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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, 2001
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 (I.R.S. Employer Identification No.)
of 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, 2002 was $-0-. As of February 28, 2002, 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.
1
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
Page
Number
PART I
Item 1. Business..........................................................3
Item 2. Properties.......................................................18
Item 3. Legal Proceedings................................................20
Item 4. Submission of Matters to a Vote of Security Holders..............21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................21
Item 6. Selected Financial Data..........................................22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......33
Item 8. Financial Statements and Supplementary Data......................35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................61
PART III
Item 10. Advisory Committee Members, Directors and Executive
Officers of the Registrant......................................61
Item 11. Executive Compensation...........................................62
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................67
Item 13. Certain Relationships and Related Transactions...................68
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................73
2
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 Donald C. Graham and/or certain entities controlled by Mr.
Graham and his family. 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. Since March 30, 2001
the Company's operations have included the operations of Masko Graham Spolka
Z.O.O. ("Masko Graham") as a result of acquiring an additional 1% interest,
for a total interest of 51%, in a joint venture. 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.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Annual 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 Company's 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 container
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.
3
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 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
59 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 14% as a result of its aggressive
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. Over
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 2001, the
Company's top 20 customers comprised over 81% of its net sales and have been
its customers for an average of 16 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-
4
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.
Over the last three fiscal years, the Company's food and beverage
container sales have grown at a compound annual growth rate of over 30%,
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 $260 million of capital invested in the hot-fill PET food
and beverage container 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, in alphabetical order, 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"), Ocean Spray Cranberries, Inc. ("Ocean Spray"),
PepsiCo, Inc. ("PepsiCo"), The Quaker Oats Company ("Quaker Oats"), Sunsweet
Growers, Inc. ("Sunsweet"), Tree Top Inc. ("Tree Top"), Tropicana Products,
Inc. ("Tropicana") and Welch Foods, Inc. ("Welch's"). For the years ended
December 31, 1999, 2000 and 2001 the Company generated approximately 45.6%,
49.4% and 55.4%, respectively, of its net sales from the food and beverage
container business.
Household and Personal Care. In the household and personal care
container 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
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
growth in demand for household and personal care plastic containers
internationally to be a contributor to its business. The Company's largest
customers in this sector include, in alphabetical order, Colgate-Palmolive
Company ("Colgate-Palmolive"), The Dial Corp. ("Dial"), Henkel KGaA
("Henkel"), The Procter and Gamble Company ("Procter & Gamble") and Unilever
NV ("Unilever"). For the years ended December 31, 1999, 2000 and 2001 the
Company generated approximately 25.6%, 25.0% and 22.6%, respectively, of its
net sales from the household and personal care container 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 73% market share
in the United States, based on 2001 unit sales. The Company has been producing
motor oil containers since the conversion to plastic began 24 years ago and
has expanded its market share and maintained margins by partnering with its
customers to improve product quality and jointly 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
5
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. 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, in alphabetical order, Ashland,
Inc. ("Ashland", producer of Valvoline motor oil), Castrol Consumer N.A.
("Castrol", an affiliated company of BP plc), Chevron Texaco Corporation
("ChevronTexaco"), Pennzoil-Quaker State Company ("Pennzoil-Quaker State", the
result of the merger between Pennzoil Products Company, "Pennzoil", and The
Quaker State Corporation, "Quaker State") and Shell Oil Products US ("Shell").
For the years ended December 31, 1999, 2000, and 2001 the Company generated
approximately 28.8%, 25.6% and 22.0%, 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.
Management believes that the Company maintains 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 63% 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
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 up 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, 2001 the Company's largest customer,
PepsiCo, accounted for 17.4% of the Company's total net sales. For the year
ended December 31, 2001 the Company's twenty largest customers, who accounted
for over 81% of net sales, were, in alphabetical order:
6
Company
Customer (1) Business Customer Since (1)
- ------------ -------- ------------------
Ashland (2) Automotive Early 1970's
Castrol Automotive Late 1960's
ChevronTexaco 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
Hershey's Food and Beverage Mid 1980's
Hi-Country Food and Beverage Late 1990's
Minute Maid Food and Beverage Late 1990's
Ocean Spray Food and Beverage Early 1990's
Pennzoil-Quaker State Automotive Early 1970's
PepsiCo (3) Food and Beverage Early 2000's
Quaker Oats Food and Beverage Late 1990's
Tropicana Food and Beverage Mid 1980's
Petrobras Distribuidora S.A. Automotive Early 1990's
Procter & Gamble Household and Personal Care Early 1980's
Shell Automotive Early 1970's
Sunsweet Food and Beverage Late 1990's
Tree Top Food and Beverage Early 1990'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.
(3) PepsiCo includes Quaker Oats and Tropicana
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 25 plants located in countries outside of the
United States, including Argentina (2), Belgium (1), Brazil (4), Canada (3),
France (4), Germany (2), Hungary (1), Italy (2), Mexico (1), Poland (2), Spain
(1), Turkey (1) and the United Kingdom (1).
Argentina, Brazil and Mexico. In Brazil, the Company operates three
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 container 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 produced for Brazilian customers from its Argentine operations to the
Company's Brazilian facilities and closed one of the facilities in Argentina.
In December 1999, 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
7
Graham Spolka Z.O.O., a 51% owned joint venture in Poland, HDPE containers are
manufactured for household and personal care and liquid food products. In late
2001 the Company committed to a plan to sell or close certain locations in
Italy, France, Germany and the United Kingdom. In early 2002 the Company
announced a second quarter closing of its operation located in Wrexham, Wales,
United Kingdom and the sale of its Italian operations.
Canada. The Company has two off site facilities and one on site
facility in Canada to service Canadian and northern U.S. customers. All are
near Toronto, Ontario. The Canadian facilities produce products for all three
of the Company's target end-use markets. In early 2001 the Company closed its
operations at a facility near Montreal, Quebec and in early 2002 announced the
closing of its operations at an off site facility in Burlington, Ontario.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (Item 7) for a discussion of impairment charges.
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,
Plastipak, Inc., Silgan Holdings Inc., Schmalbach-Lubeca Plastic Containers
USA Inc., Pechiney Plastics Packaging, 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. 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; Levittown, Pennsylvania; Maryland Heights,
Missouri; 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.
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 design and conversion successes over the
past few years include:
o 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;
o hot-fill PET wide-mouth jars for Ragu pasta sauce, Seneca
applesauce and Welch's jellies and jams;
8
o HDPE frozen juice container for Welch's in the largely
unconverted metal and paper-composite can markets; and
o 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 an agreement (the "Equipment
Sales Agreement"), Graham Engineering provides engineering, consulting and
other services and sells 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 over one-third of
its 59 facilities on site at customer and vendor facilities. Within the 59
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 1970s, 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
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.
9
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 container 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 1999, 2000
and 2001 were approximately $171.0 million, $163.4 million and $74.3 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 approximately $30 million per year.
Additional capital expenditures beyond this amount will be required to expand
capacity.
For the fiscal year 2002, the Company expects to incur approximately
$120 million of capital expenditures. However, total capital expenditures for
2002 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, as hereinafter defined.
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 $150.0 million aggregate principal amount of their 8
3/4% Senior Subordinated Notes Due 2008, Series A (the "Fixed Rate Senior
Subordinated Old Notes"), and $75.0 million 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
"Offerings") pursuant to Rule 144A under the Securities Act of $169.0 million
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 ("Registration Rights Agreements").
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
$150.0 million aggregate principal amount of their 8 3/4% Senior Subordinated
Notes Due 2008, Series B (the "Fixed Rate Senior Subordinated Exchange
Notes"), and $75.0 million 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
10
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 $169.0 million 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, 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:
o A change in the name of Holdings to Graham Packaging
Holdings Company;
o The contribution by Holdings of substantially all of its
assets and liabilities to the Operating Company, which was
renamed "Graham Packaging Company, L.P.";
o 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");
o The initial borrowing by the Operating Company of $403.5
million (the "Bank Borrowings") in connection with a new
senior credit agreement (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));
o The repayment by the Operating Company of substantially
all of the then existing indebtedness and accrued interest
of Holdings and its subsidiaries (approximately $264.9
million);
o 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;
o The redemption by Holdings of certain partnership
interests in Holdings held by the Graham Entities for
$429.6 million;
o The purchase by the Equity Investors of certain partnership
interests in Holdings held by the Graham Entities for
$208.3 million;
o The repayment by the Graham Entities of $21.2 million owed
to Holdings under certain promissory notes;
o The recognition of additional compensation expense under an
equity appreciation plan;
o The payment of certain bonuses and other cash payments and the
granting of certain equity awards to senior and middle level
Management;
o The execution of various other agreements among the
parties; and
o 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
11
LP, which constitutes approximately a 2.6% interest in Holdings. In
addition, an affiliate of DB Alex. Brown LLC and its affiliate (which acted as
two of the 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 date of the
Recapitalization (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
adequacy of the Management awards.
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 (1) 225.0
Senior Discount Notes 100.6
Equity investments and retained equity (2) 245.0
Repayment of Promissory notes 21.2
Available cash 1.7
--------
Total $ 997.0
========
USES OF FUNDS:
Repayment of existing indebtedness (3) $ 264.9
Redemption by Holdings of existing partnership interests 429.6
Purchase by Equity Investors of existing partnership interests 208.3
Partnership interests retained by Continuing Graham Entities 36.7
Payments to Management 15.4
Transaction costs and expenses 42.1
--------
Total $ 997.0
========
12
(1) Included $150.0 million of Fixed Rate Senior Subordinated Old Notes
and $75.0 million of Floating Rate Senior Subordinated Old Notes.
(2) 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 its affiliates, 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).
(3) Included $264.5 million of existing indebtedness and $0.4 million of
accrued interest.
Employees
As of December 31, 2001, the Company had approximately 4,100
employees, 2,400 of whom were located in the United States. Approximately 81%
of the Company's employees are hourly wage employees, 49% of whom are
represented by various labor unions and are covered by various collective
bargaining agreements that expire between May 2002 and September 2006.
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, 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 2001 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 63% 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
13
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 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 ranges 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. See also "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 (the "Term Loans" or "Term Loan Facilities"), a $155.0 million credit
facility (the "Revolving Credit Facility") and a $100.0 million credit
facility (the "Growth Capital Revolving Credit Facility" and, together with
the Revolving Credit Facility, the "Revolving Credit Loans"). 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: 2002--$30.6 million; 2003--$31.6 million; 2004--$220.1 million;
2005--$67.5 million; and 2006--$245.0 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 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
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: 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
14
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.
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 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
15
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
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"). 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 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
25 plants outside of the United States are located in Argentina (2), Belgium
(1), Brazil (4), Canada (3), France (4), Germany (2), Hungary (1), Italy (2),
Mexico (1), 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
16
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 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, HDPE and other
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 PepsiCo, the Company's largest customer, collectively accounted
for approximately 17.4% of the Company's net sales for the year ended December
31, 2001. PepsiCo'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. Additionally, in 2001 the Company's top 20 customers
comprised over 81% of its net sales. The Company's existing customers'
purchase orders and contracts typically vary from two 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
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 significant to the business of the Company. To
date, certain affiliates of the Graham Entities have provided 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. The
obligations of Holdings to make payments to the Graham affiliates under the
Equipment Sales 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
17
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
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 have resulted 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
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 59 plants which are located in
Argentina, Belgium, Brazil, Canada, France, Germany, Hungary, Italy, Mexico,
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 operations in Poland and Mexico are pursuant to joint venture
arrangements in which the Company owns slightly more than a 50% interest. In
1999, the Company consolidated and relocated its corporate headquarters to a
facility
18
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.
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 approximate square footage.
On Site Size
Location Or Off Site Leased/Owned (Sq. ft.)
