UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 333-53603-03
GRAHAM PACKAGING HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of 23-2553000
incorporation or organization) (I.R.S. Employer Identification No.)
2401 Pleasant Valley Road
York, Pennsylvania
(Address of principal executive offices)
17402
(zip code)
(717) 849-8500
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
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<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Condensed Financial Statements:
CONDENSED BALANCE SHEETS -
At April 2, 2000 and December 31, 1999. . . . . . . 3
CONDENSED STATEMENTS OF OPERATIONS -
For the Three Months Ended April 2, 2000 and
March 28, 1999. . . . . . . . . . . . . . . . . . . 4
CONDENSED STATEMENTS OF PARTNERS'
CAPITAL/OWNERS' EQUITY (DEFICIT) -
For the Year Ended December 31, 1999 and
Three Months Ended April 2, 2000. . . . . . . . . . 5
CONDENSED STATEMENTS OF CASH FLOWS -
For the Three Months Ended April 2, 2000 and
March 28, 1999. . . . . . . . . . . . . . . . . . . 6
NOTES TO CONDENSED FINANCIAL STATEMENTS. . . . . . . . 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . .21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . .31
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . 32
Signature: . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
April 2, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 5,244 $ 5,983
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . 127,318 108,766
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,422 52,847
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 17,459 17,138
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,443 184,734
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . 516,254 496,746
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,691 59,769
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 780,388 $ 741,249
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL/OWNERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . $ 171,977 $ 168,175
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . 27,545 24,370
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 199,522 192,545
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,032,425 992,730
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . 13,279 13,327
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 618
Commitments and contingent liabilities (see Note 10) . . . . . . . . . . . -- --
Partners' capital/owners' equity (deficit):
Partners'/owners' capital (deficit) . . . . . . . . . . . . . . . . . . . . (442,133) (439,123)
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . (23,045) (18,848)
----------- -----------
Total partners' capital/owners' equity (deficit) . . . . . . . . . . . . . (465,178) (457,971)
----------- -----------
Total liabilities and partners' capital/owners' equity (deficit) . . . . . $ 780,388 $ 741,249
=========== ===========
</TABLE>
See accompanying notes.
3
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GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
April 2, 2000 March 28, 1999
------------- --------------
(in thousands)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,988 $159,085
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,046 131,205
-------- --------
34,942 27,880
Selling, general, and administrative expenses . . . . . . . . . . . . . . . 13,418 10,445
Special charges and unusual items . . . . . . . . . . . . . . . . . . . . . 420 1,217
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,104 16,218
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,435 19,446
Other expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . 63 (62)
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (278)
-------- --------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (3,116) (3,166)
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 238
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,264) $ (3,404)
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED STATEMENTS OF PARTNERS'
CAPITAL/OWNERS' EQUITY (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Partners'/ Accumulated
Owners' Other
Capital Comprehensive
(Deficit) Income Total
---------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Balance at January 1, 1999 . . . . . . . . . . . . . . . . . . . . $ (442,271) $ 3,477 $ (438,794)
----------
Net income for the year . . . . . . . . . . . . . . . . . . . . . 1,255 -- 1,255
Cumulative translation adjustment . . . . . . . . . . . . . . . . -- (22,325) (22,325)
----------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . (21,070)
----------
Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . 1,893 -- 1,893
----------- ---------- ----------
Balance at December 31, 1999 . . . . . . . . . . . . . . . . . . . (439,123) (18,848) (457,971)
----------
Net loss for the period . . . . . . . . . . . . . . . . . . . . . (3,264) -- (3,264)
Cumulative translation adjustment . . . . . . . . . . . . . . . . -- (4,197) (4,197)
----------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . (7,461)
----------
Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . 254 -- 254
----------- ---------- ----------
Balance at April 2, 2000 . . . . . . . . . . . . . . . . . . . . . $ (422,133) $ (23,045) (465,178)
=========== ========== ==========
</TABLE>
See accompanying notes.
5
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GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
April 2, 2000 March 28, 1999
------------- --------------
(in thousands)
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,264) $ (3,404)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 15,206 11,792
Amortization of debt issuance fees . . . . . . . . . . . . . . . . . . . . . . 1,112 1,010
Accretion of Senior Discount Notes . . . . . . . . . . . . . . . . . . . . . . 3,262 2,896
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (278) --
Equity in earnings of joint venture . . . . . . . . . . . . . . . . . . . . . (5) (75)
Foreign currency transaction loss . . . . . . . . . . . . . . . . . . . . . . 97 22
Other non-cash recapitalization expense . . . . . . . . . . . . . . . . . . . 254 594
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,316) (15,773)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,108) 1,409
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . (458) 2,510
Other non-current assets and liabilities . . . . . . . . . . . . . . . . . . 162 --
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 5,835 (8,150)
-------- --------
Net cash used by operating activities . . . . . . . . . . . . . . . . . . . . . . (1,501) (7,169)
Investing activities:
Net purchases of property, plant, and equipment . . . . . . . . . . . . . . . (37,971) (33,825)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) 122
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (38,019) (33,703)
Financing activities:
Net proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . 39,928 40,555
Debt issuance fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,050) (3)
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 38,878 40,552
Effect of exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . (97) (883)
-------- --------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . (739) (1,203)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 5,983 7,476
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 5,244 $ 6,273
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
April 2, 2000
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 consolidated
balance sheet as of December 31, 1999 is derived from audited financial
statements. The condensed financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 1999. The results of operations for
the three month period ended April 2, 2000 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2000.
