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 July 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 23-2553000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Pleasant Valley Road
York, Pennsylvania
(Address of principal executive offices)
17402
(zip code)
(717) 849-8500
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Condensed Consolidated Financial Statements:
CONDENSED CONSOLIDATED BALANCE SHEETS -
At July 2, 2000 and December 31, 1999 . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - For the
Three Months and Six Months Ended July 2, 2000 and June 27,
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DEFICIT) - For the Year Ended December 31, 1999 and Six
Months Ended July 2, 2000 . . . . . . . . . . . . . . . . . 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - For the
Six Months Ended July 2, 2000 and June 27, 1999 . . . . . . 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . 34
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 35
Signature: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
July 2, 2000 December 31, 1999
------------ -----------------
ASSETS (in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . $7,736 $5,983
Accounts receivable, net . . . . . . 126,532 108,766
Inventories . . . . . . . . . . . . . 65,232 52,847
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . 17,575 17,138
-------- --------
Total current assets . . . . . . . . . 217,075 184,734
Property, plant and equipment, net . . 544,303 496,746
Other assets . . . . . . . . . . . . . 57,884 59,769
-------- --------
Total assets . . . . . . . . . . . . . $819,262 $741,249
======== ========
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses . . . . . . . . . . . . . . $177,787 $168,175
Current portion of long-term debt . . 24,075 24,370
--------- ---------
Total current liabilities . . . . . . . 201,862 192,545
Long-term debt . . . . . . . . . . . . 1,071,209 992,730
Other non-current liabilities . . . . . 14,144 13,327
Minority interest . . . . . . . . . . . -- 618
Commitments and contingent liabilities
(see Note 9) . . . . . . . . . . . . . -- --
Partners' capital (deficit):
Partners' capital (deficit) . . . . . . (442,697) (439,123)
3
<PAGE>
Accumulated other comprehensive
income . . . . . . . . . . . . . . . (25,256) (18,848)
-------- --------
Total partners' capital (deficit) . . . (467,953) (457,971)
-------- --------
Total liabilities and partners' capital
(deficit) . . . . . . . . . . . . . . $819,262 $741,249
======== ========
</TABLE>
See accompanying notes
4
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- -------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
------ ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . $203,790 $172,791 $408,778 $331,876
Cost of goods sold. . . . . . 166,799 135,801 336,845 267,006
-------- -------- -------- --------
Gross profit . . . . . . . . 36,991 36,990 71,933 64,870
Selling, general, and
administrative expenses . . 12,367 10,881 25,785 21,326
Special charges and unusual
items . . . . . . . . . . . 232 2,030 652 3,247
-------- -------- -------- --------
Operating income . . . . . . 24,392 24,079 45,496 40,297
Interest expense, net . . . . 25,066 21,354 49,501 40,800
Other expense (income) . . . 133 (20) 196 (82)
Minority interest. . . . . . (340) -- (618) --
-------- -------- -------- --------
(Loss) income before income
taxes . . . . . . . . . . . (467) 2,745 (3,583) (421)
Income tax provision . . . . 266 298 414 536
-------- -------- -------- --------
Net (loss) income . . . . . .
$ (733) $ 2,447 $(3,997) $ (957)
======== ======== ======== ========
</TABLE>
See accompanying notes
5
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Partners' 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 . . . . . S 1,893 -- 1,893
---------- --------- ----------
Balance at December 31, 1999 (439,123) (18,848) (457,971)
----------
Net loss for the period . . (3,997) (3,997)
Cumulative translation
adjustment . . . . . . . . (6,408) (6,408)
----------
Comprehensive income . . . (10,405)
Recapitalization . . . . . 423 -- 423
---------- --------- ----------
Balance at July 2, 2000 . . . $(442,697) $(25,256) $(467,953)
========== ========= ==========
</TABLE>
See accompanying notes
6
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
---------------------------
July 2, June 27,
2000 1999
------------ -----------
(in thousands)
[S] [C] [C]
Operating activities:
Net loss . . . . . . . . . . . . . . . . . $(3,997) $(957)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization . . . . . . 32,363 24,895
Amortization of debt issuance fees . . . 2,264 2,103
Accretion of Senior Discount Notes . . . 6,616 5,916
Minority interest . . . . . . . . . . . . (618) --
Equity in earnings of joint venture . . . (39) (60)
Foreign currency transaction loss . . . . 269 17
Other non-cash recapitalization
expense . . . . . . . . . . . . . . . 423 1,018
Changes in operating assets and
liabilities:
Accounts receivable . . . . . . . . . . (19,956) (26,919)
Inventories . . . . . . . . . . . . . . (13,177) (1,252)
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . (695) 97