- -------- ----------- ------------ ---------
U.S. Packaging Facilities (a)
- -----------------------------
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. Evansville, Indiana (b) Off Site Leased 146,720
11. Rancho Cucamonga, California Off Site Leased 143,063
12. Santa Ana, California Off Site Owned 127,680
13. Muskogee, Oklahoma Off Site Leased 125,000
14. Woodridge, Illinois Off Site Leased 124,137
15. Atlanta, Georgia Off Site Leased 112,400
16. Cincinnati, Ohio Off Site Leased 111,669
17. Bradford, Pennsylvania Off Site Leased 90,350
18. Berkeley, Missouri Off Site Owned 75,000
19. Jefferson, Louisiana Off Site Leased 58,799
20. Cambridge, Ohio On Site Leased 57,000
21. Port Allen, Louisiana On Site Leased 56,721
22. Shreveport, Louisiana On Site Leased 56,400
23. Richmond, California Off Site Leased 54,985
24. Houston, Texas Off Site Owned 52,500
25. Lakeland, Florida Off Site Leased 49,000
26. New Kensington, Pennsylvania On Site Leased 48,000
27. N. Charleston, South Carolina On Site Leased 45,000
28. Darlington, South Carolina On Site Leased 43,200
29. Bradenton, Florida On Site Leased 33,605
30. Vicksburg, Mississippi On Site Leased 31,200
31. Bordentown, New Jersey On Site Leased 30,000
32. West Jordan, Utah On Site Leased 25,573
33. Wapato, Washington Off Site Leased 20,300
Canadian Packaging Facilities
- -----------------------------
34. Burlington, Ontario (c) Off Site Owned 145,200
35. Mississauga, Ontario Off Site Owned 78,416
36. Toronto, Ontario On Site (d) 5,000
European Packaging Facilities
- -----------------------------
37. Assevent, France Off Site Owned 186,000
38. Noeux les Mines, France Off Site Owned 120,000
39. Wrexham, United Kingdom (c) Off Site Owned 120,000
40. Campochiaro, Italy (e) Off Site Owned 93,200
19
41. Blyes, France Off Site Owned 89,000
42. Sulejowek, Poland (f) Off Site Owned 83,700
43. Bad Bevensen, Germany Off Site Owned/Leased (g) 80,000
44. Meaux, France Off Site Owned 80,000
45. Aldaia, Spain On Site Leased 75,350
46. Sovico (Milan), Italy (e) Off Site Leased 74,500
47. Istanbul, Turkey Off Site Owned 50,000
48. Bierun, Poland (f) On Site Leased 10,652
49. Rotselaar, Belgium On Site Leased 15,070
50. Genthin, Germany On Site Leased 6,738
51. Nyirbator, Hungary On Site Leased 5,000
Latin American Packaging Facilities
- -----------------------------------
52. Sao Paulo, Brazil Off Site Leased 66,092
53. Buenos Aires, Argentina Off Site Owned 33,524
54. Leon, Mexico (h) Off Site Leased 24,000
55. Rio de Janeiro, Brazil On Site Owned/Leased (g) 22,604
56. Rio de Janeiro, Brazil On Site Leased 16,685
57. Rio de Janeiro, Brazil On Site (d) 11,000
58. San Luis, Argentina Off Site Owned 8,070
Graham Recycling
- ----------------
59. York, Pennsylvania Off Site Owned 44,416
Administrative Facilities
- -------------------------
o York, Pennsylvania N/A Leased 70,071
o Burlington, Ontario, Canada N/A Owned 4,800
o Rueil, Paris, France N/A Leased 4,300
o Sao Paulo, Brazil N/A Leased 3,800
(a) Substantially all of the Company's domestic tangible and intangible
assets are pledged as collateral pursuant to the terms of the senior
credit agreement
(b) Currently under construction
(c) Closure of operations announced; real property in the process of
being disposed of
(d) These on site facilities are operated without leasing the space
occupied
(e) Sale of operations announced
(f) This facility is owned by Masko Graham, in which the Company,
through Graham Packaging Poland, L.P., holds a 51% interest
(g) The building is owned; land is leased
(h) This facility is leased by Industrias Graham Innopack S. de R.L. de
C.V., in which the Company, through Graham Packaging Latin America,
LLC, holds a 50% interest
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.
20
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 2001.
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.
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 $150.0 million
aggregate principal amount of their Fixed Rate Senior Subordinated Old Notes
and $75.0 million 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 $169.0 million 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 and an affiliate, 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 $6.75 million. 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 $3.99 million. 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 $150.0 million aggregate
principal amount of their Fixed Rate Senior Subordinated Exchange Notes and
$75.0 million 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 $169.0 million 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.
21
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, 2001 and are derived from the Company's audited
financial statements. The combined financial statements of the Company 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 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,
-----------------------
2001 2000 1999 1998 1997
---- ----- ----- ----- ----
(In millions)
INCOME STATEMENT DATA
Net sales (1) $923.1 $842.6 $731.6 $602.4 $532.6
Gross profit (1) 151.9 134.5 142.7 115.4 84.7
Selling, general and administrative expenses 58.3 56.2 48.0 37.8 34.9
Impairment charges (2) 38.0 21.1 --- --- ---
Special charges and unusual items (3) 0.1 1.1 4.6 24.2 24.4
--- --- --- ---- ----
Operating income 55.5 56.1 90.1 53.4 25.4
Recapitalization expenses (4) --- --- --- 11.8 ---
Interest expense, net 98.5 101.7 87.5 68.0 13.4
Other expense (income) 0.2 0.2 (0.7) (0.2) 0.7
Minority interest 0.5 (0.6) (0.5) --- 0.2
Income tax provision (5) 0.3 0.4 2.5 1.1 0.6
Extraordinary loss (6) --- --- --- 0.7 ---
--- --- --- --- ---
Net (loss) income (7) (8) $(44.0) $(45.6) $ 1.3 $(28.0) $ 10.5
======= ======= ===== ======= ======
OTHER DATA:
Cash flows from:
Operating activities $52.6 $90.9 $ 55.5 $ 41.8 $ 66.9
Investing activities (77.2) (164.7) (181.8) (181.2) (72.3)
Financing activities 24.1 78.4 126.2 139.7 9.5
Adjusted EBITDA (9) 171.5 153.7 149.1 117.8 90.1
Capital expenditures (excluding acquisitions) 74.3 163.4 171.0 133.9 53.2
Investments (including acquisitions) (10) 0.2 0.1 10.3 45.2 19.0
Depreciation and amortization (11) 71.7 66.2 53.2 39.3 41.0
Ratio of earnings to fixed charges (12) --- --- 1.0x --- 1.6x
BALANCE SHEET DATA:
Working capital (deficit) (13) $ (10.4) $(23.5) $ 10.6 $ (5.5) $ 4.4
Total assets 758.6 821.3 741.2 596.7 387.5
Total debt 1,052.4 1,060.2 1,017.1 875.4 268.5
Partners' capital (deficit) (485.1) (464.4) (458.0) (438.8) 2.3
(1) Net sales increase or decrease based on fluctuations in resin prices as
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. 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.
(2) Includes impairment charges recorded on certain long-lived assets ($28.9
million and $16.3 million in the years ending December 31, 2001 and
2000, respectively) and goodwill ($9.1 million and $4.8 million for the
years ending December 31, 2001 and 2000, respectively) (see
"Management's
22
Discussion and Analysis of Financial Condition and Results of Operations
--Results of Operations" (Item 7) for a further discussion).
(3) Includes compensation costs related to the 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.
(4) Includes transaction fees, expenses and costs associated with the
termination of the interest rate collar and swap agreements as a
result of the Recapitalization.
(5) 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. 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.
(6) Represents cost incurred, including the write-off of unamortized
debt issuance fees, in connection with the early extinguishment of debt.
(7) Effective June 28, 1999, the Company changed its method of valuing
inventories for its domestic operations from the last-in, first-out
("LIFO") method to the first in, first-out ("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 increased net loss for the year
ended December 31, 1998 by $2.0 million and increased net income for
the year ended December 31, 1997 by $0.3 million.
(8) 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, and on October 9, 2001 acquired the remaining 49%; the
total purchase price for the entire 100% interest (excluding direct
costs of the acquisition), net of liabilities assumed, was $3.1 million.
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. On March 30, 2001, the Company acquired an
additional 1% interest in Masko Graham for a total interest of 51%; the
total purchase price for the entire 51% interest (excluding direct costs
of the acquisition), net of liabilities assumed, was $1.3 million. These
transactions were accounted for under the purchase method of accounting.
Results of operations are included since the respective dates of the
acquisitions.
(9) 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 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 certain
non-recurring charges. Adjusted EBITDA is included to provide additional
information with respect to the ability of Holdings and the Operating
Company to satisfy their debt service, capital expenditure 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 requirements, 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 Statements and Supplementary Data" (Item 8),
including the related notes thereto.
23
Adjusted EBITDA is calculated as follows:
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In millions)
(Loss) income before extraordinary item $ (44.0) $ (45.6) $ 1.3 $ (27.3) $10.5
Interest expense, net 98.5 101.7 87.5 68.0 13.4
Income tax expense 0.3 0.4 2.5 1.1 0.6
Depreciation and amortization 71.7 66.2 53.2 39.3 41.0
Impairment charges 38.0 21.1 -- -- --
Fees paid pursuant to the Blackstone monitoring agreement 1.0 1.0 1.0 1.0 --
Equity in loss/(earnings) of joint venture 0.2 (0.1) (0.3) (0.3) (0.2)
Non-cash compensation -- -- -- -- 0.2
Special charges and unusual items/certain non-recurring charges (a) (b) 5.3 9.6 4.6 24.2 24.4
Recapitalization expenses -- -- (0.2) 11.8 --
Minority interest 0.5 (0.6) (0.5) -- 0.2
------ ------- ------ ----- -----
Adjusted EBITDA $ 171.5 $ 153.7 $ 149.1 $ 117.8 $90.1
======= ======= ======= ======= = =====
(a) The year ended December 31, 2001 includes special charges and
unusual items related to compensation costs related to the
Recapitalization ($0.1 million) and certain non-recurring
charges including global restructuring costs ($4.9 million) and
other costs ($0.3 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 $4.2
million and $8.4 million for the years ended December 31, 2001 and
2000, respectively.
(10) Investments include the acquisitions made by the Company in the United
States, France, the United Kingdom, Brazil, Argentina, Germany, Poland
and Turkey described in note (8) above. Amounts shown under this caption
represent cash paid, net of cash acquired in the acquisitions.
(11) Depreciation and amortization excludes amortization of debt issuance
fees, which is included in interest expense, net, and impairment
charges.
(12) 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 $43.1 million for
the year ended December 31, 2001, by $45.8 million for the year ended
December 31, 2000 and by $26.3 million for the year ended December 31,
1998.
(13) 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
59 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
24
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.
Management believes that critical success factors to the Company's
business are its ability to:
o serve the complex packaging demands of its customers which include
some of the world's largest branded consumer products companies;
o 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
o 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 $260 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,
2001 the Company's sales of hot-fill PET containers has grown to $328.2
million from $70.2 million in 1996. More recently, the Company has been a
leading participant in the rapid growth of the drinkable yogurt market
where the Company manufactures containers using HDPE.
The Company's household and personal care container 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-quart
motor oil industry decreased 3% in 2001 as compared to 2000; annual volumes
declined an average of 1% to 2% in prior years. Management believes the
decline in the domestic one-quart motor oil container 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. The Company was recently awarded 100% of
Pennzoil-Quaker State's U.S. one-quart volume requirements. This award
includes supplying from a facility on site with Pennzoil-Quaker State in
Newell, West Virginia. ExxonMobil also awarded the Company 100% of its
one-quart volume requirements for one of its U.S. filling plants, located in
Port Allen, Louisiana. ExxonMobil was not a U.S. customer prior to this award.
