through its wholly owned subsidiary, Graham Recycling Company, L.P.,
the Company operates one of the largest HDPE bottles-to-bottles recycling
plants in the world, and more than 65% of its North American HDPE units
produced contain recycled HDPE bottles. The recycling plant is located near
the Company's headquarters in York, Pennsylvania.
Customers
Substantially all of the Company's sales are made to major branded
consumer products companies located in the United States and abroad. The
Company's customers demand a high degree of packaging design and engineering
11
to accommodate complex container shapes, performance and material
requirements and quick and reliable delivery. As a result, many customers
opt for long-term contracts, many of which have terms of one to ten years. A
majority of the Company's top 20 customers are under long-term contracts.
The Company's contracts typically contain provisions allowing for price
adjustments based on the market price of resins and colorants and the cost of
energy and labor, among other factors.
In many cases, the Company is the sole supplier of its customers'
custom plastic container requirements nationally, regionally or for a
specific brand. For the year ended December 31, 2000 the Company's largest
customer, Unilever, accounted for 11.4% of the Company's total net sales. On
December 4, 2000 PepsiCo, Inc. announced a proposed acquisition of Quaker
Oats. The Company currently provides plastic containers to Quaker Oats,
PepsiCo and to Tropicana, an existing unit of PepsiCo, Inc. Had the three
entities been combined for all of calendar year 2000, they would have
accounted for approximately 12% of the Company's total net sales. For
the year ended December 31, 2000 the Company's twenty largest customers,
who accounted for over 77% of net sales, were, in alphabetical order:
Customer(1) Business Company Customer
Since(1)
- ----------- -------- ----------------
Ashland(2) Automotive Early 1970's
Castrol Automotive Late 1960's
Chevron Automotive Early 1970's
Clement Pappas Food and Beverage Mid 1990's
Colgate-Palmolive Household and Personal Care Mid 1980's
Danone Food and Beverage Late 1970's
Dial Household and Personal Care Early 1990's
Equilon Automotive Early 1970's
Hershey's Food and Beverage Mid 1980's
Hi-Country Food and Beverage Late 1990's
Northland Cranberries Food and Beverage Late 1990's
Ocean Spray Food and Beverage Early 1990's
Pennzoil-Quaker State Automotive Early 1970's
Petrobras Distribuidora S.A. Automotive Early 1990's
Procter & Gamble Household and Personal Care Early 1980's
Quaker Oats Food and Beverage Late 1990's
Tree Top Food and Beverage Early 1990's
Tropicana Food and Beverage Mid 1980's
Unilever Household and Personal Care, Early 1970's
Food and Beverage
Welch's Food and Beverage Early 1990's
(1) These companies include their predecessors, if applicable, and the
dates may reflect customer relationships initiated by predecessors to
the Company or entities acquired by the Company.
(2) Ashland is the producer of Valvoline motor oil.
12
International Operations
The Company has significant operations outside the United States in
the form of wholly owned subsidiaries, cooperative joint ventures and other
arrangements. The Company has 26 plants located in countries outside of the
United States, including Argentina (2), Belgium (1), Brazil (5), Canada (4),
France (4), Germany (2), Hungary (1), Italy (2), Poland (2), Spain (1),
Turkey (1), and the United Kingdom (1).
Argentina, Brazil and Mexico. In Brazil, the Company operates four
on-site plants for motor oil packaging, including one for Petrobras
Distribuidora S.A., the national oil company of Brazil. The Company also
operates an off-site plant in Brazil for its motor oil and agricultural and
chemical businesses. On April 30, 1997, the Company acquired 80% of certain
assets and assumed 80% of certain liabilities of Rheem-Graham Embalagens
Ltda. in Brazil, which is now known as Graham Packaging do Brasil Industria e
Comercio S.A. ("Graham Packaging do Brazil"). In February 1998, the Company
acquired the residual 20% ownership interest in Graham Packaging do Brasil.
In Argentina, the Company purchased 100% of the capital stock of Dodisa,
S.A., Amerpack, S.A., Lido Plast, S.A. and Lido Plast San Luis, S.A. In April
2000, Dodisa, S.A., Amerpack, S.A., and Lido Plast, S.A. were dissolved
without liquidation and merged into Graham Packaging Argentina, S.A. In June
2000, in order to maximize efficiency, the Company shifted some of the volume
from its Argentine operations produced for Brazilian customers to the
Company's Brazilian facilities and closed one of the facilities in Argentina.
In Mexico, the Company entered into a joint venture agreement with Industrias
Innopack, S.A. de C.V. to manufacture, sell and distribute custom plastic
containers in Mexico, the Caribbean and Central America.
Europe. The Company has on-site plants in Belgium, Germany, Hungary,
Poland and Spain and ten off-site plants in France, Germany, Italy, Poland,
Turkey and the United Kingdom, for the production of plastic containers for
liquid food, household and personal care, automotive and agricultural
chemical products. Through Masko Graham Spolka Z.O.O., a 50% owned joint
venture in Sulejowek, Poland, HDPE containers are manufactured for household
and personal care and liquid food products. On March 30, 2001 the Company
purchased an additional 1% interest in Masko Graham Joint Venture.
Canada. The Company has three off-site facilities and one on-site
facility in Canada to service Canadian and northern U.S. customers. Three are
near Toronto, Ontario and one is near Montreal, Quebec. The Canadian
facilities produce products for all three of the Company's target end-use
markets. In the first quarter of 2001 the Company announced the closing of
13
its facility in Anjou, Quebec, Canada where manufacturing operations are
expected to cease during the second quarter of 2001.
Competition
The Company faces substantial regional and international competition
across its product lines from a number of well-established businesses. The
Company's primary competitors include Owens-Illinois, Inc., Ball Corporation,
Crown Cork & Seal Company, Inc., Consolidated Container Company LLC (which
was formed in 1999 by combining the former Franklin Plastics and Plastic
Containers owned by Suiza Foods Corporation and Reid Plastics), Plastipak,
Inc., Silgan Holdings Inc., Schmalbach-Lubeca Plastic Containers USA Inc.,
Rexham Packaging (who acquired American National Can, Inc. in 2000),
Logoplaste S.A. and Alpla Werke Alwin Lehner GmbH. Several of these
competitors are larger and have greater financial and other resources than
the Company has. Management believes that the Company's long-term success is
dependent on its ability to provide superior levels of service, its speed to
market and its ability to develop product innovations and improve its
production technology and expertise. Other important competitive factors
include rapid delivery of products, production quality and price.
Marketing and Distribution
The Company's sales are made through its own direct sales force;
agents or brokers are not utilized to conduct sales activities with customers
or potential customers. Sales activities are conducted from the Company's
corporate headquarters in York, Pennsylvania and from field sales offices
located in Houston, Texas; Cincinnati, Ohio; Levittown, Pennsylvania;
Burlington, Ontario; Mississauga, Ontario; Rancho Cucamonga, California;
Paris, France; Buenos Aires, Argentina; Sao Paulo, Brazil; Milan, Italy; and
Sulejowek, Poland. The Company's products are typically delivered by truck,
on a daily basis, in order to meet customers' just-in-time delivery
requirements, except in the case of on-site operations. In many cases, the
Company's on-site operations are integrated with its customers' manufacturing
operations so that deliveries are made, as needed, by direct conveyance to
the customers' filling lines.
14
Superior Product Design and Development Capabilities
The Company's ability to develop new, innovative containers to meet
the design and performance requirements of its customers has established the
Company as a market leader. The Company has demonstrated significant
success in designing innovative plastic containers that require customized
features such as complex shapes, reduced weight, handles, grips, view
stripes, pouring features and graphic intensive customized labeling, and
often must meet specialized performance and structural requirements such as
hot-fill capability, recycled material usage, oxygen barriers, flavor
protection and multi-layering. In addition to increasing demand for its
customers' products, the Company believes that its innovative packaging
stimulates consumer demand and drives further conversion to plastic
packaging. Consequently, the Company's strong design capabilities have been
especially important to its food and beverage customers, who generally use
packaging to differentiate and add value to their brands while spending less
on promotion and advertising. The Company has been awarded significant
contracts based on these unique product design capabilities that management
believes sets it apart from its competition. Some of the Company's recent
design and conversion successes include:
- - hot-fill PET 16 ounce containers with oxygen barrier coating for
conversion from glass bottles of Tropicana Season's Best brand, Pepsi's
Dole brand and Welch's brand juices;
- - hot-fill PET wide-mouth jars for Ragu pasta sauce, Seneca applesauce and
Welch's jellies and jams;
- - HDPE frozen juice container for Welch's in the largely unconverted metal
and paper-composite can markets; and
- - the debut of single and multi-serve, brand-distinctive, custom plastic
beverages packages, such as: Gatorade 10 ounce, Danimals 100 milliliter
and 93 milliliter yogurt drinks, Snapple 20 ounce and Tropicana Twister
1.75 liter containers.
The Company's innovative designs have been recognized, through
various awards, by a number of customers and industry organizations.
Management believes the Company's design and development capabilities,
coupled with the support of Graham Engineering in the design of blow molding
wheels and recycling systems, has positioned the Company as the packaging
design and development leader in the industry. Pursuant to the Equipment
Sales Agreement, Graham Engineering will continue to provide engineering,
15
consulting and other services and sell to the Company certain proprietary
blow molding wheels. Over the past several years the Company has received
and has filed for numerous patents. See "--The Recapitalization";"--
Intellectual Property"; and "Certain Relationships and Related Transactions--
Certain Business Relationships--Equipment Sales Agreement" (Item 13).
Manufacturing
A critical component of the Company's strategy is to locate
manufacturing plants on site, reducing expensive shipping and handling
charges and increasing production and distribution efficiencies. The Company
is a leader in providing on-site manufacturing arrangements, with
approximately one-third of its 60 facilities on site at customer and vendor
facilities. Within the 60 plants, the Company operates over 400 production
lines. The Company sometimes dedicates particular production lines within a
plant to better service customers. The plants generally operate 24 hours a
day, five to seven days a week, although not every production line is run
constantly. When customer demand requires, the plants run seven days a week.
In the blow molding process used for HDPE applications, resin pellets
are blended with colorants or other necessary additives and fed into the
extrusion machine, which uses heat and pressure to form the resin into a
round hollow tube of molten plastic called a parison. Bottle molds mounted
radially on a wheel capture the parison as it leaves the extruder. Once
inside the mold, air pressure is used to blow the parison into the bottle
shape of the mold. In the 1970's, the Company introduced the Graham Wheel.
The Graham Wheel is a single parison, electro-mechanical rotary blow molding
technology designed for its speed, reliability and ability to use virgin
resins, high barrier resins and recycled resins simultaneously without
difficulty. The Company has achieved very low production costs, particularly
in plants housing Graham Wheels. While certain of the Company's competitors
also use wheel technology in their production lines, the Company has
developed a number of proprietary improvements which Management believes
permit the Company's wheels to operate at higher speeds and with greater
efficiency in the manufacture of containers with one or more special
features, such as multiple layers and in-mold labeling.
In the stretch blow molding process used for hot-fill PET
applications, resin pellets are fed into a Husky injection molding machine
that uses heat and pressure to mold a test tube shaped parison or "preform."
The preform is then fed into a Sidel blow molder where it is re-heated to
allow it to be formed through a stretch blow molding process into a final
16
container. During this re-heat and blow process, special steps are taken to
induce the temperature resistance needed to withstand high temperatures on
customer filling lines. Management believes that the Husky injection molders
and Sidel blow molders used by the Company are widely recognized as the
leading technologies for high speed production of hot-fill PET containers and
have replaced less competitive technologies used initially in the manufacture
of hot-fill PET containers. Management believes that equipment for the
production of cold-fill containers can be refitted to accommodate the
production of hot-fill containers. However, such refitting has only been
accomplished at a substantial cost and has proven to be substantially less
efficient than the Company's equipment for producing hot-fill PET containers.
The Company maintains a program of quality control with respect to
suppliers, line performance and packaging integrity for its containers. The
Company's production lines are equipped with various types of automatic
inspection machines that electronically inspect containers. Additionally,
product samples are inspected and tested by Company employees on the
production line for proper dimensions and performance and are also inspected
and audited after packaging. Containers that do not meet quality standards
are crushed and recycled as raw materials. The Company monitors and updates
its inspection programs to keep pace with modern technologies and customer
demands. Quality control laboratories are maintained at each manufacturing
facility to test characteristics of the products and compliance with quality
standards.
The Company has highly modernized equipment in its plants, consisting
primarily of rotational wheel systems and shuttle systems, both of which are
used for HDPE and PP blow molding, and injection-stretch blow molding systems
for custom PET containers. The Company is also pursuing development
initiatives in barrier technologies to strengthen its position in the food
and beverage business. In the past, the Company has achieved substantial
cost savings in its manufacturing process by productivity and process
enhancements, including increasing line speeds, utilizing recycled products,
reducing scrap and optimizing plastic volume requirements for each product's
specifications.
Total capital expenditures, excluding acquisitions, for 1998, 1999
and 2000 were approximately $133.9 million, $171.0 million and $163.4
million, respectively. Management believes that capital investment to
maintain and upgrade property, plant and equipment is important to remain
competitive. Management estimates that the annual capital expenditures
required to maintain the Company's current facilities are currently
17
approximately $30 million per year. Additional capital expenditures beyond
this amount will be required to expand capacity.
For the fiscal year 2001, the Company expects to incur approximately
$110 million of capital expenditures. However, total capital expenditures
for 2001 will depend on the size and timing of growth related opportunities.
The Company's principal sources of cash to fund capital requirements will be
net cash provided by operating activities and borrowings under its Senior
Credit Agreement.
The Recapitalization
Pursuant to an Agreement and Plan of Recapitalization, Redemption and
Purchase, dated as of December 18, 1997 (the "Recapitalization Agreement"),
(i) Holdings, (ii) the Graham Entities, and (iii) BMP/Graham Holdings
Corporation, a Delaware corporation ("Investor LP") formed by Blackstone
Capital Partners III Merchant Banking Fund L.P. (together with its
affiliates, "Blackstone"), and BCP/Graham Holdings L.L.C., a Delaware limited
liability company and a wholly owned subsidiary of Investor LP ("Investor GP"
and, together with Investor LP, the "Equity Investors") agreed to a
recapitalization of Holdings (the "Recapitalization"). Closing under the
Recapitalization Agreement occurred on February 2, 1998.
On February 2, 1998, as part of the Recapitalization, the Operating
Company and GPC Capital Corp. I ("CapCo I" and, together with the Operating
Company, the "Company Issuers") consummated an offering (the "Senior
Subordinated Offering") pursuant to Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"), of their Senior Subordinated Notes
Due 2008, consisting of $150,000,000 aggregate principal amount of their 8
3/4% Senior Subordinated Notes Due 2008, Series A (the "Fixed Rate Senior
Subordinated Old Notes"), and $75,000,000 aggregate principal amount of their
Floating Interest Rate Subordinated Term Securities Due 2008, Series A
("FIRSTS"SM) (the "Floating Rate Senior Subordinated Old Notes" and, together
with the Fixed Rate Senior Subordinated Old Notes, the "Senior Subordinated
Old Notes"). ("FIRSTS" is a service mark of DB Alex. Brown LLC (formerly BT
Alex. Brown Incorporated)).
On February 2, 1998, as part of the Recapitalization, Holdings and
GPC Capital Corp. II ("CapCo II" and, together with Holdings, the "Holdings
Issuers", which when referred to with the Company Issuers will collectively
be referred to as the "Issuers") consummated an offering (the "Senior
Discount Offering" and, together with the Senior Subordinated Offering, the
18
"Offerings") pursuant to Rule 144A under the Securities Act of $169,000,000
aggregate principal amount at maturity of their 10 3/4% Senior Discount Notes
Due 2009, Series A (the "Senior Discount Old Notes" and, together with the
Senior Subordinated Old Notes, the "Old Notes").
In connection with the Recapitalization, the Issuers entered into
Registration Rights Agreements with the Initial Purchasers of the Old Notes,
pursuant to which the Issuers agreed to exchange the respective issues of Old
Notes for Notes having the same terms but registered under the Securities Act
and not containing the restrictions on transfer that are applicable to the
Old Notes.
Pursuant to the related Registration Rights Agreement, on September
8, 1998, the Company Issuers consummated exchange offers (the "Senior
Subordinated Exchange Offers"), pursuant to which the Company Issuers issued
$150,000,000 aggregate principal amount of their 8 3/4% Senior Subordinated
Notes Due 2008, Series B (the "Fixed Rate Senior Subordinated Exchange
Notes"), and $75,000,000 aggregate principal amount of their Floating
Interest Rate Subordinated Term Securities Due 2008, Series B (the "Floating
Rate Senior Subordinated Exchange Notes" and, together with the Fixed Rate
Senior Subordinated Exchange Notes, the "Senior Subordinated Exchange
Notes"), which were registered under the Securities Act, in exchange for
equal principal amounts of Fixed Rate Senior Subordinated Old Notes and
Floating Rate Senior Subordinated Old Notes, respectively. The Senior
Subordinated Old Notes and the Senior Subordinated Exchange Notes are herein
collectively referred to as the "Senior Subordinated Notes." Pursuant to the
applicable Registration Rights Agreement, on September 8, 1998, the Holdings
Issuers consummated an exchange offer (the "Senior Discount Exchange Offer"),
pursuant to which the Holdings Issuers issued $169,000,000 aggregate
principal amount at maturity of their 10 3/4% Senior Discount Notes Due 2009,
Series B (the "Senior Discount Exchange Notes" and, together with the Senior
Discount Old Notes, the "Senior Discount Notes"), which were registered under
the Securities Act, in exchange for an equal principal amount at maturity of
Senior Discount Old Notes.
The Senior Subordinated Notes were issued under an Indenture dated as
of February 2, 1998 (the "Senior Subordinated Indenture") between the Company
Issuers, Holdings, as guarantor, and United States Trust Company of New York,
as Trustee. The Senior Discount Notes (together with the Senior Subordinated
Notes, the " Notes") were issued under an Indenture dated as of February 2,
1998 (the "Senior Discount Indenture" and together with the Senior
Subordinated Indenture, the "Indentures") between the Holdings Issuers and
The Bank of New York, as Trustee. The Senior Subordinated Old Notes were,
19
and the Senior Subordinated Exchange Notes are, fully and unconditionally
guaranteed by Holdings on a senior subordinated basis.
The other principal components and consequences of the
Recapitalization included the following:
- A change in the name of Holdings to Graham Packaging Holdings
Company;
- The contribution by Holdings of substantially all of its assets and
liabilities to the Operating Company, which was renamed "Graham
Packaging Company, L.P.";
- The contribution by certain Graham Entities to the Operating Company
of their ownership interests in certain partially-owned subsidiaries
of Holdings and certain real estate used but not owned by Holdings
and its subsidiaries (the "Graham Contribution");
- The initial borrowing by the Operating Company of $403.5 million (the
"Bank Borrowings") in connection with the Senior Credit Agreement
entered into by and among the Operating Company, Holdings and a
syndicate of lenders (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and
Capital Resources" (Item 7));
- The repayment by the Operating Company of substantially all of the
existing indebtedness and accrued interest of Holdings and its
subsidiaries (approximately $264.9 million);
- The distribution by the Operating Company to Holdings of all of the
remaining net proceeds of the Bank Borrowings and the Senior
Subordinated Offering (other than amounts necessary to pay certain
fees and expenses and payments to Management) which, in aggregate,
were approximately $313.7 million;
- The redemption by Holdings of certain partnership interests in
Holdings held by the Graham Entities for $429.6 million;
- The purchase by the Equity Investors of certain partnership interests
in Holdings held by the Graham Entities for $208.3 million;
- The repayment by the Graham Entities of $21.2 million owed to
Holdings under certain promissory notes;
- The recognition of additional compensation expense under the Equity
Appreciation Plan;
- The payment of certain bonuses and other cash payments and the
granting of certain equity awards to senior and middle level
Management;
- The execution of various other agreements among the parties; and
20
- The payment of a $6.2 million tax distribution by the Operating
Company on November 2, 1998 to certain Graham Entities for tax
periods prior to the Recapitalization.
Upon the consummation of the Recapitalization, Investor LP owned an
81% limited partnership interest in Holdings, Investor GP owned a 4% general
partnership interest in Holdings, and the Continuing Graham Entities retained
a 1% general partnership interest and a 14% limited partnership interest in
Holdings. Upon the consummation of the Recapitalization, Holdings owned a
99% limited partnership interest in the Operating Company, and GPC Opco GP
LLC ("Opco GP"), a wholly owned subsidiary of Holdings, owned a 1% general
partnership interest in the Operating Company. Following the consummation of
the Recapitalization, certain members of Management owned an aggregate of
approximately 3% of the outstanding common stock of Investor LP, which
constitutes approximately a 2.6% interest in Holdings. In addition, an
affiliate of DB Alex. Brown LLC and Deutsche Bank AG (which acted as Initial
Purchasers of the Old Notes in the Offerings) acquired approximately a 4.8%
equity interest in Investor LP. See "Security Ownership of Certain
Beneficial Owners and Management" (Item 12).
CapCo I, a wholly owned subsidiary of the Operating Company, and
CapCo II, a wholly owned subsidiary of Holdings, were incorporated in
Delaware in January 1998. The sole purpose of CapCo I is to act as co-
obligor of the Senior Subordinated Notes and as co-borrower under the Senior
Credit Agreement. The sole purpose of CapCo II is to act as co-obligor of
the Senior Discount Notes and as co-guarantor with Holdings under the Senior
Credit Agreement. CapCo I and CapCo II have only nominal assets, do not
conduct any operations and did not receive any proceeds of the Offerings.
Accordingly, investors in the Notes must rely on the cash flow and assets of
the Operating Company or the cash flow and assets of Holdings, as the case
may be, for payment of the Notes.
Pursuant to the Recapitalization Agreement, the Graham Entities have
agreed that neither they nor their affiliates will, subject to certain
exceptions, for a period of five years from and after the Closing, engage in
the manufacture, assembly, design, distribution or marketing for sale of
rigid plastic containers for the packaging of consumer products less than ten
liters in volume.
The Recapitalization Agreement contains various representations,
warranties, covenants and conditions. The representations and warranties
generally did not survive the Closing. The Graham Entities have agreed to
indemnify Holdings in respect of any claims by Management with respect to the
21
adequacy of the Management awards and, subject to a limit of $12.5 million on
payments by the Graham Entities, 50% of certain specified environmental costs
in excess of $5.0 million.
Pursuant to the Recapitalization Agreement, upon the Closing,
Holdings entered into the Equipment Sales Agreement, the Consulting Agreement
and Partners Registration Rights Agreement (each as defined) described under
"Certain Relationships and Related Transactions" (Item 13).
SUMMARY OF SOURCES AND USES OF FUNDS
The following table sets forth a summary of the sources and uses of
the funds associated with the Recapitalization.
AMOUNT
-------------
(In Millions)
SOURCES OF FUNDS:
Bank Borrowings $ 403.5
Senior Subordinated Notes 225.0
Senior Discount Notes 100.6
Equity investments and retained equity 245.0
Repayment of Promissory notes 21.2
Available cash 1.7
----------
Total $ 997.0
==========
USES OF FUNDS:
Repayment of existing indebtedness $ 264.9
Redemption by Holdings of existing partnership interests 429.6
Purchase by Equity Investors of existing partnership 208.3
interests
Partnership interests retained by Continuing Graham 36.7
Entities
Payments to Management 15.4
Transaction costs and expenses 42.1
----------
Total $ 997.0
==========
22
Included $150.0 million of Fixed Rate Senior Subordinated Old Notes
and $75.0 million of Floating Rate Senior Subordinated Old Notes.
Included a $208.3 million equity investment made by Blackstone and
Management in the Equity Investors and a $36.7 million retained
partnership interest of the Continuing Graham Entities. In addition,
an affiliate of DB Alex. Brown LLC and Bankers Trust International
PLC, two of the Initial Purchasers, acquired approximately a 4.8%
equity interest in Investor LP. See "Security Ownership of Certain
Beneficial Owners and Management" (Item 12).
Included $264.5 million of existing indebtedness and $0.4 million of
accrued interest.
Employees
As of December 31, 2000, the Company had approximately 4,000
employees, 2,400 of which were located in the United States. Approximately
79% of the Company's employees are hourly wage employees, 43% of whom are
represented by various labor unions and are covered by various collective
bargaining agreements that expire between February, 2001 and April, 2004.
During the past three years, the Company's subsidiaries in France, Graham
Packaging France, S.A.S. and Graham Emballages Plastiques S.A. have
experienced labor stoppages on several occasions, none of which exceeded two
days in duration. Management believes that it enjoys good relations with the
Company's employees.
Environmental Matters
The Company's operations, both in the U.S. and abroad, are subject to
national, state, provincial and/or local laws and regulations that impose
limitations and prohibitions on the discharge and emission of, and establish
standards for the use, disposal, and management of, certain materials and
waste, and impose liability for the costs of investigating and cleaning up,
and certain damages resulting from, present and past spills, disposals, or
other releases of hazardous substances or materials. Environmental Laws can
be complex and may change often, capital and operating expenses to comply can
be significant, and violations may result in substantial fines and penalties.
In addition, environmental laws such as the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, also known as
"Superfund" in the United States, impose strict, and in certain
circumstances, joint and several, liability on responsible parties for the
investigation and cleanup of contaminated soil, groundwater and buildings,
23
and liability for damages to natural resources, at a wide range of
properties. Contamination at properties formerly owned or operated by the
Company as well as at properties the Company currently owns or operates, and
properties to which hazardous substances were sent by the Company, may result
in liability for the Company under environmental laws. The Company is not
aware of any material noncompliance with the environmental laws currently
applicable to it and is not the subject of any material claim for liability
with respect to contamination at any location. Management believes that it
is not reasonably possible that losses related to existing environmental
liabilities, in aggregate, could be material to the Company's financial
position, results of operations and liquidity. For its operations to comply
with environmental laws, the Company has incurred and will continue to incur
costs, which were not material in fiscal 2000 and are not expected to be
material in the future.
