GRAHAM PACKAGING CO, 10-Q, 1998-11-10

GRAHAM PACKAGING CO
10-Q, 1998-11-10
MISCELLANEOUS PLASTICS PRODUCTS

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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
(Mark One)

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 1998

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

GRAHAM PACKAGING COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE 23-2786688
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1110 East Princess Street
York, Pennsylvania
(Address of principal executive offices)

17403
(zip code)

(717) 849-8500
(Registrant's telephone number, including area code)

Indicate by checkmark 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 [ ] .
<PAGE>
<PAGE>

GRAHAM PACKAGING COMPANY

INDEX

PART I. FINANCIAL INFORMATION

Page Number
-----------
Item 1: Condensed Financial Statements:

CONDENSED BALANCE SHEETS -
At September 27, 1998 and December 31, 1997 . . . . . . . . 3

CONDENSED STATEMENTS OF OPERATIONS - For the
Three months and Nine Months Ended September 27, 1998 and
September 28, 1997 . . . . . . . . . . . . . . . . . . . . 4

CONDENSED STATEMENTS OF PARTNERS' CAPITAL/
OWNERS' EQUITY (DEFICIT)-
For the Year Ended December 31, 1997 and Nine Months
Ended September 27, 1998 . . . . . . . . . . . . . . . . . 5

CONDENSED STATEMENTS OF CASH FLOWS - For the
Nine Months Ended September 27, 1998 and
September 28, 1997 . . . . . . . . . . . . . . . . . . . . 6

NOTES TO CONDENSED FINANCIAL STATEMENTS . . . . . . . . . . . . 8

Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 20

PART II. OTHER INFORMATION

Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 31

Signature: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

2
<PAGE>
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

GRAHAM PACKAGING COMPANY
CONDENSED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
September 27, December 31,
1998 1997
---------------------- ----------------------
(Unaudited)
<S> <C> <C>

ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,329 $ 7,218
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,030 69,295
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,212 32,236
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . 16,461 9,198
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,032 117,947
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 349,309 260,296
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,606 7,248
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $552,947 $385,491
======== ========
LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . $130,071 $108,361
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 6,228 4,771
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,299 113,132
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733,543 263,694
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 7,659 3,345
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4,983
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Partners' capital/owners' equity (deficit):
Partners'/owners' capital (deficit) . . . . . . . . . . . . . . . . . . . . . . . (328,525) 20,383
Notes receivable for ownership interests . . . . . . . . . . . . . . . . . . . . -- (20,240)
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,971 194
-------- --------
Total partners' capital/owners' equity (deficit) . . . . . . . . . . . . . . . . (324,554) 337
-------- --------
Total liabilities and partners' capital/Owners' equity (deficit) . . . . . . . . $552,947 $385,491
======== ========
See accompanying notes.
</TABLE>

3
<PAGE>
<PAGE>

GRAHAM PACKAGING COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $150,095 $133,237 $429,566 $384,345
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 120,387 111,486 343,389 321,152
-------- -------- -------- --------
29,708 21,751 86,177 63,193
Selling, general, and administrative expenses . . . . . . . 9,011 8,542 25,715 25,479
Special charges and unusual items . . . . . . . . . . . . . 2,483 990 19,318 4,672
-------- -------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . 18,214 12,219 41,144 33,042
Recapitalization expenses . . . . . . . . . . . . . . . . . -- -- 10,496 --
Interest expense, net . . . . . . . . . . . . . . . . . . . 16,546 3,603 42,212 10,337
Other (income) expense . . . . . . . . . . . . . . . . . . (355) (153) (224) 10
Minority interest . . . . . . . . . . . . . . . . . . . . . -- 98 -- 142
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary item . 2,023 8,671 (11,340) 22,553
Income tax provision . . . . . . . . . . . . . . . . . . . 474 350 482 530
-------- -------- -------- --------
Income (loss) before extraordinary item . . . . . . . . . . 1,549 8,321 (11,822) 22,023
Extraordinary loss from early extinguishment of debt . . . -- -- 675 --
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 1,549 $ 8,321 $(12,497) $ 22,023
======== ======== ======== ========

See accompanying notes.
</TABLE>

4
<PAGE>
<PAGE>

GRAHAM PACKAGING COMPANY
CONDENSED STATEMENTS OF PARTNERS' CAPITAL/OWNERS' EQUITY (DEFICIT)
(Unaudited)

<TABLE>
<CAPTION>
Notes
Partners'/ Receivable
Owners' For Other
Capital Ownership Comprehensive
(Deficit) Interests Income Total
---------------- ---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1997 . . . . . . . . . . . . . . . . $ 38,715 $(20,240) $ (1,670) $ 16,805
---------
Net income for the year . . . . . . . . . . . . . . . . . 10,213 -- -- 10,213
Cumulative translation adjustment . . . . . . . . . . . . -- -- 1,864 1,864
---------
Comprehensive income . . . . . . . . . . . . . . . . . . 12,077
---------
Cash distributions to owners . . . . . . . . . . . . . . (28,737) -- -- (28,737)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 192 -- -- 192
--------- -------- -------- ---------
Balance at December 31, 1997 . . . . . . . . . . . . . . . 20,383 (20,240) 194 337
---------
Net loss for the period . . . . . . . . . . . . . . . . . (12,497) -- -- (12,497)
Cumulative translation adjustment . . . . . . . . . . . . -- -- 3,777 3,777
---------
Comprehensive income . . . . . . . . . . . . . . . . . . (8,720)
---------
Cash distributions to owners . . . . . . . . . . . . . . (624) -- -- (624)
Recapitalization . . . . . . . . . . . . . . . . . . . . (335,787) 20,240 -- (315,547)
--------- -------- -------- ---------
Balance at September 27, 1998 . . . . . . . . . . . . . . . $(328,525) $ -- $ 3,971 $(324,554)
========= ======== ======== =========