Following its strategy to expand while at the same time
restructure the business in selected international areas, the Company
currently operates 25 facilities, either on its own or through joint ventures,
in Argentina, Belgium, Brazil, Canada, France, Germany, Hungary, Italy,
Mexico, Poland, Spain, Turkey and the United Kingdom. In 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 in 2000, the Company experienced a downturn in financial performance in
certain plants in France. In the first half of 2001, the Company experienced a
downturn in financial performance in its operations in Argentina and later in
2001, the Company's operations in Argentina were subjected to the severe
downturn in the Argentine economy. In the third quarter of 2001, the Company
experienced a loss or reduction of business at its plant in Sovico, Italy. In
early 2001 the Company closed its facility in Anjou, Quebec, Canada and in
early 2002 announced the closing of another plant in Burlington, Ontario.
During the latter portion of 2001, the Company committed to plans to sell or
close certain plants in Europe, including plants in France, Germany, Italy and
the United Kingdom. (See "--Results of Operations" for a discussion of
impairment charges.) On March 30, 2001 the Company purchased an additional 1%
interest in Masko Graham.
25
For the year ended December 31, 2001, 81% 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 three to ten years; the remainder
of which are 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 12 month
average market prices per pound of PET and HDPE resins in North America over
the years ending December 31, 2001, 2000 and 1999:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
PET $0.65 $0.62 $0.54
HDPE $0.43 $0.44 $0.41
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,
-----------------------
2001 2000 1999
---- ---- ----
(In Millions)
North America $742.5 80.4% $667.2 79.2% $566.2 77.4%
Europe 154.3 16.7% 146.2 17.3% 140.9 19.3%
Latin America 26.3 2.9% 29.2 3.5% 24.5 3.3%
------ ---- ----- ---- ----- ----
$923.1 100.0% $842.6 100.0% $731.6 100.0%
====== ====== ====== ====== ====== ======
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In Millions)
Food & Beverage $511.6 55.4% $416.2 49.4% $333.4 $45.6%
Household and Personal Care 208.5 22.6% 210.6 25.0% 187.5 25.6%
Automotive 203.0 22.0% 215.8 25.6% 210.7 28.8%
----- ----- ----- ----- ----- -----
$923.1 100.0% $842.6 100.0% $731.6 100.0%
====== ====== ====== ====== ====== ======
2001 Compared to 2000
26
Net Sales. Net sales for the year ended December 31, 2001 increased
$80.5 million to $923.1 million from $842.6 million for the year ended
December 31, 2000. The increase in sales was primarily due to an increase in
units sold. Units sold increased by 18.7% for the year ended December 31, 2001
as compared to the year ended December 31, 2000, primarily due to additional
North American food and beverage business, where units sold increased by
38.0%. On a geographic basis, sales for the year ended December 31, 2001 in
North America were up $75.3 million or 11.3% from the year ended December 31,
2000. The North American sales increase included higher units sold of 15.6%.
North American sales in the food and beverage business and the household and
personal care business contributed $83.2 million and $0.9 million,
respectively, to the increase, while sales in the automotive business were
$8.8 million lower. Units sold in North America increased by 38.0% in the food
and beverage business, but decreased by 0.8% in the household and personal
care business and by 3.8% in the automotive business. Sales for the year ended
December 31, 2001 in Europe were up $8.1 million or 5.5% from the year ended
December 31, 2000, principally in the food and beverage business. Overall,
European sales reflected a 25.6% 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 $5.0 million for the year ended
December 31, 2001 compared to the year ended December 31, 2000. Sales in Latin
America for the year ended December 31, 2001 were down $2.9 million or 9.9%
from the year ended December 31, 2000, primarily due to exchange rate changes
of approximately $5.9 million, offset by a 3.1% increase in units sold.
Gross Profit. Gross profit for the year ended December 31, 2001
increased $17.4 million to $151.9 million from $134.5 million for the year
ended December 31, 2000. Gross profit for the year ended December 31, 2001
increased $9.5 million in North America, increased $8.7 million in Europe and
decreased $0.8 million in Latin America when compared to the year ended
December 31, 2000. The increase in gross profit resulted primarily from higher
sales volume in North America and Europe, along with restructuring and
customer consolidation in Europe. The continued economic uncertainties in
Argentina and exchange rate changes in Brazil were contributing factors to the
decrease in the Latin American gross profit.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2001 increased $2.1
million to $58.3 million from $56.2 million for the year ended December 31,
2000. The increase in selling, general and administrative expenses is due
primarily to overall growth in the business, offset by lower non-recurring
charges for the year ended December 31, 2001 compared to the year ended
December 31, 2000. As a percent of sales, selling, general and administrative
expenses, excluding non-recurring charges, increased to 6.2% of sales in 2001
from 5.9% in 2000.
Impairment Charges. During 2001, the Company evaluated the
recoverability of its long-lived assets in the following locations (with the
operating segment under which it reports in parenthesis) due to indicators of
impairment as follows:
o Argentina (Latin America) - operating losses and cash flow deficits
experienced, the loss or reduction of business and the severe
downturn in the Argentine economy
o Italy (Europe) - operating losses and reduction of business, as well
as the Company's commitment to a plan to sell these locations
o Certain plants in France (Europe) - the Company's commitment to a
plan to sell or close these locations
o Bad Bevensen, Germany (Europe) - the Company's commitment to a plan
to sell or close this location
o United Kingdom (Europe) - the Company's commitment to a plan to
close this location
o Burlington, Canada (North America) - the Company's commitment to a
plan to close this location
o Turkey (Europe) - a significant change in the ability to utilize
certain assets
During 2000, the Company evaluated the recoverability of its
long-lived assets in the following locations (with the operating segment under
which it reports in parenthesis) due to indicators of impairment as follows:
o United Kingdom (Europe) - operating losses experienced and projected
o Certain plants in France (Europe) - operating losses experienced and
projected
o Anjou, Canada (North America) - operating losses experienced and
projected
o Brazil (Latin America) - a significant change in the ability to
utilize certain assets
For assets to be held and used, the Company determined that the
undiscounted cash flows were below the carrying
27
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 impairment charges of
$4.1 million and $15.8 million for the years ended December 31, 2001 and 2000,
respectively. For assets to be disposed of, the Company adjusted the carrying
values of these long-lived assets in these locations to the lower of their
carrying values or their estimated fair values less costs to sell, resulting
in impairment charges of $24.8 million and $0.5 million for the years ended
December 31, 2001 and 2000, respectively. These assets have a remaining
carrying amount as of December 31, 2001 of $0.1 million. Similarly, the
Company evaluated the recoverability of its enterprise goodwill, and
consequently recorded impairment charges of $9.1 million and $4.8 million for
the years ended December 31, 2001 and 2000, respectively. 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.
As of December 31, 2001, all of the assets in Italy and certain
assets in France, Germany, the United Kingdom and Canada were held for
disposal. Operating (loss) income for the United Kingdom for each of the three
years ended December 31, 2001, 2000 and 1999 was $(3.7) million, $(9.1)
million and $1.7 million, respectively. Operating loss for Italy for each of
the three years ended December 31, 2001, 2000 and 1999 was $7.8 million,
$1.5 million and $1.8 million, respectively. Discrete financial
information is not available for the other locations whose assets are held for
disposal.
Special Charges and Unusual Items. In 2001 and 2000, special charges
and unusual items related to compensation costs related to the Recapitalizaion
(see "Business -- The Recapitalization" (Item 1) for a further discussion of
the recapitalization compensation).
Interest Expense, Net. Interest expense, net decreased $3.2 million
to $98.5 million for the year ended December 31, 2001 from $101.7 million for
the year ended December 31, 2000. The decrease was primarily related to lower
interest rates in 2001 compared to 2000. Interest expense, net includes $15.0
million and $13.6 million of non-cash interest on the Senior Discount Notes
for the years ended December 31, 2001 and 2000, respectively.
Other Expense (Income). Other expense (income) was $0.2 million for
the year ended December 31, 2001 as compared to $0.3 million for the year
ended December 31, 2000. The lower loss was due primarily to a higher foreign
exchange gain in the year ended December 31, 2001 as compared to the year
ended December 31, 2000.
Net Loss. Primarily as a result of factors discussed above, net loss
for the year ended December 31, 2001 was $44.0 million compared to net loss of
$45.6 million for the year ended December 31, 2000.
Adjusted EBITDA. Primarily as a result of factors discussed above,
Adjusted EBITDA (as defined in Item 6 "Selected Financial Data") in 2001
increased 11.6% to $171.5 million from $153.7 million in 2000.
2000 Compared to 1999
Net Sales. Net sales for the year ended December 31, 2000 increased
$111.0 million to $842.6 million from $731.6 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 sold
increased by 45.1%. On a geographic basis, sales for the year ended December
31, 2000 in North America were up $101.0 million or 17.8% from the year ended
December 31, 1999. The North American sales increase included higher units
sold of 17.1%. North American sales in the food and beverage business, the
household and personal care business and the automotive business contributed
$71.2 million, $18.5 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 $5.3 million or 3.8%, net
of a $4.4 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 $21.6 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 19.2% from the year
ended December 31, 1999, primarily due to the inclusion of the Argentine
subsidiary. Overall, Latin American sales reflected a 7.4% increase in
units sold.
28
Gross Profit. Gross profit for the year ended December 31, 2000
decreased $8.2 million to $134.5 million from $142.7 million for the year
ended December 31, 1999. Gross profit for the year ended December 31, 2000
increased $0.5 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 $8.2
million to $56.2 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 5.9% of sales in 2000 from 6.6%
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.
Special Charges and Unusual Items. In 2000, special charges and
unusual items included $1.1 million related to compensation costs related to
the 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 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 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 "Selected Financial Data") in 2000
increased 3.1% to $153.7 million from $149.1 million in 1999.
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 comprehensive income by $10.4 million, $10.4 million
and $22.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
29
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. Conversion
to the euro eliminated currency exchange rate risk between the member
countries. Beginning on January 1, 2002, new euro-denominated bills and coins
were issued and during 2002 legacy currencies will be withdrawn from
circulation.
The Company continues to address the many areas involved with the
introduction of the euro, including information management, finance, legal and
tax. The Company has converted its information technology, and business and
financial systems, to accept the euro currency. While the Company will
continue to evaluate the impact of the euro, the Company believes the effect
of the introduction of the euro, including any related cost of conversion,
will not have a material adverse impact on its financial condition and results
of operations.
Liquidity and Capital Resources
In 2001, 2000 and 1999 the Company generated a total of $199.1
million of cash from operations, $132.2 million from increased indebtedness
and $97.6 million from capital contributions. This $428.9 million was
primarily used to fund $408.7 million of capital expenditures, $10.6 million
of investments, make $1.1 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 of the revolving credit
facilities under the Senior Credit Agreement at December 31, 2001 is $129.5
million, $119.5 million of which is under the Revolving Credit Facility and
$10.0 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 $25.0 million in 2002, $27.5 million in 2003, $93.0
million in 2004, $64.9 million in 2005 and $242.7 million in 2006. The Company
expects to fund scheduled debt 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.
The 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, 2001, the aggregate accreted
value of the Senior Discount Notes was $151.6 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, 2001, the Company's total indebtedness was $1,052.4 million.
Unused lines of credit at December 31, 2001 and 2000 were $132.9
million and $134.8 million, respectively. Substantially all unused lines of
credit have no major restrictions, except as described in Item 13 ("Certain
Relationships and Related Transactions"), 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 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
30
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, 1998, 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 2001, 2000
and 1999 were approximately $74.3 million, $163.4 million and $171.0 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.
For the fiscal year 2002, the Company expects to incur approximately
$120 million of capital expenditures. However, total capital expenditures for
2002 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 $26.8
million at December 31, 2001.
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:
o in respect of overhead, tax liabilities, legal, accounting and other
professional fees and expenses;
o 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
o to finance, starting on July 15, 2003, the payment of cash interest
payments on the Senior Discount Notes.