Other non-current assets and
liabilities . . . . . . . . . . . . 956 --
Accounts payable and accrued expenses . 11,993 8,598
-------- --------
Net cash provided by operating activities . . . 16,402 13,456
Investing activities:
Net purchases of property, plant and
equipment . . . . . . . . . . . . . . (84,092) (73,365)
Acquisition of North American
business . . . . . . . . . . . . . . . -- (1,800)
Loans to affiliates . . . . . . . . . . . (1,136) (2,471)
Other . . . . . . . . . . . . . . . . . . (52) 145
-------- --------
7
<PAGE>
Net cash used in investing activities . . . . . (85,280) (77,491)
Financing activities:
Net proceeds from issuance of long-term
debt . . . . . . . . . . . . . . . . . . 72,194 66,029
Debt issuance fees . . . . . . . . . . . (1,050) (8)
------- -------
Net cash provided by financing activities . . . 71,144 66,021
Effect of exchange rate changes . . . . . . . . (513) (1,346)
------- -------
Increase in cash and cash equivalents . . . . . 1,753 640
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . 5,983 7,476
------- -------
Cash and cash equivalents at end of period . . $7,736 $8,116
======= =======
See accompanying notes
8
<PAGE>
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 2, 2000
1. Basis of Presentation
The accompanying unaudited condensed financial statements of Graham
Packaging Holdings Company ("Holdings"), a Pennsylvania limited partnership,
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
and six month periods ended July 2, 2000 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2000.
On April 4, 2000 Holdings established Graham Packaging Belgium S. A.
and constructed a new facility in Rotselaar, Belgium. All entities and
assets owned by Holdings are referred to collectively as Graham Packaging
Group (the "Group").
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.
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 from the date of the
Recapitalization based upon the terms of the related debt instruments. In
9
<PAGE>
addition, Recapitalization expenses of approximately $25 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 financial statements. Compensation expense
totaling $10.7 million, of which $10.2 million had been expensed as of July
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 8.
3. Debt Arrangements
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
July 2, 2000 1999
------------- ----------------
(in thousands)
<S> <C> <C>
Term loan $554,375 $561,850
Revolving loan 165,000 92,500
Revolving credit facilities 6,063 8,709
Senior Subordinated Notes 225,000 225,000
Senior Discount Notes 129,708 123,092
Other 15,138 5,949
--------- ---------
1,095,284 1,017,100
Less amounts classified as current 24,075 24,370
--------- ---------
$1,071,209 $992,730
========== =========
</TABLE>
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 Graham Packaging Company, L. P. (the
"Operating Company") totaling $570 million and two revolving loan facilities
to the Operating Company totaling $255 million. The unused portion of the
10
<PAGE>
revolving loan facilities at July 2, 2000 was $88 million. 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 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.
Interest paid during the six months ended July 2, 2000 and June 27,
1999, net of amounts capitalized, totaled $39.7 million and $30.3 million,
respectively.
4. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
July 2, 2000 1999
-------------- -------------
(in thousands)
<S> <C> <C>
Finished Goods . . . . . . . $40,925 $32,551
Raw material and parts . . . 24,307 20,296
------- -------
$65,232 $52,847
======= =======
</TABLE>
11
<PAGE>
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses included the following:
<TABLE>
<CAPTION>
December 31,
July 2, 2000 1999
------------- -------------
(in thousands)
<S> <C> <C>
Accounts payable . . . . . . $109,480 $94,906
Accrued employee compensation
and benefits . . . . . . . 19,609 21,116
Accrued interest . . . . . . 22,555 21,432
Other . . . . . . . . . . . . 26,143 30,721
-------- --------
$177,787 $168,175
======== ========
</TABLE>
6. 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
2000 and 1999, some of the Group's various taxable entities incurred
additional net operating losses for which no carryforward benefit has been
recognized.
7. 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
12
<PAGE>
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
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):
13
<PAGE>
<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 the acquisitions had taken place on January 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- -------------------
June 27, 1999 June 27, 1999
-------------------- -------------------
(in thousands)
<S> <C> <C>
Net sales . . . . . . $175,787 $337,547
Net income (loss) . . 1,270 (2,464)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in the basis of fixed assets
and increased interest expense on acquisition debt. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1999, or of future results
of operations of the entities.