A number of governmental authorities both in the U.S. and abroad have
considered, are expected to consider, or have passed legislation aimed at
reducing the amount of disposed plastic wastes. Those programs have
included, for example, mandating certain rates of recycling and/or the use of
recycled materials, imposing deposits or taxes on plastic packaging material,
and/or requiring retailers or manufacturers to take back packaging used for
their products. That legislation, as well as voluntary initiatives similarly
aimed at reducing the level of plastic wastes, could reduce the demand for
certain plastic packaging, result in greater costs for plastic packaging
manufacturers, or otherwise impact the Company's business. Some consumer
products companies (including certain customers of the Company) have
responded to these governmental initiatives and to perceived environmental
concerns of consumers by using bottles made in whole or in part of recycled
plastic. The Company operates one of the largest HDPE bottles-to-bottles
recycling plants in the world and more than 65% of its HDPE units produced in
North America contain materials from recycled HDPE bottles. The Company
believes that to date these initiatives and developments have not materially
adversely affected the Company.
Intellectual Property
The Company holds various patents and trademarks. While in the aggregate
the patents are of material importance to its business, the Company believes
that its business is not dependent upon any one patent or trademark. The
Company also relies on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain its
competitive position. There can be no assurance, however, that others will
24
not obtain knowledge of such proprietary know-how through independent
development or other access by legal means. In addition to its own patents
and proprietary know-how, the Company is a party to certain licensing
arrangements and other agreements which authorize it to use certain other
proprietary processes, know-how and related technology and/or to operate
within the scope of certain patents owned by other entities. The duration
of the Company's licenses generally range from 9 to 20 years. In some cases
the licenses granted to the Company are perpetual and in other cases the term
is related to the life of the patents associated with the licenses. The
Company also has licensed or sublicensed certain of its intellectual property
rights to third parties. Also see "Certain Relationships and Related
Transactions" (Item 13).
Certain Risks of the Business
Substantial Leverage. Upon the consummation of the Recapitalization,
the Operating Company and Holdings became highly leveraged. The Senior
Credit Agreement, as amended by the Amendments (as defined below), includes
four term loans to the Operating Company with initial term loans totaling up
to $570.0 million, a $155.0 million Revolving Credit Facility, and a $100.0
million Growth Capital Revolving Credit Facility. The Indentures (as
defined) permit the Issuers to incur additional indebtedness, subject to
certain limitations. The annual debt service requirements for the Company
are as follows: 2001--$27.4 million; 2002--$27.2 million; 2003--$29.7
million; 2004--$220.8 million; and 2005--$67.2 million. The Company can incur
$75 million in additional indebtedness beyond the amount of the Senior Credit
Agreement. The Company does not anticipate that this additional indebtedness
would be expressly subordinated to other indebtedness. Accordingly, if
incurred at the Operating Company level, such additional indebtedness would
be senior to the Operating Company's Senior Subordinated Notes, and the
Senior Discount Notes of Holdings would be structurally subordinated to such
additional indebtedness.
The Issuers' high degree of leverage could have important
consequences to the holders of the Notes, including, but not limited to, the
following: (i) the Issuers' ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Issuers' cash flow from operations must be dedicated to the
payment of principal and interest on their indebtedness, thereby reducing the
funds available to the Issuers for other purposes, including capital
expenditures necessary for maintenance of the Company's facilities and for
the growth of its businesses; (iii) certain of the Issuers' borrowings are
and will continue to be at variable rates of interest, which exposes the
Issuers to the risk of increased interest rates; (iv) the indebtedness
outstanding under the Senior Credit Agreement is secured and matures prior to
25
the maturity of the Notes; (v) the Issuers may be substantially more
leveraged than certain of their competitors, which may place the Issuers at a
competitive disadvantage; and (vi) the Issuers' substantial degree of
leverage, as well as the covenants contained in the Indentures and the Senior
Credit Agreement, may hinder their ability to adjust rapidly to changing
market conditions and could make them more vulnerable in the event of a
downturn in general economic conditions or in their business.
Ability to Service Debt. The Issuers' ability to make scheduled
payments or to refinance their obligations with respect to their indebtedness
will depend on their financial and operating performance, which, in turn, is
subject to prevailing economic conditions and to certain financial, business
and other factors beyond their control. If the Issuers' cash flow and
capital resources are insufficient to fund their respective debt service
obligations, they may be forced to reduce or delay planned expansion and
capital expenditures, sell assets, obtain additional equity capital or
restructure their debt. There can be no assurance that the Issuers'
operating results, cash flow and capital resources will be sufficient for
payment of their indebtedness. In the absence of such operating results and
resources, the Issuers could face substantial liquidity problems and might be
required to dispose of material assets or operations to meet their respective
debt service and other obligations, and there can be no assurance as to the
timing of such sales or the proceeds which the Issuers could realize
therefrom. In addition, because the Operating Company's obligations under
the Senior Credit Agreement will bear interest at floating rates, an increase
in interest rates could adversely affect, among other things, the Operating
Company's ability to meet its debt service obligations. In the future, the
Operating Company will be required to make the following scheduled principal
payments on the Term Loans under the Senior Credit Agreement: 2001--$20.0
million; 2002--$25.0 million; 2003--$27.5 million; 2004--$93.0 million; 2005-
- -$64.9 million; 2006--$242.7 million; and 2007--$74.0 million. The Term Loan
Facilities under the Senior Credit Agreement shall be prepaid, subject to
certain conditions and exceptions, with (i) 100% of the net proceeds of any
incurrence of indebtedness, subject to certain exceptions, by Holdings or its
subsidiaries, (ii) 75% of the net proceeds of issuances of equity, subject to
certain exceptions, after the Closing by Holdings or any of its subsidiaries,
(iii) 100% of the net proceeds of certain asset dispositions, (iv) 50% of the
annual excess cash flow (as such term is defined in the Senior Credit
Agreement) of Holdings and its subsidiaries on a consolidated basis and (v)
100% of the net proceeds from any condemnation and insurance recovery events,
subject to certain reinvestment rights. Outstanding balances under the
Revolving Credit Facility and Growth Capital Revolving Credit Facility are
payable in 2004.
26
Additionally, if the Issuers were to sustain a decline in their
operating results or available cash, they could experience difficulty in
complying with the covenants contained in the Senior Credit Agreement, the
Indentures or any other agreements governing future indebtedness. The
failure to comply with such covenants could result in an event of default
under these agreements, thereby permitting acceleration of such indebtedness
as well as indebtedness under other instruments that contain cross-
acceleration and cross-default provisions.
Holding Company Structure; Structural Subordination of Senior
Discount Exchange Notes. Holdings is a holding company which has no
significant assets other than its direct and indirect partnership interests
in the Operating Company. CapCo II, a wholly owned subsidiary of Holdings,
was formed for the purpose of serving as a co-issuer of the Senior Discount
Notes and has no operations or assets from which it will be able to repay the
Senior Discount Notes. Accordingly, the Holdings Issuers must rely entirely
upon distributions from the Operating Company to generate the funds necessary
to meet their obligations, including the payment of accreted value or
principal and interest on the Senior Discount Notes. The Senior Subordinated
Indenture and the Senior Credit Agreement contain significant restrictions on
the ability of the Operating Company to distribute funds to Holdings. There
can be no assurance that the Senior Subordinated Indenture, the Senior Credit
Agreement or any agreement governing indebtedness that refinances such
indebtedness or other indebtedness of the Operating Company will permit the
Operating Company to distribute funds to Holdings in amounts sufficient to
pay the Accreted Value or principal or interest on the Senior Discount Notes
when the same become due (whether at maturity, upon acceleration or
otherwise).
The only significant assets of Holdings are its partnership interests
in the Operating Company. All such interests are pledged by Holdings as
collateral under the Senior Credit Agreement. Therefore, if Holdings were
unable to pay the Accreted Value or principal or interest on the Senior
Discount Notes, the ability of the holders of the Senior Discount Notes to
proceed against the partnership interests of the Operating Company to satisfy
such amounts would be subject to the prior satisfaction in full of all
amounts owing under the Senior Credit Agreement. Any action to proceed
against such partnership interests by or on behalf of the holders of Senior
Discount Notes would constitute an event of default under the Senior Credit
Agreement entitling the lenders thereunder to declare all amounts owing
thereunder to be immediately due and payable, which event would in turn
constitute an event of default under the Senior Subordinated Indenture,
entitling the holders of the Senior Subordinated Notes to declare the
27
principal and accrued interest on the Senior Subordinated Notes to be
immediately due and payable. In addition, as secured creditors, the lenders
under the Senior Credit Agreement would control the disposition and sale of
the Operating Company partnership interests after an event of default under
the Senior Credit Agreement and would not be legally required to take into
account the interests of unsecured creditors of Holdings, such as the holders
of the Senior Discount Notes, with respect to any such disposition or sale.
There can be no assurance that the assets of Holdings after the satisfaction
of claims of its secured creditors would be sufficient to satisfy any amounts
owing with respect to the Senior Discount Notes.
The Senior Discount Notes will be effectively subordinated to all
existing and future claims of creditors of Holdings' subsidiaries, including
the lenders under the Senior Credit Agreement, the holders of the Senior
Subordinated Notes and trade creditors. As described above, the rights of
the Holdings Issuers and their creditors, including the holders of the Senior
Discount Notes, to realize upon the assets of Holdings or any of its
subsidiaries upon any such subsidiary's liquidation (and the consequent
rights of the holders of the Senior Discount Notes to participate in the
realization of those assets) will be subject to the prior claims of the
lenders under the Senior Credit Agreement and the creditors of Holdings'
subsidiaries including in the case of the Operating Company, the lenders
under the Senior Credit Agreement and the holders of the Senior Subordinated
Notes. In such event, there may not be sufficient assets remaining to pay
amounts due on any or all of the Senior Discount Notes then outstanding.
Under the Senior Credit Agreement, the Operating Company is subject to
restrictions on the payment of dividends or other distributions to Holdings;
provided that, subject to certain limitations, the Operating Company may pay
dividends or other distributions to Holdings (i) in respect of overhead, tax
liabilities, legal, accounting and other professional fees and expenses, (ii)
to fund purchases and redemptions of equity interests of Holdings or Investor
LP held by then present or former officers or employees of Holdings, the
Operating Company or their Subsidiaries (as defined) or by any employee stock
ownership plan upon such person's death, disability, retirement or
termination of employment or other circumstances with certain annual dollar
limitations and (iii) to finance, starting on July 15, 2003, the payment of
cash interest payments on the Senior Discount Notes.
The Senior Subordinated Notes and all amounts owing under the Senior
Credit Agreement will mature prior to the maturity of the Senior Discount
Notes. The Senior Discount Indenture requires that any agreements governing
indebtedness that refinances the Senior Subordinated Notes or the Senior
Credit Agreement not contain restrictions on the ability of the Operating
28
Company to make distributions to Holdings that are more restrictive than
those contained in the Senior Subordinated Indenture or the Senior Credit
Agreement, respectively. There can be no assurance that if the Operating
Company is required to refinance the Senior Subordinated Notes or any amounts
under the Senior Credit Agreement, it will be able to do so upon acceptable
terms, if at all.
Subordination of Senior Subordinated Notes and Holdings Guarantee.
The Senior Subordinated Notes are unsecured obligations of the Company
Issuers that are subordinated in right of payment to all Senior Indebtedness
of the Company Issuers, including all indebtedness under the Senior Credit
Agreement. The Indentures and the Senior Credit Agreement will permit the
Operating Company to incur additional Senior Indebtedness, provided that
certain conditions are met, and the Operating Company expects from time to
time to incur additional Senior Indebtedness. In the event of the
insolvency, liquidation, reorganization, dissolution or other winding up of
the Company Issuers or upon a default in payment with respect to, or the
acceleration of, or if a judicial proceeding is pending with respect to any
default under, any Senior Indebtedness, the lenders under the Senior Credit
Agreement and any other creditors who are holders of Senior Indebtedness must
be paid in full before a holder of the Senior Subordinated Notes may be paid.
Accordingly, there may be insufficient assets remaining after such payments
to pay principal or interest on the Senior Subordinated Notes. In addition,
under certain circumstances, no payments may be made with respect to the
principal of or interest on the Senior Subordinated Notes if a default exists
with respect to certain Senior Indebtedness. CapCo I, a wholly owned
subsidiary of the Operating Company, was formed solely for the purpose of
serving as a co-issuer of the Senior Subordinated Notes and has no operations
or assets from which it will be able to repay the Senior Subordinated Notes.
Accordingly, the Company Issuers must rely entirely upon the cash flow and
assets of the Operating Company to generate the funds necessary to meet their
obligations, including the payment of principal and interest on the Senior
Subordinated Notes.
The Senior Subordinated Notes are fully and unconditionally
guaranteed by Holdings on a senior subordinated basis. The Holdings
Guarantee is subordinated to all senior indebtedness of Holdings and
effectively subordinated to all indebtedness and other liabilities (including
but not limited to trade payables) of Holdings' subsidiaries. Because the
Holdings Guarantee will be subordinated in right of payment to all senior
indebtedness of Holdings and effectively subordinated to all indebtedness and
other liabilities (including trade payables) of Holdings' subsidiaries
(including the Operating Company), investors should not rely on the Holdings
29
Guarantee in evaluating an investment in the Senior Subordinated Exchange
Notes.
Restrictive Debt Covenants. The Senior Credit Agreement and the
Indentures contain a number of significant covenants that, among other
things, restrict the ability of the Issuers to dispose of assets, repay other
indebtedness, incur additional indebtedness, pay dividends, prepay
subordinated indebtedness (including, in the case of the Senior Credit
Agreement, the Notes), incur liens, make capital expenditures and make
certain investments or acquisitions, engage in mergers or consolidations,
engage in certain transactions with affiliates and otherwise restrict the
activities of the Issuers. In addition, under the Senior Credit Agreement,
the Operating Company is required to satisfy specified financial ratios and
tests. The ability of the Operating Company to comply with such provisions
may be affected by events beyond the Operating Company's control, and there
can be no assurance that the Operating Company will meet those tests. The
breach of any of these covenants could result in a default under the Senior
Credit Agreement. In the event of any such default, depending upon the
actions taken by the lenders, the Issuers could be prohibited from making any
payments of principal or interest on the Notes. In addition, the lenders
could elect to declare all amounts borrowed under the Senior Credit
Agreement, together with accrued interest, to be due and payable and could
proceed against the collateral securing such indebtedness. If the Senior
Indebtedness were to be accelerated, there can be no assurance that the
assets of the Operating Company would be sufficient to repay in full that
indebtedness and the other indebtedness of the Operating Company.
Risks Associated with International Operations. The Company has
significant operations outside the United States in the form of wholly owned
subsidiaries, cooperative joint ventures and other arrangements. The
Company's 26 plants outside of the United States are located in Argentina
(2), Belgium (1), Brazil (5), Canada (4), France (4), Germany (2), Hungary
(1), Italy (2), Poland (2), Spain (1), Turkey (1), and the United Kingdom
(1). As a result, the Company is subject to risks associated with operating
in foreign countries, including fluctuations in currency exchange rates,
imposition of limitations on conversion of foreign currencies into dollars or
remittance of dividends and other payments by foreign subsidiaries,
imposition or increase of withholding and other taxes on remittances and
other payments by foreign subsidiaries, labor relations problems,
hyperinflation in certain foreign countries and imposition or increase of
investment and other restrictions by foreign governments or the imposition of
environmental or employment laws. To date, the above risks in Europe, North
America and Latin America have not had a material impact on the Company's
30
operations, but no assurance can be given that such risks will not have a
material adverse effect on the Company in the future.
Exposure to Fluctuations in Resin Prices and Dependence on Resin
Supplies. The Company depends on large quantities of PET and HDPE resins in
manufacturing its products. One of its primary strategies is to grow the
business by capitalizing on the conversion from glass, metal and paper
containers to plastic containers. A sustained increase in resin prices, to
the extent that those costs are not passed on to the end-consumer, would make
plastic containers less economical for the Company's customers, and could
result in a slower pace of conversions to plastic containers. Historically,
the Company has passed through substantially all increases in the cost of
resins to its customers through contractual provisions and standard industry
practice; however, if the Company is not able to do so in the future and
there are sustained increases in resin prices, the Company's operating
margins could be affected adversely. Furthermore, if the Company cannot
obtain resin from any of its suppliers, the Company may have difficulty
obtaining alternate sources quickly and economically, and its operations and
profitability may be impaired.
Dependence on Significant Customer. All product lines the Company
provides to Unilever, the Company's largest customer, collectively accounted
for approximately 11.4% of the Company's net sales for the year ended December
31, 2000. Unilever's termination of its relationship with the Company could
have a material adverse effect upon the Company's business, financial
position or results of operations. On December 4, 2000 PepsiCo, Inc.
announced a proposed acquisition of Quaker Oats. The Company currently
provides plastic containers to Quaker Oats, PepsiCo and to Tropicana, an
existing unit of PepsiCo, Inc. Had the three entities been combined for all
of calendar year 2000, they would have accounted for approximately 12% of the
Company's total net sales. Additionally, in 2000 the Company's top 20
customers comprised over 77% of its net sales. The Company's existing
customers' purchase orders and contracts typically vary from one to ten
years. Prices under these arrangements are tied to market standards and
therefore vary with market conditions. The contracts generally are
requirements contracts which do not obligate the customer to purchase any
given amount of product from the Company. Accordingly, despite the existence
of supply contracts with its customers, the Company faces the risk that
customers will not purchase the amounts that the Company expects pursuant to
its customers' supply contracts.
Dependence on Key Personnel. The success of the Company depends to a
large extent on a number of key employees, and the loss of the services
provided by them could have a material adverse effect on the Company's
ability to operate its business and implement its strategies effectively. In
particular, the loss of the services provided by G. Robinson Beeson, Scott G.
Booth, John A. Buttermore, John E. Hamilton, Roger M. Prevot, Ashok Sudan and
Philip R. Yates, among others, could have a material adverse effect on the
31
Company. The Company does not maintain "key" person insurance on any of its
executive officers.
Relationship with Graham Affiliates. The relationship of the Company
with Graham Engineering and Graham Capital Corporation ("Graham Capital"), or
their successors or assigns, is material to the business of the Company. To
date, certain affiliates of the Graham Entities have provided important
equipment, technology and services to Holdings and its subsidiaries. Upon
the Recapitalization, Holdings entered into the Equipment Sales Agreement (as
defined) with Graham Engineering, pursuant to which Graham Engineering will
provide the Company with the Graham Wheel and related technical support, and
the Consulting Agreement (as defined in Item 13) with Graham Capital,
pursuant to which Graham Capital will provide the Company with certain
consulting services. The obligations of Holdings to make payments to the
Graham affiliates under the Equipment Sales Agreement and the Consulting
Agreement would be unsubordinated obligations of Holdings. Accordingly, such
obligations would be pari passu with the Senior Discount Notes and would be
structurally subordinated to the Senior Subordinated Notes. If any such
agreements were terminated prior to their scheduled terms or if the relevant
Graham affiliate fails to comply with any such agreement, the business,
financial condition and results of operations of the Company could be
materially and adversely affected.
Fraudulent Conveyance. In connection with the Recapitalization, the
Operating Company made a distribution to Holdings of $313.7 million of the
net proceeds of the Senior Subordinated Offering and the Bank Borrowings, and
Holdings redeemed certain partnership interests held by the Graham Entities
for $429.6 million (without giving effect to payment by the Graham Entities
of $21.2 million owed to Holdings under certain promissory notes). If a
court in a lawsuit brought by an unpaid creditor of one of the Issuers or a
representative of such creditor, such as a trustee in bankruptcy, or one of
the Issuers as a debtor-in-possession, were to find under relevant federal
and state fraudulent conveyance statutes that such Issuer had (a) actual
intent to defraud or (b) did not receive fair consideration or reasonably
equivalent value for the distribution from the Operating Company to Holdings
or for incurring the debt, including the Notes, in connection with the
financing of the Recapitalization, and that, at the time of such incurrence,
such Issuer (i) was insolvent, (ii) was rendered insolvent by reason of such
incurrence, (iii) was engaged in a business or transaction for which the
assets remaining with such Issuer constituted unreasonably small capital or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court could void such
Issuer's obligations under the Notes, subordinate the Notes to other
32
indebtedness of such Issuer or take other action detrimental to the holders
of the Notes.
The measure of insolvency for these purposes varies depending upon
the law of the jurisdiction being applied. Generally, however, a company
would be considered insolvent for these purposes if the sum of the company's
debts (including contingent debts) were greater than the fair saleable value
of all the company's property, or if the present fair saleable value of the
company's assets were less than the amount that would be required to pay its
probable liability on its existing debts as they become absolute and matured.
Moreover, regardless of solvency or the adequacy of consideration, a court
could void an Issuer's obligations under the Notes, subordinate the Notes to
other indebtedness of such Issuer or take other action detrimental to the
holders of the Notes if such court determined that the incurrence of debt,
including the Notes, was made with the actual intent to hinder, delay or
defraud creditors.
The Issuers believe that the indebtedness represented by the Notes
was incurred for proper purposes and in good faith without any intent to
hinder, delay or defraud creditors, that the Issuers received reasonably
equivalent value or fair consideration for incurring such indebtedness, that
the Issuers were prior to the issuance of the Notes and, after giving effect
to the issuance of the Notes and the use of proceeds in connection with the
Recapitalization, continued to be, solvent under the applicable standards
(notwithstanding the negative net worth and insufficiency of earnings to
cover fixed charges for accounting purposes that will result from the
Recapitalization) and that the Issuers have and will have sufficient capital
for carrying on their businesses and are and will be able to pay their debts
as they mature. There can be no assurance, however, as to what standard a
court would apply in order to evaluate the parties' intent or to determine
whether the Issuers were insolvent at the time, or rendered insolvent upon
consummation, of the Recapitalization or the sale of the Notes or that,
regardless of the method of valuation, a court would not determine that an
Issuer was insolvent at the time, or rendered insolvent upon consummation, of
the Recapitalization.
In rendering their opinions in connection with the Offerings, counsel
for the Issuers and counsel for the Initial Purchasers did not express any
opinion as to the applicability of federal or state fraudulent conveyance
laws.
Control by Blackstone. Since the consummation of the
Recapitalization, Blackstone has indirectly controlled approximately 80% of
33
the general partnership interests in Holdings. Pursuant to the Holdings
Partnership Agreement (as defined), holders of a majority of the general
partnership interests generally have the sole power, subject to certain
exceptions, to take actions on behalf of Holdings, including the appointment
of management and the entering into of mergers, sales of substantially all
assets and other extraordinary transactions. There can be no assurance that
the interests of Blackstone will not conflict with the interests of holders
of the Notes.
Risks Associated with Possible Future Acquisitions. The Company's
future growth may be a function, in part, of acquisitions of other consumer
goods packaging businesses. To the extent that it grows through acquisition,
the Company will face the operational and financial risks commonly
encountered with that type of a strategy. The Company would also face
certain operational risks, such as, failing to assimilate the operations and
personnel of the acquired businesses, disrupting the Company's ongoing
business, dissipating the Company's limited management resources and
impairing relationships with employees and customers of the acquired business
as a result of changes in ownership and management. Additionally, in order
to finance acquisitions, the Company would likely incur additional
indebtedness, as permitted under the Senior Credit Agreement and the
Indentures, in which case it would also face certain financial risks
associated with the incurring of additional indebtedness to make an
acquisition, such as reducing its liquidity, access to capital markets and
financial stability.
Item 2. Properties
The Company currently owns or leases 60 plants located in Argentina,
Belgium, Brazil, Canada, France, Germany, Hungary, Italy, Poland, Spain,
Turkey, the United Kingdom and the United States. Twenty-one of the Company's
plants are located on site at customer and vendor facilities. The Company's
operation in Sulejowek, Poland during 2000 was pursuant to a joint venture
arrangement in which the Company owns a 50% interest. In 1999, the Company
consolidated and relocated its corporate headquarters to a facility located in
York, Pennsylvania. The Company believes that its plants, which are of varying
ages and types of construction, are in good condition, are suitable for the
Company's operations and generally are expected to provide sufficient
capacity to meet the Company's requirements for the foreseeable future.
34
The following table sets forth the location of the Company's plants
and administrative facilities, whether on-site or off-site, whether leased or
owned, and their approximate current square footage.
On Site Size
Location Or Off Site Leased/Owned (Sq. ft.)