The financial statements include the operations of Graham Packaging
Holdings Company, a Pennsylvania limited partnership; Graham Packaging
Company, L.P., a Delaware limited partnership (the "Operating Company");
Graham Packaging Italy, S.r.L.; Graham Packaging France Partners; Graham
Packaging Poland, L.P.; Graham Packaging do Brasil Industria e Comercio S.A.;
Graham Packaging Canada Limited; Graham Recycling Company, L.P.; subsidiaries
thereof; and land and buildings that were used in the operations, owned by
the control group of owners and contributed to the Graham Packaging Group (as
defined). Prior to February 2, 1998, these operations of the Graham
Packaging Group were under common control by virtue of ownership by the
Donald C. Graham family. In addition, the consolidated financial statements
of the Group include GPC Capital Corp. I, a wholly owned subsidiary of the
Operating Company and GPC Capital Corp. II, a wholly owned subsidiary of
Holdings. The purpose of GPC Capital Corp. I is solely to act as co-obligor
with the Operating Company under the Senior Subordinated Notes (as herein
defined) and as co-borrower with the Operating Company under the New Credit
Agreement (as herein defined), and the purpose of GPC Capital Corp. II is
solely to act as co-obligor with Holdings under the Senior Discount Notes and
as co-guarantor with Holdings of the New Credit Agreement. GPC Capital Corp.
7
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I and GPC Capital Corp. II have only nominal assets and do not conduct any
independent operations. Furthermore, since July 27, 1998 the consolidated
financial statements of the Group include the operations of Graham Emballages
Plastiques S.A.; Graham Packaging U.K. Ltd.; Graham Plastpak Plastik Ambalaj
A.S.; and Graham Packaging Deutschland GmbH as a result of the acquisition of
selected plants of Crown Cork & Seal. Since July 1, 1999 the consolidated
financial statements of the Group include the operations of Graham Packaging
Argentina S.A. as a result of the acquisition of companies in Argentina.
Since July 6, 1999 the consolidated financial statements of the Group include
the operations of PlasPET Florida, Ltd. as a result of an investment made in
a limited partnership. (Refer to Note 8 for a discussion of each of these
investments). These entities and assets are referred to collectively as
Graham Packaging Group (the "Group"). With respect to the periods subsequent
to the Recapitalization that occurred on February 2, 1998 (see Note 2), the
financial statements and references to the "Group" relate to Holdings and its
subsidiaries on a consolidated basis. All amounts in the financial
statements are those reported in the historic financial statements of the
individual operations. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Since the Recapitalization, Holdings has had no assets, liabilities or
operations other than its direct and indirect investments in the Operating
Company, its ownership of GPC Capital Corp. II and the Senior Discount Notes
and related unamortized issuance costs. Holdings has fully and
unconditionally guaranteed the Senior Subordinated Notes of the Operating
Company and GPC Capital Corp. I on a senior subordinated basis. Holdings is
jointly and 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
11. 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
8
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Investors") agreed to a recapitalization of Holdings (the "Recapitalization").
Closing under the Recapitalization Agreement occurred on February 2, 1998.
The principal components and consequences of the Recapitalization
included the following:
- A change in the name of Holdings to Graham Packaging Holdings Company;
- The contribution by Holdings of substantially all of its assets and
liabilities to the Operating Company, which was renamed "Graham
Packaging Company, L.P.";
- The contribution by certain Graham 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 of 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);
9
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- The redemption by Holdings of certain partnership interests in Holdings
held by the Graham Partners for $429.6 million;
- The purchase by the Equity Investors of certain partnership interests in
Holdings held by the Graham Partners for $208.3 million;
- The repayment by the Graham Partners of amounts owed to Holdings under
the $20.2 million promissory notes;
- The recognition of additional compensation expense under the Equity
Appreciation Plan;
- The payment of certain bonuses and other cash payments and the granting
of certain equity awards to senior and middle level management;
- The execution of various other agreements among the parties; and
- The payment of a $6.2 million tax distribution by the Operating Company
on November 2, 1998 to certain Graham Partners for tax periods prior to
the Recapitalization.
As a result of the consummation of the Recapitalization, Investor LP
owns an 81% limited partnership interest in Holdings, and Investor GP owns a
4% general partnership interest in Holdings. Certain Graham Partners or
affiliates thereof or other entities controlled by Donald C. Graham and his
family, have retained a 1% general partnership interest and a 14% limited
partnership interest in Holdings. Additionally, Holdings owns a 99% limited
partnership interest in the Operating Company, and GPC Opco GP L.L.C., a
wholly owned subsidiary of Holdings, owns a 1% general partnership interest
in the Operating Company.