8. Special Charges and Unusual Items
The special charges and unusual items recorded in the three month and
six month periods ended July 2, 2000 and June 27, 1999 were as follows:
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
----------- ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Systems conversion $--- $467 $-- $720
Recapitalization
compensation 232 830 652 1,840
Restructuring of
facilities -- 733 -- 733
Aborted acquisition
costs -- -- -- (46)
---- ------- ----- ------
$232 $2,030 $652 $3,247
==== ======= ===== ======
</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 from the date of the Recapitalization.
Beginning in 1998, the Group incurred restructuring charges at the
Blyes plant in France, including the legal liability of severing 51
employees. Restructuring charges, principally severance costs, of $733,000
were incurred during the second quarter of 1999 relative to the
restructuring. The amount of the restructuring charges paid and the amount
of the remaining accrual as of July 2, 2000 was $1,739,000 and $126,000,
respectively.
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
15
<PAGE>
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.
10. Condensed Operating Company Data
Condensed financial data for the Operating Company as of July 2, 2000
and December 31, 1999 was as follows:
<TABLE>
<CAPTION>
December 31,
July 2, 2000 1999
------------ ------------
(in thousands)
<S> <C> <C>
Current assets . . . . . . . . . $224,067 $191,711
Noncurrent assets . . . . . . . . 597,477 551,638
Total assets 821,544 743,349
Current liabilities . . . . . . . 201,862 192,545
Noncurrent liabilities . . . . . 955,645 883,583
Partners' capital (deficit) . . . (335,963) (332,779)
</TABLE>
Condensed financial data for the Operating Company for the three
and six month periods ended July 2, 2000 and June 27, 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
--------- --------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Sales . . . . . . . . $203,790 $172,791 $408,778 $331,876
Gross profit . . . . 36,991 36,990 71,933 64,870
Net income . . . . . 2,685 5,594 2,801 5,202
</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.
16
<PAGE>
11. Comprehensive Income
Comprehensive income (loss) for the three and six month periods ended
July 2, 2000 and June 27, 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
---------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net (loss) income . . . . . $ (733) $2,447 $ (3,997) $ (957)
Foreign currency . . . . . (2,211) (2,670) (6,408) (19,353)
-------- ------ -------- --------
Comprehensive income (loss) $(2,944) $ (223) $(10,405) $(20,310)
======= ====== ======== ========
</TABLE>
12. Segment Information
The Group has adopted SFAS No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information". The Group is organized and
managed on a geographical basis in three operating segments: North America,
which includes the United States and Canada, Europe and Latin America.
Segment information for the three and six month periods ended July 2, 2000
and June 27, 1999 was as follows (in thousands):
17
<PAGE>
<TABLE>
<CAPTION>
North Latin
America Europe America Total
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales Three Months
Ended July 2,
2000 $160,554 $36,493 $6,743 $203,790
Three Months
Ended June
27, 1999 135,084 2,809 4,898 172,791
Six Months
Ended July 2,
2000 321,604 73,055 14,119 408,778
Six Months
Ended June
27, 1999 254,912 67,482 9,482 331,876
Net income Three Months
(loss) Ended July 2,
2000 1,038 (1,506) (265) (733)
Three Months
Ended June
27, 1999 1,788 456 203 2,447
Six Months
Ended July 2,
2000 (329) (3,268) (400) (3,997)
Six Months
Ended June
27, 1999 (783) (397) 223 (957)
</TABLE>
13. New Accounting Pronouncements
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
18
<PAGE>
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 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.
In June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -an amendment of FASB
Statement No. 133." This Standard amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain
hedging activities. Management has not completed its review of SFAS No. 133,
as amended, and has not determined the impact adoption will have on the
Group's results of operations or financial position.
In November 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition". This Bulletin sets forth the SEC Staff's position
regarding the point at which it is appropriate for a registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all
of the following criteria are met:
- persuasive evidence of an arrangement exists;
- delivery has occurred or service has been rendered;
- the seller's price to the buyer is fixed or determinable;
and
- collectibility is reasonably assured.
The Company uses the above criteria to determine when revenue should be
recognized, and therefore, the issuance of SAB 101 is not expected to have a
material impact on the Company's financial statements.
14. Subsequent Event
The Company currently is pursuing an initial public offering, which
may be completed during the second half of 2000. In connection with this
contemplated public offering, the Company will effect a reorganization in which
our wholly owned subsidiary, GPC Capital Corp. II, will:
- exchange 32,666,667 shares of its newly issued common stock
for all of the general and limited partnership interests of
Holdings,
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<PAGE>
- exchange options to purchase a maximum of 1,633,333 shares
of its common stock for all of the options of Holdings, and
on the same economic terms and conditions as the Holdings
options,
- change its name to Graham Packaging Company Inc.
