<PAGE>
FORM 10-Q/A
AMENDMENT NO. 1 TO 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 HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 23-2553000
(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 filled by the 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_.
1
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
<S> <C> <C>
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
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 28, December 31,
1998 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 .............................................................. 35,593 7,248
--------- ---------
Total assets .............................................................. $ 444,149 $ 385,491
========= =========
LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses .................................. $ 105,213 $ 108,361
Current portion of long-term debt ...................................... 6,521 4,771
--------- ---------
Total current liabilities ................................................. 111,734 113,132
Long-term debt ............................................................ 760,699 263,694
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) ....................................... (431,410) 20,383
Notes receivable for ownership interests .................................. -- (20,240)
Other comprehensive income ................................................ (837) 194
--------- ---------
Total Partners' capital/Owners' equity (deficit) .......................... (432,247) 337
--------- ---------
Total liabilities and Partners' capital/Owners' equity (deficit) .......... $ 444,149 $ 385,491
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
GRAHAM PACKAGING HOLDINGS 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 administrative expenses ............... 8,282 8,619 16,704 16,937
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 ................................... -- -- 11,496 --
Interest expense, net ....................................... 18,262 3,474 30,201 6,734
Other (income) expense ...................................... (30) (166) 131 163
Minority interest ........................................... -- 44 -- 44
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item ........................................................ 3,441 9,516 (18,898) 13,882
Income tax provision ........................................ -- 180 8 180
--------- --------- --------- ---------
Income (loss) before extraordinary item ..................... 3,441 9,336 (18,906) 13,702
Extraordinary loss from early extinguishment of debt ........ -- -- 675 --
--------- --------- --------- ---------
Net income (loss) ........................................... $ 3,441 $ 9,336 $ (19,581) $ 13,702
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
GRAHAM PACKAGING HOLDINGS 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 ............................ (19,581) -- -- (19,581)
Cumulative translation adjustment .................. -- -- (1,031) (1,031)
---------
Comprehensive income ............................... (20,612)
---------
Cash distributions to owners ....................... (624) -- -- (624)
Recapitalization ................................... (431,588) 20,240 -- (411,348)
--------- --------- --------- ---------
Balance at June 28,1998 .............................. $(431,410) $ -- $ (837) $(432,247)
========= ========= ========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
GRAHAM PACKAGING HOLDINGS 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 .......................................................... $ (19,581) $ 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 ....................................... 1,559 154
Accretion of Senior Discount Notes ....................................... 4,356 --
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 .................................. (3,311) 14,505
Net cash (used in) provided by operating activities .......................... (7,334) 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 ........................... 758,958 32,827
Recapitalization debt repayments ....................................... (264,410) --
Recapitalization owner note payments ................................... 20,240 --
Recapitalization cash distributions to owners .......................... (429,566) --
Other cash distributions to owners ..................................... (624) (11,754)
Debt issuance fees ..................................................... (34,239) --
--------- ---------
Net cash provided by financing activities .................................... 50,359 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.
6
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
1. Basis of Presentation
The accompanying unaudited condensed financial statements of Graham
Packaging Holdings 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
Holdings Company, a Pennsylvania limited partnership formerly known as Graham
Packaging Company ("Holdings"); 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. In addition, the financial
statements include GPC Capital Corp. I, a wholly owned subsidiary of the
Operating Company and GPC Capital Corp. II, a wholly owned subsidiary of
Holdings, whose purpose is solely to act as co-obligor of the Senior
Subordinated Notes and Senior Discount Notes, respectively. GPC Capital Corp.
I and GPC Capital Corp. II have only nominal assets and do not conduct any
independent operations. These entities and assets are collectively referred to
as Graham Packaging Group (the "Group"). With respect to the periods
subsequent to the Recapitalization on February 2, 1998, the condensed
financial statements and references to the "Group" relate to Holdings and its
subsidiaries on a consolidated basis and for the period prior to the
Recapitalization to the "Group" on a combined basis. The combined financial
statements include the accounts and results of operations of the Group for all
periods that the operations were under control. All amounts in the combined
financial statements are those reported in the historic financial statements
of the individual operations. All significant intercompany accounts and
transactions have been eliminated in the combined and consolidated financial
statements.
Since the Recapitalization Holdings has had no assets, liabilites or
operations other than its direct and indirect investments in the Operating
Company, its ownership of GPC Capital Corp. II and the Senior Discount Notes
and related unamortized issuance costs.
Holdings has fully and unconditionally guaranteed the Senior
Subbordinated Notes of the Operating Company and GPC Capital Corp. I on a
senior subordinated basis. Holdings is jointly and severally liable with GPC
Capital Corp. II with respect to all obligations on the Senior Discount Notes
of Holdings and GPC Capital Corp. II. Condensed financial data for the
Operating Company is presented in Note 10. No separate financial statements
are presented for GPC Capital Corp. I and GPC Capital Corp. II. As indicated
above, GPC Capital Corp. I and GPC Capital Corp. II have no independent
operations, and Management has determined that separate financial statements
for GPC Capital Corp. I and GPC Capital Corp. II would not be material to
investors.