Contractual Obligations and Commitments
The following table sets forth the Company's contractual obligations
and commitments, in millions:
Payments Due by Period
----------------------
Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
----------------------- ----- -------- --------- --------- -------
Long-Term Debt $1,036.4 $28.9 $248.0 $308.2 $451.3
Capital Lease Obligations 16.0 1.7 3.8 4.2 6.3
Operating Leases 76.0 15.4 25.5 11.5 23.6
Capital Expenditures 26.8 26.8 -- -- --
-------- ----- ------ ------ ------
Total Contractual Cash Obligations $1,155.2 $72.8 $277.3 $323.9 $481.2
======== ===== ====== ====== ======
Transactions with Affiliates
The relationship of the Company with Graham Engineering is
significant to the business of the Company. To date, Graham Engineering has
provided equipment, technology and services to Holdings and its subsidiaries.
Holdings is a party to 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. The Company paid Graham
Engineering approximately $10.3 million, $8.5 million and $20.4 million for
such services and equipment for the years ended December 31, 2001, 2000 and
1999, respectively.
31
Graham Family Growth Partnership has supplied management services
to the Company since 1998. The Company paid Graham Family Growth Partnership
approximately $1.0 million for such services for each of the three years ended
December 31, 2001, 2000 and 1999.
Blackstone has supplied management services to the Company since
1998. The Company paid Blackstone approximately $1.0 million for such services
for each of the three years ended December 31, 2001, 2000 and 1999.
Critical Accounting Policies and Estimates
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") 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 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 SFAS 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. Management believes that this policy
is critical to the financial statements, particularly when evaluating
long-lived assets for impairment. Varying results of such analysis are
possible due to the significant estimates involved in such evaluations.
Derivatives
On January 1, 2001 the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 138. These
standards establish accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, are 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, the effective
portion of the change 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. On January 1, 2001, in
connection with the adoption of SFAS 133, the Company recorded $0.4 million in
OCI as a cumulative transition adjustment for derivatives designated as cash
flow hedges prior to adopting SFAS 133. The Company enters into interest rate
swap agreements to hedge the exposure to increasing rates with respect to its
Senior Credit Agreement. These interest rate swaps are accounted for as
cash flow hedges. The effective portion of the change in the fair value of the
interest rate swaps is recorded in OCI and was $13.5 million for the year
ended December 31, 2001. Approximately 73% of the amount recorded within OCI
is expected to be recognized as interest expense in the next twelve months.
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. Continued use of hedge
accounting is dependent on Management's adherence to this accounting policy.
Failure to properly document the Company's interest rate swaps as cash flow
hedges would result in income statement recognition of all or part of the
$13.5M recorded in OCI as of December 31, 2001. The potential income statement
impact resulting from a failure to adhere to this policy makes this policy
critical to the financial statements.
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. These forward contracts are
accounted for as fair value hedges. During the year ended December 31, 2001,
there was no net gain or loss recognized in earnings as a result of fair value
hedges. The Company has no outstanding forward exchange contracts as of
December 31, 2001.
For disclosure of all of the Company's significant accounting
policies see Note 1 to Financial Statements.
32
New Accounting Pronouncements Not Yet Adopted
On June 29, 2001, SFAS 142, "Goodwill and Other Intangible Assets",
was approved by the Financial Accounting Standards Boards ("FASB"). SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of SFAS 142.
The Company is required to implement SFAS 142 on January 1, 2002. Management
does not believe that adoption of SFAS 142 will have a significant impact on
the Company's results of operations or financial position.
On October 3, 2001, SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", was approved by the FASB. SFAS 144 addresses
the financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company is required to implement SFAS 144 on January 1,
2002. Management does not believe that adoption of SFAS 144 will have a
significant impact on the Company's results of operations or financial
position.
Subsequent Events
During the first quarter of 2002, the Company accepted an offer to
sell the land and building at its plant in Burlington, Canada. The resulting
gain is expected to be approximately $3.2 million. Also during the first
quarter of 2002, the Company announced a second quarter closing of its
operation located in Wrexham, Wales, United Kingdom and the sale of its
Italian operations. The resulting gains or losses are not expected to be
significant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a result of the Recapitalization, the Company has significant
long and short-term debt commitments outstanding as of December 31, 2001.
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 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,
2001. 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, 2001 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 Interest
Rate Swap Agreements at December 31, 2001
(In thousands)
Fair Value
2002 2003 2004 2005 2006 Thereafter Total December 31, 2001
---- ---- ---- ---- ---- ---------- ----- -----------------
Interest rate sensitive
liabilities:
Variable rate
borrowings,
including short-term
amounts $30,585 $31,610 $220,147 $67,476 $245,041 $155,894 $750,753 $750,753
Average interest rate 5.65% 4.74% 4.65% 4.78% 4.87% 6.26% 5.11%
Fixed rate borrowings -- -- -- -- -- $301,638 $301,638 $247,490
Average interest rate -- -- -- -- -- 9.76% 9.76%
$30,585 $31,610 $220,147 $67,476 $245,041 $457,532 $1,052,391 $998,243
======= ======= ======== ======= ======== ======== ========== ========
Derivatives matched
against liabilities:
Pay fixed swaps $200,000 $300,000 -- -- -- -- $500,000 $(13,145)
Pay rate 5.81% 5.25% -- -- -- -- 5.47%
Receive rate 1.94% 2.99% -- -- -- -- 2.57%
33
Expected Maturity Date of Long-Term Debt (Including Current Portion) and Interest
Rate Swap Agreements at December 31, 2000 (In thousands)
Fair Value
December
2001 2002 2003 2004 2005 Thereafter Total 31, 2000
---- ---- ---- ---- ---- ---------- ----- --------
Interest rate sensitive
liabilities:
Variable rate
borrowings,
including
short-term amounts $27,359 $27,160 $29,714 $220,825 $67,163 $401,278 $773,499 $773,499
Average interest rate 9.43% 9.37% 9.35% 9.50% 9.78% 10.10% 9.82%
Fixed rate borrowings -- -- -- -- -- $286,680 $286,680 $140,700
Average interest rate -- -- -- -- -- 9.70% 9.70%
$27,359 $27,160 $29,714 $220,825 $67,163 $687,958 $1,060,179 $914,199
======= ======= ======= ======== ======= ======== ========== ========
Derivatives matched
against liabilities:
Pay fixed swaps $150,000 $200,000 $100,000 -- -- -- $450,000 $392
Pay rate 5.51% 5.81% 5.77% -- -- -- 5.70%
Receive rate 6.73% 6.73% 6.73% -- -- -- 6.73%
As of December 31, 2000 the Company had forward exchange agreements to
purchase French Francs with U.S. dollars in the amount of $2,239,000. The fair
value of these agreements as of December 31, 2000 was $2,382,000, with a
weighted average exchange rate of 7.40 French Francs:$1. There were no
forward exchange contracts outstanding as of December 31, 2001. These forward
exchange contracts are accounted for as fair value hedges, and therefore,
their maturities had no effect on operations.
34
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page Number
Report of Independent Auditors 36
Audited Financial Statements 37
Consolidated Balance Sheets at
December 31, 2001 and 2000 37
Consolidated Statements of Operations
for the years ended December 31, 2001, 2000 and 1999 38
Statements of Partners' Capital (Deficit) for the
years ended December 31, 2001, 2000 and 1999 39
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 40
Notes to Financial Statements 41
35
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, 2001 and 2000, 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, 2001. Our audits also included
financial statement schedules I and II listed in the index at Item 14(a).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement 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, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 19, 2002
36
GRAHAM PACKAGING HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,032 $ 9,844
Accounts receivable, net 90,182 112,329
Inventories 60,476 65,401
Prepaid expenses and other current assets 14,054 12,572
------ ------
Total current assets 173,744 200,146
Property, plant and equipment:
Machinery and equipment 883,692 807,086
Land, buildings and leasehold improvements 97,578 108,245
Construction in progress 39,689 97,249
------ ------
1,020,959 1,012,580
Less accumulated depreciation and amortization 471,374 440,787
--------- ---------
549,585 571,793
Other assets 35,232 49,360
------- -------
Total assets $ 758,561 $ 821,299
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable $95,749 $146,659
Accrued expenses 79,381 67,160
Current portion of long-term debt 30,585 27,359
------ ------
Total current liabilities 205,715 241,178
Long-term debt 1,021,806 1,032,820
Other non-current liabilities 13,582 11,618
Minority interest 2,512 62
Commitments and contingent liabilities (see Notes 18 and 19) -- --
Partners' capital (deficit):
Partners' capital (deficit) (427,911) (433,997)
Notes and interest receivable for ownership interests (2,443) (1,147)
Accumulated other comprehensive income (54,700) (29,235)
--------- ---------
Total partners' capital (deficit) (485,054) (464,379)
--------- ---------
Total liabilities and partners' capital (deficit) $ 758,561 $ 821,299
========= =========
See accompanying notes to financial statements.
37
GRAHAM PACKAGING HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net sales $923,068 $842,551 $731,586
Cost of goods sold 771,201 708,037 588,933
------- ------- -------
Gross profit 151,867 134,514 142,653
Selling, general, and administrative expenses 58,230 56,200 48,016
Impairment charges 37,988 21,056 --
Special charges and unusual items 147 1,118 4,553
------- ------- -------
Operating income 55,502 56,140 90,084
Interest expense 99,052 102,202 88,260
Interest income (612) (509) (786)
Other expense (income) 199 265 (729)
Minority interest 530 (623) (442)
------ ------- ------
(Loss) income before income taxes (43,667) (45,195) 3,781
Income tax provision 303 442 2,526
------ ------ -----
Net (loss) income $ (43,970) $ (45,637) $ 1,255
========== ========== ========
See accompanying notes to financial statements.
38
GRAHAM PACKAGING HOLDINGS COMPANY
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(In thousands)
Notes and
Interest Accumulated
Partners' Receivable for Other
Capital Ownership Comprehensive
(Deficit) Interests Income Total
--------- --------- ------ -----
Consolidated balance at January 1, 1999 (442,271) -- 3,477 (438,794)
Net income for the year 1,255 -- -- 1,255
Cumulative translation adjustment -- -- (22,325) (22,325)
--------
Comprehensive income (loss) (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 (loss) (56,024)
Capital contribution 50,000 (1,147) -- 48,853
Recapitalization 763 -- -- 763
------ ------ ------ -------
Consolidated balance at December 31, 2000 (433,997) (1,147) (29,235) (464,379)
Net loss for the year (43,970) -- -- (43,970)
Cumulative effect of change in accounting for
derivatives -- -- 392 392
Changes in fair value of derivatives -- -- (13,537) (13,537)
Additional minimum pension liability -- -- (1,937) (1,937)
Cumulative translation adjustment -- -- (10,383) (10,383)
--------
Comprehensive income (loss) (69,435)
Capital contribution 50,000 (1,296) -- 48,704
Recapitalization 56 -- -- 56
-------- -------- --------- ----------
Consolidated balance at December 31, 2001 $(427,911) $(2,443) $(54,700) $(485,054)
========== ======== ========= ==========
See accompanying notes to financial statements.