As a result of these transactions, Graham Packaging Company Inc. will be the
parent company of the Graham Packaging Group.
All share and per share amounts give effect to these transactions
assuming an exchange ratio of 3,266.67 shares of Graham Packaging Company
Inc. common stock for each partnership unit of Holdings.
As a result of the reorganization, the Company will recognize a net
deferred tax asset for the difference between the financial reporting and tax
bases of the Company's assets and liabilities. This difference will be
accounted for by recording a deferred tax asset of approximately $215.3
million, primarily resulting from the 1998 Recapitalization, with a
corresponding credit to additional paid in capital and a deferred tax
liability of approximately $13.7 million with a corresponding one-time charge
to earnings.
As a result of the anticipated reorganization, the Group's taxable
income will be subject to federal and state income taxes. The objective of
the pro forma financial information is to show what the significant effects
on the historical results of operations might have been had the Group been
subject to federal and state income taxes at the effective tax rates that
would have applied for all periods. The pro forma effect of the
reorganization on income tax provision (benefit) and net income is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Pro forma income tax provision
(benefit) . . . . . . . . . . . . $343 $920 $(212) $(405)
Pro forma net (loss) income . . . (810) 1,825 (3,371) (16)
</TABLE>
20
<PAGE>
15. Earnings (Loss) Per Share
The partnership is contemplating a reorganization and an initial
public offering. The anticipated exchange of common stock for general and
limited partnership units is included at an assumed exchange ratio of 3,266.67
shares per partnership unit. Each partnership unit is defined as 0.01% of
Holdings.
Upon completion of the reorganization 32,666,667 shares of common
stock will be outstanding; a maximum of 1,633,333 shares of common stock will
be subject to options; and no shares of preferred stock will be outstanding.
Earnings per share is calculated in accordance with FASB Statement
No. 128 and requires two presentations of earnings per share--"basic" and
"diluted." Basic earnings per share is computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of
common shares (the denominator) for the period. The computation of diluted
earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potentially dilutive common shares
had been issued. Shares issuable pursuant to option awards which were deemed
common stock equivalents were excluded from the computation of diluted
earnings per share if their effect is antidilutive. The following table sets
forth the computation of pro forma basic and diluted earnings (loss) per
share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
------ ------- ------ -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Pro forma numerator for basic
and diluted earnings (loss)
per share . . . . . . . . . . $(810) $1,825 $(3,371) $ (16)
Denominator:
Pro forma denominator for
basic earnings (loss) per
share . . . . . . . . . . . . 32,667 32,667 32,667 32,667
Potential dilutive common
stock . . . . . . . . . . . . -- 773 -- --
------ ------ ------ ------
Pro forma denominator for
diluted earnings (loss) per
share . . . . . . . . . . . . 32,667 33,440 32,667 32,667
21
<PAGE>
Pro forma earnings (loss)
per share:
Basic . . . . . . . . . $(0.02) $0.06 $(0.10) $(0.00)
Diluted . . . . . . . . (0.02) 0.05 $(0.10) $(0.00)
</TABLE>
22
<PAGE>
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 statements regarding our future financial
position, economic performance and results of operations, as well as our
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 we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations include,
without limitation, our exposure to fluctuations in resin prices and our
dependence on resin supplies, competition in our markets, including the
impact of possible new technologies, our high degree of leverage and
substantial debt service obligations, the restrictive covenants contained in
instruments governing our indebtedness, a decline in the domestic motor oil
business, risks associated with our international operations, our dependence
on significant customers and the risk that customers will not purchase our
products in the amounts expected by us under our requirements contracts, our
dependence on our key management and our labor force and the material adverse
effect that could result from the loss of their services, risks associated
with environmental regulation, risks associated with possible future
acquisitions, and the possibility that we may not be able to achieve success
in developing and expanding our business, including our 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 forward-looking statements attributable to us, or persons acting
on our behalf, are expressly qualified in their entirety by the cautionary
statements set forth in this paragraph.
Overview
We are a worldwide leader in the design, manufacture and sale of
customized blow molded plastic containers for the branded food and beverage,
household and personal care, and automotive lubricants markets with 57 plants
throughout North America, Europe and Latin America. Our primary focus is to
operate in select markets that will position us to benefit from the growing
conversion to high performance plastic packaging from more commodity
packaging. We target branded consumer product manufacturers for whom
23
<PAGE>
customized packaging design is a critical component in their efforts to
differentiate their products to consumers. We initially pursue these
attractive product areas with one or two major consumer products companies in
each category that we expect will lead the conversion to plastic packaging
for that category. We utilize our innovative design, engineering and
technological capabilities to deliver highly customized, high performance
products to our customers in these areas in order to distinguish and increase
sales of their branded products. We collaborate with our customers through
joint initiatives in product design and cost reduction, and innovative
operational arrangements, which include on-site manufacturing facilities.
