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 June 28, 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
GRAHAM PACKAGING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 23-2786688
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 [ ]. No [X].
<PAGE>
GRAHAM PACKAGING COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page Number
ITEM 1: Condensed Financial Statements:
CONDENSED BALANCE SHEETS -
At June 28, 1998 and December 31, 1997 3
CONDENSED STATEMENTS OF OPERATIONS - For the
Three months and Six Months Ended June 28, 1998
and June 29, 1997 4
CONDENSED STATEMENTS OF PARTNERS'
CAPITAL/OWNER'S EQUITY (DEFICIT) -
For the Year Ended December 31, 1997 and
Six Months Ended June 28, 1998 5
CONDENSED STATEMENTS OF CASH FLOWS -For the
Six Months Ended June 28, 1998 and June 29, 1997 6
NOTES TO CONDENSED FINANCIAL STATEMENTS 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 6: Exhibits and Reports on Form 8-K 20
Signature: 21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
GRAHAM PACKAGING COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 28, 1998 December 31, 1997
--------------------------------------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,088 $ 7,218
Accounts receivable, net 80,528 69,295
Inventories 30,789 32,236
Prepaid expenses and other current assets 11,581 9,198
-------- --------
Total current assets 127,986 117,947
Property, plant, and equipment, net 280,570 260,296
Other assets 31,002 7,248
-------- --------
Total assets $439,558 $385,491
======== ========
LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses $105,206 $108,361
Current portion of long-term debt 6,521 4,771
-------- --------
Total current liabilities 111,727 113,132
Long-term debt 655,731 263,694
Other non-current liabilities 3,963 3,345
Minority interest --- 4,983
Commitments and contingencies --- ---
Partners' capital/Owners' equity (deficit):
Partner's/Owners' capital (deficit) (331,026) 20,383
Notes receivable for ownership interests --- (20,240)
Other comprehensive income (837) 194
-------- --------
Total Partners' capital/Owners' equity (deficit) (331,863) 337
-------- --------
Total liabilities and Partners' capital/Owners' $439,558 $385,491
equity (deficit) ========= =========
</TABLE>
See accompanying notes.
<PAGE>
GRAHAM PACKAGING COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net sales $145,053 $134,648 $279,471 $251,108
Cost of goods sold 113,161 111,011 223,002 209,666
-------- -------- -------- --------
31,892 23,637 56,469 41,442
Selling, general, and 8,282 8,619 16,704 16,937
administrative expenses
Special charges and unusual items 1,937 2,150 16,835 3,682
-------- -------- -------- --------
Operating income 21,673 12,868 22,930 20,823
Recapitalization expenses --- --- 10,496 ---
Interest expense, net 15,460 3,474 25,666 6,734
Other (income) expense (30) (166) 131 163
Minority interest --- 44 --- 44
-------- -------- -------- --------
Income (loss) before income taxes 6,243 9,516 (13,363) 13,882
and extraordinary item
Income tax provision --- 180 8 180
-------- -------- -------- --------
Income (loss) before extraordinary 6,243 9,336 (13,371) 13,702
item
Extraordinary loss from early --- --- 675 ---
extinguishment of debt -------- -------- -------- --------
Net income (loss) $ 6,243 $ 9,336 $(14,046) $ 13,702
======== ======== ======== ========
</TABLE>
See accompanying notes.
<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 (14,046) --- --- (14,046)
Cumulative translation adjustment --- --- (1,031) (1,031)
-----------
Comprehensive income (15,077)
-----------
Cash distributions to owners (624) --- --- (624)
Recapitalization (336,739) 20,240 --- (316,499)
---------- -------- -------- ----------
Balance at June 28,1998 $(331,026) $ --- $ (837) $(331,863)
========== ======== ======== ==========
</TABLE>
See accompanying notes.