As a result of the Recapitalization, the Group incurred charges of
approximately $32 million related to the issuance of debt which will be
recognized as interest expense over 6 to 11 years based upon the terms of the
related debt instruments. In addition, Recapitalization expenses of
approximately $25 million, which related to transaction fees, expenses,
compensation, unamortized licensing fees and costs associated with the
10
<PAGE>
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 was reflected as an extraordinary loss in the financial
statements. Compensation expense totaling $10.7 million, of which $9.9
million had been expensed as of April 2, 2000, related to stay bonuses and
the granting of certain ownership interests to management which will be
recognized over a period up to three years from the date of the
Recapitalization. See Note 9.
3. Debt Arrangements
On February 2, 1998, as discussed in Note 2 to the Financial Statements,
the Group refinanced the majority of its existing credit facilities in
connection with the Recapitalization and entered into a new Credit Agreement
(the "New Credit Agreement") with a consortium of banks. The New Credit
Agreement was amended on August 13, 1998 to provide for an additional Term
Loan Borrowing of an additional $175 million and on March 30, 2000 as
described below (the "Amendments"). The New Credit Agreement and the
Amendments consist of four term loans to the Operating Company totaling $570
million and two revolving loan facilities to the Operating Company totaling
$255 million. The unused portion of the revolving loan facilities at April
2, 2000 was $119 million. The obligations of the Operating Company under the
New Credit Agreement and Amendments are guaranteed by Holdings and certain
other subsidiaries of Holdings. The term loans are payable in quarterly
installments through January 31, 2007, and require payments of $15.0 million
in 2000, $20.0 million in 2001, $25.0 million in 2002, $27.5 million in 2003
and $93.0 million in 2004. The revolving loan facilities expire on January
31, 2004. Interest is payable at (a) the "Alternate Base Rate" (the higher
of the Prime Rate or the Federal Funds Rate plus 0.50%) plus a margin ranging
from 0% to 2.25%; or (b) the "Eurocurrency Rate" (the applicable interest
rate offered to banks in the London interbank eurocurrency market) plus a
margin ranging from 0.625% to 3.25%. A commitment fee ranging from 0.20% to
0.50% is due on the unused portion of the revolving loan commitment. As part
of the Amendments to the New Credit Agreement, if certain events of default
were to occur, or if the Group's Net Leverage Ratio were above 5.15:1.0 at
September 30, 2000, Blackstone has agreed to make an equity contribution to
the Group through the administrative agent of up to $50 million. The Group's
Net Leverage Ratio being above 5.15:1.0 at September 30, 2000 is not an event
of default under the New Credit Agreement and Amendments. The March 30, 2000
Amendment also allows a pro forma adjustment to the Net Leverage Ratio to
include the receipt of net cash proceeds from any registered public offering
occurring after September 30, 2000 but before October 31, 2000 for purposes
of determining whether Blackstone is required to make the above-mentioned
equity contribution; changes the terms under which the Company can access
$100 million of Growth Capital Revolving Loans from a dollar for dollar
equity match to a capital call with various test dates based on certain
leverage
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tests for quarters ending on or after June 30, 2001, which would provide for
up to an additional $50 million equity contribution by Blackstone; allows the
proceeds of the equity contribution (if required) to be applied to Revolving
Credit Loans; and changes certain covenants, principally to increase the
amount of permitted capital expenditures in 2000 and subsequent years. In
addition, the New Credit Agreement and Amendments contain certain affirmative
and negative covenants as to the operations and financial condition of the
Group, as well as certain restrictions on the payment of dividends and other
distributions to Holdings.
Substantially all domestic tangible and intangible assets of the Group
are pledged as collateral pursuant to the terms of the New Credit Agreement
and Amendments.
The Recapitalization also included the issuance of $225 million of
Senior Subordinated Notes of the Operating Company and $100.6 million gross
proceeds of Senior Discount Notes ($169 million aggregate principal amount at
maturity) of Holdings. The Senior Subordinated Notes are unconditionally
guaranteed on a senior subordinated basis by Holdings and mature on January
15, 2008, with interest payable on $150 million at a fixed rate of 8.75% and
with interest payable on $75 million at LIBOR plus 3.625%. The Senior
Discount Notes mature on January 15, 2009, with cash interest payable
semi-annually beginning January 15, 2003 at 10.75%. The effective interest
rate to maturity on the Senior Discount Notes is 10.75%.
At April 2, 2000 the Operating Company had entered into three U.S.
Dollar interest rate swap agreements that effectively fix the Eurocurrency
Rate on $450 million of the term loans, on $200 million through April 9, 2002
at 5.8075%, on $100 million through April 9, 2003 at 5.77% and on $150
million through September 10, 2001 at 5.5075%.
Under the New Credit Agreement and Amendments, 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 due semi-annually on the Senior Discount Notes.