We believe that critical success factors to our business are our
ability to:
- serve the complex packaging demands of our customers which
include some of the world's largest branded consumer
products companies;
- 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
- make the correct investments in plant and technology
necessary to satisfy the two factors mentioned above.
We believe that the area with the greatest opportunity for growth
continues to be in producing containers for the North American food and
beverage market because of the continued conversion to plastic packaging,
including the demand for hot-fill PET containers for juices, juice drinks,
sport drinks, teas and other food products. Since the beginning of 1997, we
have invested over $191 million in capital expenditures to expand our
technology, machinery and plant structure to prepare for what we believed
would be the growth in the hot-fill PET area. For the year ended December
31, 1999, our sales of hot-fill PET containers had grown to $198.9 million
from $68.2 million in 1996. In this business, we continue to benefit from
more experienced plant staff, improved line speeds, higher absorption of
selling, general and administrative expenses and fixed overhead costs, and
improved resin pricing and material usage.
Our household and personal care business continues to grow, as
package conversion trends continue from other packaging forms in some of our
product lines. We continue to benefit as liquid fabric care detergents,
hard-surface cleaners and liquid automatic dishwashing detergents, which are
packaged in plastic containers, capture an increased share from powdered
detergents and cleaners, which are predominantly packaged in paper-based
containers. We have upgraded our machinery to new larger blow molders to
24
<PAGE>
standardize production lines, improve flexibility and reduce manufacturing
costs.
Our North American one-quart motor oil container business is in a
mature industry. We have been able to partially offset pricing pressures by
renewing or extending contracts, improving manufacturing efficiencies, line
speeds, labor efficiency and inventory management and reducing container
weight and material spoilage. Unit volume in the one-quart motor oil
industry increased in 1999 as compared to 1998, despite an average annual
volume decline of 1% to 2% in prior years. We believe that the decline in
the domestic one-quart motor oil business will continue for the next several
years but believe that there are significant volume opportunities for
automotive product business in foreign countries, particularly those in Latin
America. On April 30, 1997, we acquired 80% of certain assets and 80% of
certain liabilities of Rheem-Graham Embalagens Ltda., a leading supplier of
containers to the motor oil industry in Brazil, and on February 17, 1998, we
purchased the residual 20% ownership interest. Since that acquisition, we
have signed agreements to operate two additional plants in Brazil, both of
which are now in production.
Consistent with our strategy to expand in selected international
areas, we currently have 24 facilities, either on our own or through joint
ventures, in Argentina, Belgium, Brazil, Canada, France, Germany, Hungary,
Italy, Poland, Turkey and the United Kingdom. We believe that the
acquisition of manufacturing plants in Europe from Crown Cork & Seal has
provided additional competitive scale to our global sales efforts. In
addition, given the recent troubled economy in Latin America, and more
specifically Brazil, we closely monitor our operations and investment there.
For the six months ended July 2, 2000, 73% of our net sales were
generated by our top twenty customers, the majority of which are under long-
term contracts with terms ranging from two to ten years; the remainder of our
net sales were generated by customers with which we have been doing business
for over 20 years on average. Prices under these arrangements are typically
tied to market standards and, therefore, vary with market conditions. In
general, the contracts are requirements contracts that do not obligate the
customer to purchase any given amount of product from us.
Based on industry data, the following table summarizes the average
market prices per pound of polyethylene terephthalate, or PET, and high
density polyethylene, or HDPE, resins in North America over three and six
month periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PET . . . . . . . . . . . . . $0.62 $0.50 $0.59 $0.50
HDPE . . . . . . . . . . . . 0.47 0.39 0.45 0.36
</TABLE>
25
<PAGE>
In general, our dollar gross profit is substantially unaffected by
fluctuations in the prices of PET and HDPE resins, the primary raw materials
for our products, because industry practice and our agreements with our
customers permit substantially all price changes to be passed through to
customers by means of corresponding changes in product pricing.
Consequently, we believe that our cost of goods sold, as well as certain
other expense items, should not be analyzed solely on a percentage of net
sales basis.
We do 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 our partners. We may make tax distributions to our partners
to reimburse them for such tax obligations, if any. Our foreign operations
are subject to tax in their local jurisdictions. Most of these entities have
historically incurred net operating losses.