<PAGE>
GRAHAM PACKAGING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
June 28, 1998 June 29, 1997
---------------------------------
(In thousands)
<S> <C> <C>
Operating activities:
Net (loss) income $ (14,046) $ 13,702
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 17,948 20,105
Amortization of debt issuance fees 1,380 154
Extraordinary loss 675 ---
Write-off of license fees 1,436 ---
Minority interest --- 44
Equity income in earnings of joint venture (150) (137)
Foreign currency transaction loss 19 95
Other non-cash items 1,554 ---
Changes in operating assets and liabilities, net of
Acquisition of business:
Accounts receivable (11,169) (12,594)
Inventories 1,213 (3,196)
Prepaid expenses and other current assets (1,883) (1,057)
Accounts payable and accrued expenses (3,318) 14,505
--------- ---------
Net cash (used in) provided by operating activities (6,341) 31,621
Investing activities:
Net purchases of property, plant, and equipment (41,478) (22,506)
Acquisition of Brazilian business (2,995) (21,500)
Other (879) (358)
--------- ---------
Net cash used in investing activities (45,352) (44,364)
Financing activities:
Net proceeds from issuance of long-term debt 658,346 32,827
Recapitalization debt repayments (264,410) ---
Recapitalization owner note payments 20,240 ---
Recapitalization cash distributions to owners (334,717) ---
Other cash distributions to owners (624) (11,754)
Debt issuance fees (29,469) ---
--------- ---------
Net cash provided by financing activities 49,366 21,073
Effect of exchange rate changes 197 140
--------- ---------
(Decrease) increase in cash and cash equivalents (2,130) 8,470
Cash and cash equivalents at beginning of period 7,218 3,431
---------- ---------
Cash and cash equivalents at end of period $ 5,088 $ 11,901
========== =========
</TABLE>
See accompanying notes.
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 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 six month periods ended June 28, 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. See Note 3. GPC Capital Corp. I has only
nominal assets and does not conduct any independent operations. All
significant intercompany accounts and transactions have been eliminated in
the combined and consolidated financial statements.
<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.
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
2. Recapitalization--(Continued)
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";
-- 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;
<PAGE>
-- The payment of certain bonuses and other cash payments and
the granting of certain equity awards to senior and middle
level management; and
-- The execution of various other agreements among the parties.
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
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 $34 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
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
2. Recapitalization--(Continued)
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 8.
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 consists of three term loans to
the Operating Company totaling $395 million and two revolving loan facilities
to the Operating Company totaling $255 million. The obligations of the
Operating Company under the New Credit Agreement are guaranteed by Holdings
and certain other subsidiaries of Holdings. The term loans are payable in
quarterly installments beginning June 30, 1998 through January 31, 2007, and
require payments of $3,200,000 in 1998, $3,200,000 in 1999, $13,200,000 in
2000, $18,200,000 in 2001 and $23,200,000 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
contains 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.
Interest paid during the six months ended June 28, 1998 and June 29,
1997 was $11,306,000 and $6,699,000, respectively.
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%.
The Operating Company has entered into two U.S. Dollar interest rate
swap agreements that effectively fix the Eurocurrency Rate on $300 million of
the term loans, on $200 million through April 9, 2002 at 5.8075% and on $100
million through April 9, 2003 at 5.77%.
Under the New 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
<PAGE>
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.
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
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 the
Group and certain other entities. Additionally, the Group has
entered into a Monitoring Agreement with Blackstone Management Partners III
for advisory and consulting services.
5. Inventories
Inventories consisted of the following:
June 28, December 31,
1998 1997
-------- ------------
(in thousands)
Finished goods $ 19,774 $18,759
Raw materials and parts 12,985 15,447
-------- -------
32,759 34,206
Less LIFO allowance 1,970 1,970
-------- -------
$ 30,789 $32,236
======== =======
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses included the following:
June 28, December 31,
1998 1997
-------- ------------
(in thousands)
Accounts payable $ 52,875 $56,547
Accrued employee compensation and benefits 12,301 16,305
Special charges and unusual items 3,325 18,472
Accrued interest 13,651 512
Other 23,054 16,525
-------- --------
$105,206 $108,361
======== ========
<PAGE>
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
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.
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
8. Special Charges and Unusual Items
The special charges and unusual items recorded in the three and six
month periods ended June 28, 1998 and June 29, 1997, in thousands of dollars,
were as follows:
Three Months Six Months
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Systems Conversion $ 409 $ --- $ 775 $ ---
Recapitalization compensation 1,528 --- 16,060 ---
Litigation --- 2,150 --- 3,682
------ ------ ------- ------
$1,937 $2,150 $16,835 $3,682
====== ====== ======= ======
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 9.
<PAGE>
9. 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.
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
9. Contingencies--(Continued)
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 Unusual Items in respect thereof for the year ended
December 31, 1997.