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<PAGE>
On September 8, 1998, Holdings and GPC Capital Corp. II consummated an
exchange offer for all of their outstanding Senior Discount Notes Due 2009
which had been issued on February 2, 1998 (the "Senior Discount Old Notes")
and issued in exchange therefor their Senior Discount Notes Due 2009, Series
B (the "Senior Discount Exchange Notes"), and the Operating Company and GPC
Capital Corp. I consummated exchange offers for all of their outstanding
Senior Subordinated Notes Due 2008 which had been issued on February 2, 1998
(the "Senior Subordinated Old Notes" and, together with the Senior Discount
Old Notes, the "Old Notes") and issued in exchange therefor their Senior
Subordinated Notes Due 2008, Series B (the "Senior Subordinated Exchange
Notes" and, together with the Senior Discount Exchange Notes, the "Exchange
Notes"). Each issue of Exchange Notes has the same terms as the
corresponding issue of Old Notes, except that the Exchange Notes are
registered under the Securities Act of 1933 and do not include the
restrictions on transfer applicable to the Old Notes. The Senior
Subordinated Old Notes were, and the Senior Subordinated Exchange Notes are,
fully and unconditionally guaranteed by Holdings on a senior subordinated
basis.
Interest paid during the three months ended April 2, 2000 and March 28,
1999, net of amounts capitalized, totaled $24.0 million and $18.3 million,
respectively.
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 L.L.C. for
advisory and consulting services.
13
<PAGE>
5. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 2, December 31,
2000 1999
-------- ------------
(in thousands)
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,830 $ 32,551
Raw materials and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,592 20,296
-------- --------
$ 55,422 $ 52,847
======== ========
</TABLE>
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses included the following:
<TABLE>
<CAPTION>
April 2, December 31,
2000 1999
--------- ------------
(in thousands)
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107,467 $ 94,906
Accrued employee compensation and benefits . . . . . . . . . . . . . . . . . . . 18,460 21,116
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,497 21,432
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,553 30,721
-------- --------
$171,977 $168,175
======== ========
</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 partners/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
14
<PAGE>
2000 and 1999, some of the Group's various taxable entities incurred
additional net operating losses for which no carryforward benefit has been
recognized.
8. Acquisitions
Purchase of Graham Packaging Argentina S.A
On July 1, 1999 the Company acquired selected companies located in
Argentina for a total purchase price (including acquisition-related costs) of
$8.5 million, net of liabilities assumed, subject to certain contingent
consideration. The contingent consideration will be calculated utilizing a
predetermined formula based on the entities' performance during a multi-year
period ending December 31, 2000. If and when such contingency is satisfied,
additional goodwill will be recorded. The acquisition was recorded under the
purchase method of accounting and accordingly, the results of operations of
the acquired operations are included in the financial statements of the Group
beginning on July 1, 1999. The initial purchase price has been allocated to
assets acquired and liabilities assumed based on fair values. Goodwill is
being amortized over 20 years on the straight-line basis. The initial
allocated fair value of assets acquired and liabilities assumed is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . .$ 2,831
Property, plant and equipment . . . . . . . . . . . . . . . . 4,840
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . 9,044
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,715
Less liabilities assumed . . . . . . . . . . . . . . . . . . 8,244
--------
Net cost of acquisition . . . . . . . . . . . . . . . . . . .$ 8,471
========
</TABLE>
Investment in Limited Partnership of PlasPET Florida, Ltd.
On April 26, 1999 the Company acquired 51% of the operating assets of
PlasPET Florida, Ltd., while becoming the general partner on July 6, 1999,
for a total purchase price (including acquisition-related costs) of $1.2
15
<PAGE>
million, net of liabilities assumed. The investment was recorded under the
equity method of accounting prior to July 6, 1999. The acquisition was
recorded on July 6, 1999 under the purchase method of accounting and
accordingly, the results of operations of the acquired operations are
included in the financial statements of the Group beginning on July 6, 1999.
The initial purchase price has been allocated to assets acquired and
liabilities assumed based on fair values. Goodwill is being amortized over
20 years on the straight-line basis. The allocated fair value of assets
acquired and liabilities assumed is summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . $ 443
Property, plant and equipment . . . . . . . . . . . . . . 4,689
Other assets . . . . . . . . . . . . . . . . . . . . . . 132
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 2,841
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 8,105
Less liabilities assumed . . . . . . . . . . . . . . . . 6,907
--------
Net cost of acquisition . . . . . . . . . . . . . . . . . $ 1,198
========
</TABLE>
The following table sets forth unaudited pro forma results of
operations, assuming that all of the above acquisitions had taken place on
January 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 29, 1999
------------------
(in thousands)
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . $161,760
Loss before extraordinary item . . . . . . . . . . . . (3,734)
Net loss . . . . . . . . . . . . . . . . . . . . . . . (3,734)
</TABLE>
16
<PAGE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in the basis of fixed assets
and increased interest expense on acquisition debt. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1999, or of future results
of operations of the entities.
9. Special Charges and Unusual Items
The special charges and unusual items recorded in the three months
ended April 2, 2000 and March 28, 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
April 2, March 28,
2000 1999
-------- ---------
(in thousands)
<S> <C> <C>
Systems conversion . . . . . . . . . . . . . . . . $ -- $ 253
Recapitalization compensation . . . . . . . . . . . $ 420 1,010
Aborted acquisition costs . . . . . . . . . . . . . -- (46)
-------- --------
$ 420 $ 1,217
======== ========
</TABLE>
The systems conversion expenses relate to costs incurred by the Group
as part of a multi-year project to ensure that its information systems and
related hardware would be year 2000 compliant. The Group engaged outside
consultants beginning in 1997 to assist with the evaluation and assessment of
its information systems requirements and the selection and implementation of
enterprise resource planning software.