Results of Operations
The following tables set forth the major components of our net sales
(in millions) and such net sales expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
July 2, 2000 June 27, 1999 July 2, 2000 June 27, 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Food & Beverage . . . . . . . $97.7 47.9% $77.2 44.7% $196.7 48.1% $146.7 44.2%
Household and Personal Care . 51.1 25.1 42.8 24.8 103.6 25.3 86.9 26.2
Automotive . . . . . . . . . 55.0 27.0 52.8 30.5 108.5 26.6 98.3 29.6
------ ----- ------ ----- ------ ------ ------ -----
Total Net Sales . . . . . . . $203.8 100.0% $172.8 100.0% $408.8 100.0% $331.9 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
July 2, 2000 June 27, 1999 July 2, 2000 June 27, 1999
------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America . . . . . . . . $160.6 78.8% $135.1 78.2% $321.6 78.7% $254.9 76.8%
Europe . . . . . . . . . . . 36.5 17.9 32.8 19.0 73.1 17.9 67.5 20.3
Latin America . . . . . . . . 6.7 3.3 4.9 2.8 14.1 3.4 9.5 2.9
------ ----- ------ ----- ------ ------ ------ -----
Total Net Sales . . . . . . . $203.8 100.0% $172.8 100.0% $408.8 100.0% $331.9 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
26
<PAGE>
Three Months Ended July 2, 2000 Compared to Three Months Ended June 27, 1999
Net Sales. Net sales for the three months ended July 2, 2000
increased $31.0 million to $203.8 million from $172.8 million for the three
months ended June 27, 1999. The increase in sales was primarily due to a
5.3% increase in resin pounds sold and an increase in resin prices. On a
geographic basis, sales for the three months ended July 2, 2000 in North
America were up $25.5 million or 18.9% from the three months ended June 27,
1999. The North American sales increase included higher resin pounds sold of
4.8%. North American sales in the food and beverage business, the household
and personal care business and the automotive business contributed $17.0
million, $4.6 million and $3.9 million, respectively, to the increase. Sales
for the three months ended July 2, 2000 in Europe were up $3.7 million or
11.3% from the three months ended June 27, 1999, principally in the food and
beverage and household and personal care businesses. Overall, European sales
reflected a 9.0% increase in resin pounds sold. Sales in Latin America for
the three months ended July 2, 2000 were up $1.8 million or 36.7% from the
three months ended June 27, 1999, primarily due to the inclusion of our
newly-acquired Latin American subsidiary.
Gross Profit. Gross profit for both the three months ended July 2,
2000 and the three months ended June 27, 1999 was $37.0 million. Gross
profit for the three months ended July 2, 2000 increased $1.9 million in
North America, decreased $1.6 million in Europe and decreased $0.3 million in
Latin America when compared to the three months ended June 27, 1999.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the three months ended July 2, 2000 increased
$1.5 million to $12.4 million from $10.9 million for the three months ended
June 27, 1999. The increase in 2000 selling, general and administrative
expenses is due primarily to the overall growth of the business, principally
in North America. As a percent of sales, selling, general and administrative
expenses decreased to 6.1% of sales for the three months ended July 2, 2000
from 6.3% for the three months ended June 27,1999.
Special Charges and Unusual Items. Special charges and unusual
items decreased $1.8 million to $0.2 million for the three months ended July
2, 2000 from $2.0 million for the three months ended June 27, 1999. Special
charges and unusual items in the three months ended July 2, 2000 included
compensation related to the 1998 recapitalization of $0.2 million. Special
charges and unusual items in the three months ended June 27, 1999 included
costs related to year 2000 system conversion of $0.5 million, compensation
related to the 1998 recapitalization of $0.8 million and restructuring of
facilities charges of $0.7 million.
27
<PAGE>
Interest Expense, Net. Interest expense, net increased $3.7 million
to $25.1 million, including $3.4 million of non-cash interest on our senior
discount notes, for the three months ended July 2, 2000 from $21.4 million
for the three months ended June 27, 1999. The increase was primarily related
to increased debt levels in 2000 compared to 1999.
Other Expense (Income). Other expense (income) was $0.1 million for
the three months ended July 2, 2000, as compared to $0.0 million for the
three months ended June 27, 1999. The higher expense was due primarily to
higher foreign exchange losses in the three months ended July 2, 2000 as
compared to the three months ended June 27, 1999.
Net Income (Loss). Primarily as a result of factors discussed
above, net loss for the three months ended July 2, 2000 was $0.7 million
compared to net income of $2.4 million for the three months ended June 27,
1999.