10. 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 six month periods ended June 28, 1998
and June 29, 1997, in thousands of dollars, was as follows:
Three Months Six Months
----------------- ------------------
1998 1997 1998 1997
------ ------- -------- -------
Net Income (loss) $6,243 $ 9,336 $(14,046) $13,702
Foreign Currency (332) 933 (1,031) 3,154
------ ------- -------- -------
Comprehensive income (loss) $5,911 $10,269 $(15,077) $16,856
====== ======= ======== =======
<PAGE>
GRAHAM PACKAGING COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
11. New Accounting Pronouncements Not Yet Adopted
In June 1997, the FASB 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
employer's 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.
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.
<PAGE>
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.
12. Subsequent Events
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 of $41,477,000. The
acquisition will be recorded under the purchase method of accounting and
accordingly, the results of operation of the acquired operations will be
included in the financial statements of the Company beginning on July 27,
1998.
On August 13, 1998, the Company amended its New Credit Agreement to
provide for up to an additional $175 million in term loan borrowings.
Principal payments required under this new term facility are payable in
quarterly installments beginning March 31, 1999 through January 31, 2007,
with payments of $1.8 million in each of the next five years.
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"), which have the same terms as the 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 Exchange Notes are fully and unconditionally guaranteed by Holdings on a
senior subordinated basis. See Note 3.
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 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.
<PAGE>
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.
Based on industry data, the following table summarizes average market
price per pound of PET and HDPE resins:
Three Months Ended June Six Months Ended June
----------------------- ---------------------
1998 1997 1998 1997
------ ----- ------ ------
PET $0.55 $0.49 $0.54 $0.46
HDPE 0.39 0.49 0.40 0.47
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.
<PAGE>
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 Six Months Ended
------------------------------------------- --------------------------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive $ 50.5 34.8% $ 52.7 39.2% $ 95.5 34.2% $ 96.6 38.5%
Food & Beverage 51.6 35.6 38.5 28.6 97.6 34.9 69.5 27.7
HC/PC 43.0 29.6 43.4 32.2 86.4 30.9 85.0 33.8
------ ----- ------ ----- ------ ----- ------ -----
Total Net Sales $145.1 100.0% $134.6 100.0% $279.5 100.0% $251.1 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------- --------------------------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
---------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America $122.2 84.2% $115.5 85.8% $234.5 83.9% $215.0 85.6%
Europe 17.7 12.2 16.0 11.9 34.9 12.5 33.0 13.2
Latin America 5.2 3.6 3.1 2.3 10.1 3.6 3.1 1.2
------ ----- ------ ----- ------ ----- ------ -----
Total Net Sales $145.1 100.0% $134.6 100.0% $279.5 100.0% $251.1 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended June 28, 1998 Compared to Three Months Ended June 29, 1997
Net Sales. Net sales for the three months ended June 28, 1998 increased
$10.5 million to $145.1 million from $134.6 million for the three months
ended June 29, 1997. The increase in sales was primarily due to a 10.5%
increase in unit volume, a 6.0% increase in resin pounds sold and changes in
product mix. These increases were partially offset by a net decrease in
average resin prices. The most significant geographic increase in net sales
was in North America, where sales for the three months ended June 28, 1998
<PAGE>
were $6.7 million or 5.8% greater than in the three months ended June 29,
1997. The North American sales increase included higher unit volume of 5.5%
and higher pounds sold of 5.3%. North American sales in the food and
beverage business contributed $10.3 million. to the increase, while sales in
the automotive business and HC/PC business were $2.4 million and $1.2 million
lower, respectively. Sales for the three months ended June 28, 1998 in
Europe were up $1.7 million or 10.6% from the three months ended June 29,
1997, primarily in the food & beverage business. Overall, European sales
reflected a 28.5% increase in units and a 1.9% increase in pounds sold.
Additionally, sales for the three months ended June 28, 1998 were up $2.1
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 three months ended June 28, 1998
increased $8.3 million to $31.9 million from $23.6 million for the three
months ended June 29, 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 $6.1 million or 25.9%. Additionally,
gross profit for the three months ended June 28, 1998 increased $1.8 million
in Europe and $0.4 million in Latin America when compared to the three month
period ended June 29, 1997.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 28, 1998 declined
$0.3 million to $8.3 million from $8.6 million for the three months ended
June 29, 1997. As a percent of sales, selling, general and administrative
expenses declined to 5.7% of sales in 1998 from 6.4% 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. Offsetting, this decrease in 1998 selling, general and administrative
expenses is the inclusion of the Company's Latin America subsidiary which was
acquired in the second quarter of 1997.