Recapitalization compensation 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.
17
<PAGE>
Beginning in 1998 the Group incurred restructuring charges at the
Blyes plant in France, including the legal liability of severing 51
employees. No restructuring charges were incurred during either of the three
months ended April 2, 2000 or March 28, 1999. The amount of the
restructuring charges paid and the amount of the remaining accrual as of
April 2, 2000 was $1,664,000 and $201,000, respectively.
10. Contingencies
The Group is party to various litigation matters arising in the
ordinary course of business. The ultimate legal and financial liability of
the Group with respect to litigation cannot be estimated with certainty, but
Management believes, based on its examination of such matters, experience to
date and discussions with counsel, that such ultimate liability will not be
material to the business, financial condition or results of operations of the
Group.
11. Condensed Operating Company Data
Condensed financial data for the Operating Company as of April 2, 2000
and December 31, 1999 was as follows:
<TABLE>
<CAPTION>
April 2, 2000 December 31, 1999
------------- -----------------
(in thousands)
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $212,434 $191,711
Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,172 551,638
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782,606 743,349
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,522 192,545
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 919,690 883,583
Partners' capital/owners' equity (deficit) . . . . . . . . . . . . . . . . (336,606) (332,779)
</TABLE>
Condensed financial data for the Operating Company for the three
months ended April 2, 2000 and March 28, 1999 was as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
April 2, 2000 March 28, 1999
------------- --------------
(in thousands)
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,988 $159,085
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,942 27,880
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 (392)
</TABLE>
Full separate financial statements and other disclosures of the
Operating Company have not been presented. Management has determined that
such financial information is not material to investors.
12. Comprehensive Income
Comprehensive income (loss) for the three months ended April 2, 2000
and March 28, 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
April 2, March 28,
2000 1999
-------- ---------
(in thousands)
<S> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,264) $ (3,404)
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,197) (16,683)
-------- --------
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,461) $(20,087)
======== ========
</TABLE>
13. Segment Information
The Group has adopted SFAS No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information". The Group is organized and
19
<PAGE>
managed on a geographical basis in three operating segments: North America,
which includes the United States and Canada, Europe and Latin America.
Segment information for the three months ended April 2, 2000 and March 28,
1999 was as follows (in thousands):
<TABLE>
<CAPTION>
North America Europe Latin America Total
------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Net sales Three Months Ended April 2, 2000 $161,050 $36,563 $7,375 $204,988
Three Months ended March 28, 1999 119,828 34,673 4,584 159,085
Net income (loss) Three Months Ended April 2, 2000 (1,367) (1,761) (136) (3,264)
Three Months Ended March 28, 1999 (2,570) (854) 20 (3,404)
</TABLE>
14. New Accounting Pronouncements
Effective January 1, 1999, the Group adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed For or
Obtained For Internal Use". The adoption of this SOP had no significant
impact on the Group's earnings or financial position.
On January 1, 1999 the Group adopted SOP 98-5, "Reporting on the Cost
of Start-Up Activities". The adoption of this SOP had no significant impact
on the Group's earnings or financial position.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This
Standard 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.
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of Effective Date
20
<PAGE>
of FASB Statement No. 133." This Standard defers the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. Management has not completed its review of SFAS No. 133 and has not
determined the impact adoption will have on the Group's results of operations
or financial position.
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Report on Form 10-Q, including, without limitation, statements regarding
the future financial position, economic performance and results of operations
of the Company (as defined below), as well as the Company's business
strategy, budgets and projected costs and plans and objectives of management
for future operations, and the information referred to under "Quantitative
and Qualitative Disclosures About Market Risk" (Part I, Item 3), are
forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may", "will", "expect", "intend", "estimate", "anticipate", "believe", or
"continue" or the negative thereof or variations thereon or similar
terminology. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, the Company can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
issuers' expectations include, without limitation, the high degree of
leverage and substantial debt service obligations of the Operating Company
and Holdings, the restrictive covenants contained in instruments governing
indebtedness of the Company, including the New Credit Agreement and
Amendments, competition in the Company's markets, including the impact of
possible new technologies, a decline in the domestic motor oil business,
risks associated with the Company's international operations, the Company's
exposure to fluctuations in
21
<PAGE>
resin prices and its dependence on resin supplies, the Company's dependence
on significant customers and the risk that customers will not purchase the
Company's products in the amounts expected by the Company under their
requirements contracts, the Company's dependence on key employees and the
material adverse effect that could result from the loss of their services,
the Company's dependence on certain continuing relationships with Graham
Engineering and other Graham Partners and affiliates thereof, risks
associated with environmental regulation, risks associated with possible
future acquisitions, risks associated with hedging transactions, and the
possibility that the Company may not be able to achieve success in developing
and expanding its business, including, with limitation, the Company's
hot-fill PET plastic container business. See "Business -- Certain Risks of
the Business" in Holdings' Annual Report on Form 10-K for the fiscal year
ended December 31, 1999. All written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the cautionary statements set forth in this
paragraph.