Six Months Ended July 2, 2000 Compared to Six Months Ended June 27, 1999
Net Sales. Net sales for the six months ended July 2, 2000
increased $76.9 million to $408.8 million from $331.9 million for the six
months ended June 27, 1999. The increase in sales was primarily due to a
10.8% increase in resin pounds sold and an increase in resin prices. On a
geographic basis, sales for the six months ended July 2, 2000 in North
America were up $66.7 million or 26.2% from the six months ended June 27,
1999. The North American sales increase included higher resin pounds sold of
11.8%. North American sales in the food and beverage business, the household
and personal care business and the automotive business contributed $42.4
million, $10.6 million and $13.7 million, respectively, to the increase.
Sales for the six months ended July 2, 2000 in Europe were up $5.6 million or
8.3% from the six months ended June 27, 1999, principally in the food and
beverage and household and personal care businesses. Overall, European sales
reflected a 7.2% increase in resin pounds sold. Sales in Latin America for
the six months ended July 2, 2000 were up $4.6 million or 48.4% from the six
months ended June 27, 1999, primarily due to the inclusion of our newly-
acquired Latin American subsidiary.
Gross Profit. Gross profit for the six months ended July 2, 2000
increased $7.0 million to $71.9 million from $64.9 million for the six months
ended June 27, 1999. The increase in gross profit resulted primarily from
the higher sales volume as compared to the prior year. Gross profit for the
six months ended July 2, 2000 increased $9.5 million in North America,
decreased $2.6 million in Europe and increased $0.1 million in Latin America
when compared to the six months ended June 27, 1999.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the six months ended July 2, 2000 increased $4.5
28
<PAGE>
million to $25.8 million from $21.3 million for the six months ended June 27,
1999. The increase in 2000 selling, general and administrative expenses is
due primarily to the overall growth of the business, principally in North
America. As a percent of sales, selling, general and administrative expenses
decreased to 6.3% of sales for the six months ended July 2, 2000 from 6.4% for
the six months ended June 27, 1999.
Special Charges and Unusal Items. Special charges and unusual items
decreased $2.6 million to $0.6 million for the six months ended July 2, 2000
from $3.2 million for the six months ended June 27, 1999. Special charges and
unusual items in the six months ended July 2, 2000 included compensation
related to the 1998 recapitalization of $0.6 million. Special charges and
unusual items in the six months ended June 27, 1999 included costs related to
year 2000 system conversion of $0.7 million, compensation related to the 1998
recapitalization of $1.8 million and restructuring of facilities charges of
$0.7 million.
Interest Expense, Net. Interest expense, net increased $8.7 million
to $49.5 million, including $6.6 million of non-cash interest on our senior
discount notes, for the six months ended July 2, 2000 from $40.8 million for
the six months ended June 27, 1999. The increase was primarily related to
increased debt levels in 2000 compared to 1999.
Other Expense (Income). Other expense (income) was $0.2 million for
the six months ended July 2, 2000 as compared to $(0.1) million for the six
months ended June 27, 1999. The higher expense was due primarily to higher
foreign exchange losses in the six months ended July 2, 2000 as compared to
the six months ended June 27, 1999.
Net Loss. Primarily as a result of factors discussed above, net
loss for the six months ended July 2, 2000 was $4.0 million compared to net
loss of $1.0 million for the six months ended June 27, 1999.
Effect of Changes in Exchange Rates
In general, our results of operations are affected by changes in
foreign exchange rates. Subject to market conditions, we price our products
in our 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 our profitability, and an increase in the value of the
dollar relative to these other currencies can have a negative effect on our
profitability. Exchange rate fluctuations decreased comprehensive income by
$2.2 million and $2.7 million for the three months ended July 2, 2000 and
June 27, 1999, respectively, and decreased comprehensive income by $6.4
million and $19.4 million for the six months ended July 2, 2000 and June 27,
1999, respectively.
29
<PAGE>
Euro Conversion
On January 1, 1999, eleven of fifteen member countries of the
European Economic Union fixed conversion rates between their existing
currencies, or 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.
We are 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 our 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. We believe the effect of the
introduction of the euro, as well as any related cost of conversion, will not
have a material adverse impact on our financial condition and results of
operations.
Derivatives
We enter into interest rate swap agreements to hedge the exposure to
increasing rates with respect to our senior 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 our senior credit agreement. We also enter into forward
exchange contracts, when appropriate, to hedge the exchange rate exposure on
transactions that are denominated in a foreign currency.