See accompanying notes.
</TABLE>

5
<PAGE>
<PAGE>

GRAHAM PACKAGING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended
----------------------------------------------
September 27, September 28,
1998 1997
---------------------- ----------------------
(In thousands)
<S> <C> <C>
Operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,497) $ 22,023
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 28,097 30,503
Amortization of debt issuance fees . . . . . . . . . . . . . . . . . . . . . . 2,333 233
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675 --
Write-off of license fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,436 --
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 142
Equity income in earnings of joint venture . . . . . . . . . . . . . . . . . . (350) (173)
Foreign currency transaction loss . . . . . . . . . . . . . . . . . . . . . . . (51) 103
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,487 --
Changes in operating assets and liabilities, net of
Acquisition of business:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,096) (13,951)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,037) (5,958)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . (6,027) (2,570)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . (2,679) 13,446
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 3,291 43,798

Investing activities:
Net purchases of property, plant, and equipment . . . . . . . . . . . . . . . (79,284) (36,338)
Acquisition of Brazilian & European businesses . . . . . . . . . . . . . . . . (46,240) (17,068)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,485) (457)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (127,009) (53,863)

6
<PAGE>
<PAGE>

Nine Months Ended
----------------------------------------------
September 27, September 28,
1998 1997
---------------------- ----------------------
(In thousands)
<S> <C> <C>
Financing activities:
Net proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . 735,216 31,098
Recapitalization debt repayments . . . . . . . . . . . . . . . . . . . . . . . (264,410) --
Recapitalization owner note payments . . . . . . . . . . . . . . . . . . . . . 20,240 --
Recapitalization cash distributions to owners . . . . . . . . . . . . . . . . (334,717) --
Other cash distributions to owners . . . . . . . . . . . . . . . . . . . . . . (624) (17,204)
Debt issuance fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,541) --
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 122,164 13,894
Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . (335) (189)
-------- --------
(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . (1,889) 3,640
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 7,218 3,431
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 5,329 $ 7,071
======== ========

See accompanying notes.
</TABLE>

7
<PAGE>
<PAGE>

GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
September 27, 1998

1. Basis of Presentation

The accompanying unaudited condensed financial statements of Graham
Packaging Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do
not include all of the information and footnotes required by generally
accepted accounting principles for complete annual financial statements. In
the opinion of management, all adjustments (consisting only of usual
recurring adjustments considered necessary for a fair presentation) are
reflected in the condensed financial statements. The condensed combined
balance sheet as of December 31, 1997, is derived from audited financial
statements. The condensed combined financial statements and notes thereto
should be read in conjunction with the combined financial statements and
notes thereto for the year ended December 31, 1997. The results of
operations for the three and nine month periods ended September 27, 1998 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 1998.

The financial statements include the operations of Graham Packaging
Company, a Delaware limited partnership formerly known as Graham Packaging
Holdings I, L.P. (the "Operating Company"); Graham Packaging Italy, an
Italian SRL; Graham Packaging France Partners, G.P.; Graham Packaging Poland,
L.P.; Graham Packaging do Brasil Industriais e Comerciais S.A.; Graham
Packaging Canada, Ltd., a Canadian limited liability company; Graham
Recycling Company, L.P.; subsidiaries thereof; and land and buildings that
were used in the operations, owned by the control group of owners and
contributed to the Group. Prior to February 2, 1998, these operations were
under common control by virtue of ownership by the Donald C. Graham family.
These entities and assets are collectively referred to as Graham Packaging
Group (the "Group"). For the period prior to the Recapitalization, the
condensed financial statements and references to the Group relate to the Group
on a combined basis and include the accounts and results of operations that
were then conducted through Holdings (as hereinafter defined). (See Note 2.)
The combined financial statements include the accounts and results of
operations of the Group for all periods that the operations were under common
control. All amounts in the combined financial statements are those reported
in the historic financial statements of the individual operations. With
respect to the periods subsequent to the Recapitalization on February 2, 1998,
the condensed financial statements and references to the "Group" relate to the
Operating Company and its subsidiaries on a consolidated basis. Such
consolidated financial statements include GPC Capital Corp. I, a wholly owned
subsidiary of the Operating Company whose purpose is solely to act as
co-obligor of the Senior Subordinated Notes and co-borrower under the New
Credit Agreement and the Amendment. See Note 3. GPC Capital Corp. I has only
nominal assets and does not conduct any independent operations. Furthermore,
since July 27, 1998 the financial statements include the operations of Graham
Emballages Plastiques France S.A.; Graham Packaging U.K. Ltd.; CMB Plastpak
Plastic, Ambalaj Sanayi A.S.; and Graham Packaging Deutschland Gmbh as a
result of the acquisition of selected plants of Crown Cork & Seal. See Note 8.
All significant intercompany accounts and transactions have been eliminated in
the combined and consolidated financial statements.

8
<PAGE>
<PAGE>

No separate financial statements are presented for GPC Capital Corp.
I. As indicated above, GPC Capital Corp. I has no independent operations,
and Management has determined that separate financial statements for GPC
Capital Corp. I would not be material to investors.

The Operating Company is a wholly owned subsidiary of Graham
Packaging Holdings Company, a Pennsylvania limited partnership formerly known
as Graham Packaging Company ("Holdings"). Holdings has fully and
unconditionally guaranteed the Senior Subordinated Notes of the Operating
Company and GPC Capital Corp. I on a senior subordinated basis.

2. Recapitalization

Pursuant to an Agreement and Plan of Recapitalization, Redemption and
Purchase, dated as of December 18, 1997 (the "Recapitalization Agreement"),
(i) Holdings, (ii) the owners of the Group (the "Graham Partners") and (iii)
BMP/Graham Holdings Corporation, a Delaware corporation formed by Blackstone
Capital Partners III Merchant Banking Fund L.P. ("Investor LP"), and
BCP/Graham Holdings L.L.C., a Delaware limited liability company and a wholly
owned subsidiary of Investor LP ("Investor GP" and together with Investor LP,
the "Equity Investors") agreed to a recapitalization of Holdings (the
"Recapitalization"). Closing under the Recapitalization Agreement occurred
on February 2, 1998.