39
GRAHAM PACKAGING HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Operating activities:
Net (loss) income $(43,970) $(45,637) $ 1,255
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 71,707 66,200 53,247
Impairment charges 37,988 21,056 --
Amortization of debt issuance fees 4,637 4,658 4,749
Accretion of Senior Discount Notes 14,959 13,588 12,395
Minority interest 530 (623) (442)
Equity in loss (earnings) of joint venture 246 (63) (231)
Foreign currency transaction loss (gain) 219 292 (11)
Other non-cash Recapitalization expense 56 763 1,865
Changes in operating assets and liabilities, net of
acquisitions of businesses:
Accounts receivable 21,029 (6,898) (25,262)
Inventories 4,020 (13,753) (12,315)
Prepaid expenses and other current assets (2,151) 4,191 (2,955)
Other non-current assets and liabilities (7,180) (1,406) 1,099
Accounts payable and accrued expenses (49,453) 48,523 22,131
-------- -------- -------
Net cash provided by operating activities 52,637 90,891 55,525
Investing activities:
Net purchases of property, plant and equipment (74,315) (163,429) (170,972)
Acquisitions of/investments in businesses, net of cash (163) (109) (10,284)
acquired
Other (2,680) (1,145) (500)
-------- --------- ---------
Net cash used in investing activities (77,158) (164,683) (181,756)
Financing activities:
Proceeds from issuance of long-term debt 708,542 443,496 480,462
Payment of long-term debt (733,202) (412,986) (354,152)
Notes and interest for ownership interests (1,296) (1,147) --
Capital contributions 50,000 50,000 --
Contributions (to) from minority shareholders (15) 68 --
Debt issuance fees and other 106 (1,038) (123)
------- ------- -------
Net cash provided by financing activities 24,135 78,393 126,187
Effect of exchange rate changes (426) (740) (1,449)
------- ------- -------
(Decrease) increase in cash and cash equivalents (812) 3,861 (1,493)
Cash and cash equivalents at beginning of year 9,844 5,983 7,476
------- ------- -------
Cash and cash equivalents at end of year $ 9,032 $ 9,844 $ 5,983
======= ======= =======
See accompanying notes to financial statements.
40
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated 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.; Graham Packaging U.K. Ltd.; Graham
Plastik Ambalaj A.S.; Graham Packaging Deutschland GmbH; 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). In
addition, the 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 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. Since March 30, 2001 the consolidated financial
statements of the Company include the operations of Masko Graham Spolka Z.O.O.
("Masko Graham") as a result of acquiring an additional 1% interest, for a
total of 51% interest, in a joint venture. (Refer to Note 3 for a discussion
of each of these investments). These entities and assets are referred to
collectively as Graham Packaging Holdings Company (the "Company"). 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 financial
statements.
Since the Recapitalization (as herein defined - see Note 2),
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, having only nominal assets and not conducting any
independent operations, 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 severally liable with GPC
Capital Corp. II with respect to all obligations on the Senior Discount Notes
(as herein defined) 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 lubricants industries. The Company has manufacturing facilities
in Argentina, Belgium, Brazil, Canada, France, Germany, Hungary, Italy,
Mexico, Poland, Spain, Turkey, the United Kingdom and the United States.
Revenue Recognition
Sales are recognized as products are shipped and upon passage of
title to the customer.
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.
41
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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 $19.3 million and $24.0 million
as of December 31, 2001 and 2000, respectively. These amounts are net of
accumulated amortization of $17.8 million and $13.2 million as of December 31,
2001 and 2000, 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 three to ten years.
Goodwill was $6.4 million and $17.6 million as of December 31, 2001 and 2000,
respectively. These amounts are net of accumulated amortization of $3.5
million and $2.6 million as of December 31, 2001 and 2000, 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") 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 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 SFAS 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
On January 1, 2001 the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 138. These
standards establish accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, are 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, the effective
portion of the change 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. On January 1, 2001, in
connection with the adoption of SFAS 133, the Company recorded $0.4 million in
OCI as a cumulative transition adjustment for derivatives designated as cash
flow hedges prior to adopting SFAS 133. The Company enters into interest
rate swap agreements to hedge the exposure to increasing rates with respect to
its Senior Credit Agreement. These interest rate swaps are accounted for as
cash flow hedges. The effective portion of the change in the fair value of the
interest rate swaps is recorded in OCI and was $13.5 million for the year
ended December 31, 2001. Approximately 73% of the amount recorded within OCI
is expected to be recognized as interest expense in the next twelve months.
SFAS 133 defines new requirements for designation and documentation of hedging
42
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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.
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. These forward contracts are
accounted for as fair value hedges. During the year ended December 31, 2001,
there was no net gain or loss recognized in earnings as a result of fair value
hedges. The Company has no outstanding forward exchange contracts as of
December 31, 2001.
Foreign Currency Translation
The Company uses the local currency as the functional currency for
principally 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, changes in fair value of
derivatives designated and accounted for as cash flow hedges and additional
minimum pension liability are included in OCI 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 ("APB") 25, "Accounting for Stock Issued to Employees". SFAS 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 123.
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 $1.1 million and $1.0 million as of
December 31, 2001 and 2000, 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 U.S. 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 2000 and 1999
financial statements to conform to the 2001 presentation.
43
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
New Accounting Pronouncements Not Yet Adopted
On June 29, 2001, SFAS 142, "Goodwill and Other Intangible Assets",
was approved by the Financial Accounting Standards Board ("FASB"). SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of SFAS 142.
The Company is required to implement SFAS 142 on January 1, 2002. Management
does not believe that adoption of SFAS 142 will have a significant impact on
the Company's results of operations or financial position.
On October 3, 2001, SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", was approved by the FASB. SFAS 144 addresses
the financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company is required to implement SFAS 144 on January 1,
2002. Management does not believe that adoption of SFAS 144 will have a
significant impact on the Company's results of operations or financial
position.
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 then owners of the Company (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., 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 ("Closing").
The principal components and consequences of the Recapitalization
included the following:
o A change in the name of Holdings to Graham Packaging Holdings Company;
o The contribution by Holdings of substantially all of its assets
and liabilities to the Operating Company, which was renamed
"Graham Packaging Company, L.P.";
o 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;
o 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;
o The issuance of $225.0 million Senior Subordinated Notes by the
Operating Company and $100.6 million gross proceeds ($169.0
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;
o The repayment by the Operating Company of substantially all of the
existing indebtedness and accrued interest of Holdings and its
subsidiaries;
o 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);
o The redemption by Holdings of certain partnership interests in
Holdings held by the Graham Entities for $429.6 million;
o The purchase by the Equity Investors of certain partnership interests
in Holdings held by the Graham Entities for $208.3 million;
o The repayment by the Graham Entities of amounts owed to Holdings
under the $20.2 million promissory notes;
o The recognition of additional compensation expense under am equity
appreciation plan;
44
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
o The payment of certain bonuses and other cash payments and the
granting of certain equity awards to senior and middle level
management;
o The execution of various other agreements among the parties; and
o 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.
3. Acquisitions
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):
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,
and on October 9, 2001 acquired the remaining 49%, for a total purchase price
(including acquisition-related costs) of $3.3 million, net of liabilities
assumed. The investment was accounted for under the equity method of
accounting prior to July 6, 1999. The original 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.............................. $ 479
Property, plant and equipment............... 4,689
Other assets................................ 1,052
Goodwill.................................... 4,032
------
Total....................................... 10,252
Less liabilities assumed.................... 6,906
------
45
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
Net cost of acquisition..................... $3,346
======
Purchase of additional 1% interest in Masko Graham
On March 30, 2001 the Company acquired an additional 1% interest in
Masko Graham for a total interest of 51%. The total purchase price (including
acquisition-related costs) for the entire 51% interest in the operating assets
was $1.4 million, net of liabilities assumed. The investment was accounted for
under the equity method of accounting prior to March 30, 2001. The acquisition
was recorded on March 30, 2001 under the purchase method of accounting and
accordingly, the results of operations of Masko Graham are consolidated in the
financial statements of the Company beginning on March 30, 2001. 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.............................. $3,743
Property, plant and equipment............... 8,210
Goodwill.................................... 954
-----
Total....................................... 12,907
Less liabilities assumed.................... 11,474
------
Net cost of acquisition..................... $ 1,433
=======
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,
---------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Net sales $925,782 $851,946 $746,808
Net loss (44,102) (46,415) (1,106)
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 $2.4 million and $1.2 million at December 31, 2001 and 2000,
respectively. Management performs ongoing credit evaluations of its customers
and generally does not require collateral.
The Company had sales to two customers which exceeded 10% of total
sales in any of the past three years. The Company's sales to one customer were
17.4%, 11.7% and 8.7% for the years ended December 31, 2001, 2000 and 1999,
respectively. For the year ended December 31, 2001, approximately 100% of the
sales to this customer were made in North America. The Company's sales to
another customer were 9.4%, 11.4% and 10.2% for the years ended December 31,
2001, 2000 and 1999, respectively. For the year ended December 31, 2001,
approximately 66%, 32% and 2% of the sales to this customer were made in North
America, Europe and Latin America, respectively.
46
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
5. Inventories
Inventories consisted of the following:
December 31,
------------
2001 2000
---- ----
(In thousands)
Finished goods $43,403 $43,085
Raw materials and parts 17,073 22,316
------ ------
$60,476 $65,401
======= =======
6. Impairment Charges
During 2001, the Company evaluated the recoverability of its
long-lived assets in the following locations (with the operating segment under
which it reports in parenthesis) due to indicators of impairment as follows:
o Argentina (Latin America) - operating losses and cash flow deficits
experienced, the loss or reduction of business and the severe
downturn in the Argentine economy
o Italy (Europe) - operating losses and reduction of business, as well
as the Company's commitment to a plan to sell these locations
o Certain plants in France (Europe) - the Company's commitment to a
plan to sell or close these locations
o Bad Bevensen, Germany (Europe) - the Company's commitment to a plan
to sell or close this location
o United Kingdom (Europe) - the Company's commitment to a plan to
close this location
o Burlington, Canada (North America) - the Company's commitment to a
plan to close this location
o Turkey (Europe) - a significant change in the ability to utilize
certain assets
During 2000, the Company evaluated the recoverability of its
long-lived assets in the following locations (with the operating segment under
which it reports in parenthesis) due to indicators of impairment as follows:
o United Kingdom (Europe) - operating losses experienced and projected
o Certain plants in France (Europe) - operating losses experienced and
projected
o Anjou, Canada (North America) - operating losses experienced and
projected
o Brazil (Latin America) - a significant change in the ability to
utilize certain assets
For assets to be held and used, 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 impairment charges of $4.1 million and $15.8 million for
the years ended December 31, 2001 and 2000, respectively. For assets to be
disposed of, the Company adjusted the carrying values of these long-lived
assets in these locations to the lower of their carrying values or their
estimated fair values less costs to sell, resulting in impairment charges of
$24.8 million and $0.5 million for the years ended December 31, 2001 and 2000,
respectively. These assets have a remaining carrying amount as of December 31,
2001 of $0.1 million. Similarly, the Company evaluated the recoverability of
its enterprise goodwill, and consequently recorded impairment charges of $9.1
million and $4.8 million for the years ended December 31, 2001 and 2000,
respectively. 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.
As of December 31, 2001, all of the assets in Italy and certain
assets in France, Germany, the United Kingdom and Canada were held for
disposal. Operating (loss) income for the United Kingdom for the three years
ended December 31, 2001, 2000 and 1999 was $(3.7) million, $(9.1) million and
$1.7 million, respectively. Operating loss for Italy for each of the three
years ended December 31, 2001, 2000 and 1999 was $7.8 million, $1.5 million
and $1.8 million, respectively. Discrete financial information is not
available for the other locations whose assets are held for disposal.