Special Charges and Unusual Items. Special charges and unusual items
decreased $0.2 million for the three months ended June 28, 1998 from $2.1
million for the three months ended June 29, 1997. Special charges and
unusual items in the three months ended June 28, 1998 included costs related
to year 2000 system conversion expenditures of $0.4 million (see "Information
Systems Initiative" for a further discussion), and Recapitalization
compensation costs of $1.5 million. The special charges and unusual items in
the three months ended June 29, 1997 reflect legal fees related to the JCI
Schmalbach-Lubeca litigation.
<PAGE>
Interest Expense, Net. Interest expense, net increased $12.0 million to
$15.5 million for the three months ended June 28, 1998 from $3.5 million for
the three months ended June 29, 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 decreased $0.2 million for
the three months ended June 28, 1998 from ($0.2) million for the three months
ended June 29, 1997. The lower income was due primarily to a lower net
foreign exchange gain/loss in the three months ended June 28, 1998 as
compared to the three months ended June 29, 1997.
Net Income. Primarily as a result of factors discussed above, net income for
the three months ended June 28, 1998 was $6.2 million compared to net income
of $9.3 million for the three months ended June 29, 1997.
Six Months Ended June 28, 1998 Compared to Six Months Ended June 29, 1997
Net Sales. Net sales for the six months ended June 28, 1998 increased $28.4
million to $279.5 million from $251.1 million for the six months ended June
29, 1997. The increase in sales was primarily due to a 12.2% increase in
unit volume, a 10.8% increase in resin pounds sold and changes in product
mix. These increases were partially offset by a net decrease in average resin
prices. The most significant geographic increase in net sales was in North
America, where sales for the six months ended June 28, 1998 were $19.5
million or 9.1% greater than in the six months ended June 29, 1997. The
North American sales increase included higher unit volume of 7.0% and higher
pounds sold of 9.7%. North American sales in the food and beverage business
contributed $24.1 million. to the increase, while sales in the automotive
business and HC/PC business were $4.3 million and $0.3 million lower,
respectively. Sales for the six months ended June 28, 1998 in Europe were up
$1.9 million or 5.8% from the six months ended June 29, 1997, primarily in
the food & beverage business. Overall, European sales reflected a 26.1%
increase in units and a 2.1% increase in pounds sold. Additionally, sales
for the three months ended June 28, 1998 were up $7.0 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 six months ended June 28, 1998 increased
$15.1 million to $56.5 million from $41.4 million for the six months ended
June 29, 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
<PAGE>
North America was up $12.7 million or 30.9%. Additionally, gross profit for
the six months ended June 28, 1998 in Europe increased $1.4 million and $1.0
million in Latin America when compared to the six month period ended June 29,
1997.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 28, 1998 declined $0.2
million to $16.7 million from $16.9 million for the six months ended June 29,
1997. As a percent of sales, selling, general and administrative expenses
declined to 6.0% of sales in 1998 from 6.7% in 1997. The decline is due
primarily to lower costs in Europe of $1.0 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. Offsetting, this decrease in 1998 selling, general and administrative
expenses is the inclusion of the Company's Latin America subsidiary which was
acquired in the second quarter of 1997.
Special Charges and Unusual Items. Special charges and unusual items
increased $13.1 million for the six months ended June 28, 1998 from $3.7
million for the six months ended June 29, 1997. Special charges and
unusual items in the six months ended June 28, 1998 included costs related to
year 2000 system conversion expenditures of $0.8 million (see "Information
Systems Initiative" for a further discussion), and Recapitalization
compensation costs of $16.0 million. The special charges and unusual items
in the six months ended June 29, 1997 reflect legal fees related to the JCI
Schmalbach-Lubeca litigation.
Interest Expense, Net. Interest expense, net increased $19.0 million to
$25.7 million for the six months ended June 28, 1998 from $6.7 million for
the six months ended June 29, 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 of $0.1 million for the six
months ended June 28, 1998 compared to $0.2 million for the six months ended
June 29, 1997. The lower expense was due primarily to a lower net foreign
exchange gain/loss in the six months ended June 28, 1998 as compared to the
six months ended June 29, 1997.