The principal components and consequences of the Recapitalization
included the following:

- A change in the name of Holdings to Graham Packaging Holdings
Company;

- The contribution by Holdings of substantially all of its assets and
liabilities to the Operating Company, which was renamed "Graham
Packaging Company";

9
<PAGE>
<PAGE>

- The contribution by certain Graham Partners to the Group of their
ownership interests in certain partially-owned subsidiaries of
Holdings and certain real estate used but not owned by Holdings and
its subsidiaries;

- The initial borrowing by the Operating Company of $403.5 million
(the "Bank Borrowings") in connection with the New Credit Agreement
entered into by and among the Operating Company, Holdings and a
syndicate of lenders;

- The issuance of $225 million Senior Subordinated Notes by the
Operating Company and $100.6 million gross proceeds ($169 million
aggregate principal amount at maturity) Senior Discount Notes by
Holdings. A wholly owned subsidiary of each of the Operating
Company and Holdings serves as co-issuer with its parent for its
respective issue of Notes;

- The repayment by the Operating Company of substantially all of the
existing indebtedness and accrued interest of Holdings and its
subsidiaries;

- The distribution by the Operating Company to Holdings of all of the
remaining net proceeds of the Bank Borrowings and the Senior
Subordinated Notes (other than amounts necessary to pay certain
fees and expenses and payments to Management);

- The redemption by Holdings of certain partnership interests in
Holdings held by the Graham Partners for $429.6 million;

- The purchase by the Equity Investors of certain partnership
interests in Holdings held by the Graham Partners for $208.3
million;

- The repayment by the Graham Partners of amounts owed to Holdings
under the $20.2 million promissory notes;

- The recognition of additional compensation expense under the Equity
Appreciation Plan;

- The payment of certain bonuses and other cash payments and the
granting of certain equity awards to senior and middle level
management;

- The execution of various other agreements among the parties; and

- The payment of a $6.2 million tax distribution by the Operating
Company on November 2, 1998 to certain Graham Partners 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 Partners or
affiliates thereof or other entities controlled by Donald C. Graham and his

10
<PAGE>
<PAGE>

family, have retained a 1% general partnership interest and a 14% limited
partnership interest in Holdings. Additionally, Holdings owns a 99% limited
partnership interest in the Operating Company, and GPC Opco GP L.L.C., a
wholly owned subsidiary of Holdings, owns a 1% general partnership interest
in the Operating Company.

As a result of the Recapitalization, the Group incurred charges of
approximately $32 million related to the issuance of debt which will be
recognized as interest expense over 6 to 11 years based upon the terms of the
related debt instruments. In addition, Recapitalization expenses of
approximately $24.8 million, which related to transaction fees, expenses,
compensation, unamortized licensing fees and costs associated with the
termination of the interest rate collar and swap agreements were incurred.
The Recapitalization also resulted in the write-off of unamortized debt
issuance fees which is reflected as an extraordinary loss in the consolidated
financial statements. The group will also incur compensation expense
totaling $10.7 million related to stay bonuses and the granting of certain
ownership interests to management which will be recognized over a period up
to three years. See Note 9.

3. Debt Arrangements

On February 2, 1998, the Group refinanced the majority of its existing
credit facilities in connection with the Recapitalization and entered into a
new Credit Agreement (the "New Credit Agreement") with a consortium of banks.
The New Credit Agreement was amended on August 13, 1998 (the "Amendment") to
provide for an additional Term Loan Borrowing of up to an additional $175
million which can be drawn in two installments (of which $75 million was drawn
and outstanding as of September 27, 1998). A commitment fee of .75% is due on
the unused portion. The New Credit Agreement and the Amendment consist of four
term loans to the Operating Company totaling up to $570 million and two
revolving loan facilities to the Operating Company totaling $255 million. The
obligations of the Operating Company under the New Credit Agreement and
Amendment 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 $3.2 million in 1998, $5.0 million
in 1999, $15.0 million in 2000, $20.0 million in 2001 and $25.0 million in
2002. The revolving loan facilities expire on January 31, 2004. Interest is
payable at (a) the "Alternate Base Rate" (the higher of the Prime Rate or the
Federal Funds Rate plus 0.50%) plus a margin ranging from 0% to 2.00%; 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
3.00%. A commitment fee ranging from 0.20% to 0.50% is due on the unused
portion of the revolving loan commitment. In addition, the New Credit
Agreement and Amendment contain certain affirmative and negative covenants
as to the operations and financial condition of the Group, as well as certain
restrictions on the payment of dividends and other distributions to Holdings.

The Recapitalization also included the issuance of $225 million in
Senior Subordinated Notes Due 2008 of the Operating Company and GPC Capital
Corp. I. The Senior Subordinated Notes are fully and unconditionally
guaranteed on a senior subordinated basis by Holdings and mature on
January 15, 2008, with interest payable on $150 million at 8.75% and with
interest payable on $75 million at LIBOR plus 3.625%.

11
<PAGE>
<PAGE>

Interest paid during the nine months ended September 27, 1998 and
September 28, 1997 was $32.7 million and $9.8 million, respectively.

The Operating Company has entered into three U.S. Dollar interest rate
swap agreements that effectively fix the Eurocurrency Rate on $450 million of
the term loans, on $200 million through April 9, 2002 at 5.8075%, on $100
million through April 9, 2003 at 5.77% and on $150 million through
September 10, 2001 at 5.5075%.

Under the New Credit Agreement and Amendment, 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 their present or former officers or employees
of Holdings, the Operating Company or their Subsidiaries (as defined) or by
any employee stock ownership plan upon such person's death, disability,
retirement or termination of employment or other circumstances with certain
annual dollar limitations and (iii) to finance starting on July 15, 2003, the
payment of cash interest payments on the Senior Discount Notes.

On September 8, 1998, 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 "Old Notes") and
issued in exchange therefor their Senior Subordinated Notes Due 2008, Series B
(the "Exchange Notes"). Each issue of Exchange Notes has the same terms as
the corresponding issue of Old Notes, except that the Exchange Notes are
registered under the Securities Act of 1933 and do not include the restrictions
on transfer applicable to the Old Notes. The Old Notes were, and the
Exchange Notes are, fully and unconditionally guaranteed by Holdings on a
senior subordinated basis.

4. Related Party Transactions

Pursuant to the Recapitalization Agreement, the Graham Partners have
agreed that neither they nor their affiliates will, subject to certain
exceptions, for a period of five years from and after the Closing of the
Recapitalization, 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.