47
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
7. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
------------
2001 2000
---- ----
(In thousands)
Accrued employee compensation and benefits $23,930 $22,800
Accrued interest 12,361 14,962
Other 43,090 29,398
------ -------
$79,381 $67,160
======= =======
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. For the year ended
December 31, 2001, the Company incurred costs of employee termination benefits
in Burlington, Canada of $0.9 million, which included the legal liability of
severing 139 employees, in the United Kingdom of $0.6 million, which included
the legal liability of severing 26 employees and in Bad Bevensen, Germany of
$0.6 million, which included the legal liability of severing 22 employees. The
following table reflects a rollforward of the reorganization costs, primarily
included in accrued employee compensation and benefits, (in thousands):
Europe &
North United
America Burlington, Kingdom Germany
Reduction Canada Reduction Reduction
in Force Shutdown in Force in Force Total
--------- -------- --------- --------- -----
Reserves at December 31, 1999 $ -- $ -- $ -- $ -- $ --
Increase in reserves 4,513 -- -- -- 4,513
Cash payments (908) -- -- -- (908)
----- ----- ----- ----- -----
Reserves at December 31, 2000 3,605 -- -- -- 3,605
(Decrease) increase in reserves (442) 895 595 564 1,612
Cash payments (2,756) -- (595) -- (3,351)
------ ----- ----- ----- ------
Reserves at December 31, 2001 $ 407 $ 895 $ -- $ 564 $1,866
====== ===== ===== ===== ======
8. Debt Arrangements
Long-term debt consisted of the following:
December 31,
------------
2001 2000
---- ----
(In thousands)
Term loan $ 526,950 $ 546,900
Revolving loan 125,000 125,500
Revolving credit facilities 5,111 5,805
Senior Subordinated Notes 225,000 225,000
Senior Discount Notes 151,638 136,680
Capital leases 16,041 17,849
Other 2,651 2,445
--------- ---------
1,052,391 1,060,179
Less amounts classified as current 30,585 27,359
--------- ---------
$1,021,806 $1,032,820
========= =========
48
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
On February 2, 1998, as discussed in Note 2, 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 (the "Term Loans" or "Term Loan Facilities"), a $155
million revolving credit facility (the "Revolving Credit Facility") and a $100
million growth capital revolving credit facility (the "Growth Capital
Revolving Credit Facility" and, together with the Revolving Credit Facility,
the "Revolving Credit Loans"). The unused availability of the revolving credit
facilities under the Senior Credit Agreement and the Amendments at December
31, 2001 and 2000 was $129.5 million and $128.3 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 $25.0 million in 2002, $27.5 million in
2003, $93.0 million in 2004, $64.9 million in 2005 and $242.7 million in 2006.
The Revolving Credit 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, 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 changed 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 provided for up to an
additional $50 million equity contribution by Blackstone; allowed the proceeds
of the equity contribution to be applied to Revolving Credit Loans; and
changed 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, 1998, 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, 2001 the Company was in compliance
with all 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 Amendments.
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, 2001, the Operating Company had entered into three
U.S. Dollar interest rate swap agreements that effectively fix the
Eurocurrency Rate on $500 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 $200 million through September 10, 2003 at 4.99%.
49
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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:
o in respect of overhead, tax liabilities, legal, accounting and other
professional fees and expenses;
o 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
o 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, as amended, 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 weighted average effective rate on the outstanding
borrowings under the Term Loans and Revolving Credit Loans was 4.70% and 9.77%
at December 31, 2001 and 2000, respectively, excluding the effect of interest
rate swaps.
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, 2001 equivalent to $3.5 million. The
Company's average effective rate on borrowings of $5.1 million on these credit
facilities at December 31, 2001 was 11.64%. The Company's average effective
rate on borrowings of $5.8 million on these credit facilities at December 31,
2000 was 9.53%.
Interest paid during 2001, 2000 and 1999, net of amounts capitalized
of $2.6 million, $4.2 million and $3.7 million, respectively, totaled $81.9
million, $90.6 million and $66.2 million, respectively.
The annual debt service requirements of the Company for the
succeeding five years are as follows: 2002--$30.6 million; 2003--$31.6
million; 2004--$220.1 million; 2005--$67.5 million; and 2006--$245.0 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.
50
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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. Other long-term debt includes the Senior
Discount Notes and $150 million of Senior Subordinated Notes and totaled
approximately $301.6 million and $286.7 million at December 31, 2001 and 2000,
respectively. The fair value of this long-term debt, including the current
portion, was approximately $247.5 million and $140.7 million at December 31,
2001 and 2000, 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 Senior 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. Interest
rate swaps are recorded on the balance sheet in accrued expenses and other
non-current liabilities at fair value. The effective portion of cash flow
hedges are recorded in OCI.
The following table presents information for all interest rate
swaps. 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.
December 31,
------------
2001 2000
---- ----
(in thousands)
Notional amount $500,000 $450,000
Fair value - (liability)/asset (13,145) 392
Derivatives are an important component of the Company's interest
rate management program, leading to acceptable levels of variable interest
rate risk. Due to sharply declining interest rates in 2001, the effect of
derivatives was to increase interest expense by $7.0 million compared to an
entirely unhedged variable rate debt portfolio. Their incremental effect on
interest expense for 2000 and 1999 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 accounted for in accordance
with SFAS 133. There were no currency forward contracts outstanding at
December 31, 2001. At December 31, 2000 the Company had foreign currency
forward exchange contracts totaling $2.2 million with a fair value of $2.4
million.
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. Therefore, the
Company does not expect to incur material credit losses on its risk management
or other financial instruments.
51
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
10. Lease Commitments
The Company was a party to various leases involving real property
and equipment during 2001, 2000 and 1999. Total rent expense for operating
leases amounted to $24.0 million in 2001, $19.9 million in 2000 and $15.6
million in 1999. Minimum future lease obligations on long-term noncancelable
operating leases in effect at December 31, 2001 are as follows: 2002--$15.4
million; 2003--$14.1 million; 2004--$11.4 million; 2005--$6.2 million;
2006--$5.3 million; and thereafter--$23.6 million. Minimum future lease
obligations on capital leases in effect at December 31, 2001 are as follows:
2002--$1.7 million; 2003--$1.9 million; 2004--$1.9 million; 2005--$2.2
million; 2006--$2.0 million; and thereafter--$6.3 million. The gross amount of
assets under capital leases was $20.3 million and $20.5 million as of December
31, 2001 and 2000, respectively.
11. Transactions with Affiliates
Transactions with entities affiliated through common ownership
included the following:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands)
Equipment purchases from affiliates $10,269 $ 8,451 $20,367
Goods purchased from affiliates $ 1,066 $ -- $ --
Management services provided by affiliates, including
management, legal, tax, accounting, insurance, treasury
and employee benefits administration services $ 2,034 $ 2,020 $ 2,028
Management services provided and sales to Graham
Engineering Corporation, including engineering services
and raw materials $ 2 $ 51 $ 2,453
Loans to Management for equity contribution $ 1,146 $ 1,147 $ --
Interest income on notes receivable from owners $ 150 $ -- $ --
Account balances with affiliates include the following:
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
Accounts receivable $ -- $ 95
Accounts payable $1,964 $ 270
Notes and interest receivable for ownership interests $2,443 $1,147
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
52
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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.
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, 2001 and 2000:
2001 2000
---- ----
Change in benefit obligation: (In thousands)
- -----------------------------
Benefit obligation at beginning of year $(37,606) $(33,375)
Service cost (2,804) (2,731)
Interest cost (2,668) (2,319)
Benefits paid 812 592
Employee contributions (167) (230)
Change in benefit payments due to experience (414) (89)
Effect of exchange rate changes 497 754
Curtailments 123 --
(Increase) decrease in benefit obligation due to change in discount (2,668) 1,607
rate
Decrease (increase) in benefit obligation due to plan experience 1,365 (949)
Increase in benefit obligation due to plan change (238) (866)
------- -------
Benefit obligation at end of year (43,768) (37,606)
Change in plan assets:
- ----------------------
Plan assets at market value at beginning of year 33,498 32,051
Actual return on plan assets (2,599) (573)
Foreign currency exchange rate changes (426) (704)
Employer contribution 3,783 3,084
Employee contribution 167 230
Benefits paid (807) (590)
------ ------
Plan assets at market value at end of year 33,616 33,498
Funded status (10,152) (4,108)
Unrecognized net actuarial gain (loss) 6,571 (391)
Unrecognized prior service cost 1,701 1,851
------- -------
Net amount recognized $(1,880) $ (2,648)
======== ========
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $ -- $ 497
Accrued benefit liability (4,888) (3,145)
Intangible asset 1,071 --
Accumulated other comprehensive income 1,937 --
-------- -------
Net amount recognized $(1,880) $(2,648)
======== =======
The net amount recognized of $1.9 million at December 31, 2001
consists of $3.4 million accrued pension expense, $1.0 million intangible
asset, and $1.2 million accumulated other comprehensive income for the United
States plan, $0.6 million accrued pension expense, $0.1 million intangible
assets and $0.7 million accumulated other comprehensive income for the
Canadian plan, $0.1 million accrued pension expense for the United Kingdom
plan, and $0.8 million accrued pension expense for the German plan. The net
amount recognized 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 United Kingdom plan, $0.8 million accrued pension
expense for the German plan and $0.5 million prepaid pension asset for the
Canadian plan.
53
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
Actuarial Assumptions
---------------------
United
U.S. Canada Kingdom Germany
---- ------ ------- -------
Discount rate - 2001 7.25% 6.50% 5.50% 6.00%
- 2000 7.75% 7.00% 5.50% 6.00%
- 1999 7.50% 7.00% 5.50% 6.00%
Long-term rate of return on plan assets - 2001 9.00% 8.00% 7.75% N/A
- 2000 9.00% 8.00% 7.75% N/A
- 1999 8.00% 8.00% 8.00% N/A
Weighted average rate of increase for future
Compensation levels - 2001 4.75% 5.00% 4.00% 3.00%
- 2000 5.00% 5.00% 4.00% 3.00%
- 1999 5.00% 5.00% 4.25% 3.00%
The Company's net pension cost for its defined benefit pension plans
includes the following components:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands)
Service cost $ 2,804 $ 2,731 $ 2,739
Interest cost 2,668 2,319 1,975
Net investment return on plan assets 318 (153) (3,293)
Curtailment loss 310 -- --
Net amortization and deferral (3,054) (2,497) 1,365
------- ------- -----
Net periodic pension costs $ 3,046 $ 2,400 $ 2,786
======= ======= =======
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 2001, 2000 and 1999 were $1.1 million,
$1.0 million and $0.9 million, respectively.
13. Partners' Capital
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
below).
As contemplated by the Recapitalization Agreement, upon the Closing,
Graham Capital and its successors or assigns, Graham Family Growth
Partnership, Graham Packaging Corporation ("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 GPC Holdings, L.P. ("Graham LP") and Investor LP.
Capital Accounts. A capital account is maintained for each partner
on the books of the Company. The Holdings Partnership Agreement provides that
at no time during the term of the partnership or upon dissolution and
54
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
liquidation thereof shall a limited partner with a negative balance in its
capital account have any obligation to Holdings or the other partners to
restore such negative balance. Items of partnership income or loss are
allocated to the partners' capital accounts in accordance with their
percentage interests except as provided in Section 704(c) of the Internal
Revenue Code with respect to contributed property where the allocations are
made in accordance with the U.S. Treasury regulations thereunder.
Distributions. The Holdings Partnership Agreement requires certain
tax distributions to be made if and when the Company has taxable income. Other
distributions shall be made in proportion to the partners' respective
percentage interests.
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 below) 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 either Graham GP Corp. and/or Graham LP (individually "Continuing
Graham Partner" and collectively the "Continuing Graham Partners") 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 Partner 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 Partners shall have a right to include in such sale or
transfer a 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 GPC Capital
Corporation II ("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.
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 of Holdings 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
55
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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. 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. During 2001 51.1 Unit Options were forfeited and 46.0 were
granted. As of December 31, 2001, 481.1 Unit Options were outstanding at an
exercise price of $25,789 per unit and 245.6 of the Options outstanding were
vested.
The Company applies APB 25 in accounting for the Option Plan. The
exercise price of the Unit was equal to or greater than the fair market value
of the 0.01% interest of Holdings 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 income (loss) for 2001, 2000 and 1999 would have been reflected as
follows (in thousands):
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
As reported $ (43,970) $ (45,637) $ 1,255
Pro forma (44,223) (46,150) 727
The fair value of each Unit Option 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 2001: pay out yield 0%,
expected volatility of 0%, risk free interest rate of 4.22%, and expected life
of 4.5 years; and in 1999: pay out yield 0%, expected volatility of 0%, risk
free interest rate of 4.57%, and expected life of 3.6 years.