Overview
Unless the context otherwise requires, all references herein to the
"Company", with respect to periods prior to the Recapitalization, refer to
the business historically conducted by Holdings (which served as the
operating entity for the business prior to the Recapitalization) and one of
its predecessors (Graham Container Corporation), together with Holdings'
subsidiaries and certain affiliates, and, with respect to periods subsequent
to the Recapitalization, refer to Holdings and its subsidiaries.
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 consumer 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
22
<PAGE>
Rheem-Graham Embalagens Ltda., a leading supplier of bottles to the motor oil
industry in Brazil, 80% of which was acquired on April 30, 1997 and the
remaining 20% on February 17, 1998. 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. On April 26,
1999, the Company made an investment in PlasPET Florida, Ltd., a developer
and blowmolder of PET custom plastic containers. Most recently, on July 1,
1999, the Company acquired Lidoplast, S.A. and Amerpack, S.A., leading
plastic bottle and tube manufacturers in Argentina.
Based on industry data, the following table summarizes the average
market prices per pound of PET and HDPE resins over a three-month period in
North America:
<TABLE>
<CAPTION>
Three Months Ended
April 2, 2000 March 28, 1999
------------- --------------
<S> <C> <C>
PET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.57 $ 0.50
HDPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.42 0.34
</TABLE>
It should be noted that the year 2000 average market prices, above,
reflect a one-time price index adjustment as of January 1, 2000, which
decreased the prices of PET and HDPE by $0.055 per pound and $0.035 per
pound, respectively.
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 the cost of goods sold, as well as
certain other expense items, should not be analyzed as a percentage of net
sales.
Results of Operations
23
<PAGE>
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
April 2, 2000 March 28, 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Automotive $ 53.5 26.1% $ 45.5 28.6%
Food & Beverage 99.0 48.3 69.5 43.7
HC/PC 52.5 25.6 44.1 27.7
-------- -------- -------- --------
Total Net Sales $ 205.0 100.0% $ 159.1 100.0%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
April 2, 2000 March 28, 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
North America $ 161.0 78.5% $ 119.8 75.3%
Europe 36.6 17.9 34.7 21.8
Latin America 7.4 3.6 4.6 2.9
-------- -------- -------- --------
Total Net Sales $ 205.0 100.0% $ 159.1 100.0%
======== ======== ======== ========
</TABLE>
Three Months Ended April 2, 2000 Compared to Three Months Ended March 28, 1999
Net Sales. Net sales for the three months ended April 2, 2000 increased
$45.9 million to $205.0 million from $159.1 million for the three months
ended March 28, 1999. The increase in sales was primarily due to an
increase in resin prices and a 16.5% increase in resin pounds sold. On a
geographic basis, sales for the three months ended April 2, 2000 in North
America were up $41.2 million or 34.4% from the three months ended March 28,
1999. The North American sales increase included higher pounds sold of
19.3%. North American sales in the automotive business, the food and
beverage business and the HC/PC business contributed $9.8 million, $25.4
million and $6.0 million, respectively, to the increase. Sales for the three
months ended April 2, 2000 in Europe were up $1.9 million or 5.5% from the
24
<PAGE>
three months ended March 28, 1999, primarily in the food & beverage business.
Overall, European sales reflected a 5.4% increase in pounds sold. Sales for
the three months ended April 2, 2000 in Latin America were up $2.8 million
from the three months ended March 28, 1999.
Gross Profit. Gross profit for the three months ended April 2, 2000
increased $7.0 million to $34.9 million from $27.9 million for the three
months ended March 28, 1999. The increase in gross profit resulted primarily
from the higher sales volume as compared to the prior year and continued
operational improvements. Gross profit for the three months ended April 2,
2000 increased $7.7 million in North America, decreased $1.0 million in
Europe and increased $0.3 million in Latin America when compared to the three
months ended March 28, 1999.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the three months ended April 2, 2000 increased
$3.0 million to $13.4 million from $10.4 million for the three months ended
March 28, 1999. The increase in 2000 selling, general and administrative
expenses is due primarily to overall growth of the business, principally in
North America.
Special Charges and Unusual Items. Special charges and unusual items
decreased $0.8 million to $0.4 million for the three months ended April 2,
2000 from $1.2 million for the three months ended March 28, 1999. Special
charges and unusual items in the three months ended April 2, 2000 included
Recapitalization compensation of $0.4 million. Special charges and unusual
items in the three months ended March 28, 1999 included costs related to year
2000 system conversion of $0.2 million and Recapitalization compensation of
$1.0 million.
Interest Expense, Net. Interest expense, net increased $5.0 million to
$24.4 million (including $3.3 million of non-cash interest on the Senior
Discount Notes) for the three months ended April 2, 2000 from $19.4 million
for the three months ended March 28, 1999. The increase was primarily
related to increased debt levels in 2000 compared to 1999.
Other (Income) Expense. Other (income) expense was $0.1 million for the
three months ended April 2, 2000 as compared to ($0.1) million for the three
months ended March 28, 1999. The lower income was due primarily to lower
equity income in the three months ended April 2, 2000 as compared to the
three months ended March 28, 1999.