- -------- ----------- ------------ ---------
U.S. Packaging Facilities
1. York, Pennsylvania Off Site Owned 395,554
2. Maryland Heights, Missouri Off Site Owned 308,961
3. Holland, Michigan Off Site Leased 218,128
4. York, Pennsylvania Off Site Leased 210,370
5. Selah, Washington On Site Owned 170,553
6. Atlanta, Georgia On Site Leased 165,000
7. Montgomery, Alabama Off Site Leased 150,143
8. Emigsville, Pennsylvania Off Site Leased 148,300
9. Levittown, Pennsylvania Off Site Leased 148,000
10. Rancho Cucamonga, California Off Site Leased 143,063
11. Santa Ana, California Off Site Owned 127,680
12. Muskogee, Oklahoma Off Site Leased 125,000
13. Woodridge, Illinois Off Site Leased 124,137
14. Atlanta, Georgia Off Site Leased 112,400
15. Cincinnati, Ohio Off Site Leased 111,669
16. Bradford, Pennsylvania Off Site Leased 90,350
17. Berkeley, Missouri Off Site Owned 75,000
18. Jefferson, Louisiana Off Site Leased 58,799
19. Cambridge, Ohio On Site Leased 57,000
20. Port Allen, Louisiana On Site Leased 56,721
21. Shreveport, Louisiana On Site Leased 56,400
22. Richmond, California Off Site Leased 54,985
23. Houston, Texas Off Site Owned 52,500
24. Lakeland, Florida Off Site Leased 49,000
25. New Kensington, Pennsylvania On Site Leased 48,000
26. N. Charleston, South Carolina On Site Leased 45,000
27. Darlington, South Carolina On Site Leased 43,200
28. Bradenton, Florida On Site Leased 33,605
29. Vicksburg, Mississippi On Site Leased 31,200
30. Bordentown, New Jersey On Site Leased 30,000
31. Tulsa, Oklahoma On Site Leased 28,500
32. Wapato, Washington Off Site Leased 20,300
33. Rancho Cucamonga, California Off Site Leased 17,179
35
Canadian Packaging Facilities
34. Burlington, Ontario, Canada Off Site Owned 145,200
35. Mississauga, Ontario, Canada Off Site Owned 78,416
36. Anjou, Quebec, Canada Off Site Owned 44,875
37. Toronto, Ontario, Canada On Site 5,000
European Packaging Facilities
38. Assevent, France Off Site Owned 186,000
39. Noeux les Mines, France Off Site Owned 120,000
40. Wrexham, United Kingdom Off Site Owned 120,000
41. Campochiaro, Italy Off Site Owned 93,200
42. Blyes, France Off Site Owned 89,000
43. Sulejowek, Poland Off Site Owned 83,700
44. Bad Bevensen, Germany Off Site Owned/Leased 80,000
45. Meaux, France Off Site Owned 80,000
46. Aldaia, Spain On Site Leased 75,350
47. Sovico (Milan), Italy Off Site Leased 74,500
48. Istanbul, Turkey Off Site Owned 50,000
49. Rotselaar, Belgium On Site Leased 15,070
50. Bierun, Poland On Site Leased 10,652
51. Genthin, Germany On Site Leased 6,738
52. Nyirbator, Hungary On Site Leased 5,000
Latin American Packaging Facilities
53. Sao Paulo, Brazil Off Site Leased 66,092
54. Buenos Aires, Argentina Off Site Owned 33,524
55. Rio de Janeiro, Brazil On Site Owned/Leased 22,604
56. Rio de Janeiro, Brazil On Site Leased 16,685
57. Rio de Janeiro, Brazil On Site 11,000
58. San Luis, Argentina Off Site Owned 8,070
59. Santos, Brazil On Site Leased 5,800
Graham Recycling
60. York, Pennsylvania Off Site Owned 44,416
Administrative Facilities
- York, Pennsylvania N/A Leased 70,071
- Burlington, Ontario, Canada N/A Owned 4,800
- Rueil, Paris, France N/A Leased 4,300
- Sao Paulo, Brazil N/A Leased 3,800
36
Substantially all of the Company's domestic tangible and intangible
assets are pledged as collateral pursuant to the terms of the Senior
Credit Agreement and Amendments
This facility is leased by PlasPET Florida, Ltd., in which the Company
holds a 51% interest
The Company expects to close this facility during the second quarter of
2001
This facility was owned by the Masko Graham Joint Venture during 2000,
in which the Company holds a 50% interest
Currently under construction
These on-site facilities are operated without leasing the space occupied
The building is owned; land is leased
Contributed to the Operating Company as part of the Graham Contribution.
With respect to the Berkeley, Missouri facility (location 17 in the
table above), a manufacturing warehouse and parcel of land, the latter
two of which are not listed in the table above, were contributed to the
Operating Company as part of the Graham Contribution.
Item 3. Legal Proceedings
The Company is party to various litigation matters arising in the
ordinary course of business. The ultimate legal and financial liability of
the Company with respect to such litigation cannot be estimated with
certainty, but Management believes, based on its examination of such matters,
experience to date and discussions with counsel, that such ultimate liability
will not be material to the business, financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Because Holdings is a limited partnership, equity interests in
Holdings take the form of general and limited partnership interests. There
is no established public trading market for any of the general or limited
partnership interests in Holdings.
There are two owners of general partner interests in Holdings:
Investor GP and Graham Packaging Corporation. The limited partnership
interests in Holdings are owned by Investor LP and a Graham family entity.
See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
Opco GP is the sole owner of a general partnership interest in the
Operating Company, and Holdings is the sole owner of a limited partnership
interest in the Operating Company.
The Operating Company owns all of the outstanding capital stock of
CapCo I. Holdings owns all of the outstanding capital stock of CapCo II.
Holdings has made distributions to its partners totaling the amounts
set forth in the Statements of Partners' Capital (Deficit) included in
Item 8 of this Report, during the periods indicated therein.
Under the Senior Credit Agreement, the Operating Company is subject
to restrictions on the payment of dividends and other distributions to
Holdings, as described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Liquidity and Capital
Resources."
As indicated under Item 1, "Business---The Recapitalization", upon
the Closing of the Recapitalization, (i) certain limited and general
partnership interests in Holdings held by the Graham Entities were redeemed
by Holdings for $429.6 million, and (ii) certain limited and general
partnership interests in Holdings held by the Graham Entities were purchased
by the Equity Investors for $208.3 million.
As indicated under Item 1, "Business---The Recapitalization", upon
the Closing of the Recapitalization on February 2, 1998, the Company Issuers
consummated an offering pursuant to Rule 144A under the Securities Act of
their Senior Subordinated Notes Due 2008, consisting of $150,000,000
38
aggregate principal amount of their Fixed Rate Senior Subordinated Old Notes
and $75,000,000 aggregate principal amount of their Floating Rate Senior
Subordinated Old Notes. On February 2, 1998, as part of the
Recapitalization, the Holdings Issuers also consummated an offering pursuant
to Rule 144A under the Securities Act of $169,000,000 aggregate principal
amount at maturity of their Senior Discount Old Notes. Pursuant to the
Purchase Agreement dated January 23, 1998 (the "Purchase Agreement"), the
Initial Purchasers, DB Alex. Brown LLC, Bankers Trust International PLC,
Lazard Freres & Co. LLC and Salomon Brothers Inc, purchased the Senior
Subordinated Old Notes at a price of 97.0% of the principal amount, for a
discount of 3% from the initial offering price of 100% or a total discount of
$6,750,000. Pursuant to the Purchase Agreement, the Initial Purchasers
purchased the Senior Discount Old Notes at a price of 57.173% of the
principal amount for a discount of 2.361% from the initial offering price of
59.534% or a total discount of $3,990,090. Pursuant to the Purchase
Agreement, the Issuers also reimbursed the Initial Purchasers for certain
expenses. Pursuant to the Senior Subordinated Exchange Offers, on September
8, 1998, the Company Issuers exchanged $150,000,000 aggregate principal
amount of their Fixed Rate Senior Subordinated Exchange Notes and $75,000,000
aggregate principal amount of their Floating Rate Senior Subordinated
Exchange Notes for equal principal amounts of Fixed Rate Senior Subordinated
Old Notes and Floating Rate Senior Subordinated Old Notes, respectively.
Pursuant to the Senior Discount Exchange Offer, on September 8, 1998, the
Holdings Issuers exchanged $169,000,000 aggregate principal amount at
maturity of their Senior Discount Exchange Notes for an equal principal
amount of Senior Discount Old Notes. The Senior Subordinated Old Notes were,
and the Senior Subordinated Exchange Notes are, fully and unconditionally
guaranteed by Holdings on a senior subordinated basis.
Item 6. Selected Financial Data
The following table sets forth certain selected historical financial
data for the Company for and at the end of each of the years in the five-year
period ended December 31, 2000 and are derived from the Company's audited
financial statements. The combined financial statements as of December 31,
1996 and 1997 and for each of the two years in the period ended December 31,
1997 have been restated for the change in accounting for inventory costs as
described in note (7) to the following table. The combined financial
statements of the Company (as defined in Note 1 to the Financial Statements
(Item 8)) have been prepared for periods prior to the Recapitalization to
include Holdings and its subsidiaries on a combined basis and for periods
subsequent to the Recapitalization, on a consolidated basis. The following
table should be read in conjunction with "Management's Discussion and
39
Analysis of Financial Condition and Results of Operations" (Item 7) and the
consolidated financial statements of the Company, including the related notes
thereto, included under Item 8.
Year Ended December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In millions)
INCOME STATEMENT DATA
Net sales $459.7 $521.7 $588.1 $716.1 $824.6
Gross profit 77.0 84.7 115.4 142.7 135.1
Selling, general and administrative expenses 35.5 34.9 37.8 48.0 56.8
Impairment charges --- --- --- --- 21.1
Special charges and unusual items 7.0 24.4 24.2 4.6 1.1
------ ------ ------ ------ ------
Operating income 34.5 25.4 53.4 90.1 56.1
Recapitalization expenses --- --- 11.8 --- ---
Interest expense, net 14.5 13.4 68.0 87.5 101.7
Other (income) expense, net (1.0) 0.7 (0.2) (0.7) 0.2
Minority interest --- 0.2 --- (0.5) (0.6)
Income tax provision --- 0.6 1.1 2.5 0.4
Extraordinary loss --- --- 0.7 --- ---
------ ------ ------ ------ ------
Net income (loss) $ 21.0 $ 10.5 $(28.0) $ 1.3 $(45.6)
====== ====== ====== ====== ======
OTHER DATA:
Cash flows from:
Operating activities $68.0 $66.9 $41.8 $ 55.5 $ 90.9
Investing activities (32.8) (72.3) (181.2) (181.8) (164.7)
Financing activities (34.6) 9.5 139.7 126.2 78.4
Adjusted EBITDA 90.4 90.1 117.7 149.1 153.7
Capital expenditures (excluding 31.3 53.2 133.9 171.0 163.4
acquisitions)
Investments (including acquisitions) 1.2 19.0 45.2 10.3 0.1
Depreciation and amortization 48.2 41.0 39.3 53.2 66.2
Ratio of earnings to fixed charges 2.2x 1.6x --- 1.0x ---
BALANCE SHEET DATA:
Working capital (deficit) $ 18.7 $ 4.4 $ (5.5) $ 10.6 $(23.5)
Total assets 340.5 387.5 596.7 741.2 821.3
Total debt 240.5 268.5 875.4 1,017.1 1,060.2
Partners' capital (deficit) 18.5 2.3 (438.8) (458.0) (464.4)
Net sales increase or decrease based on fluctuations in resin prices as
industry practice and the Company's agreements with its customers permit
40
substantially all price changes to be passed through to customers by
means of corresponding changes in product pricing. Therefore, the
Company's dollar gross profit is substantially unaffected by
fluctuations in resin prices. However, a sustained increase in resin
prices, to the extent that those costs are not passed on to the end-
consumer, would make plastic containers less economical for the
Company's customers, and could result in a slower pace of conversions to
plastic containers.
Includes impairment charges recorded on certain long-lived assets ($16.3
million) and goodwill ($4.8 million) (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" (Item 7) for a further discussion).
Includes compensation costs related to the Company's 1998
recapitalization, restructuring, systems conversion, aborted acquisition
and legal costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (Item 7) and "Financial Statements
and Supplementary Data" (Item 8), including the related notes thereto.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (Item 7) and "Financial Statements and
Supplementary Data" (Item 8), including the related notes thereto.
As a limited partnership, Holdings is not subject to U.S. federal income
taxes or most state income taxes. Instead, such taxes are assessed to
Holdings' partners based on the income of Holdings. Holdings made tax
distributions to its partners to reimburse them for such tax
liabilities. The Company's foreign operations are subject to tax in
their local jurisdictions. Most of these entities have historically had
net operating losses and recognized minimal tax expense.
Represents cost incurred, including the write-off of unamortized debt
issuance fees, in connection with the early extinguishment of debt.
Effective June 28, 1999, the Company changed its method of valuing
inventories for its domestic operations from the LIFO method to the FIFO
method as over time it more closely matches revenues with costs. The
FIFO method more accurately reflects the costs related to the actual
physical flow of raw materials and finished goods inventory.
Accordingly, the Company believes the FIFO method of valuing inventory
will result in a better measurement of operating results. All
previously reported results have been restated to reflect the
retroactive application of the accounting change as required by
generally accepted accounting principles. The accounting change
41
decreased net income for the year ended December 31, 1996 by $0.2
million, increased net income for the year ended December 31, 1997 by
$0.3 million and increased net loss for the year ended December 31, 1998
by $2.0 million.
In April 1997, the Company acquired 80% of certain assets and assumed
80% of certain liabilities of Rheem-Graham Embalagens Ltda. for $20.3
million (excluding direct costs of the acquisition). The remaining 20%
was purchased in February 1998. In July 1998, the Company acquired
selected plastic container manufacturing operations of Crown, Cork &
Seal located in France, Germany, the United Kingdom and Turkey for $38.9
million (excluding direct costs of the acquisition), net of liabilities
assumed. On April 26, 1999, the Company acquired 51% of the operating
assets of PlasPET Florida, Ltd., while becoming the general partner on
July 6, 1999, for $1.1 million (excluding direct costs of the
acquisition), net of liabilities assumed. On July 1, 1999, the Company
acquired selected companies located in Argentina for $8.1 million
(excluding direct costs of the acquisition), net of liabilities assumed.
These transactions were accounted for under the purchase method of
accounting. Results of operations are included since the dates of
acquisition.
Adjusted EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting principles and should not be
used as an alternative to net income as an indicator of operating
performance or to cash flow as a measure of liquidity. Adjusted EBITDA
is defined in the Company's two existing indentures as earnings before
minority interest, extraordinary items, interest expense, interest
income, income taxes, depreciation and amortization expense, the
ongoing $1 million per year fee paid pursuant to the Blackstone
monitoring agreement, non-cash equity income in earnings of joint
ventures, other non-cash charges, recapitalization expenses,
special charges and unusual items and non-recurring charges.
Adjusted EBITDA is included in this Report to provide additional
information with respect to the ability of Holdings and the Operating
Company to satisfy their debt service, capital expenditure and working
capital requirements and because certain covenants in Holdings' and the
Operating Company's borrowing arrangements are tied to similar measures.
While Adjusted EBITDA and similar measures are frequently used as a
measure of operations and the ability to meet debt service requirement,
these terms are not necessarily comparable to other similarly titled
captions of other companies due to the potential inconsistencies in the
method of calculation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Item 7) and "Financial
42
Statements and Supplementary Data (Item 8), including the related notes
thereto.
Adjusted EBITDA is calculated as follows:
Year Ended December 31,
---------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In millions)
Income (loss) before extraordinary item $ 21.0 $ 10.5 $(27.3) $ 1.3 $(45.6)
Interest expense, net 14.5 13.4 68.0 87.5 101.7
Income tax expense -- 0.6 1.1 2.5 0.4
Depreciation and amortization 48.2 41.0 39.3 53.2 66.2
Impairment charges - - - - 21.1
Fees paid pursuant to the Blackstone monitoring agreement -- -- 1.0 1.0 1.0
Equity income in earnings of joint venture (0.3) (0.2) (0.3) (0.3) (0.1)
Non-cash compensation -- 0.2 -- -- --
Special charges and unusual items/certain non-recurring charges (A) 7.0 24.4 24.2 4.6 9.6
Recapitalization expenses -- -- 11.8 (0.2) --
Minority interest -- 0.2 -- (0.5) (0.6)
------ ------ ------- ------ ------
Adjusted EBITDA (B) $ 90.4 $ 90.1 $ 117.8 $149.1 $ 153.7
====== ====== ======= ====== ======
(A) For the year ended December 31, 2000 includes special charges and
unusual items related to compensation costs related to the
Company's 1998 recapitalization ($1.1 million) and certain non-
recurring charges including costs related to a postponed initial
public offering ($1.5 million), global restructuring costs ($6.0
million) and other costs ($1.0 million). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" (Item 7) and "Financial Statements and Supplementary
Data" (Item 8), including the related notes thereto.
(B) Does not include project startup costs, which are treated as non-
recurring in accordance with the definition of EBITDA under the
Company's Senior Credit Agreement. These startup costs were $8.4
million and $4.4 million for the years ended December 31, 2000 and
1999, respectively.
Investments include the acquisitions made by the Company in the United
States, France, the United Kingdom, Brazil, Argentina, Germany and
Turkey described in note (8) above. Amounts shown under this caption
represent cash paid, net of cash acquired in the acquisitions.
43
Depreciation and amortization excludes amortization of debt issuance
fees, which is included in interest expense, net.
For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, minority interest
and extraordinary items, plus fixed charges. Fixed charges include
interest expense on all indebtedness, amortization of debt issuance
fees, and one-third of rental expense on operating leases representing
that portion of rental expense deemed to be attributable to interest.
Earnings were insufficient to cover fixed charges by $26.3 million for
the year ended December 31, 1998 and by $45.8 million for the year ended
December 31, 2000.
Working capital is defined as current assets, less cash and cash
equivalents, minus current liabilities, less current maturities of long-
term debt.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company is a worldwide leader in the design, manufacture and sale
of customized blow molded plastic containers for the branded food and
beverage, household and personal care, and automotive lubricants markets with
60 plants throughout North America, Europe and Latin America. The Company's
primary focus is to operate in select markets that will position it to
benefit from the growing conversion to high performance plastic packaging
from more commodity packaging. The Company targets branded consumer product
manufacturers for whom customized packaging design is a critical component in
their efforts to differentiate their products to consumers. The Company
initially pursues these attractive product areas with one or two major
consumer products companies in each category that it expects will lead the
conversion to plastic packaging for that category. The Company utilizes its
innovative design, engineering and technological capabilities to deliver
highly customized, high performance products to its customers in these areas
in order to distinguish and increase sales of their branded products. The
Company collaborates with its customers through joint initiatives in product
design and cost reduction, and innovative operational arrangements, which
include on-site manufacturing facilities.
44
Management believes that critical success factors to the Company's
business are its ability to:
- serve the complex packaging demands of its customers which include
some of the world's largest branded consumer products companies;
- forecast trends in the packaging industry across product lines and
geographic territories (including those specific to the rapid
conversion of packaging products from glass, metal and paper to
plastic); and
- make the correct investments in plant and technology necessary to
satisfy the two factors mentioned above.
Management believes that the area with the greatest opportunity for
growth continues to be in producing containers for the North American food
and beverage market because of the continued conversion to plastic packaging,
including the demand for hot-fill PET containers for juices, juice drinks,
sport drinks, teas and other food products. Since the beginning of 1997, the
Company has invested over $230 million in capital expenditures to expand its
technology, machinery and plant structure to prepare for what it believed
would be the growth in the hot-fill PET area. For the year ended December
31, 2000 the Company's sales of hot-fill PET containers has grown to $246.6
million from $68.2 million in 1996. In this business, the Company continues
to benefit from more experienced plant staff, improved line speeds, higher
absorption of selling, general and administrative expenses and fixed overhead
costs, and improved resin pricing and material usage.
The Company's household and personal care business continues to grow,
as package conversion trends continue from other packaging forms in some of
its product lines. The Company continues to benefit as liquid fabric care
detergents, hard-surface cleaners and liquid automatic dishwashing
detergents, which are packaged in plastic containers, capture an increased
share from powdered detergents and cleaners, which are predominantly packaged
in paper-based containers. The Company has upgraded its proprietary
machinery in the United States to new larger blow molders to standardize
production lines, improve flexibility and reduce manufacturing costs.
The Company's North American one-quart motor oil container business
is in a mature industry. The Company has been able to partially offset
pricing pressures by renewing or extending contracts, improving manufacturing
efficiencies, line speeds, labor efficiency and inventory management and
reducing container weight and material spoilage. Unit volume in the one-
45
quart motor oil industry decreased in 2000 as compared to 1999, in addition
to an average annual volume decline of 1% to 2% in prior years. Management
believes the decline in the domestic one-quart motor oil business will
continue for the next several years but believes there are significant volume
opportunities for automotive product business in foreign countries,
particularly those in Latin America. On April 30, 1997, the Company acquired
80% of certain assets and 80% of certain liabilities of Rheem-Graham
Embalagens Ltda., a leading supplier of containers to the motor oil industry
in Brazil, and on February 17, 1998, the Company purchased the residual 20%
ownership interest. Since that acquisition, the Company has signed
agreements to operate two additional plants in Brazil, both of which are now
in production.
Consistent with its strategy to expand in selected international
areas, the Company currently operates 26 facilities, either on its own or
through joint ventures, in Argentina, Belgium, Brazil, Canada, France,
Germany, Hungary, Italy, Poland, Spain, Turkey and the United Kingdom. During
the latter portion of 2000, the Company experienced a decline in its
operations in the United Kingdom. This reduction in business was the result
of the loss of a key customer in that location. Also, the Company experienced
a downturn in financial performance in certain plants in France. Although
management is addressing these issues, some of these performance declines are
considered to be other than temporary. (See "--Results of Operations" for a
discussion of impairment charges). In addition, given the recent troubled
economy in Latin America, Management closely monitors its operations and
investment there. In the first quarter of 2001 the Company announced the
closing of its facility in Anjou, Quebec, Canada. Manufacturing operations
are expected to cease during the second quarter of 2001. The Company
believes the effect of the closing will not have a material adverse
impact on its financial condition and results of operations. On March 30,
2001 the Company purchased an additional 1% interest in Masko Graham Joint
Venture.
For the year ended December 31, 2000, 77% of the Company's net sales
were generated by the top twenty customers, the majority of which are under
long-term contracts with terms ranging from two to twelve years; the
remainder of which were generated by customers with whom the Company has been
doing business for over 17 years on average. Prices under these arrangements
are typically tied to market standards and, therefore, vary with market
conditions. In general, the contracts are requirements contracts that do not
obligate the customer to purchase any given amount of product from the
Company.
Based on industry data, the following table summarizes average market
prices per pound of PET and HDPE resins in North America over the years
ending December 31, 2000, 1999 and 1998:
Year Ended December 31,
------------------------------
2000 1999 1998
----- ----- -----
PET $0.62 $0.54 $0.53
HDPE 0.44 0.41 0.37
46
In general, the Company's dollar gross profit is substantially
unaffected by fluctuations in the prices of PET and HDPE resins, the primary
raw materials for the Company's products, because industry practice and the
Company's agreements with its customers permit substantially all price
changes to be passed through to customers by means of corresponding changes
in product pricing. Consequently, the Company believes that cost of goods
sold, as well as certain other expense items, should not be analyzed solely
on a percentage of net sales basis. A sustained increase in resin prices, to
the extent that those costs are not passed on to the end-consumer, would make
plastic containers less economical for the Company's customers, and could
result in a slower pace of conversions to plastic containers.
The Company does not pay U.S. federal income taxes under the
provisions of the Internal Revenue Code, as the applicable income or loss is
included in the tax returns of its partners. The Company may make tax
distributions to its partners to reimburse them for such tax obligations, if
any. The Company's foreign operations are subject to tax in their local
jurisdictions. Most of these entities have historically incurred net
operating losses.
Results of Operations
The following tables set forth the major components of the Company's
net sales and such net sales expressed as a percentage of total revenues:
Year Ended December 31,
(In Millions)
2000 1999 1998
Food and Beverage $402.9 48.9% $323.1 45.1% $221.1 37.6%
Household and Personal Care 208.7 25.3% 185.3 25.9% 178.3 30.3%
Automotive 213.0 25.8% 207.7 29.0% 188.7 32.1%
------ ------ ------ ------ ------ ------
Total Net Sales $824.6 100.0% $716.1 100.0% $558.1 100.0%
====== ====== ====== ====== ====== ======
47
Year Ended December 31,
(In Millions)
2000 1999 1998
North America $656.6 79.6% $555.0 77.5% $465.3 79.1%
Europe 138.9 16.9% 136.7 19.1% 100.8 17.2%
Latin America 29.1 3.5% 24.4 3.4% 22.0 3.7%
------ ------ ------ ------ ------ ------
Total Net Sales $824.6 100.0% $716.1 100.0% $588.1 100.0%
====== ====== ====== ====== ====== ======
2000 Compared to 1999
Net Sales. Net sales for the year ended December 31, 2000 increased
$108.5 million to $824.6 million from $716.1 million for the year ended
December 31, 1999. The increase in sales was primarily due to increases in
resin prices and units sold. Units sold increased by 18.0% for the year ended
December 31, 2000 as compared to the year ended December 31, 1999, primarily
due to additional North American food and beverage business, where units
increased by 45.1%. On a geographic basis, sales for the year ended
December 31, 2000 in North America were up $101.6 million or 18.3% from
the year ended December 31, 1999. The North American sales increase included
higher sold of 17.1%. North American sales in the food and beverage business,
the household and personal care business and the automotive business
contributed $71.5 million, $18.8 million and $11.3 million, respectively,
to the increase. Units sold in North America increased by 45.1% in food and
beverage and 7.8% in household and personal care, but decreased by 2.6% in
automotive. Sales for the year ended December 31, 2000 in Europe were up
$2.2 million or 1.6%, net of a $5.1 million decrease in the United Kingdom,
from the year ended December 31, 1999, principally in the food and beverage
business. Overall, European sales reflected a 20.9% increase in units sold.
The growth in sales due to capital investments made in recent periods was
primarily offset by exchange rate changes of approximately $20.5 million for
the year ended December 31, 2000 compared to the year ended December 31, 1999.
Sales in Latin America for the year ended December 31, 2000 were up $4.7
million or 19.3% from the year ended December 31, 1999, primarily due to the
inclusion of the Company's newly-acquired Latin American subsidiary. Overall,
Latin American sales reflected a 7.4% increase in units sold.
Gross Profit. Gross profit for the year ended December 31, 2000
decreased $7.6 million to $135.1 million from $142.7 million for the year
48
ended December 31, 1999. Gross profit for the year ended December 31, 2000
increased $1.1 million in North America, decreased $8.4 million in Europe and
decreased $0.3 million in Latin America when compared to the year ended
December 31, 1999. The decrease in gross profit resulted primarily from
increased plant start-up costs of $4.0 million in North America and Europe,
non-recurring charges of $1.8 million in North America, Europe and Latin
America and increased costs associated with expanding capacity in
anticipation of product demand from certain key customers, partially offset
by the higher sales volume in North America for the year ended December 31,
2000 compared to the year ended December 31, 1999.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2000 increased $8.8
million to $56.8 million from $48.0 million for the year ended December 31,
1999. The increase in selling, general and administrative expenses is due
primarily to non-recurring charges, including costs related to a postponed
initial public offering ($1.5 million) and restructuring costs incurred in
North America ($0.8 million), Europe ($3.3 million) and Latin America ($0.4
million). As a percent of sales, selling, general and administrative
expenses, excluding non-recurring charges, decreased to 6.1% of sales in 2000
from 6.7% in 1999.