15. Special Charges and Unusual Items
The special charges and unusual items were as follows:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands)
Restructuring of facilities $ -- $ -- $ 552
System conversion -- -- 1,304
Recapitalization compensation 147 1,118 2,669
Aborted acquisition costs -- -- 28
----- ------ ------
$ 147 $1,118 $4,553
===== ====== ======
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 relate to stay bonuses and the granting of
certain ownership interests to Management pursuant to the terms of the
Recapitalization (see Note 2). These expenses have been fully recognized over
the three years from the date of the Recapitalization.
56
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
16. Other Expense (Income)
Other expense (income) consisted of the following:
Year Ended December 31,
2001 2000 1999
---- ---- ----
(In thousands)
Foreign exchange (gain) loss $(176) $240 $(333)
Equity in loss (earnings) of joint ventures 246 (63) (231)
Other 129 88 (165)
---- ---- ------
$199 $265 $(729)
==== ==== ======
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 $271.7
million at December 31, 2001 and $347.5 million at December 31, 2000.
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
temporary differences between the reported amounts and the tax bases of the
assets and liabilities of such entities:
December 31,
------------
2001 2000
---- ----
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ 31,867 $ 27,541
Fixed assets, principally due to differences in depreciation and assigned
values 7,703 2,567
Accrued retirement indemnities 1,069 991
Inventories 434 766
Accruals and reserves 383 810
Capital leases 431 501
Other items 300 102
-------- --------
Gross deferred tax assets 42,187 33,278
Valuation allowance (34,565) (26,729)
-------- --------
Net deferred tax assets 7,622 6,549
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation and assigned
values 8,025 8,049
Goodwill -- 93
Other items 143 --
------- --------
Gross deferred tax liabilities 8,168 8,142
------- --------
Net deferred tax liabilities $ 546 $ 1,593
======= ========
Current deferred tax assets of $0.3 million in 2001 and $0.05
million in 2000 are included in prepaid expenses and other current assets.
Non-current deferred tax assets of $0.2 million in 2001 and none in 2000 are
included in other assets. Current deferred tax liabilities of $0.1 million in
2001 and $0.3 million in 2000 are included in accrued expenses. Non-current
deferred tax liabilities of $1.0 million in 2001 and $1.3 million in 2000 are
included in other non-current liabilities.
57
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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 2001 provision for income taxes is comprised of $1.2 million of
current provision and $0.9 million of deferred benefit. The amounts relate
entirely to the Company's foreign legal entities.
The difference between the 2001 actual income tax provision and an
amount computed by applying the U.S. federal statutory rate for corporations
to earnings before income taxes is attributable to the following:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands)
Taxes at U.S. federal statutory rate $(15,284) $(15,818) $1,323
Partnership income not subject to federal income 281 4,146 (1,178)
taxes
Foreign loss without current tax benefit 15,260 11,926 2,050
Other 46 188 331
-------- -------- ------
$ 303 $ 442 $2,526
======== ======== ======
At December 31, 2001, the Company's various taxable entities had net
operating loss carryforwards for purposes of reducing future taxable income by
approximately $87.6 million, for which no benefit has been recognized. Of this
amount, $17.2 million related to carryforwards that will expire, if unused, at
various dates ranging from 2002 to 2006 and the remaining carryforwards have
no expiration date.
At December 31, 2001, the unremitted earnings of non-U.S.
subsidiaries totaling $8.2 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 $0.4 million of withholding taxes would apply.
18. Commitments
In connection with plant expansion and improvement programs, the
Company had commitments for capital expenditures of approximately $26.8
million at December 31, 2001.
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 will not be
material to the business, financial condition or results of operations of the
Company.
58
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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 2001 $742,450 $154,268 $26,350 $923,068
2000 667,301 146,189 29,192 (131) 842,551
1999 566,202 140,892 24,492 731,586
Special charges and unusual items 2001 $147 $-- $-- $147
2000 1,118 -- -- 1,118
1999 3,750 848 (45) 4,553
Operating income (loss) 2001 $98,756 $(37,707) $(5,547) $55,502
2000 90,296 (32,009) (2,147) 56,140
1999 92,962 (4,250) 1,372 90,084
Depreciation and amortization 2001 $62,584 $10,800 $2,960 $76,344
2000 56,518 10,959 3,381 70,858
1999 44,023 11,294 2,679 57,996
Impairment charges 2001 $1,135 $31,274 $5,579 $37,988
2000 461 18,539 2,056 21,056
1999 -- -- -- --
Interest expense (income), net 2001 $96,639 $1,326 $475 $98,440
2000 100,667 878 148 101,693
1999 88,142 (629) (39) 87,474
Income tax (benefit) expense 2001 $(998) $586 $715 $303
2000 53 542 (153) 442
1999 521 859 1,146 2,526
Identifiable assets 2001 $842,888 $144,106 $27,935 $(256,368) $758,561
2000 843,908 170,939 39,763 (233,311) 821,299
1999 724,985 169,028 43,545 (196,309) 741,249
Capital expenditures, excluding acquisitions 2001 $46,242 $23,683 $4,390 $74,315
2000 128,370 32,729 2,330 163,429
1999 137,825 31,381 1,766 170,972
59
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2001
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
-------- ------------- ---------- -----
2001 $511.6 $208.5 $203.0 $923.1
2000 416.2 210.6 215.8 842.6
1999 333.4 187.5 210.7 731.6
21. Subsequent Events
During the first quarter of 2002, the Company accepted an offer to
sell the land and building at its plant in Burlington, Canada. The resulting
gain is expected to be approximately $3.2 million. Also during the first
quarter of 2002, the Company announced a second quarter closing of its
operation located in Wrexham, Wales, United Kingdom and the sale of its
Italian operations. The resulting gains or losses are not expected to be
significant.
60
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 Holdings and their respective ages and
positions at December 31, 2001 are set forth in the table below. Unless
otherwise indicated, all references to positions in this Item 10 are to
positions with the Operating Company. For a description of the Advisory
Committee, see "The Partnership Agreements--Holdings Partnership Agreement."
Name Age Position
- ---- --- --------
Philip R. Yates 54 Chief Executive Officer
Roger M. Prevot 43 President and Chief Operating Officer
John E. Hamilton 43 Chief Financial Officer of the Operating
Company; Chief Financial Officer, Assistant
Treasurer and Assistant Secretary of
Holdings
G. Robinson Beeson 54 Senior Vice President and General Manager,
Automotive and Latin America
Scott G. Booth 45 Senior Vice President and General Manager,
Household & Personal Care and Canada
John A. Buttermore 55 Vice President and General Manager, Food &
Beverage
George M. Lane 58 Senior Vice President, Global People
Resources
Ashok Sudan 49 Vice President and General Manager, Europe
Jay W. Hereford 51 Vice President, Finance and Administration of
the Operating Company; Assistant Treasurer
and Assistant Secretary of Holdings
Donald C. Graham 69 Chairman, Advisory Committee of Holdings
William H. Kerlin, Jr. 51 Vice Chairman, Advisory Committee of Holdings
Chinh E. Chu 35 Member, Advisory Committee of Holdings; Vice
President, Secretary and Assistant
Treasurer of Holdings
Howard A. Lipson 38 Member, Advisory Committee of Holdings;
President, Treasurer and Assistant
Secretary of Holdings
David A. Stonehill 33 Member, Advisory Committee of Holdings; Vice
President, Assistant Treasurer and
Assistant Secretary of Holdings
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. Prior to February 1998, Mr. Yates served as
President and Chief Operating Officer.
Roger M. Prevot has served as President and Chief Operating Officer
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. 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. Since the Recapitalization, Mr. Hamilton has served as Chief
Financial Officer, Assistant Treasurer and Assistant Secretary of Holdings.
G. Robinson Beeson has served as Senior Vice President or Senior
Vice President and General Manager, Automotive and Latin America, Senior Vice
President and General Manager, Automotive or Vice President and General
Manager, Automotive 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
61
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.
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.
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/PET; a position he entered in 1998.
Prior to that Mr. Sudan held various management positions in manufacturing.
Mr. Sudan has been with the Company and predecessor companies since 1977.
Jay W. Hereford has served as Vice President, Finance and
Administration since November 1998. Prior to joining the Company, Mr. Hereford
served as Vice President, Treasurer and Chief Financial Officer of Continental
Plastic Containers, Inc. from 1992 to November 1998. Since November 1998, Mr.
Hereford has served as Assistant Treasurer and Assistant Secretary of
Holdings.
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. Prior to February 1998, Mr. Kerlin served in
several positions, including Vice Chairman and Chief Executive Officer.
Chinh E. Chu is a Senior Managing Director of Blackstone, which he
joined in 1990. Mr. Chu has served as a member of the Advisory Committee since
the Recapitalization. Mr. Chu currently serves on the Boards of Directors of
Prime Succession Inc., Rose Hills Co. and Haynes International, Inc. Since the
Recapitalization, Mr. Chu has served as Vice President, Secretary and
Assistant Treasurer of Holdings.
Howard A. Lipson is a Senior Managing Director of Blackstone. Since
joining Blackstone in 1988, Mr. Lipson has been responsible for and involved
in the execution of Blackstone's purchase of Six Flags (a joint venture with
TimeWarner), the acquisition of Graham Packaging Company, and Blackstone's
investments in Universal Orlando, Allied Waste Industries, Volume Services
America, Ritvik Toys, UCAR, US Radio and Transtar among others. He currently
serves as Director of AMF, Allied Waste Industries, Volume Services America,
Rose Hills, Prime Succession, Ritvik Toys and Universal Orlando. Prior to
joining Blackstone, Mr. Lipson was a member of the Mergers and Acquisitions
Group of Salomon Brothers Inc. Mr. Lipson graduated with honors from the
Wharton School of the University of Pennsylvania. Since the Recapitalization,
Mr. Lipson has served as President, Treasurer and Assistant Secretary of
Holdings.
David A. Stonehill is a Principal of Blackstone, 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 had worked from September
1996. Since July 2000, Mr. Stonehill has served as Vice President, Assistant
Treasurer and Assistant Secretary of Holdings.
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.
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, 2001, 2000 and 1999, and their respective titles at December 31,
2001. The philosophy of the Company is to compensate all employees at levels
competitive with the market to enable the Company to attract,
62
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
------ -------
(1) (2)
Other Restricted Securities All
Bonus Annual Stock Underlying LTIP Other
Name and Principal Position Year Salary Earned Comp. Awards Options Payouts Comp.
--------------------------- ---- ------ ------ ----- ------ ------- ------- -----
Philip R. Yates 2001 435,011 630,766 -0- -0- -0- -0- 4,260
Chief Executive Officer 2000 397,070 -0- -0- -0- -0- -0- 4,258
1999 310,978 315,000 -0- -0- 13.6 -0- 4,417
Roger M. Prevot 2001 315,672 400,380 -0- -0- 14.0 -0- 3,600
President and Chief Operating 2000 285,427 -0- -0- -0- -0- -0- 3,843
Officer (3) 1999 202,999 205,000 -0- -0- 9.3 -0- 3,606
John E. Hamilton 2001 219,154 231,635 -0- -0- -0- -0- 3,774
Chief Financial Officer 2000 201,966 -0- -0- -0- -0- -0- 3,752
1999 171,098 175,000 -0- -0- 18.7 -0- 3,553
Ashok Sudan 2001 172,022 240,000 -0- -0- -0- -0- 3,803
Vice President and General 2000 163,380 -0- -0- -0- -0- -0- 3,782
Manager, Europe 1999 152,246 75,000 -0- -0- -0- -0- 3,627
John A. Buttermore 2001 177,565 240,000 -0- -0- -0- -0- 4,231
Vice President and General 2000 171,301 -0- -0- -0- -0- -0- 3,906
Manager, Food & Beverage 1999 151,104 65,000 -0- -0- -0- -0- 72,007
1) Represents bonus earned in the current year and paid in March of the
following year under the Company's annual discretionary bonus plan.