Also pursuant to the Recapitalization Agreement, Holdings entered into
an Equipment Sales, Service and Licensing Agreement and a Consulting
Agreement with certain entities controlled by Donald C. Graham and members of
his family and a Partners Registration Rights Agreement with partners of
Holdings and certain other entities. Additionally, Holdings has entered into
a Monitoring Agreement with Blackstone Management Partners III for advisory
and consulting services.

12
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<PAGE>

5. Inventories

Inventories consisted of the following:

<TABLE>
<CAPTION>
September 27, December 31,
1998 1997
---------------------- ----------------------
(in thousands)
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . . . . . . $24,571 $18,759
Raw materials and parts . . . . . . . . . . . . . . . . . . 16,610 15,447
------- -------
41,181 34,206
Less LIFO allowance . . . . . . . . . . . . . . . . . . . . 969 1,970
------- -------
$40,212 $32,236
======== =======
</TABLE>

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses included the following:

<TABLE>
<CAPTION>
September 27, December 31,
1998 1997
---------------------- ----------------------
(in thousands)
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 65,763 $ 56,547
Accrued employee compensation and benefits . . . . . . . . . 16,020 16,305
Special charges and unusual items . . . . . . . . . . . . . . 7,059 18,472
Accrued interest . . . . . . . . . . . . . . . . . . . . . . 8,130 512
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,099 16,525
------- -------
$130,071 $108,361
======== ========
</TABLE>

7. Income Taxes

The Group 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 owners. For the Group's foreign operations subject to
tax in their local jurisdictions, deferred tax assets and liabilities are

13
<PAGE>
<PAGE>

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. During 1998 and 1997, the
Group's various taxable entities incurred additional net operating loss
carryforwards for which no benefit has been recognized.

8. Purchase of Certain Plants of Crown Cork & Seal

On July 27, 1998 the Company acquired selected plastic bottle
manufacturing operations of Crown, Cork & Seal located in France, Germany,
the United Kingdom and Turkey for a total purchase price (including
acquisition-related costs) of $43.3 million, net of liabilities assumed,
subject to certain adjustments. The acquisition was recorded under the
purchase method of accounting and accordingly, the results of operations of
the acquired operations are included in the combined financial statements
of the Group beginning on July 27, 1998. The purchase price has been
allocated on a preliminary basis to assets acquired and liabilities assumed.
The Company is awaiting the final fair value appraisals. Goodwill will be
amortized over 20 years on a straight-line basis. The fair value initially
allocated to assets and liabilities acquired is summarized as follows
(in thousands):

Current assets. . . . . . . . . . . $21,321
Property, plant and equipment . . . 35,417
Other assets. . . . . . . . . . . . 3,881
Goodwill. . . . . . . . . . . . . . 8,800
_______
Total. .. . . . . . . . . . . . . . $69,419
Less liabilities assumed. . . . . . 26,142
_______
Net cost of acquisition . . . . . . $43,277
=======

The following table sets forth unaudited pro forma combined results of
operations assuming that the acquisition had taken place on January 1, 1997.

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ---------------------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
----------------- --------------- ----------------- -------------------
(in thousands)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . $156,015 $152,045 $473,002 $441,723
Income before extraordinary items . . 353 6,619 (14,328) 18,642
Net income . . . . . . . . . . . . . 353 6,619 (15,003) 18,642
</TABLE>

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

14
<PAGE>
<PAGE>

had the combination been in effect on January 1, 1997, or of future results
of operations of the combined entities.

9. Special Charges and Unusual Items

The special charges and unusual items recorded in the three and nine
month periods ended September 27, 1998 and September 28, 1997, in thousands
of dollars, were as follows:

<TABLE>
<CAPTION>
Three Months Nine Months
--------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Systems conversion . . . . . . . . . . . . . . $ 292 -- $ 1,067 $ --
Recapitalization compensation . . . . . . . . . 2,191 -- 18,251 --
Litigation . . . . . . . . . . . . . . . . . . -- 990 -- 4,672
------- ------- ------- -------
$ 2,483 $ 990 $19,318 $ 4,672
======= ======= ======= =======
</TABLE>

The systems conversion expenses relate to outside consulting and other
incremental costs incurred by Holdings in 1998 as it commenced a project to
evaluate and assess its information systems and related hardware to ensure
that they will be year 2000 compliant. As part of this process, the Group
has engaged outside consultants to assist with the evaluation and assessment
of its information systems requirements and the selection and implementation
of enterprise resource planning software.

Recapitalization expenses included in special charges and unusual items
relate to compensation and to write-off of unamortized licensing fees.
Additionally, Recapitalization expenses relate to stay bonuses and the
granting of certain ownership interests to Management pursuant to the terms
of the Recapitalization (see Note 2), which are being recognized over a
period of up to three years.

The litigation costs are primarily costs incurred and accrued by the
Group for legal fees in connection with the claims against the Group for
alleged patent infringements and the counterclaims brought by the Group
alleging violations of federal antitrust law by the plaintiffs. See Note 10.

15
<PAGE>
<PAGE>

10. Contingencies

The Group is party to various litigation matters arising in the ordinary
course of business. The ultimate legal and financial liability of the Group
with respect to 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 liability will not be material to the
business, financial condition, results of operations or cash flows of the
Group.

Holdings was sued in May, 1995, for alleged patent infringement, trade
secret misappropriation and other related state law claims by Hoover
Universal, Inc., a subsidiary of Johnson Controls, Inc. ("JCI"), in the U.S.
District Court for the Central District of California (the "JCI Litigation").
JCI alleged that Holdings was misappropriating or threatened to
misappropriate trade secrets allegedly owned by JCI relating to the
manufacture of hot-fill PET plastic containers through the hiring of JCI
employees and alleged that Holdings infringed two patents owned by JCI by
manufacturing hot-fill PET plastic containers for several of its largest
customers using a certain "pinch grip" structural design. In December, 1995,
JCI filed a second lawsuit alleging infringement of two additional patents,
which relate to a ring and base structure for hot-fill PET plastic
containers. The two suits have been consolidated for all purposes. Holdings
has answered the complaints, denying infringement and misappropriation in all
respects and asserting various defenses, including invalidity and
unenforceability of the patents at issue based upon inequitable conduct on
the part of JCI in prosecuting the relevant patent applications before the
U.S. Patent Office and anticompetitive patent misuse by JCI. Holdings has
also asserted counterclaims against JCI alleging violations of federal
antitrust law, based upon certain agreements regarding market division
allegedly entered into by JCI with another competitor and other alleged
conduct engaged in by JCI allegedly intended to raise prices and limit
competition in the market for hot-fill PET plastic containers. In March,
1997, JCI's plastic container business was acquired by Schmalbach-Lubeca
Plastic Containers USA Inc. ("Schmalbach-Lubeca"). Schmalbach-Lubeca and
certain affiliates were joined as successors to JCI and as counter-claim
defendants.