Impairment Charges. Due to operating losses experienced and projected
in the Company's United Kingdom operations and certain Canadian and French
operations, and an inability to utilize certain assets in the Company's
Brazilian operations, the Company evaluated the recoverability of its long-
lived assets in these locations. The Company determined that the
undiscounted cash flows were below the carrying value of certain long-lived
assets in these locations. Accordingly, the Company adjusted the carrying
values of these long-lived assets in these locations to their estimated fair
values, resulting in an impairment charge of $16.3 million for the year ended
December 31, 2000. Similarly, the Company evaluated the recoverability of
its goodwill in these locations, and consequently recorded an impairment
charge of $4.8 million for the year ended December 31, 2000. Goodwill was
evaluated for impairment and the resulting impairment charge recognized based
on a comparison of the related net book value of the enterprise to projected
discounted future cash flows of the enterprise.
49
Special Charges and Unusual Items. In 2000, special charges and
unusual items included $1.1 million related to compensation costs related to
the Company's 1998 recapitalization (see "Business -- The Recapitalization"
(Item 1) for a further discussion of the recapitalization compensation). In
1999, special charges and unusual items included $2.7 million related to
compensation costs related to the Company's 1998 recapitalization, $0.6
million of restructuring charges relating to operations in Europe, and $1.3
million in costs related to year 2000 system conversion.
Interest Expense, Net. Interest expense, net increased $14.2 million
to $101.7 million for the year ended December 31, 2000 from $87.5 million for
the year ended December 31, 1999. The increase was primarily related to
increased debt levels in 2000 compared to 1999. Interest expense, net
includes $13.6 million and $12.4 million of non-cash interest on the Company's
Senior Discount Notes for the years ended December 31, 2000 and 1999,
respectively.
Other Expense (Income). Other expense (income) was $0.3 million for
the year ended December 31, 2000 as compared to $(0.7) million for the year
ended December 31, 1999. The higher loss was due primarily to higher foreign
exchange loss in the year ended December 31, 2000 as compared to the year
ended December 31, 1999.
Net (Loss) Income. Primarily as a result of factors discussed above,
net loss for the year ended December 31, 2000 was $45.6 million compared to
net income of $1.3 million for the year ended December 31, 1999.
Adjusted EBITDA. Primarily as a result of factors discussed above,
Adjusted EBITDA (as defined in Item 6) in 2000 increased 3.1% to $153.7
million from $149.1 million in 1999.
1999 Compared to 1998
Net Sales. Net sales for the year ended December 31, 1999 increased
$128.0 million to $716.1 million from $588.1 million for the year ended
December 31, 1998. The increase in sales was primarily due to a 32.5%
increase in units sold. On a geographic basis, sales for the year
ended December 31, 1999 in North America were up $89.7 million or 19.3% from
the year ended December 31, 1998. The North American sales increase included
higher units sold of 16.9%. North American sales in the food and
beverage business, the household and personal care business and the
automotive business contributed $76.0 million, $4.2 million and $9.5 million,
respectively, to the increase. Sales for the year ended December 31, 1999 in
50
Europe were up $35.9 million or 35.6% from the year ended December 31, 1998,
principally in the food and beverage business, primarily due to a full year
of the Company's new European subsidiaries which were acquired in July 1998.
Overall, European sales reflected a 66.3% increase in units sold.
Additionally, sales in Latin America for the year ended December 31, 1999
were up $2.4 million.
Gross Profit. Gross profit for the year ended December 31, 1999
increased $27.3 million to $142.7 million from $115.4 million for the year
ended December 31, 1998. The increase in gross profit resulted primarily
from the higher sales volume as compared to the prior year. Gross profit in
North America was up $23.2 million or 21.6%. Additionally, gross profit
increased $3.2 million in Europe and $0.9 million in Latin America.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1999 increased $10.2
million to $48.0 million from $37.8 million for the year ended December 31,
1998. The dollar increase in 1999 selling, general and administrative
expenses is due to a full year of the Company's new European subsidiaries
which were acquired in July 1998, and the inclusion of the Company's newly
acquired North American and Latin American subsidiaries and overall growth of
the business, primarily in North America. As a percent of sales, selling,
general and administrative expenses increased to 6.7% of sales in 1999 from
6.4% in 1998.
Special Charges and Unusual Items. In 1999, special charges and
unusual items included $2.7 million related to compensation costs related to
the Company's 1998 recapitalization (see "Business -- The Recapitalization"
(Item 1) for a further discussion of the recapitalization compensation), $0.6
million of restructuring charges relating to the operations in Europe, and
$1.3 million in costs related to year 2000 system conversion. In 1998,
special charges and unusual items included $20.6 million related to
compensation costs related to the Company's 1998 recapitalization, $1.9
million of restructuring charges relating to the operations in Europe ($1.2
million) and in North America ($0.7 million), $1.0 million in costs related
to year 2000 system conversion, $0.4 million of aborted acquisition cost, and
$0.3 million of legal fees.
Recapitalization Expenses. Recapitalization expenses in the year
ended December 31, 1998 of $11.8 million related to the Company's 1998
recapitalization and also include transaction fees and costs associated with
the termination of interest rate collar and swap agreements.
51
Interest Expense, Net. Interest expense, net increased $19.5 million
to $87.5 million for the year ended December 31, 1999 from $68.0 million
for the year ended December 31, 1998. The increase was primarily related to
increased debt levels in 1999 compared to 1998. Interest expense, net includes
$12.4 million and $10.1 million of non-cash interest on the Company's Senior
Discount Notes for the years ended December 31, 1999 and 1998, respectively,
Other Expense (Income). Other expense (income) was $(0.7) million
for the year ended December 31, 1999 as compared to $(0.1) million for the
year ended December 31, 1998. The higher income was due primarily to higher
foreign exchange gain in the year ended December 31, 1999 as compared to the
year ended December 31, 1998.
Net (Loss) Income. Primarily as a result of factors discussed above,
net income for the year ended December 31, 1999 was $1.3 million compared to
net loss of $28.0 million for the year ended December 31, 1998.
Adjusted EBITDA. Primarily as a result of factors discussed above,
Adjusted EBITDA (as defined in Item 6) in 1999 increased 26.7% to $149.1
million from $117.7 million in 1998.
Effect of Changes in Exchange Rates
In general, the Company's results of operations are affected by
changes in foreign exchange rates. Subject to market conditions, the Company
prices its products in its foreign operations in local currencies. As a
result, a decline in the value of the U.S. dollar relative to these other
currencies can have a favorable effect on the profitability of the Company,
and an increase in the value of the dollar relative to these other currencies
can have a negative effect on the profitability of the Company. Exchange
rate fluctuations (decreased)/increased comprehensive income by $(10.4)
million, $(22.3) million and $3.3 million for the years ended December 31,
2000, 1999 and 1998, respectively.
Euro Conversion
On January 1, 1999, eleven of fifteen member countries of the
European Economic Union fixed conversion rates between their existing
currencies, legacy currencies, and one common currency, the euro. The euro
trades on currency exchanges and may be used in business transactions.
Conversion to the euro eliminated currency exchange rate risk between the
member countries. Beginning in January 2002, new euro-denominated bills and
52
coins will be issued and the legacy currencies will be withdrawn from
circulation.
The Company is actively addressing the many areas involved with the
introduction of the euro, including information management, finance, legal
and tax. This review includes the conversion of information technology, and
business and financial systems, and evaluation of currency risk, as well as
the impact on the pricing and distribution of the Company's products.
One outcome of the introduction of the euro is the trend toward more
uniform pricing in all European markets, including those that have not
adopted the euro as their common currency. The Company believes the effect
of the introduction of the euro, as well as any related cost of conversion,
will not have a material adverse impact on its financial condition and
results of operations.
Derivatives
The Company enters into interest rate swap agreements to hedge the
exposure to increasing rates with respect to its Senior Credit Agreement.
The differential to be paid or received as a result of these swap agreements
is accrued as interest rates change and recognized as an adjustment to
interest expense related to the Senior Credit Agreement. The Company also
enters into forward exchange contracts, when appropriate, to hedge the
exchange rate exposure on transactions that are denominated in a foreign
currency.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended by SFAS 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether
designated in hedging relationships or not, will be required to be recorded
on the balance sheet at fair value. If the derivative is designated as a
fair value hedge, the changes in the fair value of the derivative and the
hedged item will be recognized in earnings. If the derivative is designated
as a cash-flow hedge, changes in the fair value of the derivative will be
recorded in other comprehensive income (OCI) and will be recognized in the
income statement when the hedged item affects earnings. The Company does not
expect the amount to be recognized in earnings in 2001 to be material. SFAS
53
133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use
hedge accounting. For a derivative that does not qualify as a hedge, changes
in fair value will be recognized in earnings. On January 1, 2001, in
connection with the adoption of the new Statement, the Company will record
$0.4 million in OCI as a cumulative transition adjustment for derivatives
designated as cash flow-type hedges prior to adopting SFAS 133.
Liquidity and Capital Resources
In 2000, 1999 and 1998 the Company generated $188.2 million of cash
from operations, $751.8 million from increased indebtedness and $48.9 million
from capital contributions, net of notes for ownership interests. This
$988.9 million was primarily used to fund $468.3 million of capital
expenditures, $55.6 million of investments, make distributions of $6.9
million to the Company's partners, make a $409.3 million recapitalization
cash distribution to owners, net of owner note repayments, make $40.3 million
of debt issuance fee payments and for $8.5 million of other net uses.
The Company's Senior Credit Agreement currently consists of four term
loans to the Operating Company with initial term loan commitments totaling
$570 million and two revolving loan facilities to the Operating Company
totaling $255 million. Unused availability under the revolving credit
facilities at December 31, 2000 is $128.3 million, $78.3 million of which is
under the revolving credit facility and $50.0 million of which is under the
growth capital revolving credit facility. The obligations of the Operating
Company under the Senior Credit Agreement are guaranteed by Holdings and
certain other subsidiaries of Holdings. The term loans are payable in
quarterly installments through January 31, 2007, and require payments of
$20.0 million in 2001, $25.0 million in 2002, $27.5 million in 2003, $93.0
million in 2004 and $64.9 million in 2005. The Company expects to fund
scheduled dept repayments from cash from operations and unused lines of
credit. The revolving loan facilities expire on January 31, 2004.
The Senior Credit Agreement contains certain affirmative and negative
covenants as to the operations and financial condition of the Company, as
well as certain restrictions on the payment of dividends and other
distributions to Holdings. Substantially all domestic tangible and
intangible assets of the Company are pledged as collateral pursuant to the
terms of the Senior Credit Agreement.
54
The Company's 1998 recapitalization also included the issuance of
$225 million of senior subordinated notes due 2008 and the issuance of $169
million aggregate principal amount at maturity of Senior Discount Notes due
2009 which yielded gross proceeds of $100.6 million. At December 31, 2000,
the aggregate accreted value of the Senior Discount Notes was $136.7 million.
The Senior Subordinated Notes are unconditionally guaranteed on a senior
subordinated basis by Holdings and mature on January 15, 2008, with interest
payable on $150 million at a fixed rate of 8.75% and with interest payable on
$75 million at LIBOR plus 3.625%. The Senior Discount Notes mature on
January 15, 2009, with cash interest payable semi-annually beginning July 15,
2003 at 10.75%. The effective interest rate to maturity on the Senior
Discount Notes is 10.75%. At December 31, 2000, the Company's outstanding
indebtedness was $1,060.2 million.
Unused lines of credit at December 31, 2000 and 1999 were $134.8
million and $168.3 million, respectively. Substantially all unused lines of
credit have no major restrictions, except as described in Item 13, and are
provided under notes between the Company and the lending institution.
An equity contribution of $50 million was made by the Company's
owners to the Company on September 29, 2000, satisfying Blackstone's first
capital call obligation under the Senior Credit Agreement and Capital Call
Agreement. As part of the Second Amendment to the Senior Credit Agreement, if
certain events of default were to occur, or if the Company's Net Leverage
Ratio were above certain levels for test periods beginning June 30, 2001,
Blackstone has agreed to make an additional equity contribution to the
Company through the administrative agent of up to $50 million. The Company's
Net Leverage Ratio being above the specified levels at June 30, 2001 or
thereafter is not an event of default under the Senior Credit Agreement. An
additional equity contribution of $50 million was made by the Company's
owners on March 29, 2001, satisfying Blackstone's final obligation under the
Capital Call Agreement dated as of August 13, 1999, as amended on March 29,
2000, for all future test periods. The Company used the proceeds of the
Capital Calls to reduce its outstanding Revolving Credit Loans.
Total capital expenditures, excluding acquisitions, for 2000, 1999
and 1998 were approximately $163.4 million, $171.0 million and $133.9
million, respectively. Management believes that capital investment to
maintain and upgrade property, plant and equipment is important to remain
competitive. Management estimates that the annual capital expenditures
required to maintain the Company's current facilities are currently
approximately $30 million per year. Additional capital expenditures beyond
this amount will be required to expand capacity.
55
For the fiscal year 2001, the Company expects to incur approximately
$110 million of capital expenditures. However, total capital expenditures
for 2001 will depend on the size and timing of growth related opportunities.
The Company's principal sources of cash to fund capital requirements will be
net cash provided by operating activities and borrowings under its Senior
Credit Agreement. In connection with plant expansion and improvement
programs, the Company had commitments for capital expenditures of
approximately $28.9 million at December 31, 2000.
Under the Senior Credit Agreement, the Operating Company is subject
to restrictions on the payment of dividends or other distributions to
Holdings; provided that, subject to certain limitations, the Operating
Company may pay dividends or other distributions to Holdings:
- in respect of overhead, tax liabilities, legal, accounting and
other professional fees and expenses;
- to fund purchases and redemptions of equity interests of Holdings
or Investor LP held by then present or former officers or
employees of Holdings, the Operating Company or their
Subsidiaries (as defined) or by any employee stock ownership plan
upon such person's death, disability, retirement or termination
of employment or other circumstances with certain annual dollar
limitations; and
- to finance, starting on July 15, 2003, the payment of cash
interest payments on the Senior Discount Notes.
New Accounting Pronouncements Not Yet Adopted
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement provides accounting and reporting requirements
for securitizations, transfers and servicing of financial assets and
collateral and extinguishments of liabilities. This Statement is effective
for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. Management has determined that no
recognition and reclassification of collateral nor disclosures relating to
securitization transactions and collateral are required for the year ending
December 31, 2000. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March
31, 2001. Management does not believe that adoption of SFAS No. 140 with
respect to the transfers and servicing of financial assets and
56
extinguishments of liabilities will have a significant impact on the
Company's results of operations or financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a result of the Company's 1998 recapitalization, the Company has
significant long and short-term debt commitments outstanding as of December
31, 2000. These on-balance sheet financial instruments, to the extent they
provide for variable rates of interest, expose the Company to interest rate
risk. The Company manages its interest rate risk by entering into interest
rate swap agreements. All of the Company's derivative financial instrument
transactions are entered into for non-trading purposes.
To the extent that the Company's financial instruments, including
off-balance sheet derivative instruments, expose the Company to interest rate
risk and market risk, they are presented in the table below. For variable
rate debt obligations, the table presents principal cash flows and related
actual weighted average interest rates as of December 31, 2000. For fixed
rate debt obligations, the table presents principal cash flows and related
weighted average interest rates by maturity dates. For interest rate swap
agreements, the table presents notional amounts and the interest rates by
expected (contractual) maturity dates for the pay rate and actual interest
rates at December 31, 2000 for the receive rate. Note 9 of the Notes to
Financial Statements should be read in conjunction with the table below.
Expected Maturity Date of Long-Term Debt (Including Current Portion) and Fair Value
Interest Rate Swap Agreements at December 31, 2000 (In thousands) December
31, 2000
----------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total
Interest rate
sensitive
liabilities:
Variable rate
borrowings, 27,359 27,160 29,714 220,825 67,163 401,278 773,499 773,499
including short-
term amounts
Average interest
rate 9.43% 9.37% 9.35% 9.50% 9.78% 10.1%
Fixed rate borrowings -- -- -- -- -- 286,680 286,680 140,700
57
Average interest
rate -- -- -- -- -- 9.7%
27,359 27,160 29,714 220,825 67,163 687,958 1,060,179 914,199
======= ======= ======= ======= ======= ======= ========= =======
Derivatives matched
against
liabilities: 150,000 200,000 100,000 -- -- 450,000 392
Pay fixed swaps
Pay rate 5.51% 5.81% 5.77% -- -- -- -- --
Receive rate 6.73% 6.73% 6.73% -- -- -- -- --
Expected Maturity Date of Long-Term Debt (Including Current Portion) and Fair Value
Interest Rate Swap Agreements at December 31, 1999 (In thousands) December 31,
--------------------------------------------------------------------------- 1999
2000 2001 2002 2003 2004 Thereafter Total
Interest rate
sensitive
liabilities:
Variable rate
borrowings, 24,369 21,133 25,729 28,149 186,101 458,524 744,005 744,005
including short-
term amounts
Average interest
rate 7.18% 9.38% 7.88% 7.84% 8.28% 8.67%
Fixed rate borrowings -- -- -- -- -- 273,092 273,092 256,670
Average interest
rate -- -- -- -- -- 9.60%
24,369 21,133 25,729 28,149 186,101 731,616 1,017,097 1,000,675
======= ======= ======= ======= ======= ======= ========= =========
Derivatives matched
against
liabilities: -- 150,000 200,000 100,000 -- -- 450,000 9,283
Pay fixed swaps
Pay rate -- 5.51% 5.81% 5.77% -- -- -- --
Receive rate -- 6.47% 6.47% 6.47% -- -- -- --
58
December 31, 2000
Expected Fair Value
Maturity Date December 31,
2001 2000
------------- ------------
(US$ Equivalent)
US$ Functional Currency:
Forward Exchange Agreements
(Receive FF/Pay US$):
Contract Amount: $ 2,239,000 $ 2,382,000
Weighted Average Contractual Exchange Rate: 7.40 --
All of the forward exchange contracts outstanding as of December 31, 2000
matured in the first quarter of 2001. There were no forward exchange
contracts outstanding as of December 31, 1999. These forward exchange
contracts are accounted for as fair value hedges, and therefore, their
maturities had no effect on operations.
59
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Auditors 61
Audited Financial Statements 62
Consolidated Balance Sheets at December 31, 2000 and 1999 62
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 64
Statements of Partners' Capital/Owners' Equity (Deficit) for
the years ended December 31, 2000, 1999 and 1998 65
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 67
Notes to Financial Statements 69
60
INDEPENDENT AUDITORS' REPORT
To the Partners
Graham Packaging Holdings Company
We have audited the accompanying consolidated balance sheets of
Graham Packaging Holdings Company and subsidiaries (the "Company") as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, partners' capital (deficit), and cash flows for each of the three
years in the period ended December 31, 2000. Our audit also included
financial statement schedules I and II listed in the index at Item 14(a).
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 29, 2001
61
GRAHAM PACKAGING HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 9,844 $ 5,983
Accounts receivable, net 112,329 108,766
Inventories 65,401 52,847
Prepaid expenses and other current assets 12,572 17,138
---------- ----------
Total current assets 200,146 184,734
Property, plant and equipment:
Machinery and equipment 807,086 663,001
Land, buildings and leasehold improvements 108,245 95,636
Construction in progress 97,249 129,421
---------- ----------
1,012,580 888,058
Less accumulated depreciation and amortization 440,787 391,312
---------- ----------
571,793 496,746
Other assets 49,360 59,769
---------- ----------
Total assets $821,299 $ 741,249
========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable $146,659 $ 94,906
Accrued expenses 67,160 73,269
Current portion of long-term debt 27,359 24,370
---------- ----------
Total current liabilities 241,178 192,545
Long-term debt 1,032,820 992,730
Other non-current liabilities 11,618 13,327
Minority interest 62 618
Commitments and contingent liabilities (see Notes 18 and 19) -- --
Partners' capital (deficit):
Partners' capital (deficit) (433,997) (439,123)
62
Notes receivable for ownership interests (1,147) --
Accumulated other comprehensive income (29,235) (18,848)
---------- ----------
Total partners' capital (deficit) (464,379) (457,971)
---------- ----------
Total liabilities and partners' capital (deficit) $821,299 $ 741,249
========== ==========
See accompanying notes to financial statements.
63
GRAHAM PACKAGING HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31,
2000 1999 1998
Net sales $824,628 $716,084 $588,131
Cost of goods sold 689,567 573,431 472,731
--------- -------- ---------
Gross profit 135,061 142,653 115,400
Selling, general, and administrative expenses 56,747 48,016 37,765
Impairment charges 21,056 -- --
Special charges and unusual items 1,118 4,553 24,244
--------- -------- ---------
Operating income 56,140 90,084 53,391
Recapitalization expenses -- -- 11,769
Interest expense 102,202 88,260 68,379
Interest income (509) (786) (371)
Other expense (income) 265 (729) (122)
Minority interest (623) (442) --
--------- -------- ---------
(Loss) income before income taxes and extraordinary item (45,195) 3,781 (26,264)
Income tax provision 442 2,526 1,092
--------- -------- ---------
(Loss) income before extraordinary item (45,637) 1,255 (27,356)
Extraordinary loss from early extinguishment of debt -- -- 675
--------- -------- ---------
Net (loss) income $(45,637) $ 1,255 $(28,031)
========= ======== =========
See accompanying notes to financial statements.
64
GRAHAM PACKAGING HOLDINGS COMPANY
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(In thousands)
Notes Accumulated
Partners' Receivable Other Total
Capital for Ownership Comprehensive
(Deficit) Interests Income
Combined balance at January 1, 1998 $ 22,352 $ (20,240) $ 194 $ 2,306
Net loss for the year (28,031) -- -- (28,031)
Cumulative translation adjustment -- -- 3,283 3,283
---------- --------- --------- ----------
Comprehensive income (24,748)
Cash distributions to owners (6,852) -- -- (6,852)
Recapitalization (429,740) 20,240 -- (409,500)
---------- --------- --------- ----------
Consolidated balance at December 31, 1998 (442,271) -- 3,477 (438,794)
Net income for the year 1,255 -- -- 1,255
Cumulative translation adjustment -- -- (22,325) (22,325)
Comprehensive income (21,070)
Recapitalization 1,893 -- -- 1,893
---------- --------- --------- ----------
Consolidated balance at December 31, 1999 (439,123) -- (18,848) (457,971)
--
Net loss for the year (45,637) -- -- (45,637)
Cumulative translation adjustment -- -- (10,387) (10,387)
Comprehensive income (56,024)
Capital Contribution 50,000 (1,147) -- 48,853
65
Recapitalization 763 -- -- 763
---------- --------- --------- ----------
Consolidated balance at December 31, 2000 $(433,997) $(1,147) $(29,235) $(464,379)
========== ========= ========= ==========
See accompanying notes to financial statements.
66
GRAHAM PACKAGING HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2000 1999 1998
Operating activities:
Net (loss) income $(45,637) $ 1,255 $ (28,031)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 66,200 53,247 39,281
Impairment charges 21,056 - --
Amortization of debt issuance fees 4,658 4,749 3,823
Accretion of Senior Discount Notes 13,588 12,395 10,085
Extraordinary loss -- -- 675
Write-off of license fees -- -- 1,436
Minority interest (623) (442) --
Equity in earnings of joint venture (63) (231) (274)
Foreign currency transaction loss (gain) 292 (11) 43
Other non-cash recapitalization expense 763 1,865 3,419
Changes in operating assets and liabilities, net of
acquisitions of businesses:
Accounts receivable (6,898) (25,262) (1,565)
Inventories (13,753) (12,315) (801)
Prepaid expenses and other current assets 4,191 (2,955) (4,025)
Other non-current assets and liabilities (1,406) 1,099 450
Accounts payable and accrued expenses 48,523 22,131 17,291
--------- --------- ----------
Net cash provided by operating activities 90,891 55,525 41,807
Investing activities:
Net purchases of property, plant and equipment (163,429) (170,972) (133,912)
Acquisitions of/investments in businesses, net of cash (109) (10,284) (45,152)
acquired
Other (1,145) (500) (2,130)
--------- --------- ----------
Net cash used in investing activities (164,683) (181,756) (181,194)
Financing activities:
Proceeds from issuance of long-term debt 443,496 480,462 1,130,411
Payment of long-term debt (412,986) (354,152) (271,068)
Recapitalization debt repayments -- -- (264,410)
Recapitalization owner note repayments -- -- 20,240
67
Recapitalization cash distributions to owners -- -- (429,566)
Other cash distributions to owners -- -- (6,852)
Notes for ownership interests (1,147) -- --
Capital contributions 50,000 -- --
Contributions from minority shareholders 68 -- --
Debt issuance fees (1,038) (123) (39,100)
--------- --------- ----------
Net cash provided by financing activities 78,393 126,187 139,655
Effect of exchange rate changes (740) (1,449) (10)
--------- --------- ----------
Increase (decrease) in cash and cash equivalents 3,861 (1,493) 258
Cash and cash equivalents at beginning of year 5,983 7,476 7,218
--------- --------- ----------
Cash and cash equivalents at end of year $ 9,844 $ 5,983 $ 7,476
========= ========= ==========
See accompanying notes to financial statements.