2) Represents contributions to the Company's 401(k) plan, amounts
attributable to group term life insurance and payment of relocation
costs.
3) Roger M. Prevot has served as President and Chief Operating Officer
since February 8, 2000. Prior to February 8, 2000 Mr. Prevot served
as Senior Vice President or Vice President and General Manager, Food
& Beverage.
63
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.
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 full annuity without reduction. 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").
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
64
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.
The following table sets forth certain information with respect to
Options granted to the Named Executive Officers for the year ended December
31, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates Of Stock Alternative:
Price Appreciation For Grant Date
Individual Grants Option Term Value
----------------- ----------- -----
Percent of
total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base Grant Date
Options In Fiscal Price Expiration Present
Name Granted (#) Year ($/Sh) Date 5%($) 10%($) Value $
---- ----------- ---- ------ ---- ------ ------- -------
Roger M. Prevot 14.0 30.4% $25,789 4/1/10 $200,000 $490,000 N/A
President and Chief
Operating Officer
The following table sets forth certain information with respect to
the total Options granted to the Named Executive Officers at December 31,
2001.
TOTAL OPTION GRANTS AT DECEMBER 31, 2001
Number of
Securities Value of Options at End
Underlying Unexercised In of Fiscal Year
Unexercised the Money Exercisable
Options at End Options ---------------
Name of Fiscal Year --------------
---- --------------
Philip R. Yates 77.4 $ 0 43.7
Chief Executive Officer
Roger M. Prevot 66.7 $ 0 29.8
President and Chief Operating Officer
65
John E. Hamilton 48.5 $ 0 25.4
Chief Financial Officer
Ashok Sudan 12.8 $ 0 7.7
Vice President and General Manager, Europe
John A. Buttermore 8.5 $ 0 4.3
Vice President and General Manager, Food &
Beverage
Pension Plans
In the year ended December 31, 2001, the Company sponsored 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 information regarding the pension plans for each of
the three years in the period ended December 31, 2001.
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 $26,651 $35,535 $44,418 $53,302 $54,864
150,000 32,651 43,535 54,418 65,302 67,177
175,000 38,651 51,535 64,418 77,302 79,489
200,000 44,651 59,535 74,418 89,302 91,802
225,000 50,651 67,535 84,418 101,302 104,114
250,000 56,651 75,535 94,418 113,302 116,427
300,000 68,651 91,535 114,418 137,302 141,052
400,000 92,651 123,535 154,418 185,302 190,302
450,000 104,651 139,535 174,418 209,302 214,927
500,000 116,651 155,535 194,418 233,302 239,552
Note: The amounts shown are based on 2001 covered compensation
of $37,212 for an individual born in 1936. In addition,
these figures do not reflect the salary limit of $170,000
and benefit limit of $140,000 under the plan's normal form
in 2001.
The compensation covered by the defined benefit plan for salaried
employees is an amount equal to "Total Wages" (as defined). This amount
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,
2001 for each of the five Named Executive Officers participating in the plan
was as follows: Philip R. Yates, 30 years; Roger M. Prevot, 14 years; John E.
Hamilton, 18 years; Ashok Sudan, 25 years; and John A. Buttermore, 3 years.
Benefits under the plan are computed on the basis of straight-life annuity
amounts. Amounts set forth in the Pension Plan Table are not subject to
deduction for Social Security or other offset amounts.
401(k) Plan
During 2001 the Company also sponsored 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
66
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 2001, 2000, and 1999 were $1,111,000, $1,009,000,
and $875,000, respectively.
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
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 Percentage
Issuer of Beneficial Owner Type of Interest Interest
- ------ ------------------- ---------------- --------
Graham Packaging Company, L.P. Holdings Limited Partnership 99%
Opco GP (1) General Partnership 1%
GPC Capital Corp. I Operating Company Common Stock 100%
Graham Packaging Holdings Company Investor LP (2) Limited Partnership 81%
Investor GP (2) General Partnership 4%
GPC Holdings, L.P. (3) Limited Partnership 14%
Graham Packaging Corporation (3) General Partnership 1%
GPC Capital Corp. II Holdings Common Stock 100%
(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 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 "Executive
Compensation--Management Awards." In addition, an affiliate of DB
Alex. Brown LLC and its affiliate, two of the Initial 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.
67
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 Annual Report on Form 10-K.
Transactions with Graham Entities and Others
Graham Engineering has supplied both services and equipment to the
Company. The Company paid Graham Engineering approximately $10.3 million, $8.5
million and $20.4 million for such services and equipment for the years ended
December 31, 2001, 2000 and 1999, respectively.
Innopak, S.A., minority shareholder of Graham Innopack de Mexico S.
de R.L. de C.V., has supplied goods to the Company. The Company paid Innopak,
S.A. approximately $1.1 million for such goods for the year ended December 31,
2001.
The Company has provided certain services to Graham Engineering.
Graham Engineering paid the Company approximately $2.5 million for such
services for the year ended December 31, 1999.
Graham Family Growth Partnership has supplied management services to
the Company since the Recapitalization. The Company paid Graham Family Growth
Partnership approximately $1.0 million for such services for each of the three
years ended December 31, 2001, 2000 and 1999.
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, 2001, 2000 and
1999.
An affiliate of DB Alex. Brown LLC and its affiliate, two of the
Initial Purchasers of the Old Notes, acquired approximately a 4.8% equity
interest in Investor LP. See "Security Ownership of Certain Beneficial Owners
and Management" (Item 12). Bankers Trust Company, an affiliate of DB Alex.
Brown LLC and its affiliate, 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. 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 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, 1998, as amended on March 29, 2000, for all
future test periods.
Ownership percentage interests in Holdings as set forth in Item 12
were unchanged following the equity increases. The Company loaned Management
the funds required (approximately $1.1 million for each equity increase) to
cover Management's portion of the equity contribution.
Pursuant to the Purchase Agreement dated January 23, 1998, the
Initial Purchasers, DB Alex. Brown LLC and an affiliate, 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 $6.75 million. 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 $3.99
million. Pursuant to the Purchase Agreement, the Issuers also reimbursed the
Initial Purchasers for certain expenses.
68
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
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.
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).
69
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 GPC
Holdings, L.P. 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.
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 Partner 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
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 Entities 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
70
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 Holdings 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 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--The 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 to this
agreement 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
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.
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
71
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.
72
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, DB Alex. Brown LLC and an afiliate,
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)).
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)).
73
Exhibit
Number Description of Exhibit
- ------ ----------------------
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)).
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 DB Alex. Brown
LLC and an affiliate, 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)).
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, DB Alex.
Brown LLC and an affiliate, 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)).
74
Exhibit
Number Description of Exhibit
- ------ ----------------------
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)).
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)).
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--see page 75 of Form 10-K.
75
Exhibit
Number Description of Exhibit
- ------ ----------------------
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, 2001.
76
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, thereunto duly authorized, in York,
Pennsylvania, on March 28, 2002.
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)
77
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 Holdings 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 28th day of March, 2002 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
/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.
78
SCHEDULE I
GRAHAM PACKAGING HOLDINGS COMPANY
REGISTRANT'S CONDENSED FINANCIAL STATEMENTS
(In thousands)
December 31,
------------
BALANCE SHEET 2001 2000
- ------------- ---- ----
Assets
Current assets $ -- $ --
Intangible assets, net 4,068 4,494
----- -----
Total assets $4,068 $4,494
======= =======
Liabilities and partners' capital
Current liabilities $6,993 $6,993
Long-term debt 151,639 136,680
Investment in subsidiary 330,490 325,200
-------- -------
Total liabilities 489,122 468,873
Partners' capital (485,054) (464,379)
--------- -------
Total liabilities and partners' capital $4,068 $4,494
======== =======
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
STATEMENTS OF OPERATIONS
- ------------------------
Equity in (loss) earnings of subsidiaries $(28,585) $(31,650) $13,825
Interest expense (15,385) (13,971) (12,565)
Other -- (16) (5)
-------- --------- --------
Net (loss) income $(43,970) $(45,637) $ 1,255
========= ========= ========
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
STATEMENTS OF CASH FLOWS
- ------------------------
Operating activities:
Net (loss) income $(43,970) $(45,637) $ 1,255
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Amortization of debt issuance costs 426 383 170
Accretion of Senior Discount Notes 14,959 13,588 12,395
Changes in current liabilities -- 16 5
Equity loss (earnings) in subsidiaries 28,585 31,650 (13,825)
------- ------ --------
Net cash provided by operating activities -- -- --
Investing activities:
Investments in a business (50,000) (50,000) --
------- ------- --------
Net cash used in investing activities (50,000) (50,000) --
Financing activities:
Capital contributions 50,000 50,000 --
------ ------ --------
Net cash provided by financing activities 50,000 50,000 --
------ ------ --------
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.
79
SCHEDULE II
GRAHAM PACKAGING HOLDINGS COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Balance at
Year ended December 31, 2001 Beginning of year Additions Deductions Other (1) end of year
- ---------------------------- ----------------- --------- ---------- --------- -----------
Allowance for Doubtful Accounts Receivable $1,168 $2,128 $916 $23 $2,403
Allowance for Inventory Losses 1,286 2,507 1,208 -- 2,585
Year ended December 31, 2000
- ----------------------------
Allowance for Doubtful Accounts Receivable $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 Receivable $1,435 $420 $97 $33 $1,791
Allowance for Inventory Losses 1,447 297 461 -- 1,283
(1) Represents allowance attributable to entities acquired during 2001
and 1999.
80
Exhibit 21.1
SUBSIDIARIES OF GRAHAM PACKAGING HOLDINGS COMPANY
Name: Jurisdiction and Type of Formation:
- ----- -----------------------------------
Graham Packaging Company, L.P. Delaware limited partnership
GPC Capital Corp. I Delaware corporation
GPC Capital Corp. II Delaware corporation
GPC Opco GP LLC Delaware limited liability company
GPC Sub GP LLC Delaware limited liability company
Graham Packaging Canada Limited Ontario corporation
Graham Packaging France Partners Pennsylvania general partnership
Graham Packaging France, S.A.S. French corporation
Financiere Graham Packaging France SNC French general partnership
Graham Packaging Italy, S.r.L. Italian limited liability company
LIDO Plast-Graham SRL Argentine limited liability company
Societa Imballagi Plastici, S.r.L. Italian limited liability company
Graham Packaging Poland, L.P. Pennsylvania limited partnership
Masko Graham Spolka Z.O.O. Polish limited liability company
Graham Recycling Company, L.P. Pennsylvania limited partnership
Graham Packaging Latin America, LLC Delaware limited liability company
Graham Brasil Participacoes Ltda. Brazilian limited liability company
Graham Packaging do Brasil Industria e Comercio S.A. Brazilian corporation
Graham Packaging U.K. Ltd. England & Wales corporation
Graham Packaging Deutschland GmbH German limited liability company
Graham Plastpak Plastik Ambalaj A.S. Turkish corporation
Graham Packaging Europe SNC French general partnership
Graham Emballages Plastiques S.A. French corporation
Financiere Graham Emballages Plastiques SNC French general partnership
Resin Rio Comercio Ltda. Brazilian limited liability company
Graham Packaging Argentina S.A. Argentine corporation
Graham Packaging Company de Venezuela, C.A. Venezuelan corporation
Lido Plast San Luis S.A. Argentine corporation
PlasPET Florida, Ltd. Florida limited partnership
Graham Innopack de Mexico S. de R.L. de C.V. Mexican limited liability company
Industrias Graham Innopack S. de R.L. de C.V. Mexican limited liability company
Servicios Graham Innopack S. de R.L. de C.V. Mexican limited liability company
Graham Packaging Belgium S.A. Belgian corporation
Graham Packaging Iberica S.L. Spanish limited liability company
Graham Packaging Villecomtal SARL French limited liability company
81