On March 10, 1998, the Court entered summary judgment in favor of JCI
and against the Group regarding infringement of two patents, but did not
resolve certain issues related to the patents including certain of the
Group's defenses. On March 6, 1998, the Group filed suit against
Schmalbach-Lubeca in Federal Court in Delaware for infringement of the
Group's patent concerning pinch grip bottle design. On April 24, 1998, the
parties to the litigation reached an understanding on the terms of a
settlement of all claims in all of the litigation with JCI and
Schmalbach-Lubeca, subject to agreement upon and execution of a formal
settlement agreement. In June 1998, the Company finalized the settlement of
the JCI-Schmalbach litigation. The amount paid in settlement, as well as

16
<PAGE>
<PAGE>

estimated litigation expenses and professional fees, did not differ
materially from the amounts accrued in Special Charges and Unusual Items in
respect thereof for the year ended December 31, 1997.

11. Comprehensive Income

Effective January 1, 1998, the Group adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Comprehensive income for the three and nine month periods ended September 27,
1998 and September 28, 1997, in thousands of dollars, was as follows:

17
<PAGE>
<PAGE>

<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,549 $ 8,321 $(12,497) $22,023
Foreign currency 4,808 (751) 3,777 2,403
------- ------- -------- -------
Comprehensive income (loss) $ 6,357 $ 7,570 $(8,720) $24,426
======= ======= ======== =======
</TABLE>

12. New Accounting Pronouncements Not Yet Adopted

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
establishes standards for the way that public business enterprises report
selected information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore,
the Group will adopt the new requirements in 1998, which will require
retroactive disclosure. Management has not completed its review of
Statement 131 and has not determined the impact adoption will have on the
Group's financial statement disclosures.

In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use. The SOP is
effective for the Group on January 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use. The Group
currently capitalizes certain external costs and expenses all other costs as
incurred. The Group has not yet assessed what the impact of the SOP will be
on the Group's future earnings or financial position.

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Post Retirement Benefits. This standard revises
employers' disclosures about pensions and other post-retirement plans, but
does not change the measurement or recognition of those plans. This
standard will be effective for the Group's financial statements for the year
ended December 31, 1998.

18
<PAGE>
<PAGE>

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
Standard is effective for the Company's financial statements for all quarters
in the year beginning January 1, 2000. Management has not completed its
review of Statement No. 133 and has not determined the impact adoption will
have on the Company's financial statements.

19
<PAGE>
<PAGE>

Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for certain forward-looking statements. This Form 10-Q includes
"forward-looking" within the meaning of section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended ("the Exchange
Act"). All statements other than historical facts included in this Form
10-Q, including without limitation, statements regarding the Company's future
financial position, business strategy, anticipated capital expenditures,
anticipated business acquisitions, projected costs and plans and objectives
of management for future operations, 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, they can give no assurance that such expectations will prove to
have been correct.

Overview

The Company is a worldwide leader in the design, manufacture and sale of
custom blow-molded rigid plastic bottles for the automotive, food and
beverage and household cleaning & personal care (HC/PC) business. Management
believes that critical success factors to the Company's business are its
ability to (i) serve the complex packaging demands of its customers which
include some of the world's largest branded customer products companies, (ii)
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 (iii) make the correct
investments in plant and technology necessary to satisfy the two forces
mentioned above.

Management believes that there are major synergistic acquisition, joint
venture and other opportunities across the Company's businesses. In this
regard, the Company acquired certain assets and liabilities of Rheem-Graham
Embalagens Ltda., a leading supplier of bottles to the motor oil industry in
Brazil, 80% of which were acquired on April 30, 1997 and the remaining 20% on
February 17, 1998. In addition, on July 27, 1998, the Company acquired
selected plastic bottle manufacturing operations of Crown, Cork & Seal
located in France, Germany, the United Kingdom and Turkey.

20
<PAGE>
<PAGE>

Based on industry data, the following table summarizes average market
price per pound of PET and HDPE resins:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
PET . . . . . . . . . . . . . $ 0.54 $ 0.54 $ 0.54 $ 0.49
HDPE . . . . . . . . . . . . 0.36 0.47 0.39 0.47
</TABLE>

In general, the Company's dollar gross profit is substantially
unaffected by fluctuations in the prices of HDPE and PET resins, the primary
raw materials for the Company's products, because industry practice and the
Company's agreements with its customers permit price changes to be passed
through to customers by means of corresponding changes in product pricing.
Consequently, the Company believes that an analysis of the cost of goods
sold, as well as certain other expense items, should not be performed as a
percentage of net sales.

Results of Operations

The following tables set forth the major components of the Company's net
sales (in millions) and such net sales expressed as a percentage of total
revenue:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------- ----------------------------------------------------
September 27, 1998 September 28, 1997 September 27, 1998 September 28, 1997
------------------------ ------------------------ ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive . . . . . . $ 47.5 31.6% $ 52.1 39.1% $143.0 33.3% $148.7 38.7%
Food & Beverage . . . . 59.8 39.9 37.3 28.0 157.4 36.6 106.8 27.8
HC/PC . . . . . . . . . 42.8 28.5 43.8 32.9 129.2 30.1 128.8 33.5
------ ----- ------ ----- ------ ----- ------ -----
Total Net Sales . . . . $150.1 100.0% $133.2 100.0% $429.6 100.0% $384.3 100.0%
====== ===== ====== ===== ====== ===== ====== =====