Net Income. Primarily as a result of factors discussed above, net loss
for the six months ended June 28, 1998 was $14.0 million compared to net
income of $13.7 million for the six months ended June 29, 1997.
<PAGE>
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 six month periods ended June 28, 1998.
Information Systems Initiative
The Company has completed an evaluation and assessment to ensure that
its information 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 information systems
requirements and the selection and implementation of Enterprise Resource
Planning Software. As a result of this evaluation and assessment, the
Company has 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 have its remediation efforts completed by the
end of 1999, and does not expect any material impact on its results of
operations, liquidity or financial position due to incomplete or untimely
resolution of the year 2000 issue. 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.
Derivatives
The Company enters into interest rate collar and swap agreements to
hedge the exposure to increasing rates with respect to its Credit Agreement.
The differential to be paid or received as a result of these collar and swap
agreements is accrued as interest rates change and recognized as an
adjustment to interest expense related to the Credit Agreement, which was not
material in the three and six month periods ended June 28, 1998 and the three
and six month periods ended June 29, 1997.
<PAGE>
Liquidity and Capital Resources
In the six month period ended June 28, 1998, the Company funded,
through its various borrowing arrangements, $6.3 million of operating
activities and $45.4 million of investing activities, including $41.5 million
of capital expenditures and $3.0 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 $29.5 million. At June 28, 1998, the Company's
outstanding indebtedness was $662.3 million.
On September 8, 1998, Graham Packaging 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"), which have the same terms as the 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 Exchange Notes are fully and unconditionally guaranteed by Holdings on a
senior subordinated basis.
Earnings before interest, taxes, depreciation and amortization,
special charges and unusual items and extraordinary items increased $6.9
million to $32.3 million for the three months ended June 28, 1998 from $25.4
million for the three months ended June 29, 1997. Earnings before interest,
taxes, depreciation and amortization, special charges and unusual items and
extraordinary items increased $13.2 million to $57.6 million for the six
months ended June 28, 1998 from $44.4 million for the six months ended June
29, 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.
<PAGE>
During 1998, the Company expects to incur capital expenditures of
approximately $160 million, of which approximately $17.0 million will be
related to maintaining its plant and operations and $6.5 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 of
$41.5 million. Additionally, the Company plans to acquire two plastic bottle
manufacturing operations in South America for a total of approximately $28
million. The purchase price for the completed acquisition and the proposed
aggregate purchase price for the two planned acquisitions are not included in
the $160 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. On August 13,
1998, the Company amended its New Credit Agreement to provide additional
financing for its planned capital expenditures and acquisitions. The
amendment provides for up to an additional $175 million in term loan
borrowings, payable in quarterly installments beginning March 31, 1999
through January 31, 2007, and requires payments of $1.8 million in each of
the next five years.
Under the New 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 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.
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 9
to the Condensed Financial Statements.
<PAGE>
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 Net 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 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
employer's 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.
<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.
<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 Unusual Items in
respect thereof for the year ended December 31, 1997.
<PAGE>
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 June 28, 1998.
<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: September 14, 1998
GRAHAM PACKAGING COMPANY
(Registrant)
By: GPC OPCO GP.,
its General Partner
/s/ John E. Hamilton
___________________________________
John E. Hamilton
Vice President, Finance and
Administration
(chief accounting officer and duly
authorized officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 JUN-28-1998
<CASH> 7,218 5,088
<SECURITIES> 0 0
<RECEIVABLES> 70,930 82,140
<ALLOWANCES> 1,635 1,612
<INVENTORY> 32,236 30,789
<CURRENT-ASSETS> 117,947 127,986
<PP&E> 587,910 625,286
<DEPRECIATION> 327,614 344,716
<TOTAL-ASSETS> 385,491 439,558
<CURRENT-LIABILITIES> 113,132 111,727
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 337 (331,863)
<TOTAL-LIABILITY-AND-EQUITY> 385,491 439,558
<SALES> 521,707 279,471
<TOTAL-REVENUES> 521,707 279,471
<CGS> 437,301 223,002
<TOTAL-COSTS> 437,301 223,002
<OTHER-EXPENSES> 58,653 44,166
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,940 25,666
<INCOME-PRETAX> 10,813 (13,363)
<INCOME-TAX> 600 8
<INCOME-CONTINUING> 10,213 (13,371)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 675
<CHANGES> 0 0
<NET-INCOME> 10,213 (14,046)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