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:
o A change in the name of Holdings to Graham Packaging
Holdings Company;
7
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
2. Recapitalization--(Continued)
o The contribution by Holdings of substantially all of its
assets and liabilities to the Operating Company, which was
renamed "Graham Packaging Company";
o 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;
o 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;
o 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;
o The repayment by the Operating Company of substantially all
of the existing indebtedness and accrued interest of
Holdings and its subsidiaries;
o The distribution by the Operating Company to Holdings of all
of the remaining net proceeds of the Bank Borrowings and the
Senior Subordinated Notes (other than amounts necessary to
pay certain fees and expenses and payments to Management);
o The redemption by Holdings of certain partnership interests
in Holdings held by the Graham Partners for $429.6 million;
o The purchase by the Equity Investors of certain partnership
interests in Holdings held by the Graham Partners for $208.3
million.
o The repayment by the Graham Partners of amounts owed to
Holdings under the $20.2 million promissory notes;
o The recognition of additional compensation expense under the
Equity Appreciation Plan;
o The payment of certain bonuses and other cash payments and
the granting of certain equity awards to senior and middle
level management; and
o 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 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.
8
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
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 of the Operating Company and $100.6 million gross
proceeds in Senior Discount Notes ($169 million aggregate principal amount at
maturity) of Holdings. The Senior Subordinated Notes are unconditionally
guaranteed on a senior subordinated basis by Holdings and mature on January
15, 2008, with interest payable on $150 million at 8.75% and with interest
payable on $75 million at LIBOR plus 3.625%. The Senior Discount Notes mature
on January 15, 2009, with interest payable at 10.75%. Cash interest on the
Senior Discount Notes does not accrue until January 15, 2003.
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
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.
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.
9
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
5. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 28, December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
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
======= ========
</TABLE>
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses included the following:
<TABLE>
<CAPTION>
June 28, December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
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.............................................................. 23,061 16,525
-------- --------
$105,213 $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
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. 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:
<TABLE>
<CAPTION>
Three Months Six Months
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Systems Conversion $ 409 $ -- $ 775 $ --
Recapitalization compensation 1,528 -- 16,060 --
Litigation -- 2,150 -- 3,682
------- ------- ------- -------
$ 1,937 $ 2,150 $16,835 $ 3,682
======= ======= ======= =======
</TABLE>
10
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
8. Special Charges and Unusual Items--(Continued)
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.
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.
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.
11
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
10. Condensed Operating Company Data
Condensed financial data for the Operating Company as of June 28,
1998, in thousands of dollars, was as follows:
<TABLE>
<S> <C>
Current assets......................................................... $ 127,986
Noncurrent assets...................................................... 311,572
Total assets........................................................... 439,558
Current liabilities.................................................... 111,727
Noncurrent liabilities................................................. 659,694
Partners' capital...................................................... (331,863)
</TABLE>
Condensed financial data for the Operating Company for the three and six
month periods ended June 28, 1998, in thousands of dollars, was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
<S> <C> <C>
Sales.................................................................. $ 145,053 $ 279,471
Gross profit........................................................... 31,892 56,469
Income (loss) from continuing operations............................... 6,243 (13,371)
Net income (loss)...................................................... 6,243 (14,046)
</TABLE>
Full separate financial statements and other disclosures of the Operating
Company have not been presented. Management has determined that such
information is not material to investors. Additionally, condensed financial
data of the Operating Company is not presented for the corresponding periods
in 1997 because separate financial information for the Operating Company prior
to the Recapitalization would not be comparable.
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 six month periods ended June
28, 1998 and June 29, 1997, in thousands of dollars, was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income (loss) $ 3,441 $ 9,336 $(19,581) $ 13,702
Foreign Currency (332) 933 (1,031) 3,154
-------- -------- -------- --------
Comprehensive income (loss) $ 3,109 $ 10,269 $(20,612) $ 16,856
======== ======== ======== ========
</TABLE>
12. 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.
12
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 28, 1998
12. New Accounting Pronouncements Not Yet Adopted-- (Continued)
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. 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.
13. 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.
13
<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 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.
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.
14
<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%
======== ======= ======== ======= ======== ======= ======== =======
<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 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
15
<PAGE>
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.
Interest Expense, Net. Interest expense, net increased $14.8 million
to $18.3 million (including $2.8 million of non-cash interest on the
Senior Discount Notes) 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 $3.4 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 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 three 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.
16
<PAGE>
Interest Expense, Net. Interest expense, net increased $23.5 million
to $30.2 million (including $4.4 million of non-cash interest on the
Senior Discount Notes) 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 $19.6 million
compared to net income of $13.7 million for the six months ended June
29, 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 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.
17
<PAGE>
Liquidity and Capital Resources
In the six month period ended June 28, 1998, the Company
funded, through its various borrowing arrangements, $7.3 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 and $100.6
million gross proceeds of Senior Discount Notes ($169 million
aggregate principal amount as maturity). Additionally, the
Recapitalization included net distributions to owners of $409.3
million and debt issuance costs of $30.9 million. At June 28, 1998,
the Company's outstanding indebtedness was $767.2 million.
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.
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
18
<PAGE>
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.
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.
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>
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.
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.
20
<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: August 14, 1998
GRAHAM PACKAGING HOLDINGS COMPANY
(Registrant)
By BCP/Graham Holdings L.L.C.,
its General Partner
/s/ John E. Hamilton
-----------------------------------
John E. Hamilton
Vice President, Finance and Administration
(chief accounting officer and duly authorized officer)
21
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<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 JUN-28-1998
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