21
<PAGE>
<PAGE>

Three Months Ended Nine Months Ended
-------------------------------------------------- ----------------------------------------------------
September 27, 1998 September 28, 1997 September 27, 1998 September 28, 1997
------------------------ ------------------------ ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America . . . . . $114.7 76.4% $111.6 83.8% $349.2 81.3% $326.6 85.0%
Europe . . . . . . . . 29.1 19.4 15.7 11.8 64.0 14.9 48.7 12.7
Latin America . . . . . 6.3 4.2 5.9 4.4 16.4 3.8 9.0 2.3
------ ----- ------ ----- ------ ----- ------ -----
Total Net Sales . . . . $150.1 100.0% $133.2 100.0% $429.6 100.0% $384.3 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

Three Months Ended September 27, 1998 Compared to
Three Months Ended September 28, 1997

Net Sales. Net sales for the three months ended September 27, 1998
increased $16.9 million to $150.1 million from $133.2 million for the three
months ended September 28, 1997. The increase in sales was primarily due to
an 11.2% increase in resin pounds sold and changes in product mix. These
increases were partially offset by a net decrease in average resin prices.
On a geographic basis, sales for the three months ended September 27, 1998 in
North America were up $3.1 million or 2.8% from the three months ended
September 28, 1997. The North American sales increase included higher pounds
sold of 6.1%. North American sales in the food and beverage business
contributed $14.4 million to the increase, while sales in the automotive
business and HC/PC business were $5.6 million and $5.7 million lower,
respectively. Sales for the three months ended September 27, 1998 in Europe
were up $13.4 million or 85.4% from the three months ended September 28, 1997,
principally in the food & beverage and HC/PC businesses, primarily due to the
inclusion of the Company's newly-acquired European subsidiaries. Overall,
European sales reflected a 66.7% increase in pounds sold. Additionally,
sales in Latin America for the three months ended September 27, 1998 were up
$0.4 million over 1997.

Gross Profit. Gross profit for the three months ended September 27, 1998
increased $7.9 million to $29.7 million from $21.8 million for the three
months ended September 28, 1997. The increase in gross profit resulted
primarily from the higher sales volume as compared to the prior year and
continued operational improvements. Gross profit in North America was up
$6.5 million or 31.3%. Additionally, gross profit for the three months
ended September 27, 1998 increased $0.9 million in Europe and $0.5 million
in Latin America when compared to the three months ended September 28, 1997.

22
<PAGE>
<PAGE>

Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 27, 1998
increased $0.5 million to $9.0 million from $8.5 million for the three months
ended September 28, 1997. As a percent of sales, selling, general and
administrative expenses declined to 6.0% of sales in 1998 from 6.4% in 1997.
The increase in 1998 selling, general and administrative expenses is due
primarily to the inclusion of the Company's newly-acquired European
subsidiaries.

Special Charges and Unusual Items. Special charges and unusual items
increased $1.5 million for the three months ended September 27, 1998 from
$1.0 million for the three months ended September 28, 1997. Special charges
and unusual items in the three months ended September 27, 1998 included costs
related to year 2000 system conversion of $0.3 million (see "Information
Systems Initiative" for a further discussion) and Recapitalization
compensation of $2.2 million. The special charges and unusual items in
the three months ended September 28, 1997 reflect legal fees related to
the JCI-Schmalbach-Lubeca litigation.

Interest Expense, Net. Interest expense, net increased $12.9 million to
$16.5 million for the three months ended September 27, 1998 from $3.6
million for the three months ended September 28, 1997. The increase was
primarily related to the increase in debt resulting from the Recapitalization
and higher average interest rates associated with the new debt.

Other (Income) Expense. Other (income) expense was ($0.4) million for the
three months ended September 27, 1998 as compared to ($0.2) million for the
three months ended September 28, 1997. The higher income was due primarily to
higher equity income in the three months ended September 27, 1998 as compared
to the three months ended September 28, 1997.

Net Income. Primarily as a result of factors discussed above, net income for
the three months ended September 27, 1998 was $1.5 million compared to net
income of $8.3 million for the three months ended September 28, 1997.

Nine Months Ended September 27, 1998 Compared to
Nine Months Ended September 28, 1997

Net Sales. Net sales for the nine months ended September 27, 1998 increased
$45.3 million to $429.6 million from $384.3 million for the nine months ended
September 28, 1997. The increase in sales was primarily due to a 10.7%
increase in resin pounds sold and changes in product mix. These increases
were partially offset by a net decrease in average resin prices. On a
geographic basis, sales for the nine months ended September 27, 1998 in North
America were up $22.6 million or 6.9% from the nine months ended
September 28, 1997. The North American sales increase included higher pounds

23
<PAGE>
<PAGE>

sold of 8.5%. North American sales in the food and beverage business
contributed $38.5 million to the increase, while sales in the automotive
business and HC/PC business were $9.9 million and $6.0 million lower,
respectively. Approximately 64% of the decrease in North American sales
in the automotive business and approximately 92% of the decrease in North
American sales in the HC/PC business were attributable to declining resin
pricing. Sales for the nine months ended September 27, 1998 in Europe were
up $15.3 million or 31.4% from the nine months ended September 28, 1997,
principally in the food & beverage and HC/PC businesses, primarily due to the
inclusion of the Company's newly-acquired European subsidiaries. Overall,
European sales reflected a 23.3% increase in pounds sold. Additionally, sales
for the nine months ended September 27, 1998 were up $7.4 million as a result
of the Company's investment in its Latin American subsidiary in the second
quarter of 1997.

Gross Profit. Gross profit for the nine months ended September 27, 1998
increased $23.0 million to $86.2 million from $63.2 million for the nine
months ended September 28, 1997. The increase in gross profit resulted
primarily from the higher sales volume as compared to the prior year,
continued operational improvements and the favorable impact of lower
depreciation. Gross profit in North America was up $19.2 million or 31.0%.
Additionally, gross profit for the nine months ended September 27, 1998
increased $2.3 million in Europe and $1.5 million in Latin America when
compared to the nine months ended September 28, 1997.

Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 27, 1998
increased $0.2 million to $25.7 million from $25.5 million for the nine
months ended September 28, 1997. As a percent of sales, selling, general and
administrative expenses declined to 6.0% of sales in 1998 from 6.6% in 1997.
The decline is due primarily to lower costs in Europe of $0.5 million as a
result of the elimination of duplicative costs incurred prior to the
Recapitalization, the favorable impact of foreign currency translation due to
the weakening French Franc and Italian Lire and to the Company's continued
effort to control these costs. The increase in 1998 selling, general and
administrative expenses is due primarily to the inclusion of the Company's
Latin American subsidiary and the newly-acquired European subsidiaries which
were acquired in the second quarter of 1997 and the third quarter of 1998,
respectively.