68
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. Summary of Significant Accounting Policies
Principles of Consolidation and Combination
The consolidated and combined financial statements include the
operations of Graham Packaging Holdings Company, a Pennsylvania limited
partnership formerly known as Graham Packaging Company ("Holdings"); Graham
Packaging Company, L.P., a Delaware limited partnership formerly known as
Graham Packaging Holdings I, L.P. (the "Operating Company"); Graham Packaging
Italy, S.r.L.; Graham Packaging France Partners; Graham Packaging Poland,
L.P.; Graham Packaging do Brasil Industria e Comercio S.A.; Graham Packaging
Canada Limited; Graham Recycling Company, L.P.; subsidiaries thereof; and
land and buildings that were used in the operations, owned by the control
group of owners and contributed to the Company (as defined below). Prior to
February 2, 1998, these operations of the Company were under common control
by virtue of ownership by the Donald C. Graham family. In addition, the
2000, 1999, and 1998 consolidated financial statements of the Company include
GPC Capital Corp. I, a wholly owned subsidiary of the Operating Company and
GPC Capital Corp. II, a wholly owned subsidiary of Holdings. The purpose of
GPC Capital Corp. I is solely to act as co-obligor with the Operating
Company under the Senior Subordinated Notes (as herein defined) and as co-
borrower with the Operating Company under the Senior Credit Agreement (as
herein defined), and the purpose of GPC Capital Corp. II is solely to act as
co-obligor with Holdings under the Senior Discount Notes and as co-guarantor
with Holdings of the Senior Credit Agreement. GPC Capital Corp. I and GPC
Capital Corp. II have only nominal assets and do not conduct any independent
operations. Furthermore, since July 27, 1998 the consolidated financial
statements of the Company include the operations of Graham Emballages
Plastiques S.A.; Graham Packaging U.K. Ltd.; Graham Plastpak Plastik Ambalaj
A.S.; and Graham Packaging Deutschland GmbH as a result of the acquisition of
selected plants of Crown Cork & Seal. Since July 1, 1999 the consolidated
financial statements of the Company include the operations of Graham
Packaging Argentina S.A. as a result of the acquisition of companies in
Argentina. Since July 6, 1999 the consolidated financial statements of the
Company include the operations of PlasPET Florida, Ltd. as a result of an
investment made in a limited partnership. (Refer to Note 3 for a discussion
of each of these investments). These entities and assets are referred to
69
collectively as Graham Packaging Holdings Company (the "Company"). With
respect to the periods subsequent to the Recapitalization that occurred on
February 2, 1998 (see Note 2), the financial statements and references to the
"Company" relate to Holdings and its subsidiaries on a consolidated basis and
for the period prior to the Recapitalization, to the "Company" on a combined
basis. The combined financial statements include the accounts and results of
operations of the Company for all periods that the operations were under
common control. All amounts in the financial statements are those reported
in the historic financial statements of the individual operations. All
significant intercompany accounts and transactions have been eliminated in
the consolidated and combined financial statements.
Since the Recapitalization, Holdings has had no assets, liabilities
or operations other than its direct and indirect investments in the Operating
Company, its ownership of GPC Capital Corp. II and the Senior Discount Notes
and related unamortized issuance costs. Holdings has fully and
unconditionally guaranteed the Senior Subordinated Notes of the Operating
Company and GPC Capital Corp. I on a senior subordinated basis. Holdings is
jointly and severely liable with GPC Capital Corp. II with respect to all
obligations on the Senior Discount Notes of Holdings and GPC Capital Corp.
II.
Description of Business
The Company sells plastic packaging products principally to large,
multinational companies in the food and beverage, household and personal care
and automotive industries. The Company has manufacturing facilities in
Argentina, Belgium, Brazil, Canada, France, Germany, Hungary, Italy, Poland,
Spain, Turkey, the United Kingdom and the United States.
Investment in Joint Venture
The Company accounts for its investment in a joint venture in
Sulejowek, Poland under the equity method of accounting.
Revenue Recognition
Sales are recognized as products are shipped and upon passage of
title to the customer.
70
Cash and Cash Equivalents
The Company considers cash and investments with a maturity of three
months or less when purchased to be cash and cash equivalents.
Inventories
Inventories are stated at the lower of cost or market with cost
determined by the first-in, first-out (FIFO) method (see Note 5).
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation and
amortization are computed by the straight-line method over the estimated
useful lives of the various assets ranging from 3 to 31.5 years. Lease
amortization is included in depreciation expense. Interest costs are
capitalized during the period of construction of capital assets as a
component of the cost of acquiring these assets.
Other Assets
Other assets include debt issuance fees, goodwill, and other
intangible assets. Debt issuance fees totaled $24.0 million and $27.6
million as of December 31, 2000 and 1999, respectively. These amounts are
net of accumulated amortization of $13.2 million and $8.5 million as of
December 31, 2000 and 1999, respectively. Amortization is computed by the
effective interest method over the term of the related debt for debt issuance
fees and by the straight-line method for goodwill, license fees and other
intangible assets. The term used in computing amortization for goodwill is
twenty years, and for license fees and other intangible assets, from two to
ten years. Goodwill was $17.6 million and $25.1 million as of December 31,
2000 and 1999, respectively. These amounts are net of accumulated amortization
of $2.6 million and $1.9 million as of December 31, 2000 and 1999, respectively.
Goodwill is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the goodwill may not be recoverable. See
Note 6.
Long-Lived Assets
Long-lived assets, including goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company uses
an estimate of the future undiscounted net cash flows of the related asset or
71
asset grouping over the remaining life in measuring whether the assets are
recoverable. Any impairment loss, if indicated, is measured on the amount by
which the carrying amount of the asset exceeds the estimated fair value of
the asset. When fair values are not available, the Company estimates fair
value using the expected future cash flows discounted at a rate commensurate
with the risk involved. Enterprise goodwill not associated with assets being
tested for impairment under Statement of Financial Accounting Standards No.
121 is evaluated based on a comparison of discounted future cash flows of the
enterprise compared to the related net book value of the enterprise.
Derivatives
The Company enters into interest rate swap agreements to hedge the
exposure to increasing rates with respect to its Credit Agreement. The
differential to be paid or received as a result of these swap agreements is
accrued as interest rates change and recognized as an adjustment to interest
expense related to the Credit Agreement. The Company also enters into
forward exchange contracts, when considered appropriate, to hedge the
exchange rate exposure on transactions that are denominated in a foreign
currency.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended by SFAS 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether
designated in hedging relationships or not, will be required to be recorded
on the balance sheet at fair value. If the derivative is designated as a
fair value hedge, the changes in the fair value of the derivative and the
hedged item will be recognized in earnings. If the derivative is designated
as a cash-flow hedge, changes in the fair value of the derivative will be
recorded in other comprehensive income (OCI) and will be recognized in the
income statement when the hedged item affects earnings. The Company does not
expect the amount to be recognized in earnings in 2001 to be material. SFAS
133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use
hedge accounting. For a derivative that does not qualify as a hedge, changes
in fair value will be recognized in earnings. On January 1, 2001, in
connection with the adoption of the new Statement, the Company will record
$0.4 million in OCI as a cumulative transition adjustment for derivatives
designated as cash flow-type hedges prior to adopting SFAS 133.
72
Foreign Currency Translation
The Company uses the local currency as the functional currency for
all foreign operations. All assets and liabilities of foreign operations are
translated into U.S. dollars at year-end exchange rates. Income statement
items are translated at average exchange rates prevailing during the year.
The resulting translation adjustments are included in accumulated other
comprehensive income as a component of partners' capital (deficit).
Comprehensive Income
Foreign currency translation adjustments are included in other
comprehensive income and added with net income to determine total
comprehensive income which is displayed in the Statements of Partners'
Capital (Deficit).
Income Taxes
The Company does not pay U.S. federal income taxes under the
provisions of the Internal Revenue Code, as the applicable income or loss is
included in the tax returns of the partners. For the Company's
foreign operations subject to tax in their local jurisdictions, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and are measured using enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to
reverse.
Management Option Plan
The Company accounts for equity based compensation to employees using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123,
"Accounting For Stock Based Compensation", established accounting and
disclosure requirements using a fair-value based method of accounting for
equity based employee compensation plans. The Company has elected to remain
on its current method of accounting as described above and has adopted the
disclosure requirements of SFAS No. 123.
73
Postemployment Benefits
The Company maintains a Supplemental Income Plan, which provides
postemployment benefits to a certain employee of the Company. Accrued
postemployment benefits of approximately $1.0 million and $0.7 million as of
December 31, 2000 and 1999, respectively, were included in other non-current
liabilities.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications
Certain Reclassifications have been made to the 1999 and 1998
financial statements to conform to the 2000 presentation.
New Accounting Pronouncements Not Yet Adopted
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement provides accounting and reporting requirements
for securitizations, transfers and servicing of financial assets and
collateral and extinguishments of liabilities. This Statement is effective
for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. Management has determined that no
recognition and reclassification of collateral nor disclosures relating to
securitization transactions and collateral are required for the year ending
December 31, 2000. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March
31, 2001. Management does not believe that adoption of SFAS No. 140 with
respect to the transfers and servicing of financial assets and
extinguishments of liabilities will have a significant impact on the
Company's results of operations or financial position.
74
2. Recapitalization
Pursuant to an Agreement and Plan of Recapitalization, Redemption and
Purchase, dated as of December 18, 1997 (the "Recapitalization Agreement"),
(i) Holdings, (ii) the owners of the Company (the "Graham Entities") and
(iii) BMP/Graham Holdings Corporation, a Delaware corporation formed by
Blackstone Capital Partners III Merchant Banking Fund L.P. ("Investor LP"),
and BCP/Graham Holdings L.L.C., a Delaware limited liability company and a
wholly owned subsidiary of Investor LP ("Investor GP" and together with
Investor LP, the "Equity Investors") agreed to a recapitalization of Holdings
(the "Recapitalization"). Closing under the Recapitalization Agreement
occurred on February 2, 1998.
The principal components and consequences of the Recapitalization
included the following:
- A change in the name of Holdings to Graham Packaging Holdings
Company;
- The contribution by Holdings of substantially all of its assets
and liabilities to the Operating Company, which was renamed
"Graham Packaging Company, L.P.";
- The contribution by certain Graham Entities to the Company of
their ownership interests in certain partially-owned subsidiaries
of Holdings and certain real estate used but not owned by
Holdings and its subsidiaries;
- The initial borrowing by the Operating Company of $403.5 million
(the "Bank Borrowings") in connection with the Senior Credit
Agreement entered into by and among the Operating Company,
Holdings and a syndicate of lenders;
- The issuance of $225 million Senior Subordinated Notes by the
Operating Company and $100.6 million gross proceeds ($169 million
aggregate principal amount at maturity) Senior Discount Notes by
Holdings. A wholly owned subsidiary of each of the Operating
Company and Holdings serves as co-issuer with its parent for its
respective issue of Notes;
- The repayment by the Operating Company of substantially all of
the existing indebtedness and accrued interest of Holdings and
its subsidiaries;
75
- The distribution by the Operating Company to Holdings of all of
the remaining net proceeds of the Bank Borrowings and the Senior
Subordinated Notes (other than amounts necessary to pay certain
fees and expenses and payments to Management);
- The redemption by Holdings of certain partnership interests in
Holdings held by the Graham Entities for $429.6 million;
- The purchase by the Equity Investors of certain partnership
interests in Holdings held by the Graham Entities for $208.3
million;
- The repayment by the Graham Entities of amounts owed to Holdings
under the $20.2 million promissory notes;
- The recognition of additional compensation expense under the
Equity Appreciation Plan;
- The payment of certain bonuses and other cash payments and the
granting of certain equity awards to senior and middle level
management;
- The execution of various other agreements among the parties; and
- The payment of a $6.2 million tax distribution by the Operating
Company on November 2, 1998 to certain Graham Entities for tax
periods prior to the Recapitalization.
As a result of the consummation of the Recapitalization, Investor LP
owns an 81% limited partnership interest in Holdings, and Investor GP owns a
4% general partnership interest in Holdings. Certain Graham Entities or
affiliates thereof or other entities controlled by Donald C. Graham and his
family, have retained a 1% general partnership interest and a 14% limited
partnership interest in Holdings. Additionally, Holdings owns a 99% limited
partnership interest in the Operating Company, and GPC Opco GP L.L.C., a
wholly owned subsidiary of Holdings, owns a 1% general partnership interest
in the Operating Company.
As a result of the Recapitalization, the Company incurred charges of
approximately $32 million related to the issuance of debt which will be
recognized as interest expense over 6 to 11 years based upon the terms of the
related debt instruments. In addition, Recapitalization expenses of
approximately $25 million, which related to transaction fees, expenses,
76
compensation, unamortized licensing fees and costs associated with the
termination of the interest rate collar and swap agreements were incurred.
The portion of these costs related to financing activities have been
classified as Recapitalization expenses on the 1998 consolidated statement of
operations. The compensation related costs are included in special charges
and unusual items. The Recapitalization also resulted in the write-off of
unamortized debt issuance fees, which is reflected as an extraordinary loss
in the financial statements. Compensation expense totaling $10.7 million, of
which $10.6 million had been expensed as of December 31, 2000, related to
stay bonuses and the granting of certain ownership interests to management
which will be recognized over a period up to three years from the date of the
Recapitalization. See Note 15.
3. Acquisitions
Purchase of Certain Plants of Crown, Cork & Seal:
On July 27, 1998 the Company acquired selected plastic bottle
manufacturing operations of Crown, Cork & Seal located in France, Germany,
the United Kingdom and Turkey for a total purchase price (including
acquisition-related costs) of $41.4 million, net of liabilities assumed. The
acquisition was recorded under the purchase method of accounting and
accordingly, the results of operations of the acquired operations are
included in the financial statements of the Company beginning on July 27,
1998. The purchase price has been allocated to assets acquired and
liabilities assumed based on fair values. Goodwill is being amortized over 20
years on the straight-line basis. The allocated fair value of assets
acquired and liabilities assumed is summarized as follows (in thousands):
Current assets $21,965
Property, plant and equipment 29,845
Other assets 2,274
Goodwill 14,725
-------
Total 68,809
Less liabilities assumed 27,381
-------
Net cost of acquisition $41,428
=======
Purchase of Rheem-Graham Embalagens, Ltda:
On April 30, 1997, Graham Packaging do Brasil Industria e Comercio
S.A., then a wholly owned subsidiary of Holdings with no operations, and
77
owners of Holdings, acquired 80% of the operating assets of Rheem-Graham
Embalagens Ltda., which manufactures and sells plastic packaging products,
from Rheem Empreendimentos Industrialis e Comerciais. Rheem Empreendimentos
Industrialis e Comerciais contributed the remaining 20% of the operating
assets of Rheem-Graham Embalagens Ltda. in exchange for a 20% minority
interest in Graham Packaging do Brasil Industria e Comercio S.A. The
purchase price related to the 80% of the operating assets of Rheem-Graham
Embalagens Ltda. was approximately $21.1 million, which was funded through
borrowings under the Company's bank facilities. The acquisition was recorded
under the purchase method of accounting and accordingly, the results of
operations of the business acquired by Graham Packaging do Brasil Industria e
Comercio S.A. are included in the financial statements of the Company
beginning on April 30, 1997, less a minority interest amount equal to 20% of
Graham Packaging do Brasil Industria e Comercio S.A. owned by the
unaffiliated entity. The purchase price has been allocated to assets
acquired and liabilities assumed based upon fair values on the date of
acquisition. The fair value of assets and liabilities acquired and
contributed to Graham Packaging do Brasil Industria e Comercio S.A. is
summarized as follows (in thousands):
Net working capital $2,451
Property, plant and equipment 23,679
-------
$26,130
=======
In February 1998, the Company acquired the remaining 20% minority interest of
$5.0 million in Graham Packaging do Brasil Industria e Comercio S.A. from Rheem
Empreendimentos Industrialis e Comerciais for $3.0 million. The difference of
$2.0 million has been recorded as a reduction of the carrying amount of
property, plant & equipment.
Purchase of Graham Packaging Argentina S.A.
On July 1, 1999 the Company acquired selected companies located in
Argentina for a total purchase price (including acquisition-related costs) of
$8.6 million, net of liabilities assumed. The acquisition was recorded under
the purchase method of accounting and accordingly, the results of operations
of the acquired operations are included in the financial statements of the
Company beginning on July 1, 1999. The purchase price has been allocated to
assets acquired and liabilities assumed based on fair values. Goodwill is
being amortized over 20 years on the straight-line basis. The allocated fair
value of assets acquired and liabilities assumed is summarized as follows (in
thousands):
78
Current Assets . . . . . . . . . . . $ 2,831
Property, plant and equipment . . . 4,840
Goodwill . . . . . . . . . . . . . . 9,153
--------
Total . . . . . . . . . . . . . . . 16,824
Less liabilities assumed . . . . . . 8,244
--------
Net cost of acquisition . . . . . . $ 8,580
========
Investment in Limited Partnership of PlasPET Florida, Ltd.
On April 26, 1999 the Company acquired 51% of the operating assets of
PlasPET Florida, Ltd., while becoming the general partner on July 6, 1999,
for a total purchase price (including acquisition-related costs) of $1.2
million, net of liabilities assumed. The investment was accounted for under
the equity method of accounting prior to July 6, 1999. The acquisition was
recorded on July 6, 1999 under the purchase method of accounting and
accordingly, the results of operations of the acquired operations are
included in the financial statements of the Company beginning on July 6,
1999. The purchase price has been allocated to assets acquired and
liabilities assumed based on fair values. Goodwill is being amortized over
20 years on the straight-line basis. The allocated fair value of assets
acquired and liabilities assumed is summarized as follows (in thousands):
Current Assets . . . . . . . . . . . $ 443
Property, plant and equipment . . . 4,689
Other Assets . . . . . . . . . . . . 132
Goodwill . . . . . . . . . . . . . . 2,841
------
Total . . . . . . . . . . . . . . . 8,105
Less liabilities assumed . . . . . . 6,907
------
Net cost of acquisition . . . . . . $1,198
======
Even though the Company reported in the Report on Form 10-Q for the quarterly
period ended October 1, 2000 that it had committed to the sale of its 51%
interest in PlasPET Florida, Ltd., the sale was not completed as of the date
of this filing.
79
Pro Forma Information
The following table sets forth unaudited pro forma results of
operations, assuming that all of the above acquisitions had taken place at
the beginning of each period presented: .
Year Ended December 31,
-------------------------
1999 1998
---- ----
(In thousands)
Net sales $721,756 $645,578
Net loss (142) (29,334)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in the basis of fixed assets
and increased interest expense on acquisition debt. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combinations been in effect at the beginning of each period
presented, or of future results of operations of the entities.
4. Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful
accounts of $1.2 million and $1.8 million at December 31, 2000 and 1999,
respectively. Management performs ongoing credit evaluations of its
customers and generally does not require collateral.
The Company's sales to one customer, which exceeded 10% of total sales
in each of the past three years, were 11.4%, 10.2% and 12.0% for
the years ended December 31, 2000, 1999 and 1998, respectively. For the year
ended December 31, 2000, approximately 63%, 32% and 45% of the sales to this
customer were made in the United States, Europe and Canada, respectively.
80
5. Inventories
Inventories consisted of the following:
December 31,
------------
2000 1999
---- ----
(In thousands)
Finished goods $43,085 $32,551
Raw materials and parts 22,316 20,296
------- -------
$65,401 $52,847
======= =======
6. Impairment Charges
Due to operating losses experienced and projected in the Company's
United Kingdom operations and certain Canadian and French operations, and an
inability to utilize certain assets in the Company's Brazilian operations,
the Company evaluated the recoverability of its long-lived assets in these
locations. The Company determined that the undiscounted cash flows were
below the carrying value of certain long-lived assets in these locations.
Accordingly, the Company adjusted the carrying values of these long-lived
assets in these locations to their estimated fair values, resulting in an
impairment charge of $16.3 million. Similarly, the Company evaluated the
recoverability of its goodwill in these locations, and consequently recorded
an impairment charge of $4.8 million. Goodwill was evaluated for impairment
and the resulting impairment charge recognized based on a comparison of the
related net book value of the enterprise to projected discounted future cash
flows of the enterprise.
In the first quarter of 2001, the Company announced the closing of
its facility in Anjou, Quebec, Canada. Manufacturing operations are expected
to cease during the second quarter of 2001. The Company believes the effect
of the closing will not have a material adverse impact on its financial
condition and results of operations.
81
7. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
------------
2000 1999
---- ----
(In thousands)
Accrued employee compensation and benefits $22,800 $21,116
Accrued interest 14,962 21,432
Other 29,398 30,721
------- -------
$67,160 $73,269
======= =======
For the year ended December 31, 2000, the Company incurred
reorganization costs in North America and Europe of $4.5 million, which
included the legal liability of severing 53 employees. These costs are
classified within selling, general, and administrative expenses ($3.9
million) and cost of goods sold ($0.6 million) in the consolidated statement
of operations. The amount of the reorganization costs paid and the amount
of the remaining accrual as of December 31, 2000 was $0.9 million and $3.6
million, respectively. The remaining accrual as of December 31, 2000 is
included within accrued employee compensation and benefits ($3.5 million) and
other accrued expenses ($0.1 million), above.
8. Debt Arrangements
Long-term debt consisted of the following:
December 31,
------------
2000 1999
---- ----
(In thousands)
Term loan $ 546,900 $ 561,850
Revolving loan 125,500 92,500
Revolving credit facilities 5,805 8,709
Senior Subordinated Notes 225,000 225,000
Senior Discount Notes 136,680 123,092
Other 20,294 5,949
---------- ----------
1,060,179 1,017,100
82
Less amounts classified as current 27,359 24,370
---------- ----------
$1,032,820 $ 992,730
========== ==========
On February 2, 1998, as discussed in Note 2 to the Financial Statements, the
Company refinanced the majority of its existing credit facilities in
connection with the Recapitalization and entered into a senior Credit
Agreement (the "Senior Credit Agreement") with a consortium of banks. The
Senior Credit Agreement was amended on August 13, 1998 to provide for an
additional Term Loan Borrowing of an additional $175 million and on March 30,
2000 as described below (the "Amendments"). The Senior Credit Agreement and
the Amendments consist of four term loans to the Operating Company with
initial term loan commitments totaling $570 million and two revolving loan
facilities to the Operating Company totaling $255 million. The unused
availability of the revolving credit facilities at December 31, 2000 and 1999
was $128.3 million and $160.5 million, respectively. The obligations of
the Operating Company under the Senior Credit Agreement and Amendments are
guaranteed by Holdings and certain other subsidiaries of Holdings. The term
loans are payable in quarterly installments through January 31, 2007, and
require payments of $20.0 million in 2001, $25.0 million in 2002, $27.5
million in 2003, $93.0 million in 2004 and $64.9 million in 2005. The
revolving loan facilities expire on January 31, 2004. Interest is payable at
(a) the "Alternate Base Rate" (the higher of the Prime Rate or the Federal
Funds Rate plus 0.50%) plus a margin ranging from 0% to 2.25%; or (b) the
"Eurocurrency Rate" (the applicable interest rate offered to banks in the
London interbank eurocurrency market) plus a margin ranging from 0.625% to
3.25%. A commitment fee ranging from 0.20% to 0.50% is due on the unused
portion of the revolving loan commitment. As part of the Amendments to the
Senior Credit Agreement, if certain events of default were to occur, or if
the Company's Net Leverage Ratio were above 5.15:1.0 at September 30, 2000,
Blackstone agreed to make an equity contribution to the Company through the
administrative agent of up to $50 million. An equity contribution of $50
million was made by the Company's owners to the Company on September 29,
2000, satisfying Blackstone's obligation under the Amendments. The Company's
Net Leverage Ratio being above 5.15:1.0 at September 30, 2000 was not an
event of default under the Senior Credit Agreement and Amendments. The March
30, 2000 Amendment also changes the terms under which the Company can access
$100 million of Growth Capital Revolving Loans from a dollar for dollar
equity match to a capital call with various test dates based on certain
leverage tests for quarters ending on or after June 30, 2001. The March 30,
2000 Amendment provides for up to an additional $50 million equity contribution
by Blackstone; allows the proceeds of the equity contribution (if required) to
83
be applied to Revolving Credit Loans; and changes certain covenants,
principally to increase the amount of permitted capital expenditures in 2000
and subsequent years. Pursuant to the terms of the Capital Call Agreement,
an additional equity contribution of $50 million was made by the
Company's owners to the Company on March 29, 2001, satisfying Blackstone's
final obligation under the Capital Call Agreement dated as of August 13, 1999,
as amended on March 29, 2000. This equity contribution was made in advance
and in satisfaction of any capital call tests for quarters ending on or
after June 30, 2001. The Company used the proceeds of the Capital Calls to
reduce its outstanding Revolving Credit Loans. In addition, the Senior
Credit Agreement and Amendments contain certain affirmative and negative
covenants as to the operations and financial condition of the Company, as
well as certain restrictions on the payment of dividends and other
distributions to Holdings. On December 31, 2000 the Company was in
compliance with the covenants.
Substantially all domestic tangible and intangible assets of the
Company are pledged as collateral pursuant to the terms of the Senior Credit
Agreement and Amendment.
The Recapitalization also included the issuance of $225 million in
Senior Subordinated Notes of the Operating Company and $100.6 million gross
proceeds in Senior Discount Notes ($169 million aggregate principal amount at
maturity) of Holdings. The Senior Subordinated Notes are unconditionally
guaranteed on a senior subordinated basis by Holdings and mature on January
15, 2008, with interest payable on $150 million at a fixed rate of 8.75% and
with interest payable on $75 million at LIBOR plus 3.625%. The Senior
Discount Notes mature on January 15, 2009, with cash interest payable
beginning January 15, 2003 at 10.75%. The effective interest rate to
maturity on the Senior Discount Notes is 10.75%.
At December 31, 2000, the Operating Company had entered into three
U.S. Dollar interest rate swap agreements that effectively fix the
Eurocurrency Rate on $450 million of the term loans, on $200 million through
April 9, 2002 at 5.8075%, on $100 million through April 9, 2003 at 5.77% and
on $150 million through September 10, 2001 at 5.5075%.
Under the Senior Credit Agreement, the Operating Company is subject
to restrictions on the payment of dividends or other distributions to
Holdings; provided that, subject to certain limitations, the Operating
Company may pay dividends or other distributions to Holdings:
- in respect of overhead, tax liabilities, legal, accounting and
other professional fees and expenses;
- to fund purchases and redemptions of equity interests of Holdings
or Investor LP held by then present or former officers or
employees of Holdings, the Operating Company or their
Subsidiaries (as defined) or by any employee stock ownership plan
84
upon such person's death, disability, retirement or termination
of employment or other circumstances with certain annual dollar
limitations; and
- to finance, starting on July 15, 2003, the payment of cash
interest payments on the Senior Discount Notes.