25
<PAGE>
Net Loss. Primarily as a result of factors discussed above, net loss for
the three months ended April 2, 2000 was $3.3 million compared to net loss of
$3.4 million for the three months ended March 28, 1999.
Effect of Changes in Exchange Rates
In general, the Company's results of operations are affected by
changes in foreign exchange rates. Subject to market conditions, the Company
prices its products in its foreign operations in local currencies. As a
result, a decline in the value of the U.S. dollar relative to these other
currencies can have a favorable effect on the profitability of the Company,
and an increase in the value of the dollar relative to these other currencies
can have a negative effect on the profitability of the Company. Exchange
rate fluctuations decreased comprehensive income by $4.2 million and $16.7
million for the three months ended April 2, 2000 and March 28, 1999,
respectively.
Euro Conversion
On January 1, 1999, eleven of fifteen member countries of the
European Economic Union fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency, the euro. The euro
trades on currency exchanges and may be used in business transactions.
Conversion to the euro eliminated currency exchange rate risk between the
member countries. Beginning in January 2002, new euro-denominated bills and
coins will be issued and the legacy currencies will be withdrawn from
circulation.
The Company is actively addressing the many areas involved with the
introduction of the euro, including information management, finance, legal
and tax. This review includes the conversion of information technology, and
business and financial systems, and evaluation of currency risk, as well as
the impact on the pricing and distribution of the Company's products.
One outcome of the introduction of the euro is the trend toward more
uniform pricing in all European markets, including those that have not
adopted the euro as their common currency. The Company believes the effect
26
<PAGE>
of the introduction of the euro, as well as any related cost of conversion,
will not have a material adverse impact on its financial statements.
Derivatives
The Company enters into interest rate swap agreements to hedge the
exposure to increasing rates with respect to the New Credit Agreement. The
differential to be paid or received as a result of these swap agreements is
accrued as interest rates change and recognized as an adjustment to interest
expense related to the New Credit Agreement. The Company also enters into
forward exchange contract, when appropriate, to hedge the exchange rate
exposure on transactions that are denominated in a foreign currency.
Liquidity and Capital Resources
In the three month period ended April 2, 2000, the Company funded,
through its various borrowing arrangements, $1.5 million of operating
activities and $38.0 million of capital expenditures.
On February 2, 1998 the Company refinanced the majority of its
existing credit facilities in connection with the Recapitalization and
entered into a new Credit Agreement (the "New Credit Agreement") with a
consortium of banks. The New Credit Agreement was amended on August 13, 1998
to provide for an additional Term Loan Borrowing of an additional $175
million and on March 30, 2000 as described below (the "Amendments"). The New
Credit Agreement and the Amendments consist of four term loans to the
Operating Company totaling $570 million and two revolving loan facilities to
the Operating Company totaling $255 million. The unused portion of the
revolving loan facilities at April 2, 2000 was $119 million. The obligations
of the Operating Company under the New Credit Agreement and Amendments are
guaranteed by Holdings and certain other subsidiaries of Holdings. The term
loans are payable in quarterly installments through January 31, 2007, and
require payments of $15.0 million in 2000, $20.0 million in 2001, $25.0
million in 2002, $27.5 million in 2003 and $93.0 million in 2004. The
Company expects to fund scheduled debt repayments from cash from operations
and unused lines of credit. The revolving loan facilities expire on January
31, 2004. Interest is payable at (a) the "Alternate Base Rate" (the higher
of the Prime Rate or the Federal Funds Rate plus 0.50%) plus a margin ranging
from 0% to 2.25%; or (b) the "Eurocurrency Rate" (the applicable interest
rate offered to banks in the London interbank eurocurrency market) plus a
margin ranging from 0.625% to 3.25%. A commitment fee ranging from 0.20% to
0.50% is due on the unused portion of the revolving loan commitment. As part
27
<PAGE>
of the Amendments to the New Credit Agreement, if certain events of default
were to occur, or if the Company's Net Leverage Ratio were above 5.15:1.0 at
September 30, 2000, Blackstone has agreed to make an equity contribution to
the Company through the administrative agent of up to $50 million. The
Company's Net Leverage Ratio being above 5.15:1.0 at September 30, 2000 is
not an event of default under the New Credit Agreement and Amendments.
The March 30, 2000 Amendment also allows a pro forma adjustment to the Net
Leverage Ratio to include the receipt of net cash proceeds from any
registered public offering occurring after September 30, 2000 but before
October 31, 2000 for purposes of determining whether Blackstone is required
to make the above-mentioned equity contribution; changes the terms under
which the Company can access $100 million of Growth Capital Revolving Loans
from a dollar for dollar equity match to a capital call with various test
dates based on certain leverage tests for quarters ending on or after
June 30, 2001, which would provide for up to an additional $50 million
equity contribution by Blackstone; allows the proceeds of the equity
contribution (if required) to be applied to Revolving Credit Loans; and
changes certain covenants, principally to increase the amount of permitted
capital expenditures in 2000 and subsequent years. In addition, the New
Credit Agreement and Amendments contain certain affirmative and negative
covenants as to the operations and financial condition of the Company, as
well as certain restrictions on the payment of dividends and other
distributions to Holdings.