Special Charges and Unusual Items. Special charges and unusual items
increased $14.6 million for the nine months ended September 27, 1998 from
$4.7 million for the nine months ended September 28, 1997. Special charges
and unusual items in the nine months ended September 27, 1998 included costs
related to year 2000 system conversion of $1.1 million (see "Information
Systems Initiative" for a further discussion), and Recapitalization
compensation of $18.2 million. The special charges and unusual items in
the nine months ended September 28, 1997 reflect legal fees related to
the JCI-Schmalbach-Lubeca litigation.

Interest Expense, Net. Interest expense, net increased $31.9 million to
$42.2 million for the nine months ended September 27, 1998 from $10.3
million for the nine months ended September 28, 1997. The increase was

24
<PAGE>
<PAGE>

primarily related to the increase in debt resulting from the Recapitalization
and higher average interest rates associated with the new debt.

Other (Income) Expense. Other (income) expense was ($0.2) million for the
nine months ended September 27, 1998 as compared to $0.0 million for the nine
months ended September 28, 1997. The higher income was due primarily to
higher equity income in the nine months ended September 27, 1998 as compared
to the nine months ended September 28, 1997.

Net Income. Primarily as a result of factors discussed above, net loss for
the nine months ended September 27, 1998 was $12.5 million compared to net
income of $22.0 million for the nine months ended September 28, 1997.

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 did not have a material effect on the financial results of the
Company in the three and nine months ended September 27, 1998.

Information Systems Initiative

The Company has assembled a team of professionals and consultants to
ensure that any significant Year 2000 issues which might have a material
impact on the Company's results of operations, liquidity or financial
position are timely identified and any resulting remediation timely resolved.

The Company has completed an evaluation and assessment to ensure that
its information technology (IT) systems and related hardware will be year
2000 compliant. As a part of this process, the Company engaged outside
consultants in 1997 to assist with the evaluation and assessment of its IT
systems requirements and the selection and implementation of Enterprise
Resource Planning Software. As a result of this evaluation and assessment,
the Company decided to replace all of its core application systems, including
its financial accounting system, manufacturing operation system and payroll
and human resources system. The Company expects to complete the testing and
training phases of the core application systems conversion by the end of the
first quarter of 1999. IT systems conversion in the Company's North American
operations is expected to be completed by the end of the second quarter of
1999. IT systems conversions in the Company's European and Latin American
operations will immediately follow the North American conversion and are
expected to be completed by the end of 1999.

25
<PAGE>
<PAGE>

The Company has also commenced an evaluation and assessment to ensure
that its non-IT systems, namely its major manufacturing equipment, are Year
2000 compliant. All vendors who supply the Company with equipment, materials
or services have been sent letters asking their status on Year 2000 compliance.
The Company has obtained representations from its primary equipment suppliers
indicating that the related machinery is already Year 2000 compliant or Year
2000 compliance will be timely completed with vendor supplied upgrades. In
addition, the Company is currently assessing all other equipment and expects
to have this evaluation completed by the end of 1998. The ability of third
parties with whom the Company transacts business to adequately address their
year 2000 issues is outside of the Company's control. There can be no assurance
that the failure of such third parties to adequately address their year 2000
issues would not have a material adverse effect on the Company.

For the nine months ended September 27, 1998 and the year ended
December 31, 1997, the Company expensed $1.1 million and $0.5 million,
respectively, associated with its IT systems Year 2000 compliance efforts.
The Company expects to incur $12.6 million to purchase, test and install new
software as well as incur internal staff costs, consulting fees and other
expenses through the year 2000 to complete its remediation efforts,
approximately $5.4 million of which will be expensed and $7.2 million of
which will be capitalized as part of the cost of internal-use computer
software.

If for some unforeseen reason the Company is unable to complete the
conversion of its IT systems in the timetable previously described, the
Company's existing software will be modified to allow for the uninterrupted
business operations of the Company until such conversion can be completed.
No major complications are foreseen with respect to non-IT systems which
would impact the manufacture or shipment of customer product. The incomplete
or untimely resolution of the year 2000 issue is not expected to have a
material impact on the Company's results of operations, liquidity or
financial position.

No major IT projects have been deferred as a result of Year 2000
efforts.

Derivatives

The Company enters into interest rate collar and swap agreements to
hedge the exposure to increasing rates with respect to the New Credit Agreement
and Amendment. The differential to be paid or received as a result of these
collar and swap agreements is accrued as interest rates change and recognized
as an adjustment to interest expense related to the New Credit Agreement and
Amendment, which was not material in the three and nine months ended September
27, 1998 and the three and nine months ended September 28, 1997.

26
<PAGE>
<PAGE>

Liquidity and Capital Resources

In the nine month period ended September 27, 1998, the Company funded,
through its various borrowing arrangements, $125.2 million of investing
activities, including $79.3 million of capital expenditures and $46.2 million
of investments.

On February 2, 1998 the Company refinanced the majority of its existing
credit facilities in connection with the Recapitalization, requiring the
repayment of $264.9 million of existing indebtedness and entered into the New
Credit Agreement. The New Credit Agreement consisted of three term loans
totaling $395 million and two revolving loans totaling $255 million, of which
$8.5 million was initially borrowed. The Recapitalization also included the
issuance of $225 million of Senior Subordinated Notes Due 2008. Additionally,
the Recapitalization included net distributions to owners of $334.7 million and
debt issuance costs of $27.0 million. On August 13, 1998 the Company amended
its credit facility to provide for an additional Term Loan Borrowing of up to
an additional $175 million which can be drawn in two installments. At
September 27, 1998, the Company's outstanding indebtedness was $739.8 million.