Liquidity and Capital Resources
In the six month period ended July 2, 2000, we funded, through our
various borrowing arrangements and operating activities, $85.3 million of
investing activities, including $84.1 million of capital expenditures.
Our senior credit agreement currently consists of four term loans to
our subsidiary, Graham Packaging Company, totaling $570 million and two
revolving loan facilities to Graham Packaging Company totaling $255 million.
Unused availability under our revolving credit facilities at July 2, 2000 is
$88 million, $28 million of which is under our revolving credit facility and
$60 million of which is under our growth capital revolving credit facility.
30
<PAGE>
The obligations of Graham Packaging Company under our senior credit agreement
are guaranteed by us and by our U.S. subsidiaries. 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. We expect to fund
scheduled debt repayments from cash from operations and unused lines of
credit. The revolving loan facilities expire on January 31, 2004.
Our senior credit agreement contains certain affirmative and negative
covenants as to our operations and financial condition, as well as certain
restrictions on the payment of dividends and other distributions to us.
Substantially all of our domestic tangible and intangible assets are pledged
as collateral pursuant to the terms of our senior credit agreement.
Our 1998 recapitalization also included the issuance by our
subsidiaries, Graham Packaging Company and GPC Capital Corp. I, of $225
million of senior subordinated notes due 2008 and the issuance by us of $169
million aggregate principal amount at maturity of senior discount notes due
2009 which yielded gross proceeds of $100.6 million. At July 2, 2000, the
aggregate accreted value of the senior discount notes was $129.7 million.
The senior subordinated notes are unconditionally guaranteed on a senior
subordinated basis by us and mature on January 15, 2008, with interest
payable on $150 million at a fixed rate of 8.75% and with interest payable on
$75 million at LIBOR plus 3.625%. The senior discount notes mature on
January 15, 2009, with cash interest payable semi-annually beginning July 15,
2003 at 10.75%. The effective interest rate to maturity on the senior
discount notes is 10.75%. At July 2, 2000, our outstanding indebtedness was
$1,095 million.
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
$3.3 million to $42.7 million for the three months ended July 2, 2000 from
$39.4 million for the three months ended June 27, 1999. Adjusted EBITDA
increased $11.1 million to $79.9 million for the six months ended July 2,
2000 from $68.8 million for the six months ended June 27, 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 our ability to satisfy
our debt service, capital expenditure and working capital requirements and
because certain covenants in our 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
31
<PAGE>
service requirements, these terms are not necessarily titled captions of
other companies due to potential inconsistencies in the method of
calculation.
We believe that capital investment to maintain and upgrade property,
plant and equipment is important to remain competitive. We estimate that the
annual capital expenditures required to maintain our current facilities are
currently approximately $30 million per year. Additional capital
expenditures beyond this amount will be required to expand capacity. Capital
expenditures for the six months ended July 2, 2000 were $84.1 million. For
the fiscal year 2000, we expect to incur approximately $200 million of
capital expenditures. However, total capital expenditures for 2000 will
depend on the size and timing of growth related opportunities. Our principal
sources of cash to fund capital requirements will be net cash provided by
operating activities and borrowings under our senior credit agreement.
Under our senior credit agreement, we are subject to restrictions on
the payment of dividends or other distributions to us, except that our
subsidiary, Graham Packaging Company, may pay dividends or other
distributions to us:
- in respect of overhead, tax liabilities, legal, accounting
and other professional fees and expenses;
- to fund purchases and redemptions of equity interests of our
company held by then present or former officers or employees
of our company, Graham Packaging Company or its subsidiaries
or by any employee stock ownership plan upon that person's
death, disability, retirement or termination of employment
or other circumstances with certain annual dollar
limitations; and
- to finance, starting on July 15, 2003, the payment of cash
interest payments by us on our senior discount notes.
New Accounting Pronouncements
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.
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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.
In June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -an amendment of FASB
Statement No. 133." This Standard amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain
hedging activities. Management has not completed its review of SFAS No. 133,
as amended, and has not determined the impact adoption will have on our
results of operations or financial position.
In November 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition". This Bulletin sets forth the SEC Staff's position
regarding the point at which it is appropriate for a registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all
of the following criteria are met:
- persuasive evidence of an arrangement exists;
- delivery has occurred or service has been rendered;
- the seller's price to the buyer is fixed or determinable;
and
- collectibility is reasonably assured.
We use the above criteria to determine whether revenue can be recognized, and
therefore believe that the issuance of SAB 101 does not have a material
impact on our financial statements.
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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.
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PART II OTHER INFORMATION
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 July 2, 2000.
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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 16, 2000
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)
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