On September 8, 1998, Holdings and GPC Capital Corp. II consummated
an exchange offer for all of their outstanding Senior Discount Notes Due 2009
which had been issued on February 2, 1998 (the "Senior Discount Old Notes")
and issued in exchange therefor their Senior Discount Notes Due 2009, Series
B (the "Senior Discount Exchange Notes"), and the Operating Company and GPC
Capital Corp. I consummated exchange offers for all of their outstanding
Senior Subordinated Notes Due 2008 which had been issued on February 2, 1998
(the "Senior Subordinated Old Notes" and, together with the Senior Discount
Old Notes, the "Old Notes") and issued in exchange therefor their Senior
Subordinated Notes Due 2008, Series B (the "Senior Subordinated Exchange
Notes" and, together with the Senior Discount Exchange Notes, the "Exchange
Notes"). Each issue of Exchange Notes has the same terms as the
corresponding issue of Old Notes, except that the Exchange Notes are
registered under the Securities Act of 1933 and do not include the
restrictions on transfer applicable to the Old Notes. The Senior
Subordinated Old Notes were, and the Senior Subordinated Exchange Notes are,
fully and unconditionally guaranteed by Holdings on a senior subordinated
basis.
The Company's effective rate on the outstanding borrowings under the
term loan and revolving loan was 9.77% and 8.40% at December 31, 2000 and
1999, respectively.
The Company had several variable-rate revolving credit facilities
denominated in U.S. Dollars, French Francs and Italian Lira, with aggregate
available borrowings at December 31, 2000 equivalent to $6.7 million. The
Company's average effective rate on borrowings of $5.8 million on these
credit facilities at December 31, 2000 was 9.53%. The Company's average
effective rate on borrowings of $8.7 million on these credit facilities at
December 31, 1999 was 8.53%.
Interest paid during 2000, 1999 and 1998, net of amounts capitalized
of $4.2 million, $3.7 million and $2.6 million, respectively, totaled $90.6
million, $66.2 million and $42.0 million, respectively.
85
The annual debt service requirements of the Company for the
succeeding five years are as follows: 2001--$27.4 million; 2002--$27.2
million; 2003--$29.7 million; 2004--$220.8 million and 2005--$67.2 million.
9. Fair Value of Financial Instruments and Derivatives
The following methods and assumptions were used to estimate the fair
values of each class of financial instruments:
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable
The fair values of these financial instruments approximate their
carrying amounts.
Long-Term Debt
The fair values of the variable-rate, long-term debt instruments
approximate their carrying amounts. The fair value of other long-term debt
was based on market price information and was estimated using discounted cash
flow analyses based on current incremental borrowing rates for similar types
of borrowing arrangements. Other long-term debt includes the Senior Discount
Notes and $150 million of Senior Subordinated Notes and totaled
approximately $286.7 million and $273.1 million at December 31, 2000 and
1999, respectively. The fair value of this long-term debt, including the
current portion, was approximately $140.7 million and $256.7 million at
December 31, 2000 and 1999, respectively.
Derivatives
The Company is exposed to market risk from changes in interest rates
and currency exchange rates. The Company manages these exposures on a
consolidated basis and enters into various derivative transactions for
selected exposure areas. The financial impacts of these hedging instruments
are offset by corresponding changes in the underlying exposures being hedged.
The Company does not hold or issue derivative financial instruments for
trading purposes.
Interest rate swap agreements are used to hedge exposure to interest
rates associated with the Company's Credit Agreement. Under these
agreements, the Company agrees to exchange with a third party at specified
intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed-upon notional principal amount. The
86
interest rate differential is reflected as an adjustment to interest expense
over the life of the interest rate swap agreements.
The following table presents information for all interest rate
instruments. The notional amount does not necessarily represent amounts
exchanged by the parties and, therefore is not a direct measure of the
Company's exposure to credit risk. The fair value approximates the cost to
settle the outstanding contracts. The carrying value, which represents
accrued interest due to counterparties under swap agreements, was not
significant.
(in thousands) 2000 1999
---- ----
Notional amount $450,000 $450,000
Fair value 392 9,283
Although derivatives are an important component of the Company's
interest rate management program, their incremental effect on interest
expense for 2000, 1999 and 1998 was not significant.
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. The Company utilizes foreign currency
hedging activities to protect against volatility associated with purchase
commitments that are denominated in foreign currencies for machinery,
equipment and other items created in the normal course of business. The
terms of these contracts are generally less than one year.
Gains and losses related to qualifying hedges of foreign currency
firm commitments or anticipated transactions are deferred in other current
assets and are included in the basis of the underlying transactions. To the
extent that a qualifying hedge is terminated or ceases to be effective as a
hedge, any deferred gains and losses up to that point continue to be deferred
and are included in the basis of the underlying transaction. At December 31,
2000 the Company had foreign currency forward exchange contracts totaling
$2.2 million with a fair value of $2.4 million. The deferred gains and losses
on these instruments were not significant. There were no currency forward
contracts outstanding at December 31, 1999.
Credit risk arising from the inability of a counterparty to meet the
terms of the Company's financial instrument contracts is generally limited to
the amounts, if any, by which the counterparty's obligations exceed the
obligations of the Company. It is the Company's policy to enter into
financial instruments with a diversity of creditworthy counterparties.
87
Therefore, the Company does not expect to incur material credit losses on its
risk management or other financial instruments.
10. Lease Commitments
The Company was a party to various leases involving real property and
equipment during 2000, 1999 and 1998. Total rent expense for operating leases
amounted to $17.3 million in 2000, $13.5 million in 1999 and $10.6 million in
1998. Minimum future lease obligations on long-term noncancelable operating
leases in effect at December 31, 2000, are as follows: 2001--$12.7 million;
2002--$11.6 million; 2003--$10.5 million; 2004--$7.9 million; 2005--$5.6
million and thereafter--$25.1 million.
11. Transactions with Affiliates
Transactions with entities affiliated through common ownership
included the following:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In thousands)
Equipment purchases from affiliates $8,451 $20,367 $22,045
Management services provided by affiliates, including
management, legal, tax, accounting, insurance,
treasury, and employee benefits administration $2,020 $ 2,028 $ 2,071
services
Management services provided and sales to Graham
Engineering Corporation, including engineering
services and raw materials $ 51 $ 2,453 $ 1,414
Loans to Management for equity contribution $1,147 $ -- $ --
Interest income on notes receivable from owners $ -- $ -- $ 103
88
Account balances with affiliates include the following:
Year Ended December 31,
-----------------------
2000 1999
---- ----
(In thousands)
Accounts receivable $95 $ 529
Accounts payable $270 $ 513
Certain land and buildings included in the accompanying financial
statements were leased by the Company from the control group of owners under
operating leases until the assets were contributed to the Company as part of
the Recapitalizaton and the related leases were terminated. The depreciation
and operating expenses related to the land and buildings are included in the
operations of the Company.
12. Pension Plans
Substantially all employees of the Company participate in
noncontributory, defined benefit or defined contribution pension plans.
The U.S. defined benefit plan covering salaried employees provides
retirement benefits based on the final five years average compensation, while
plans covering hourly employees provide benefits based on years of service.
The Company's policy is to fund the normal cost plus amounts required to
amortize actuarial gains and losses and prior service costs over a period of
ten years. U.S. Plan assets consist of a diversified portfolio including
U.S. Government securities, certificates of deposit issued by commercial
banks, and domestic common stocks and bonds.
Prior to the Recapitalization, the Company participated in a plan
sponsored by an affiliated company. As part of the Recapitalization, the
Company's portion of pension obligations and related plan assets were spun
off into a newly established plan. The transactions resulted in a one-time
allocation of additional plan assets.
The following table sets forth the change in the Company's benefit
obligation and pension plan assets at market value for the years ended
December 31, 2000 and 1999:
89
2000 1999
---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $(33,375) $(23,568)
Service cost (2,731) (2,739)
Interest cost (2,319) (1,975)
Benefits paid 592 599
Employee Contribution (230) (239)
Change in benefit payments due to experience (89) (10)
Effect of exchange rate changes 754 (194)
Acquisitions -- (6,511)
Decrease in benefit obligation due to change in discount rate 1,607 2,149
Increase in benefit obligation due to plan experience (949) (540)
Increase in benefit obligation due to plan change (866) (347)
--------- ---------
Benefit obligation at end of year $(37,606) $(33,375)
Change in plan assets:
Plan assets at market value at beginning of year $32,051 $20,263
Actual return on plan assets (573) 3,782
Foreign currency exchange rate changes (704) 182
Employer contribution 3,084 2,343
Employee Contribution 230 239
Benefits paid (590) (599)
Acquisitions -- 5,841
--------- ---------
Plan assets at market value at end of year $33,498 32,051
Funded status (4,108) (1,324)
Unrecognized net actuarial loss (391) (3,299)
Unrecognized prior service cost 1,851 1,244
--------- ---------
Accrued pension expense $(2,648) $(3,379)
========= =========
The accrued pension expense of $2.6 million at December 31, 2000 consists
of $2.1 million accrued pension expense for the U.S. Plan, $0.2 million accrued
pension expense for the U.K. Plan, $0.8 million accrued pension expense for the
German Plan and $0.5 million prepaid pension asset for the Canadian Plan. The
accrued pension expense of $3.4 million at December 31, 1999 consists of
$2.8 million accrued pension expense for the U.S. Plan, $0.1 million accrued
pension expense for the U.K. Plan, $0.8 million accrued pension expense for
the German Plan and $0.3 million prepaid pension asset for the Canadian Plan.
90
The projected benefit obligations for these plans were determined using
discount rates of 7.75 percent as of December 31, 2000 and 7.5 percent as of
December 31, 1999 in the United States, 5.5 percent as of December 31, 2000
and 1999 in the U.K., 6.0 percent as of December 31, 2000 and 1999 in Germany
and 7.0 percent as of December 31, 2000 and 1999 in Canada. The assumed
long-term rate of return on United States plan assets was 9.0 percent for
2000 and 8.0 percent for 1999, for U.K. plan assets was 7.75% for 2000 and
8.0% for 1999, and for Canadian plan assets was 8.0 percent for 2000 and
1999. The weighted average rate of increase used for future compensation
levels was 5.0 percent for 2000, 1999 and 1998 in the United States, 4.0
percent for 2000 and 4.25 percent for 1999 in the U.K., 3.0 percent for 2000
in Germany, and 5.0 percent for 2000 and 1999 and 6.5 percent for 1998 in
Canada.
The Company's net pension cost for its defined benefit pension plans
includes the following components:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In thousands)
Service cost $ 2,731 $ 2,739 $ 1,738
Interest cost 2,319 1,975 1,356
Net investment return on plan assets (153) (3,293) (2,167)
Net amortization and deferral (2,497) 1,365 1,032
-------- -------- --------
Net periodic pension costs $ 2,400 $ 2,786 $ 1,959
======== ======== ========
The Company sponsors a defined contribution plan under Internal
Revenue Code Section 401(k) which covers all hourly and salaried employees
other than employees represented by a collective bargaining unit. The
Company also sponsored other defined contribution plans under collective
bargaining agreements. The Company's contributions are determined as a
specified percentage of employee contributions, subject to certain maximum
limitations. The Company's costs for these plans for 2000, 1999, and 1998
were $1.0 million, $0.9 million and $0.8 million, respectively.
13. Partners' Capital
At December 31, 1998, Holdings owned a 99% direct limited partnership
interest in the Operating Company. The remaining 1% interest in the
Operating Company is owned as a general partnership interest by GPC Opco GP
91
LLC, which is 100% owned by Holdings. The Operating Company in turn owns a
99% interest and, through its 100% owned subsidiary GP Sub GP, LLC, a 1%
general partnership interest in the various entities and operations included
in the financial statements, as described in Note 1, except for Graham
Packaging Canada, Ltd., GPC Capital Corp. I, Graham Plastpak Plastik Ambalaj
A.S., where the Operating Company owns 100% of the capital stock of these
subsidiaries. In addition, Holdings owns 100% of the capital stock of GPC
Capital Corp. II. As a result of the Recapitalization, any interests in
these entities formerly held by owners of Holdings were contributed to
Holdings, which in turn contributed these interests to the Operating Company.
At December 31, 1999, Holdings owned a 99% direct limited partnership
interest in the Operating Company. The remaining 1% interest in the
Operating Company is owned as a general partnership interest by GPC Opco GP
LLC, which is 100% owned by Holdings. The Operating Company in turn owns a
99% interest and, through its 100% owned subsidiary GP Sub GP, LLC, a 1%
general partnership interest in the various entities and operations included
in the financial statements, as described in Note 1, except for Graham
Packaging Argentina S.A., Graham Packaging Canada, Ltd., GPC Capital Corp. I,
and Graham Plastpak Plastik Ambalaj A.S., where the Operating Company owns
100% of the capital stock of these subsidiaries and PlasPET Florida, Ltd.,
where the Operating Company (through GP Sub GP, LLC) owns a 51% general
partnership interest. In addition, Holdings owns 100% of the capital stock
of GPC Capital Corp. II.
At December 31, 2000, Holdings owned a 99% direct limited partnership
interest in the Operating Company. The remaining 1% interest in the Operating
Company is owned as a general partnership interest by GPC Opco GP LLC, which
is 100% owned by Holdings. The Operating Company in turn owns a 99% interest
and, through its 100% owned subsidiary GP Sub GP, LLC, a 1% general
partnership interest in the various entities and operations included in the
financial statements, as described in Note 1, except for Graham Packaging
Argentina S.A., Graham Packaging Belgium S.A., Graham Packaging Canada, Ltd.,
Graham Packaging Iberica, S.L., GPC Capital Corp. I, and Graham Plastpak
Plastik Ambalaj A.S., where the Operating Company owns 100% of the capital
stock of these subsidiaries, PlasPET Florida, Ltd., where the Operating
Company (through GP Sub GP, LLC) owns a 51% general partnership interest and
Graham Innopack De Mexico S. de R.L. de C.V., where the Operating Company
(through Graham Packaging Latin America, LLC) owns a 51% membership interest.
In addition, Holdings owns 100% of the capital stock of GPC Capital Corp. II.
92
14. Management Option Plan
Pursuant to the Recapitalization Agreement, the Company has adopted
the Graham Packaging Holdings Company Management Option Plan (the "Option
Plan").
The Option Plan provides for the grant to certain management
employees of Holdings and its subsidiaries of options ("Options") to purchase
limited partnership interests in Holdings equal to 0.01% of Holdings (prior
to any dilution resulting from any interests granted pursuant to the Option
Plan), each 0.01% interest being referred to as a "Unit". The aggregate
number of Units with respect to which Options may be granted under the Option
Plan shall not exceed 500 Units, representing a total of up to 5% of the
equity of Holdings.
The exercise price per Unit shall be at or above the fair market
value of the 0.01% interest on the date of the grant. The number and type of
Units covered by outstanding Options and exercise prices may be adjusted to
reflect certain events such as recapitalizations, mergers or reorganizations
of or by Holdings. The Option Plan is intended to advance the best interests
of the Company by allowing such employees to acquire an ownership interest in
the Company, thereby motivating them to contribute to the success of the
Company and to remain in the employ of the Company.
A committee has been appointed to administer the Option Plan,
including, without limitation, the determination of the employees to whom
grants will be made, the number of Units subject to each grant, and the
various terms of such grants. As of December 31, 1998, 399.1 Unit Options
were granted at an exercise price of $25,789 per unit. No options were
vested, forfeited, canceled or exercised as of December 31, 1998. During
1999, 22.8 Unit Options were forfeited and 123.7 were granted. During 2000,
13.8 Unit Options were forfeited and none were granted. As of December 31,
2000, 486.2 Unit Options were outstanding at an exercise price of $25,789 per
unit and 227.8 of the outstanding options were vested.
The Company applies APB 25 in accounting for the Option Plan. The
exercise price of the Unit equals the fair market value of the 0.01% interest
on the date of the grant and, accordingly no compensation cost has been
recognized under the provisions of APB 25 for Units granted. Under SFAS 123,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service (or vesting) period. Had
compensation cost for the option plan been determined under SFAS 123, based
on the fair market value at the grant dates, the Company's pro forma net
93
income (loss) for 2000, 1999 and 1998 would have been reflected as follows
(in thousands):
2000 1999 1998
---- ---- ----
As reported $ (45,637) $ 1,255 $ (28,031)
Pro forma (46,150) 727 (28,452)
The fair value of each option Unit is estimated on the date of the
grant using the Minimum Value option pricing model with the following
weighted-average assumptions used for Units granted in 1999: pay out yield
0%, expected volatility of 0%, risk free interest rate of 4.57%, and expected
life of 3.6 years; and in 1998: pay out yield 0%, expected volatility of 0%,
risk free interest rate of 5.558%, and expected life of 4.6 years.
15. Special Charges and Unusual Items
The special charges and unusual items were as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In thousands)
Restructuring of facilities $ -- $ 552 $ 1,960
System conversion -- 1,304 963
Litigation -- -- 285
Recapitalization compensation 1,118 2,669 20,609
Aborted acquisition costs -- 28 427
------ ------ -------
$1,118 $4,553 $24,244
====== ====== =======
In 1998, the Company incurred restructuring charges of $2.0 million
related to the decision to close a plant in Whiting, Indiana and to
restructure a plant in Blyes, France. Included in the $2.0 million is
$1.2 million related to the legal liability of severing 51 employees at the
Blyes plant in France and $0.3 million related to the severing of 26 employees
at the Whiting, Indiana plant. In 1999, the Company incurred an additional
$0.6 million related to the plant closure in Whiting, Indiana and the facility
restructuring in Blyes, France. The amount of the charges paid as of
December 31, 2000 related to the restructuring of the facility in Blyes,
94
France that began in 1998 was $1.8 million. The remaining accrual for this
restructuring as of December 31, 2000 is $0.02 million.
The system conversion expenses relate to costs incurred by the
Company as part of a multi-year project to ensure that its information
systems and related hardware would be year 2000 compliant. The Company
engaged outside consultants beginning in 1997 to assist with the evaluation
and assessment of its information systems requirements and the selection and
implementation of enterprise resource planning software.
Recapitalization expenses included in special charges and unusual
items relate to compensation and to write-off of unamortized licensing fees.
Additionally, Recapitalization expenses relate to stay bonuses and the
granting of certain ownership interests to Management pursuant to the terms
of the Recapitalization (see Note 2), which are being recognized over a
period of up to three years.
16. Other Expense (Income)
Other expense (income) consisted of the following:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Foreign exchange loss (gain) $240 $ (333) $ 196
Equity income in earnings of joint ventures (63) (231) (274)
Other 88 (165) (44)
---- ------- -------
$265 $ (729) $ (122)
==== ======= =======
17. Income Taxes
Certain legal entities in the Company do not pay income taxes because
their income is taxed to the owners. For those entities, the reported amount
of their assets net of the reported amount of their liabilities are exceeded
by the related tax bases of their assets net of liabilities by $347.5 million
at December 31, 2000 and $426.4 million at December 31, 1999.
Income of certain legal entities related principally to the foreign
operations of the Company is taxable to the legal entities. The following
table sets forth the deferred tax assets and liabilities that result from
95
temporary differences between the reported amounts and the tax bases of the
assets and liabilities of such entities:
December 31,
------------
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ 27,541 $ 24,672
Fixed assets, principally due to differences in depreciation and assigned values 2,567 1,165
Accrued retirement indemnities 991 1,184
Inventories 766 670
Accruals and reserves 810 223
Capital leases 501 638
Other items 102 80
--------- ---------
Gross deferred tax assets 33,278 28,632
Valuation allowance (26,729) (14,545)
--------- ---------
Net deferred tax assets 6,549 14,087
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation and assigned values 8,049 11,966
Goodwill 93 2,807
Other items -- 57
--------- ---------
Gross deferred tax liabilities 8,142 14,830
--------- ---------
Net deferred tax (assets) liabilities $ 1,593 $ 743
========= =========
Current deferred tax assets of $0.05 million in 2000 and $0.07 million
in 1999 are included in prepaid expenses and other current assets. Non-current
deferred tax assets of none in 2000 and $1.2 million in 1999 are included
in other assets. Current deferred tax liabilities of $0.3 million in 2000
and none in 1999 are included in accrued expenses. Non-current deferred
tax liabilities of $1.3 million in 2000 and $2.0 million in 1999 are
included in other non-current liabilities.
The valuation allowance reduces the Company's deferred tax assets to
an amount that Management believes is more likely than not to be realized.
The 2000 provision for income taxes is comprised of $0.1 million of
current provision and $0.3 million of deferred. The amounts relate entirely
to the Company's foreign legal entities.
96
The difference between the 2000 actual income tax provision and an
amount computed by applying the U.S. federal statutory rate to earnings
before income taxes is attributable to the following:
Year Ended December 31,
2000 1999 1998
(In thousands)
Taxes at U.S. federal statutory rate $(15,818) $ 1,323 $ (9,504)
Partnership income not subject to federal income 4,146 (1,178) 7,531
taxes
Foreign loss without current tax benefit 11,926 2,050 2,617
Other 188 331 448
$ 442 $ 2,526 $ 1,092
At December 31, 2000, the Company's various taxable entities had net
operating loss carryforwards for purposes of reducing future taxable income
by approximately $75.6 million, for which no benefit has been recognized. Of
this amount, $25.7 million related to carryforwards that will expire, if
unused, at various dates ranging from 2001 to 2006 and the remaining
carryforwards have no expiration date.
At December 31, 2000, the unremitted earnings of non-U.S.
subsidiaries totaling $10.1 million were deemed to be permanently invested.
No deferred tax liability has been recognized with regard to the remittance
of such earnings. If such earnings were remitted to the United States,
approximately $0.3 million of withholdings taxes would apply.
18. Commitments
In connection with plant expansion and improvement programs, the
Company had commitments for capital expenditures of approximately $28.9
million at December 31, 2000.
19. Contingencies and Legal Proceedings
The Company is party to various litigation matters arising in the
ordinary course of business. The ultimate legal and financial liability of
the Company with respect to such litigation cannot be estimated with
certainty, but Management believes, based on its examination of such matters,
experience to date and discussions with counsel, that such ultimate liability
97
will not be material to the business, financial condition or results of
operations of the Company.
98
20. Segment Information
The Company is organized and managed on a geographical basis in three
operating segments: North America, which includes the United States and
Canada, Europe and Latin America. The accounting policies of the segments
are consistent with those described in Note 1. The Company's measure of
profit or loss is operating income (loss).
(In thousands)
North Latin
Year America Europe America Eliminations Total
Net sales 2000 $656,797 $138,880 $29,082 $(131) $824,628
1999 554,967 136,748 24,369 716,084
1998 465,317 100,835 21,979 588,131
Special charges and unusual items 2000 $1,118 $-- $-- $1,118
1999 3,750 848 (45) 4,553
1998 22,245 1,572 427 24,244
Operating income (loss) 2000 $90,296 $(32,009) $(2,147) $56,140
1999 92,962 (4,250) 1,372 90,084
1998 59,922 (7,010) 479 53,391
Depreciation and amortization 2000 $56,518 $10,959 $3,381 $70,858
1999 44,023 11,294 2,679 57,996
1998 31,384 9,405 2,315 43,104
Impairment charges 2000 $461 $18,539 $2,056 $21,056
1999 -- -- -- --
1998 -- -- - -
Interest expense (income), net 2000 $100,667 $878 $148 $101,693
1999 88,142 (629) (39) 87,474
1998 68,331 (496) 173 68,008
Income tax expense (benefit) 2000 $53 $542 $(153) $442
1999 521 859 1,146 2,526
1998 -- 311 781 1,092
Identifiable assets 2000 $843,908 $170,939 $39,763 $(233,311) $821,299
1999 724,985 169,028 43,545 (196,309) 741,249
1998 569,521 172,553 38,783 (184,110) 596,747
Capital expenditures, excluding 2000 $128,370 $32,729 $2,330 $163,429
acquisitions
99
1999 137,825 31,381 1,766 170,972
1998 114,048 13,243 6,621 133,912
Extraordinary loss from early
extinguishment of debt 2000 $-- $-- $-- $--
1999 -- -- -- --
1998 675 -- -- 675
Product Net Sales Information
The following is supplemental information on net sales by product category
(in millions):
Food and Household and
Beverage Personal Care Automotive Total
2000 $402.9 $208.7 $213.0 $824.6
1999 323.1 185.3 207.7 716.1
1998 221.1 178.3 188.7 588.1
100
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Advisory Committee Members, Directors and Executive Officers of the
Registrant
The members of the Advisory Committee of Holdings and the executive
officers of the Operating Company and their respective ages and positions at
December 31, 2000 are set forth in the table below. For a description of the
Advisory Committee, see "The Partnership Agreements--Holdings Partnership
Agreement."
Name Age Position
Philip R. Yates 53 Chief Executive Officer
Roger M. Prevot 42 President and Chief Operating Officer
John E. Hamilton 42 Chief Financial Officer
G. Robinson Beeson 53 Senior Vice President and General Manager,
Automotive and Latin America
Scott G. Booth 44 Senior Vice President and General Manager,
Household & Personal Care and Canada
John A. Buttermore 54 Vice President and General Manager, Food &
Beverage
Ashok Sudan 47 Vice President and General Manager, Europe
George M. Lane 57 Senior Vice President, Global People
Resources
Jay W. Hereford 50 Vice President, Finance and Administration
Donald C. Graham 68 Chairman, Advisory Board
William H. Kerlin, Jr. 49 Vice Chairman, Advisory Board
Chinh E. Chu 34 Member, Advisory Board
Howard A. Lipson 37 Member, Advisory Board
David A. Stonehill 32 Member, Advisory Board
Philip R. Yates has served as Chief Executive Officer since February
2000. From February 1998 until February 2000 Mr. Yates served as the Chief
Executive Officer and President of Graham Packaging Company. Prior to
February 1998, Mr. Yates served as President and Chief Operating Officer.
101
Roger M. Prevot has served as President and Chief Operating Officer
of Graham Packaging Company since February 2000. From February 1998 to
February 2000 Mr. Prevot served as Senior Vice President or Vice President
and General Manager, Food and Beverage of Graham Packaging Company. Prior to
February 1998, Mr. Prevot served as Vice President and General Manager, U.S.
Food and Beverage.
John E. Hamilton has served as Chief Financial Officer since
January 1999. From February 1998 to January 1999, Mr. Hamilton served as
Senior Vice President or Vice President, Finance and Administration. Prior
to February 1998, Mr. Hamilton served as Vice President, Finance and
Administration, North America.