Substantially all domestic tangible and intangible assets of the
Company are pledged as collateral pursuant to the terms of the New Credit
Agreement and Amendments.
The Recapitalization also included the issuance of $225 million of
Senior Subordinated Notes of the Operating Company and $100.6 million gross
proceeds of Senior Discount Notes ($169 million aggregate principal amount at
maturity). The Senior Subordinated Notes are unconditionally guaranteed on a
senior subordinated basis by Holdings and mature on January 15, 2008, with
interest payable on $150 million at a fixed rate of 8.75% and with cash
interest payable on $75 million at LIBOR plus 3.625%. The Senior Discount
Notes mature on January 15, 2009, with cash interest payable semi-annually
beginning January 15, 2003 at 10.75%. The effective interest rate to
maturity on the Senior Discount Notes is 10.75%. Additionally, the
Recapitalization included net distributions to owners of $409.3 million and
debt issuance costs of $32.4 million. At April 2, 2000, the Company's
outstanding indebtedness was $1,060 million.
Under the New Credit Agreement and Amendments, 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
28
<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 then present or former officers or employees of Holdings, the
Operating Company or their Subsidiaries (as defined) or by any employee stock
ownership plan upon such person's death, disability, retirement or
termination of employment or other circumstances with certain annual dollar
limitations and (iii) to finance, starting on July 15, 2003, the payment of
cash interest due semi-annually on the Senior Discount Notes.
On September 8, 1998, Holdings and GPC Capital Corp. II consummated
an exchange offer for all of their outstanding Senior Discount Notes Due 2009
which had been issued on February 2, 1998 (the "Senior Discount Old Notes")
and issued in exchange therefor their Senior Discount Notes Due 2009, Series
B (the "Senior Discount Exchange Notes"), and the Operating Company and GPC
Capital Corp. I consummated exchange offers for all of their outstanding
Senior Subordinated Notes Due 2008 which had been issued on February 2, 1998
(the "Senior Subordinated Old Notes" and, together with the Senior Discount
Old Notes, the "Old Notes") and issued in exchange therefor their Senior
Subordinated Notes Due 2008, Series B (the "Senior Subordinated Exchange
Notes" and, together with the Senior Discount Exchange Notes, the "Exchange
Notes"). Each issue of Exchange Notes has the same terms as the
corresponding issue of Old Notes, except that the Exchange Notes are
registered under the Securities Act of 1933 and do not include the
restrictions on transfer applicable to the Old Notes. The Senior
Subordinated Old Notes were, and the Senior Subordinated Exchange Notes are,
fully and unconditionally guaranteed by Holdings on a senior subordinated
basis.
Earnings before minority interest, extraordinary items, interest,
income taxes, depreciation and amortization expense, fees paid pursuant to
the Monitoring Agreement, non-cash equity income in earnings of joint
ventures, other non-cash charges, Recapitalization expenses, special charges
and unusual items and non-recurring charges ("Adjusted EBITDA") increased
$7.8 million to $37.2 million for the three months ended April 2, 2000 from
$29.4 million for the three months ended March 28, 1999. Adjusted EBITDA is
not intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be used as an alternative to
net income as an indicator of operating performance or to cash flow as a
measure of liquidity. Adjusted EBITDA is 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 Adjusted EBITDA 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
29
<PAGE>
captions of other companies due to potential inconsistencies in the method of
calculation.
During 2000, the Company expects to incur capital expenditures that
are similar in nature and size to those incurred in 1999. However, total
capital expenditures for 2000 may vary significantly depending on the timing
of growth related opportunities. The Company's principal sources of cash to
fund capital requirements will be net cash provided by operating activities
and borrowings under the New Credit Agreement.
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 may make tax
distributions to its partners to reimburse them for such tax obligations, if
any. The Company's foreign operations are subject to tax in their local
jurisdictions. Most of these entities have historically incurred net
operating losses.
New Accounting Pronouncements
Effective January 1, 1999, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed For or
Obtained For Internal Use". The adoption of this SOP had no significant
impact on the Company's earnings or financial position.
On January 1, 1999 the Company adopted SOP 98-5, "Reporting on the
Cost of Start-Up Activities". The adoption of this SOP had no significant
impact on the Company's earnings or financial position.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This
Standard 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.
30
<PAGE>
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of Effective Date
of FASB Statement No. 133." This Standard defers the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. Management has not completed its review of SFAS No. 133 and has not
determined the impact adoption will have on the Company's results of
operations or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the information set forth in Item 7A of Holdings' Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
31
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.13 Second Amendment to Credit Agreement
(incorporated herein by reference to Exhibit
10.13 to the Current Report on Form 8-K dated
March 30, 2000 (File No. 333-53603-03)).
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended April 2, 2000 the Company filed a
Report on Form 8-K dated March 30, 2000 with respect to the
Second Amendment to the Company's Credit Agreement.
32
<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: May 15, 2000
GRAHAM PACKAGING HOLDINGS COMPANY
(Registrant)
By: BCP/Graham Holdings L.L.C.,
its General Partner
By: /s/ John E. Hamilton
John E. Hamilton
Vice President, Finance and Administration
(chief accounting officer and duly authorized
officer)
33
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