Earnings before interest, taxes, depreciation and amortization, special
charges and unusual items and extraordinary items increased $7.4 million to
$31.2 million for the three months ended September 27, 1998 from $23.8
million for the three months ended September 28, 1997. Earnings before
interest, taxes, depreciation and amortization, special charges and unusual
items and extraordinary items increased $20.6 million to $88.8 million for
the nine months ended September 27, 1998 from $68.2 million for the nine
months ended September 28, 1997. Earnings before interest, taxes,
depreciation and amortization, special charges and unusual items and
extraordinary items 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. Earnings before interest, taxes,
depreciation and amortization, special charges and unusual items and
extraordinary items is included in this Form 10-Q to provide additional
information with respect to the ability of the Company to satisfy debt
service, capital expenditure and working capital requirements and because
certain covenants in the Company's borrowing arrangements are tied to similar
measures. While earnings before interest, taxes, depreciation and
amortization, special charges and unusual items and extraordinary items and
similar variations thereof are frequently used as a measure of operations and
the ability to meet debt service requirements, these terms are not
necessarily titled captions of other companies due to potential
inconsistencies in the method of calculation.

During 1998, the Company expects to incur capital expenditures of
approximately $140 million, of which approximately $17.0 million will be

27
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<PAGE>

related to maintaining its plant and operations and $5.1 million will be
related to a new MIS system in North America. However, total capital
expenditures for 1998 may vary significantly depending on the timing of
growth related opportunities. On July 27, 1998, the Company acquired selected
plastic bottle manufacturing operations of Crown, Cork & Seal located in
France, Germany, the United Kingdom and Turkey for a total purchase price
(including acquisition-related costs) of $43.3 million, net of
liabilities assumed, subject to certain adjustments. Additionally, the
Company plans to acquire two plastic bottle manufacturing operations in
South America for a total of approximately $25 million. The purchase price
for the completed acquisition and the proposed aggregate purchase price for
the two planned acquisitions are not included in the $140 million estimate
referred to above. The Company's principal sources of cash to fund capital
requirements will be net cash provided by operating activities and borrowings
under the New Credit Agreement.

In June 1998, the Company finalized the settlement of the
JCI-Schmalbach-Lubeca litigation. The amounts paid in settlement, as well as
estimated litigation expenses and professional fees, did not differ
materially from the amounts accrued in Special Charges and Unusual Items in
respect thereof for the year ended December 31, 1997. The cash paid in
settlement was funded by drawdowns under the New Credit Facility. See Note
10 to the Condensed Financial Statements.

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. The Company makes tax distributions to its
partners to reimburse them for such tax obligations. The Company's foreign
operations are subject to tax in their local jurisdictions. Most of these
entities have historically incurred net operating losses.

New Accounting Pronouncements Not Yet Adopted

In June 1997, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
establishes standards for the way that public business enterprises report

28
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<PAGE>

selected information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore,
the Company will adopt the new requirements in 1998, which will require
retroactive disclosure. Management has not completed its review of Statement
131 and has not determined the impact adoption will have on the Company's
financial statement disclosures.

In March 1998, the AICPA issued SOP-98-1, Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use. The SOP is
effective for the Company on January 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The
Company currently capitalizes certain external costs and expenses all other
costs as incurred. The Company has not yet assessed what the impact of the
SOP will be on the Company's future earnings or financial position.

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers' Disclosure
about Pensions and Other Post-Retirement Benefits. This standard revises
employers' disclosures about pensions and other post-retirement plans, but
does not change the measurement or recognition of those plans. This standard
will be effective for the Company's financial statements for the year ended
December 31, 1998.

29
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<PAGE>

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Holdings was sued in May, 1995, for alleged patent
infringement, trade secret misappropriation and other related state
law claims by Hoover Universal, Inc., a subsidiary of Johnson
Controls, Inc. ("JCI"), in the U.S. District Court for the Central
District of California (the "JCI Litigation"). JCI alleged that
Holdings was misappropriating or threatened to misappropriate trade
secrets allegedly owned by JCI relating to the manufacture of
hot-fill PET plastic containers through the hiring of JCI employees
and alleged that Holdings infringed two patents owned by JCI by
manufacturing hot-fill PET plastic containers for several of its
largest customers using a certain "pinch grip" structural design.
In December, 1995, JCI filed a second lawsuit alleging infringement
of two additional patents, which relate to a ring and base
structure for hot-fill PET plastic containers. The two suits have
been consolidated for all purposes. Holdings has answered the
complaints, denying infringement and misappropriation in all
respects and asserting various defenses, including invalidity and
unenforceability of the patents at issue based upon inequitable
conduct on the part of JCI in prosecuting the relevant patent
applications before the U.S. Patent Office and anticompetitive
patent misuse by JCI. Holdings has also asserted counterclaims
against JCI alleging violations of federal antitrust law, based
upon certain agreements regarding market division allegedly entered
into by JCI with another competitor and other alleged conduct
engaged in by JCI allegedly intended to raise prices and limit
competition in the market for hot-fill PET plastic containers. In
March, 1997, JCI's plastic container business was acquired by
Schmalbach-Lubeca Plastic Containers USA Inc.
("Schmalbach-Lubeca"). Schmalbach-Lubeca and certain affiliates
were joined as successors to JCI and as counter-claim defendants.

On March 10, 1998, the Court entered summary judgment in favor
of JCI and against the Group regarding infringement of two patents,
but did not resolve certain issues related to the patents including
certain of the Group's defenses. On March 6, 1998, the Group filed
suit against Schmalbach-Lubeca in Federal Court in Delaware for
infringement of the Group's patent concerning pinch grip bottle
design. On April 24, 1998, the parties to the litigation reached
an understanding on the terms of a settlement of all claims in all
of the litigation with JCI and Schmalbach-Lubeca, subject to
agreement upon and execution of a formal settlement agreement. In
June 1998, the Company finalized the settlement of the
JCI-Schmalbach litigation. The amount paid in settlement, as well
as estimated litigation expenses and professional fees, did not
differ materially from the amounts accrued in Special Charges and

30
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<PAGE>

Unusual Items in respect thereof for the year ended December 31,
1997.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 27 Financial Data Schedule

(b) Reports on Form 8-K

No reports on Form 8-K were required to be filed during the
quarter ended September 27, 1998.

31
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<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 10, 1998

GRAHAM PACKAGING COMPANY
(Registrant)

By: GPC OPCO GP L.L.C.,
its General Partner

/s/ John E. Hamilton
By:_________________________________________
John E. Hamilton
Vice President, Finance and Administration
(chief accounting officer and
duly authorized officer)

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