G. Robinson Beeson has served as Senior Vice President and General
Manager, Automotive and Latin America, Senior Vice President and General
Manager, Automotive or Vice President and General Manager, Automotive of
Graham Packaging Company since February 1998. Prior to February 1998, Mr.
Beeson served as Vice President and General Manager, U.S. Automotive.
Scott G. Booth has served as Senior Vice President and General
Manager, Household and Personal Care and Canada, Senior Vice President and
General Manager, Household and Personal Care or Vice President and General
Manager, Household and Personal Care since February 1998. Prior to February
1998, Mr. Booth served as Vice President and General Manager, U.S. Household
and Personal Care.
John A. Buttermore has served as Vice President and General
Manager, Food & Beverage since February 2000. From November 1998 until
February 2000, Mr. Buttermore served as Vice President, Market Development.
Prior to joining the Company in November 1998, Mr. Buttermore served as
Category Manager, Food Products at Plastipak Packaging Co.
Ashok Sudan has served as Vice President and General Manager,
Europe since September 1, 2000. Prior to September 1, 2000, Mr. Sudan served
as Vice President Operations, Food & Beverage; a position he entered in 1997.
Prior to that, Mr. Sudan held various management positions in manufacturing.
Mr. Sudan has been with the Company and predecessor companies since 1977.
George M. Lane has served as Senior Vice President, Global People
Resources since September 1998. Prior to September 1998, Mr. Lane served as
Vice President, Human Resources.
102
Jay W. Hereford has served as Vice President, Finance and
Administration, Assistant Treasurer and Assistant Secretary of the Operating
Company since November 1998. Mr. Hereford has also served as Vice President,
Finance and Administration, Assistant Treasurer and Assistant Secretary of
OPCO GP, and as Vice President, Secretary, Assistant Secretary and Assistant
Treasurer of various subsidiaries of the Operating Company. Prior to joining
the Company, Mr. Hereford served as Vice President, Treasurer and Chief
Financial Officer of Continental Plastic Containers, Inc. and Continental
Caribbean Containers, Inc. from 1992 to November 1998.
Donald C. Graham has served as Chairman of the Advisory Committee since
February 1998. Prior to February 1998, Mr. Graham served as Chairman.
William H. Kerlin, Jr. has served as Vice Chairman of the Advisory
Committee since February 1998. From 1996 until February 1998, Mr. Kerlin
served as Vice Chairman and Chief Executive Officer. Prior to 1996, Mr.
Kerlin served as Vice President and Vice Chairman.
Chinh E. Chu is a Senior Managing Director of The Blackstone Group,
L.P., which he joined in 1990. Mr. Chu has served as a member of the
Advisory Committee since the Recapitalization. Prior to joining Blackstone,
Mr. Chu was a member of the Mergers and Acquisitions Group of Salomon
Brothers Inc. from 1988 to 1990. He currently serves on the Boards of
Directors of Prime Succession Inc., Rose Hills Co. and Haynes International,
Inc.
Howard A. Lipson is a Senior Managing Director of The Blackstone
Group L.P., which he joined in 1988. Mr. Lipson has served as a member of
the Advisory Committee since the Recapitalization. Prior to joining
Blackstone, Mr. Lipson was a member of the Mergers and Acquisitions Group of
Salomon Brothers Inc. He currently serves on the Boards of Directors of
Allied Waste Industries, Inc., Volume Services America, AMF Group Inc.,
Ritvik Holdings Inc., Prime Succession Inc., Rose Hills Co. and Universal
Orlando.
David A. Stonehill is a Principal of The Blackstone Group L.P.,
which he joined in May 2000. Mr. Stonehill has served as a Member of the
Advisory Committee since July 2000. Prior to joining Blackstone,
Mr. Stonehill was a Senior Vice President at Chartwell Investments Inc where he
worked from September 1996 to May 2000.
103
The Boards of Directors of CapCo I and CapCo II are comprised of
Philip R. Yates, John E. Hamilton, Chinh E. Chu and David A. Stonehill. The
Board of Directors of Investor LP is comprised of Howard A. Lipson, Chinh E.
Chu and David A. Stonehill.
Except as described above, there are no arrangements or
understandings between any director or executive officer and any other person
pursuant to which that person was elected or appointed as a director or
executive officer.
104
Item 11. Executive Compensation
The following table sets forth all cash compensation paid to the
Chief Executive Officer and four other most highly compensated executive
officers of the Company (the "Named Executive Officers") for the years ended
December 31, 1998, 1999 and 2000, and their respective titles at December 31,
2000. The philosophy of the Company is to compensate all employees at
levels competitive with the market to enable the Company to attract, retain
and motivate all employees. From time to time, the compensation committee
will review the Company's compensation structure through an examination of
compensation information for comparable companies and certain broader
based data, compiled by the Company and by compensation and other consulting
firms. In 2000, the compensation committee utilized William M. Mercer
Incorporated to conduct a full review of the Company's compensation structure.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
Other Restricted Securities All
Annual Stock Underlying LTIP Other
Name and Principal Position Year Salary Bonus Comp. Awards Options Payouts Comp.
$ $ $ $ # $ $
Philip R. Yates 2000 397,070 315,000 -0- -0- -0- -0- 4,258
Chief Executive Officer 1999 310,978 300,000 -0- -0- 13.6 -0- 4,417
1998 300,019 100,474 -0- 3,866,000 63.8 2,225,000 4,800
Roger M. Prevot 2000 285,427 205,000 -0- -0- -0- -0- 3,843
President and Chief Operating 1999 202,999 196,500 -0- -0- 9.3 -0- 3,606
Officer 1998 194,404 164,169 -0- 1,933,000 43.4 750,000 3,554
John E. Hamilton 2000 201,966 175,000 -0- -0- -0- -0- 3,752
Chief Financial Officer 1999 171,098 160,500 -0- -0- 18.7 -0- 3,553
1998 158,520 132,864 -0- 688,000 29.8 400,000 3,586
G. Robinson Beeson 2000 192,176 175,000 -0- -0- -0- -0- 3,964
Senior Vice President and 1999 173,214 125,066 -0- -0- 6.4 -0- 3,879
General Manager, Automative 1998 164,719 138,273 -0- 1,074,000 29.8 500,000 4,194
and Latin America
Scott G. Booth 2000 190,110 150,000 -0- -0- -0- -0- 3,737
Senior Vice President and 1999 171,518 120,089 -0- -0- 6.4 -0- 3,557
General
Manager, Household and Personal 1998 158,104 132,489 -0- 1,074,000 29.8 500,000 3,625
Care and Canada
[FN]
1) Represents bonus paid in the current year, but accrued in the prior
year under the Company's annual discretionary bonus plan.
105
2) Represents cash payments to the named executive officers which were
used by the recipients to purchase shares of restricted common stock
of Investor LP, the value of a grant of the same number of additional
restricted shares as the shares purchased and taxes payable in
respect of these awards (see Management Awards).
3) Represents contributions to the Company's 401(k) plan and amounts
attributable to group term life insurance.
4) Roger M. Prevot has served as President and Chief Operating Officer
of the Operating Company and Opco GP since February 8, 2000. Prior
to February 8, 2000 Mr. Prevot served as Senior Vice President or
Vice President and General Manager, Food & Beverage of the Operating
Company.
Management Awards
Pursuant to the Recapitalization Agreement, immediately prior to the
Closing, Holdings made cash payments to approximately 20 senior level
managers equal to approximately $7.0 million, which represented the aggregate
value payable under Holdings' former equity appreciation plan (which was
cancelled upon the Closing) and additional cash bonuses.
Pursuant to the Recapitalization Agreement, immediately after the
Closing, Holdings granted to approximately 100 middle level managers stay
bonuses aggregating approximately $4.6 million, which are payable over a
period of up to three years.
Pursuant to the Recapitalization Agreement, immediately after the
Closing, Holdings made additional cash payments to approximately 15 senior
level managers equal to approximately $5.0 million, which represented
additional cash bonuses and the taxes payable by such managers in respect of
the awards described in this paragraph. In addition, (a) Holdings made
additional cash payments to such managers equal to approximately $3.1
million, which were used by the recipients to purchase shares of restricted
common stock of Investor LP and (b) each such recipient was granted the same
number of additional restricted shares as the shares purchased pursuant to
clause (a). Such restricted shares vest over a period of three years, and
one-third of any forfeited shares will increase the Graham Entities'
ownership interests in Holdings.
As a result of such equity awards, Management owns an aggregate of
approximately 3.0% of the outstanding common stock of Investor LP, which
constitutes approximately a 2.6% interest in Holdings.
106
Severance Agreements
In connection with the Recapitalization, the Company entered into
severance agreements with Messrs. Yates, Hamilton, Beeson, Booth, Prevot,
Stevens and Lu. Such severance agreements provided that in the event a
Termination Event (as defined therein) occurs, the executive shall receive:
(i) a severance allowance equal to one year of salary (two years for Mr.
Yates) payable in equal monthly installments over a one year period (two
years for Mr. Yates); (ii) continued group health and life insurance coverage
for one year (the executive's contribution for which would be the same
contribution as similarly situated executives and would be deducted from the
severance allowance payments); and (iii) a lump sum amount payable when the
Company pays its executives bonuses, equal to the executive's target bonus,
pro-rated to reflect the portion of the relevant year occurring prior to the
executive's termination of employment.
Supplemental Income Plan
Mr. Yates is the sole participant in the Graham Engineering
Corporation Amended Supplemental Income Plan (the "SIP"). Upon the Closing,
the Operating Company assumed Graham Engineering's obligations under the SIP.
The SIP provides that upon attaining age 65, Mr. Yates shall receive a
fifteen-year annuity providing annual payments equal to 25% of his Final
Salary (as defined therein). The SIP also provides that the annuity payments
shall be increased annually by a 4% cost of living adjustment. The SIP
permits Mr. Yates to retire at or after attaining age 55 without any
reduction in the benefit (although such benefit would not begin until Mr.
Yates attained age 65). In the event that Mr. Yates were to retire prior to
attaining age 55 (the benefit would still commence at age 65), then the
annuity payments would be reduced. In the event the Company terminates Mr.
Yates' employment without "just cause" (as defined in the SIP), then upon
attaining age 65, he would receive the entire annuity. The SIP provides for
similar benefits in the event of a termination of employment on account of
death or disability.
Management Option Plan
Pursuant to the Recapitalization Agreement, the Company has adopted
the Graham Packaging Holdings Company Management Option Plan (the "Option
Plan").
107
The Option Plan provides for the grant to management employees of
Holdings and its subsidiaries of options ("Options") to purchase limited
partnership interests in Holdings equal to 0.01% of Holdings (prior to any
dilution resulting from any interests granted pursuant to the Option Plan)
(each 0.01% interest being referred to as a "Unit"). The aggregate number of
Units with respect to which Options may be granted under the Option Plan
shall not exceed 500 Units, representing a total of up to 5% of the equity of
Holdings.
The exercise price per Unit for those Units granted is $25,789. The
number and type of Units covered by outstanding Options and exercise prices
may be adjusted to reflect certain events such as recapitalizations, mergers
or reorganizations of or by Holdings. The Option Plan is intended to advance
the best interests of the Company by allowing such employees to acquire an
ownership interest in the Company, thereby motivating them to contribute to
the success of the Company and to remain in the employ of the Company.
A committee (the "Committee") has been appointed to administer the
Option Plan, including, without limitation, the determination of the
employees to whom grants will be made, the number of Units subject to each
grant, and the various terms of such grants. The Committee may provide that
an Option cannot be exercised after the merger or consolidation of Holdings
into another company or corporation, the exchange of all or substantially all
of the assets of Holdings for the securities of another corporation, the
acquisition by a corporation of 80% or more of Holdings' partnership interest
or the liquidation or dissolution of Holdings, and if the Committee so
provides, it will also provide either by the terms of such Option or by a
resolution adopted prior to the occurrence of such merger, consolidation,
exchange, acquisition, liquidation or dissolution, that, for ten business
days prior to such event, such Option shall be exercisable as to all Units
subject thereto, notwithstanding anything to the contrary in any provisions
of such Option and that, upon the occurrence of such event, such Option shall
terminate and be of no further force or effect. The Committee may also
provide that even if the Option shall remain exercisable after any such
event, from and after such event, any such Option shall be exercisable only
for the kind and amount of securities and other property (including cash), or
the cash equivalent thereof, receivable as a result of such event by the
holder of a number of partnership interests for which such Option could have
been exercised immediately prior to such event. No suspension, termination
or amendment of or to the Option Plan shall materially and adversely affect
the rights of any participant with respect to Options issued hereunder prior
to the date of such suspension, termination or amendment without the consent
of such holder.
108
During 2000 no Unit Options were granted. The following
table sets forth certain information with respect to the total Options
granted to the Named Executive Officers at December 31, 2000.
TOTAL OPTION GRANTS AT DECEMBER 31, 2000
Number of
Securities
Underlying Value of
Unexercised Unexercised Options at End
Options at End In the Money of Fiscal Year
Name of Fiscal Year Options Exercisable
Philip R. Yates 77.4 $ 0 36.0
Chief Executive
Officer
Roger M. Prevot 52.7 $ 0 24.5
President and Chief
Operating Officer
John E. Hamilton 48.5 $ 0 21.5
Chief Financial
Officer
G. Robinson Beeson 36.2 $ 0 16.8
Senior Vice
President and General
Manager, Automative and
Latin America
Scott G. Booth 36.2 $ 0 16.8
Senior Vice
President and
General Manager,
Household and
Personal Care and
Canada
109
Pension Plans
In the year ended December 31, 2000, the Company participated in a
noncontributory, defined benefit pension plan for salaried and hourly
employees other than employees covered by collectively bargained plans. The
Company also sponsored other noncontributory defined benefit plans under
collective bargaining agreements. These plans covered substantially all of
the Company's U.S. employees. The defined benefit plan for salaried
employees provides retirement benefits based on the final five years average
compensation and years of service, while plans covering hourly employees
provide benefits based on years of service. See Note 12 of the Notes to
Financial Statements for each of the three years in the period ended December
31, 2000.
The following table shows estimated annual benefits upon retirement
under the defined benefit plan for salaried employees, based on the final
five years average compensation and years of service, as specified therein:
Pension Plan Table
Years of Service
Remuneration 15 20 25 30 35
$ 125,000 $26,841 $35,788 $44,735 $53,682 $55,245
150,000 32,841 43,788 54,735 65,682 67,557
175,000 38,841 51,788 64,735 77,682 79,870
200,000 44,841 59,788 74,735 89,682 92,182
225,000 50,841 67,788 84,735 101,682 104,495
250,000 56,841 75,788 94,735 113,682 116,807
300,000 68,841 91,788 114,735 137,682 141,432
400,000 92,841 123,788 154,735 185,682 190,682
450,000 104,841 139,788 174,735 209,682 215,307
500,000 116,841 155,788 194,735 233,682 239,932
Note: The amounts shown are based on 2000 covered compensation of
$35,100 for an individual born in 1935. In addition, these figures do not
reflect the salary limit of $170,000 and benefit limit under the plan's
normal form of $135,000 in 2000.
The compensation covered by the defined benefit plan for salaried
employees is an amount equal to "Total Wages" (as defined). This amount
110
includes the annual Salary and Bonus amounts shown in the Summary
Compensation Table above for the five Named Executive Officers who
participated in the plan. The estimated credited years of service for the
year ended December 31, 2000 for each of the five Named Executive Officers
participating in the plan was as follows: Philip R. Yates, 29 years; John E.
Hamilton, 17 years; G. Robinson Beeson, 26 years; Scott G. Booth, 13 years;
and Roger M. Prevot, 13 years. Benefits under the plan are computed on the
basis of straight-life annuity amounts. Amounts set forth in the Pension
Table are not subject to deduction for Social Security or other offset
amounts.
The Recapitalization Agreement provided that assets of the Graham
Engineering defined benefit plan related to employees not covered by
collective bargaining agreements will be transferred to a new non-
contributory defined benefit plan sponsored by the Company for such
employees. Such was completed in 1999.
401(k) Plan
During 2000 the Company also participated in a defined contribution
plan under Internal Revenue Code Section 401(k), which covered all U.S.
employees of the Company except those represented by a collective bargaining
unit. The Company also sponsored other noncontributory defined contribution
plans under collective bargaining agreements. The Company's contributions
were determined as a specified percentage of employee contributions, subject
to certain maximum limitations. The Company's costs for the salaried and
non-collective bargaining hourly plan for 2000, 1999, and 1998 were
$1,009,000, $875,000, and $804,000, respectively. See Note 12 of the Notes
to Financial Statements for each of the three years in the period ended
December 31, 2000.
Pursuant to the Recapitalization Agreement, assets of this plan
related to Company employees were transferred to a new plan sponsored by the
Company following the Closing of the Recapitalization.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table and accompanying footnotes set forth certain
information regarding beneficial ownership of the limited partnership and
general partnership interests in the Issuers, as of the date hereof, by (i)
each person who is known by the Issuers to own beneficially more than 5% of
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such interests, (ii) each member of the Advisory Committee of Holdings and
each of the executive officers of the Operating Company and (iii) all members
of the Advisory Committee of Holdings and the executive officers of the
Operating Company as a group. For a more detailed discussion of certain
ownership interests following the Recapitalization, see " Business-- The
Recapitalization" (Item 1) and "Certain Relationships and Related Party
Transactions" (Item 13).
Name and Address Type of Percentage
Issuer of Beneficial Owner Interest Interest
Graham Packaging Company, L.P. Holdings Limited 99%
Partnership
Opco GP General 1%
Partnership
GPC Capital Corp. I Operating Company Common Stock 100%
Graham Packaging Holdings Company Investor LP Limited 81%
Partnership
Investor GP General 4%
Partnership
GPC Holdings, L.P. Limited 14%
Partnership
Graham Packaging CorporationGeneral 1%
Partnership
GPC Capital Corp. II Holdings Common Stock 100%
[FN]
(1) Opco GP is a wholly owned subsidiary of Holdings.
(2) Investor GP is a wholly owned subsidiary of Investor LP. Upon the
consummation of the Recapitalization, Blackstone, Blackstone Offshore
Capital Partners III L.P. and Blackstone Family Investment Partnership
III L.P. became, collectively, the beneficial owner of 100.0% of the
common stock of Investor LP. Blackstone Management Associates III L.L.C.
("BMA") is the general partner of each of such entities. Messrs. Peter
G. Peterson, Stephen A. Schwarzman and Howard A. Lipson are members of
BMA, which has investment and voting control over the shares held or
controlled by Blackstone. Each of such persons disclaims beneficial
ownership of such shares. The address of each of the Equity Investors is
c/o The Blackstone Group L.P., 345 Park Avenue, New York, New York 10154.
Following the consummation of the Recapitalization, Blackstone
transferred to Management approximately 3.0% of the common stock of
Investor LP. See "Management--Management Awards." In addition, an
affiliate of DB Alex. Brown LLC and Deutsche Bank AG, two of the Initial
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Purchasers of the Old Notes, acquired approximately 4.8% of the common
stock of Investor LP. After giving effect to these transactions,
Blackstone's beneficial ownership of the common stock of Investor LP
declined by a corresponding 3.0% and 4.8%, respectively, to approximately
92.2%.
(3) GPC Holdings, L.P. and Graham Packaging Corporation are wholly owned,
directly or indirectly, by the Graham family. The address of both is c/o
Graham Capital Company, 1420 Sixth Avenue, York, Pennsylvania 17403.
Item 13. Certain Relationships and Related Transactions
The summaries of agreements set forth below do not purport to be
complete and are qualified in their entirety by reference to all the
provisions of such agreements. Copies of the Recapitalization Agreement, the
Consulting Agreement, the Equipment Sales Agreement and the Partners
Registration Rights Agreement are exhibits to this Report on Form 10-K.
Transactions with Graham Entities and Others
At the time of the Recapitalization, Donald C. Graham and Jean
Rubie were each one-third owners of Techne Technipack Engineering Italia
S.p.A. ("Techne"). Techne supplies shuttle blow-molders to many of the
Company's non-U.S. facilities. The Company paid Techne approximately $5.2
million for such equipment for the year ended December 31, 1998. Prior to
the Recapitalization, Mr. Rubie served as General Manager, Europe, of the
Company. During 1998 and subsequent to the Recapitalization, Mr. Graham sold
his ownership interest in Techne.
Graham Engineering has supplied both services and equipment to the
Company. The Company paid Graham Engineering approximately $8.5 million,
$20.4 million, and $16.8 million for such services and equipment for the
years ended December 31, 2000, 1999 and 1998, respectively.
The Company has provided certain services to Graham Engineering.
Graham Engineering paid the Company approximately $.05 million, $2.5 million
and $1.4 million for such services for the years ended December 31, 2000,
1999 and 1998, respectively.
Graham Family Growth Partnership and Graham Partners, Inc. have
supplied management services to the Company since the Recapitalization. The
Company paid Graham Family Growth Partnership and Graham Partners, Inc.
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approximately $1.0 million, $1.0 million and $1.1 million for such services
for the years ended December 31, 2000, 1999 and 1998, respectively.
Blackstone has supplied management services to the Company since
the Recapitalization. The Company paid Blackstone approximately $1.0 million
for such services for each of the three years ended December 31, 2000, 1999,
and 1998.
The Company has entered into an Airplane Time-Sharing Agreement
with Graham Capital Company in conjunction with the Recapitalization. Other
parties to the agreement were Graham Architectural Products Corporation,
Graham Partners, Inc., Western Industries, Inc. and Graham Engineering
Corporation. The Company paid $20,000, $18,000 and $3,500 for the years
ended December 31, 2000, 1999 and 1998, respectively, pursuant to such
agreement.
An affiliate of BT Alex. Brown Incorporated and Bankers Trust
International PLC, two of the Initial Purchasers of the Old Notes, acquired
approximately a 4.8% equity interest in Investor LP. See "Security
Ownership." Bankers Trust Company, an affiliate of BT Alex. Brown
Incorporated and Bankers Trust International PLC, acted as administrative
agent and provided a portion of the financing under the Senior Credit
Agreement entered into in connection with the Recapitalization, for which it
received customary commitment and other fees and compensation.
An equity contribution of $50 million was made by the Company's
owners to the Company on September 29, 2000, satisfying Blackstone's first
capital call obligation under the Senior Credit Agreement and Capital Call
Agreement. Ownership percentage interests in Holdings as set forth in Item
12 were unchanged following the equity increase. The Company loaned
Management the funds required (approximately $1.1 million) to cover
Management's portion of the equity contribution.
As part of the Second Amendment to the Senior Credit Agreement, if
certain events of default were to occur, or if the Company's Net Leverage
Ratio were above certain levels for test periods beginning June 30, 2001,
Blackstone has agreed to make an equity contribution to the Company through
the administrative agent of up to $50 million. The Company's Net Leverage
Ratio being above the specified levels at June 30, 2001 or thereafter is not
an event of default under the Senior Credit Agreement. An equity
contribution of $50 million was made by the Company's owners on March 29,
2001, satisfying Blackstone's final obligation for all future test periods.
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Pursuant to the Purchase Agreement dated January 23, 1998, the
Initial Purchasers, BT Alex. Brown Incorporated, Bankers Trust International
PLC, Lazard Freres & Co. LLC and Salomon Brothers Inc, purchased the Senior
Subordinated Old Notes at a price of 97.0% of the principal amount, for a
discount of 3% from the initial offering price of 100% or a total discount of
$6,750,000. Pursuant to the Purchase Agreement, the Initial Purchasers
purchased the Senior Discount Old Notes at a price of 57.173% of the
principal amount, for a discount of 2.361% from the initial offering price of
59.534% or a total discount of $3,990,090. Pursuant to the Purchase
Agreement, the Issuers also reimbursed the Initial Purchasers for certain
expenses.
The Partnership Agreements
The Operating Company Partnership Agreement
The Operating Company was formed under the name "Graham Packaging
Holdings I, L.P." on September 21, 1994 as a limited partnership in
accordance with the provisions of the Delaware Revised Uniform Limited
Partnership Act. Upon the Closing of the Recapitalization, the name of the
Operating Company was changed to "Graham Packaging Company, L.P." The
Operating Company will continue until its dissolution and winding up in
accordance with the terms of the Operating Company Partnership Agreement (as
defined).
Prior to the Recapitalization, Graham Recycling Corporation
("Recycling") was the sole general partner of the Operating Company and
Holdings was the sole limited partner of the Operating Company. As provided
in the Recapitalization Agreement, immediately prior to the Closing,
Recycling contributed to Opco GP its general partnership interest in the
Operating Company, and the partnership agreement of the Operating Company was
amended and restated to reflect such substitution of sole general partner and
certain other amendments (the "Operating Company Partnership Agreement").
Following the Closing, Holdings has remained the sole limited partner of the
Operating Company.
The purpose of the Operating Company is the sale and manufacturing
of rigid plastic containers and any business necessary or incidental thereto.
Management. The Operating Company Partnership Agreement provides
that the general partner shall be entitled in its sole discretion and without
the approval of the other partners to perform or cause to be performed all
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management and operational functions relating to the Operating Company and
shall have the sole power to bind the Operating Company. The limited partner
shall not participate in the management or control of the business.
Exculpation and Indemnification. The Operating Company Partnership
Agreement provides that neither the general partner nor any of its
affiliates, nor any of its partners, shareholders, officers, directors,
employees or agents, shall be liable to the Operating Company or any partner
for any breach of the duty of loyalty or any act or omission not in good
faith or which involves intentional misconduct or a knowing violation of law
or the Operating Company Partnership Agreement. The Operating Company shall
indemnify the general partner and its affiliates, and its partners,
shareholders, officers, directors, employees and agents, from and against any
claim or liability of any nature arising out of the assets or business of the
Operating Company.
Affiliate Transactions. The Operating Company may enter into
transactions with any partner or any of its affiliates which is not
prohibited by applicable law; provided that, any material transaction with
any partner or any of its affiliates shall be on terms reasonably determined
by the General Partner to be comparable to the terms which can be obtained
from third parties.
Transfers of Partnership Interests. The Operating Company
Partnership Agreement provides that the limited partner shall not transfer
its limited partnership interests.
Dissolution. The Operating Company Partnership Agreement provides
that the Operating Company shall be dissolved upon the earliest of (i)
December 31, 2044, (ii) the sale, exchange or other disposition of all or
substantially all of the Operating Company's assets, (iii) the withdrawal,
resignation, filing of a certificate of dissolution or revocation of the
charter or bankruptcy of a general partner, or the occurrence of any other
event which causes a general partner to cease to be a general partner unless
there shall be another general partner, (iv) the withdrawal, resignation,
filing of a certificate of dissolution or revocation of the charter or
bankruptcy of a limited partner, or the occurrence of any other event which
causes a limited partner to cease to be a limited partner unless there shall
be another limited partner, (v) the acquisition by a single person of all of
the partnership interests in the Operating Company, (vi) the issuance of a
decree of dissolution by a court of competent jurisdiction, or (vii)
otherwise as required by applicable law.
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The Holdings Partnership Agreement
Holdings was formed under the name "Sonoco Graham Company" on April
3, 1989 as a limited partnership in accordance with the provisions of the
Pennsylvania Uniform Limited Partnership Act, and on March 28, 1991, Holdings
changed its name to "Graham Packaging Company." Upon the Closing of the
Recapitalization, the name of Holdings was changed to "Graham Packaging
Holdings Company." Holdings will continue until its dissolution and winding
up in accordance with the terms of the Holdings Partnership Agreement (as
defined).
As contemplated by the Recapitalization Agreement, upon the
Closing, Graham Capital and its successors or assigns, Graham Family Growth
Partnership, Graham GP Corp., Investor LP and Investor GP entered into a
Fifth Amended and Restated Agreement of Limited Partnership (the "Holdings
Partnership Agreement"). The general partners of the Partnership are
Investor GP and Graham GP Corp. The limited partners of the Partnership are
Graham Family Growth Partnership, Graham Capital and Investor LP.
The purpose of Holdings is the sale and manufacturing of rigid
plastic containers and any business necessary or incidental thereto.
Management; Advisory Committee. The Holdings Partnership Agreement
provides that the general partner elected by the general partner(s) holding a
majority of the general partnership interests in Holdings (the "Managing
General Partner") shall be entitled in its sole discretion and without the
approval of the other partners to perform or cause to be performed all
management and operational functions relating to Holdings and shall have the
sole power to bind Holdings, except for certain actions in which the Managing
General Partner shall need the approval of the other general partners. The
limited partners shall not participate in the management or control of the
business.
The partnership and the general partners shall be advised by a
committee (the "Advisory Committee") comprised of five individuals, three of
whom shall be appointed from time to time by Investor GP and, for so long as
the Continuing Graham Entities and their affiliates do not sell more than
two-thirds of their partnership interests owned at the Closing, two of whom
shall be appointed from time to time by the other general partners. Such
committee shall serve solely in an advisory role and shall not have any power
to act for or bind Holdings.
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Annual Fee. The Holdings Partnership Agreement provides that, so
long as the Continuing Graham Entities and their affiliates do not sell more
than two-thirds of their partnership interests owned at the Closing, Holdings
will pay to Graham Family Growth Partnership an annual fee of $1.0 million.
Exculpation and Indemnification. The Holdings Partnership
Agreement provides that no general partner nor any of its affiliates, nor any
of its respective partners, shareholders, officers, directors, employees or
agents, shall be liable to Holdings or any of the limited partners for any
act or omission, except resulting from its own willful misconduct or bad
faith, any breach of its duty of loyalty or willful breach of its obligations
as a fiduciary, or any breach of certain terms of the Holdings Partnership
Agreement. Holdings shall indemnify the general partners and their
affiliates, and their respective partners, shareholders, officers, directors,
employees and agents, from and against any claim or liability of any nature
arising out of the assets or business of Holdings.
Affiliate Transactions. Holdings may not enter into any
transaction with any partner or any of its affiliates unless the terms
thereof are believed by the general partners to be in the best interests of
Holdings and are intrinsically fair to Holdings and equally fair to each of
the partners; provided that, Holdings may perform and comply with the
Recapitalization Agreement, the Equipment Sales Agreement, the Consulting
Agreement and the Monitoring Agreement (as defined).
Transfers of Partnership Interests. The Holdings Partnership
Agreement provides that, subject to certain exceptions including, without
limitation, in connection with an IPO Reorganization (as defined) and the
transfer rights described below, general partners shall not withdraw from
Holdings, resign as a general partner, nor transfer their general partnership
interests without the consent of all general partners, and limited partners
shall not transfer their limited partnership interests.
If any Continuing Graham Partner wishes to sell or otherwise
transfer its partnership interests pursuant to a bona fide offer from a third
party, Holdings and the Equity Investors must be given a prior opportunity to
purchase such interests at the same purchase price set forth in such offer.
If Holdings and the Equity Investors do not elect to make such purchase, then
such Continuing Graham Entities may sell or transfer such partnership
interests to such third party upon the terms set forth in such offer. If the
Equity Investors wish to sell or otherwise transfer their partnership
interests pursuant to a bona fide offer from a third party, the Continuing
Graham Entities shall have a right to include in such sale or transfer a
118
proportionate percentage of their partnership interests. If the Equity
Investors (so long as they hold 51% or more of the partnership interests)
wish to sell or otherwise transfer their partnership interests pursuant to a
bona fide offer from a third party, the Equity Investors shall have the right
to compel the Continuing Graham Partners to include in such sale or transfer
a proportionate percentage of their partnership interests.
Dissolution. The Holdings Partnership Agreement provides that
Holdings shall be dissolved upon the earliest of (i) the sale, exchange or
other disposition of all or substantially all of Holdings' assets (including
pursuant to an IPO Reorganization), (ii) the withdrawal, resignation, filing
of a certificate of dissolution or revocation of the charter or bankruptcy of
a general partner, or the occurrence of any other event which causes a
general partner to cease to be a general partner unless (a) the remaining
general partner elects to continue the business or (b) if there is no
remaining general partner, a majority-in-interest of the limited partners
elect to continue the partnership, or (iii) such date as the partners shall
unanimously elect.
IPO Reorganization. "IPO Reorganization" means the transfer of all
or substantially all of Holdings' assets and liabilities to CapCo II in
contemplation of an initial public offering of the shares of common stock of
CapCo II. The Holdings Partnership Agreement provides that, without the
approval of each general partner, the IPO Reorganization may not be effected
through any entity other than CapCo II.
Tax Distributions. The Partnership Agreement requires certain tax
distributions to be made.
Partners Registration Rights Agreement
Pursuant to the Recapitalization Agreement, upon the Closing,
Holdings, CapCo II, the Continuing Graham Entities, the Equity Investors and
Blackstone entered into a registration rights agreement (the "Partners
Registration Rights Agreement"). Under the Partners Registration Rights
Agreement, CapCo II will grant, with respect to the shares of its common
stock to be distributed pursuant to an IPO Reorganization, (i) to the
Continuing Graham Entities and their affiliates (and their permitted
transferees of partnership interests in Holdings) two "demand" registrations
after an initial public offering of the shares of common stock of CapCo II
has been consummated and customary "piggyback" registration rights (except
with respect to such initial public offering, unless Blackstone and its
119
affiliates are selling their shares in such offering) and (ii) to the Equity
Investors, Blackstone and their affiliates an unlimited number of "demand"
registrations and customary "piggyback" registration rights. The Partners
Registration Rights Agreement also provides that CapCo II will pay certain
expenses of the Continuing Graham Entities, the Equity Investors, Blackstone
and their respective affiliates relating to such registrations and indemnify
them against certain liabilities, which may arise under the Securities Act.
See "The Partnership Agreements--Holdings Partnership Agreement."
Certain Business Relationships
Equipment Sales Agreement. Pursuant to the Recapitalization
Agreement, upon the Closing, Holdings and Graham Engineering entered into the
Equipment Sales, Service and Licensing Agreement ("Equipment Sales
Agreement"), which provides that, with certain exceptions, (i) Graham
Engineering will sell to Holdings and its affiliates certain of Graham
Engineering's larger-sized proprietary extrusion blow molding wheel systems
("Graham Wheel Systems"), at a price to be determined on the basis of a
percentage mark-up of material, labor and overhead costs that is as favorable
to Holdings as the percentage mark-up historically offered by Graham
Engineering to Holdings and is as favorable as the mark-up on comparable
equipment offered to other parties, (ii) each party will provide consulting
services to the other party at hourly rates ranging from $60 to $200
(adjusted annually for inflation) and (iii) Graham Engineering will grant to
Holdings a nontransferable, nonexclusive, perpetual, royalty-free right and
license to use certain technology. Subject to certain exceptions set forth in
the Equipment Sales Agreement, Holdings and its affiliates will have the
exclusive right to purchase, lease or otherwise acquire the applicable Graham
Wheel Systems in North America and South America, the countries comprising
the European Economic Community as of the Closing and any other country in or
to which Holdings has produced or shipped extrusion blow molded plastic
bottles representing sales in excess of $1.0 million in the most recent
calendar year. The Equipment Sales Agreement terminates on December 31, 2007,
unless mutually extended by the parties. After December 31, 1998, either
party may terminate the other party's right to receive consulting services.
Effective January 21, 2000 Holdings terminated Graham Engineering's rights to
receive consulting services from Holdings.
Consulting Agreement. Pursuant to the Recapitalization Agreement,
upon the Closing, Holdings and Graham Capital entered into a Consulting
Agreement (the "Consulting Agreement"), pursuant to which Graham Capital
provided Holdings with general business, operational and financial consulting
120
services at mutually agreed retainer or hourly rates (ranging from $200 to
$750 per hour). The Consulting Agreement terminated on February 2, 2000, the
second anniversary of the Closing.
Promissory Notes of Graham Entities
From 1994 through the Closing, there was outstanding $20.2 million
principal amount of promissory notes owed by the Graham Entities to Holdings,
which had been contributed by the Graham Entities as capital in Holdings.
Such promissory notes (including accrued interest) were repaid in full in
connection with the Recapitalization.
Payment of Certain Fees and Expenses
In connection with the Recapitalization, Blackstone received a fee
of approximately $9.3 million, and the Operating Company has reimbursed or
will reimburse Blackstone for all out-of-pocket expenses incurred in
connection with the Recapitalization. In addition, pursuant to a monitoring
agreement (the "Monitoring Agreement") entered into among Blackstone,
Holdings and the Operating Company, Blackstone will receive a monitoring fee
equal to $1.0 million per annum, and will be reimbursed for certain out-of-
pocket expenses. In the future, an affiliate or affiliates of Blackstone may
receive customary fees for advisory and other services rendered to Holdings
and its subsidiaries. If such services are rendered in the future, the fees
will be negotiated from time to time on an arm's length basis and will be
based on the services performed and the prevailing fees then charged by third
parties for comparable services.
121
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following Financial Statement Schedules are included
herein:
Schedule I - Registrant's Condensed Financial Statements
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they
are not applicable or not required or because the
required information is included in the financial
statements or the notes thereto.
(b) The following exhibits are filed herewith or incorporated
herein by reference:
Exhibit
Number Description of Exhibit
2.1 - Agreement and Plan of Recapitalization, Redemption and Purchase
dated as of December 18, 1997, as amended as of January 29,
1998, by and among Graham Packaging Holdings Company, BCP/Graham
Holdings L.L.C., BMP/Graham Holdings Corporation and the other
parties named therein (incorporated herein by reference to
Exhibit 2.1 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
2.2 - Purchase Agreement dated January 23, 1998 among Graham Packaging
Holdings Company, Graham Packaging Company, L.P., GPC Capital
Corp. I, GPC Capital Corp. II, BT Alex. Brown Incorporated,
Bankers Trust International PLC, Lazard Freres & Co. L.L.C. and
Salomon Brothers Inc (incorporated herein by reference to
Exhibit 2.2 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
2.3 - Purchase Agreement between CarnaudMetalbox S.A. and Graham
Packaging Company, L.P. dated as of July 27, 1998 (incorporated
herein by reference to Exhibit 2.3 to the Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (File No. 333-
53603-03)).
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3.1 - Certificate of Limited Partnership of Graham Packaging Company,
L.P. (incorporated herein by reference to Exhibit 3.1 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
3.2 - Amended and Restated Agreement of Limited Partnership of Graham
Packaging Company, L.P. dated as of February 2, 1998
(incorporated herein by reference to Exhibit 3.2 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
3.3 - Certificate of Incorporation of GPC Capital Corp. I
(incorporated herein by reference to Exhibit 3.3 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
3.4 - By-Laws of GPC Capital Corp. I (incorporated herein by reference
to Exhibit 3.4 to the Registration Statement on Form S-4 (File
No. 333-53603-03)).
3.5 - Certificate of Limited Partnership of Graham Packaging Holdings
Company (incorporated herein by reference to Exhibit 3.5 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
3.6 - Fifth Amended and Restated Agreement of Limited Partnership of
Graham Packaging Holdings Company dated as of February 2, 1998
(incorporated herein by reference to Exhibit 3.6 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
3.7 - Certificate of Incorporation of GPC Capital Corp. II
(incorporated herein by reference to Exhibit 3.7 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
3.8 - By-Laws of GPC Capital Corp. II (incorporated herein by
reference to Exhibit 3.8 to the Registration Statement on Form
S-4 (File No. 333-53603-03)).
4.1 - Indenture dated as of February 2, 1998 among Graham Packaging
Company, L.P. and GPC Capital Corp. I and Graham Packaging
Holdings Company, as guarantor, and United States Trust Company
of New York, as Trustee, relating to the Senior Subordinated
Notes Due 2008 of Graham Packaging Company, L.P. and GPC Capital
Corp. I, unconditionally guaranteed by Graham Packaging Holdings
Company (incorporated herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
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4.2 - Form of 8 3/4% Senior Subordinated Note Due 2008, Series A
(included in Exhibit 4.1) (incorporated herein by reference to
Exhibit 4.2 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
4.3 - Form of 8 3/4% Senior Subordinated Note Due 2008, Series B
(included in Exhibit 4.1) (incorporated herein by reference to
Exhibit 4.3 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
4.4 - Form of Floating Interest Rate Term Security Due 2008, Series A
(included in Exhibit 4.1) (incorporated herein by reference to
Exhibit 4.4 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
4.5 - Form of Floating Interest Rate Term Security Due 2008, Series B
(included in Exhibit 4.1) (incorporated herein by reference to
Exhibit 4.5 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
4.6 - Registration Rights Agreement dated as of February 2, 1998 among
Graham Packaging Company, L.P. and GPC Capital Corp. I and
Graham Packaging Holdings Company, as guarantor, and BT Alex.
Brown Incorporated, Bankers Trust International PLC, Lazard
Freres & Co. L.L.C. and Salomon Brothers Inc, relating to the
Senior Subordinated Notes Due 2008 of Graham Packaging Company,
L.P. and GPC Capital Corp. I, unconditionally guaranteed by
Graham Packaging Holdings Company (incorporated herein by
reference to Exhibit 4.6 to the Registration Statement on Form
S-4 (File No. 333-53603-03)).
4.7 - Indenture dated as of February 2, 1998 among Graham Packaging
Holdings Company and GPC Capital Corp. II and The Bank of New
York, as Trustee, relating to the Senior Discount Notes Due 2009
of Graham Packaging Holdings Company and GPC Capital Corp. II
(incorporated herein by reference to Exhibit 4.7 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
4.8 - Form of 10 3/4% Senior Discount Note Due 2009, Series A
(included in Exhibit 4.7) (incorporated herein by reference to
Exhibit 4.8 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
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4.9 - Form of 10 3/4% Senior Discount Note Due 2009, Series B
(included in Exhibit 4.7) (incorporated herein by reference to
Exhibit 4.9 to the Registration Statement on Form S-4 (File No.
333-53603-03)).
4.10 - Registration Rights Agreement dated as of February 2, 1998 among
Graham Packaging Holdings Company, GPC Capital Corp. II, BT
Alex. Brown Incorporated, Bankers Trust International PLC,
Lazard Freres & Co. L.L.C. and Salomon Brothers Inc. relating to
the Senior Discount Notes Due 2009 of Graham Packaging Holdings
Company and GPC Capital Corp. II (incorporated herein by
reference to Exhibit 4.10 to the Registration Statement on Form
S-4 (File No. 333-53603-03)).
10.1 - Credit Agreement dated as of February 2, 1998 among Graham
Packaging Holdings Company, Graham Packaging Company, L.P., GPC
Capital Corp. I, the lending institutions identified in the
Credit Agreement and the agents identified in the Credit
Agreement (incorporated herein by reference to Exhibit 10.1 to
the Registration Statement on Form S-4 (File No. 333-53603-03)).
10.2 - Consulting Agreement dated as of February 2, 1998 between Graham
Packaging Holdings Company and Graham Capital Corporation
(incorporated herein by reference to Exhibit 10.2 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
10.3 - Equipment Sales, Service and License Agreement dated February 2,
1998 between Graham Engineering Corporation and Graham Packaging
Holdings Company (incorporated herein by reference to Exhibit
10.3 to the Registration Statement on Form S-4 (File No. 333-
53603-03)).
10.4 - Forms of Retention Incentive Agreement (incorporated herein by
reference to Exhibit 10.4 to the Registration Statement on Form
S-4 (File No. 333-53603-03)).
10.5 - Forms of Severance Agreement (incorporated herein by reference
to Exhibit 10.5 to the Registration Statement on Form S-4 (File
No. 333-53603-03)).
125
10.6 - Registration Rights Agreement by and among Graham Packaging
Company, L.P., GPC Capital Corp. II, Graham Capital Corporation,
Graham Family Growth Partnership, BCP /Graham Holdings L.L.C.,
BMP/Graham Holdings Corporation and the other parties named
therein (incorporated herein by reference to Exhibit 10.6 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
10.7 - Monitoring Agreement dated as of February 2, 1998 among Graham
Packaging Holdings Company, Graham Packaging Company, L.P. and
Blackstone (incorporated herein by reference to Exhibit 10.7 to
the Registration Statement on Form S-4 (File No. 333-53603-03)).
10.8 - Management Stockholders Agreement (incorporated herein by
reference to Exhibit 10.8 to the Registration Statement on Form
S-4 (File No. 333-53603-03)).
10.9 - Form of Equity Incentive Agreement (incorporated herein by
reference to Exhibit 10.9 to the Registration Statement on Form
S-4 (File No. 333-53603-03)).
10.10 - Stockholders' Agreement dated as of February 2, 1998 among
Blackstone Capital Partners III Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners III L.P., Blackstone Family
Investment Partnership III, L.P., BMP/Graham Holdings
Corporation, Graham Packaging Holdings Company, GPC Capital
Corp. II and BT Investment Partners, Inc. (incorporated herein
by reference to Exhibit 10.10 to the Registration Statement on
Form S-4 (File No. 333-53603-03)).
10.11 - Graham Packaging Holdings Company Management Option Plan
(incorporated herein by reference to Exhibit 10.11 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
10.12 - First Amendment to Credit Agreement dated as of August 13, 1998
(incorporated herein by reference to Exhibit 10.12 to the Annual
Report on Form 10-K for the fiscal year ended December 31, 1998
(File No. 333-53603-03)).
10.13 -
Second Amendment to Credit Agreement dated as of March 29, 2000
(incorporated herein by reference to Exhibit 10.13 to the Report
on Form 8-K dated as of April 18, 2000 (File No. 333-53603-03)).
126
18 - Letter re Change in Accounting Principles (incorporated herein
by reference to Exhibit 18 to the Quarterly Report on Form 10-Q
for the quarterly period ended September 26, 1999 (File No. 333-
53603-03)).
21.1 - Subsidiaries of Graham Packaging Holdings Company.
24 - Power of Attorney--Page II of Form 10-K.
99.1 - Form of Fixed Rate Senior Subordinated Letter of Transmittal
(incorporated herein by reference to Exhibit 99.1 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
99.2 - Form of Fixed Rate Senior Subordinated Notice of Guaranteed
Delivery (incorporated herein by reference to Exhibit 99.2 to
the Registration Statement on Form S-4 (File No. 333-53603-03)).
99.3 - Form of Floating Rate Senior Subordinated Letter of Transmittal
(incorporated herein by reference to Exhibit 99.3 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
99.4 - Form of Floating Rate Senior Subordinated Notice of Guaranteed
Delivery (incorporated herein by reference to Exhibit 99.4 to
the Registration Statement on Form S-4 (File No. 333-53603-03)).
99.5 - Form of Senior Discount Letter of Transmittal (incorporated
herein by reference to Exhibit 99.5 to the Registration
Statement on Form S-4 (File No. 333-53603-03)).
99.6 - Form of Senior Discount Notice of Guaranteed Delivery
(incorporated herein by reference to Exhibit 99.6 to the
Registration Statement on Form S-4 (File No. 333-53603-03)).
(c) Reports on Form 8-K
No Reports on Form 8-K were required to be filed during the quarter
ended December 31, 2000.
127
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
by the undersigned hereunto duly authorized.
Dated: March 30, 2001
GRAHAM PACKAGING HOLDINGS COMPANY
(Registrant)
By: BCP /Graham Holdings L.L.C.,its General
Partner
By: /s/ John E. Hamilton
Name: John E. Hamilton
Title: Vice President, Finance and
Administration (chief accounting
officer and duly authorized
officer)
128
POWER OF ATTORNEY
We, the undersigned officers of BCP/Graham Holdings L.L.C., as
general partner of Graham Packaging Holdings Company, and directors of
BMP/Graham Corporation, as sole member of BCP/Graham Holdings L.L.C., as the
general partner of Graham Packaging Holdings Company, do hereby constitute
and appoint Philip R. Yates and John E. Hamilton, or either of them, our true
and lawful attorneys and agents, to sign for us, or any of us, in our names
in the capacities indicated below, any and all amendments to this report, and
to cause the same to be filed with the Securities and Exchange Commission,
granting to said attorneys, and each of them, full power and authority to do
and perform any act and thing necessary or appropriate to be done in the
premises, as fully to all intents and purposes as the undersigned could do if
personally present, and we do hereby ratify and confirm all that said
attorneys and agents, or either of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on the 30th day of March, 2001 by the
following persons on behalf of the registrant and in the capacities
indicated, with respect to BCP/Graham Holdings L.L.C., as general partner of
Graham Packaging Holdings Company, or BMP/Graham Holdings Corporation, as
sole member of BCP/Graham Holdings L.L.C., as indicated below:
Signature Title
/s/ Howard A. Lipson President, Treasurer and Assistant Secretary
Howard A. Lipson (Principal Executive Officer) of BCP /Graham
Holdings L.L.C.
/s/ John E. Hamilton Vice President, Finance and Administration
John E. Hamilton (Principal Financial Officer and Principal
Accounting Officer) of BCP / Graham Holdings
L.L.C.
/s/ Howard A. Lipson Director of BMP/Graham Holdings Corporation
Howard A. Lipson
129
/s/ Chinh E. Chu Director of BMP/Graham Holdings Corporation
Chinh E. Chu
/s/ David A. Stonehill Director of BMP/Graham Holdings Corporation
David A. Stonehill
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report to security holders covering the registrant's last fiscal
year has been sent to security holders. No proxy statement, form of proxy or
other proxy soliciting material has been sent to more than 10 of the
registrant's security holders with respect to any annual or other meeting of
security holders.
130
SCHEDULE I
GRAHAM PACKAGING HOLDINGS COMPANY
REGISTRANT'S CONDENSED FINANCIAL STATEMENTS
(In thousands)
BALANCE SHEET December 31, 2000 December 31, 1999
Assets
Current assets $ -- $ --
Intangible assets, net 4,494 4,877
Total assets $ 4,494 $ 4,877
Liabilities and partners' capital
Current liabilities $ 6,993 $ 6,977
Long-term debt 136,680 123,092
Investment in subsidiary 325,200 332,779
Total liabilities 468,873 462,848
Partners' capital (464,379) (457,971)
Total liabilities and partners' capital $ 4,494 $ 4,877
Year Ended Year Ended Year Ended
STATEMENTS OF OPERATIONS December 31, 2000 December 31, 1999 December 31, 1998
Equity in earnings of subsidiaries $(31,650) $ 13,825 $(16,485)
Recapitalization expenses -- -- (1,000)
Interest expense (13,971) (12,565) (10,546)
Other (16) (5) --
Net (loss) income $(45,637) $ 1,255 $(28,031)
131
Year Ended Year Ended Year Ended
STATEMENTS OF CASH FLOWS December 31, 2000 December 31, 1999 December 31, 1998
Operating activities:
Net (loss) income $(45,637) $ 1,255 $(28,031)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Amortization of debt issuance costs 383 170 462
Accretion of Senior Discount Notes 13,588 12,395 10,085
Changes in current liabilities 16 5 6,972
Equity loss (income) in subsidiaries 31,650 (13,825) 16,485
Net cash provided by operating activities -- -- 5,973
Investing activities:
Investments in a business (48,853) -- 314,477
Net cash (used in) provided by investing (48,853) - 314,477
activities
Financing activities:
Borrowings on long-term debt -- -- 100,612
Cash distributions from (to) partners -- -- (415,554)
Debt issuance fees -- -- (5,508)
Notes for ownership interests (1,147) -- --
Capital contributions 50,000 -- --
Net cash provided by (used in) financing 48,853 -- (320,450)
activities
Increase in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of period -- -- --
Cash and cash equivalents at end of period $ - $ $ --
Supplemental cash flow information:
Cash paid for interest $ -- $ -- $ --
See footnotes to consolidated financial statements of Graham Packaging
Holdings Company.
132
SCHEDULE II
GRAHAM PACKAGING HOLDINGS COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Year ended December 31, 2000 Balance @ Balance @
Beginning of Additions Deductions Other end of year
year
Allowance for Doubtful Accounts $1,791 $319 $942 $-- $1,168
Allowance for Inventory Losses 1,283 1,127 1,124 -- 1,286
Year ended December 31, 1999
Allowance for Doubtful Accounts $1,435 $420 $97 $33 $1,791
Allowance for Inventory Losses 1,447 297 461 -- 1,283
Year ended December 31, 1998
Allowance for Doubtful Accounts $1,635 $32 $395 $163 $1,435
Allowance for Inventory Losses 566 514 220 587 1,447
[FN]
(1) Represents allowance attributable to entities acquired during 1999
and 1998.
133