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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no established public trading market for any of the general or
limited partnership interests in the registrant. The aggregate market value
of the voting securities held by non-affiliates of the registrant as of
February 28, 2001 was $-0-. As of February 28, 2001, the general partnership
interests in the registrant were owned by BCP /Graham Holdings L.L.C. and
Graham Packaging Corporation, and the limited partnership interests in the
registrant were owned by BMP/Graham Holdings Corporation and certain members
of the family of Donald C. Graham and entities controlled by them. See Item
12, "Security Ownership of Certain Beneficial Owners and Management."
_______________
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
Page
Number
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 34
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 37
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . 37
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 38
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 44
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . 57
Item 8. Financial Statements and Supplementary Data . . . . . 60
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 101
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Item 10. Advisory Committee Members, Directors and
Executive Officers of the Registrant . . . . . . . . 101
Item 11. Executive Compensation . . . . . . . . . . . . . . . 105
3
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . 111
Item 13. Certain Relationships and Related Transactions . . . 113
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . 122
4
PART I
Item 1. Business
Unless the context otherwise requires, all references herein to the
"Company," with respect to periods prior to the recapitalization described
below (the "Recapitalization"), refer to the business historically conducted
by Graham Packaging Holdings Company ("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. Since the
Recapitalization, Graham Packaging Company, L.P. (the "Operating Company")
has been a wholly owned subsidiary of Holdings. All references to the
"Recapitalization" herein shall mean the collective reference to the
Recapitalization of Holdings and related transactions as described under "The
Recapitalization" below, including the initial borrowings under the Senior
Credit Agreement (as defined below), the Offerings (as defined below) and the
related uses of proceeds. References to "Continuing Graham Entities" herein
refer to Graham Packaging Corporation ("Graham GP Corp."), Graham Family
Growth Partnership or affiliates thereof or other entities controlled by
Donald C. Graham and his family, and references to "Graham Entities" refer to
the Continuing Graham Entities, Graham Engineering Corporation ("Graham
Engineering") and the other partners of Holdings (consisting of Donald C.
Graham and certain entities controlled by Mr. Graham and his family). Since
July 27, 1998, the Company's operations have included 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 Company's operations have included the operations of Graham
Packaging Argentina S.A. as a result of the acquisition of selected companies
in Argentina. Since July 6, 1999 the Company's operations have included the
operations of PlasPET Florida, Ltd. as a result of an investment made in a
limited partnership. All references to "Management" herein shall mean the
management of the Company at the time in question, unless the context
indicates otherwise. In addition, unless otherwise indicated, all sources
for all industry data and statistics contained herein are estimates contained
in or derived from internal or industry sources believed by the Company to be
reliable.
5
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Report on Form 10-K, including statements regarding the future financial
position, economic performance and results of operations of the Company (as
defined above), 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 II, Item 7A), 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 Company's exposure to fluctuations in resin
prices and its dependence on resin supplies, competition in the Company's
markets, including the impact of possible new technologies, 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, a decline in the domestic motor oil business,
risks associated with the Company's international operations, 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 management and
its 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 the
Company may not be able to achieve success in developing and expanding its
business, including the Company's hot-fill PET plastic container business.
See "--Certain Risks of the Business." All 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.
General
Holdings was formed under the name "Sonoco Graham Company" on
April 3, 1989 as a Pennsylvania limited partnership and changed its name to
"Graham Packaging Company" on March 28, 1991. The Operating Company was
6
formed under the name "Graham Packaging Holdings I, L.P." on September 21,
1994 as a Delaware limited partnership. The predecessor to Holdings,
controlled by the Continuing Graham Entities, was formed in the mid-1970's as
a regional domestic custom plastic container supplier, using the proprietary
Graham Rotational Wheel.
Upon the Recapitalization, substantially all of the assets and
liabilities of Holdings were contributed to the Operating Company, and
subsequent to the Recapitalization, the primary business activity of Holdings
has consisted of its direct and indirect ownership of 100% of the partnership
interests in the Operating Company. Upon the Recapitalization, the Operating
Company and Holdings changed their names to "Graham Packaging Company, L.P."
and "Graham Packaging Holdings Company," respectively.
The principal executive offices of the Company are located at 2401
Pleasant Valley Road, York, Pennsylvania 17402, Telephone (717) 849-8500.
The Company is managed in three operating segments: North America,
which includes the United States and Canada; Europe; and Latin America. Each
operating segment includes three major service lines: Food and Beverage,
Household and Personal Care, and Automotive.
The Company is 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
60 plants throughout North America, Europe and Latin America. The Company's
primary focus is to operate in select markets that will position it to
benefit from the growing conversion to high performance plastic packaging
from more commodity packaging. The Company targets branded consumer product
manufacturers for whom customized packaging design is a critical component in
their efforts to differentiate their products to consumers. The Company
initially pursues these attractive product areas with one or two major
consumer product companies in each category that the Company expects will
lead the conversion to plastic packaging for that category. The Company
utilizes its innovative design, engineering and technological capabilities to
deliver highly customized, high performance products to its customers in
these areas in order to distinguish and increase sales of their branded
products. The Company collaborates with its customers through joint
initiatives in product design and cost reduction, and innovative operational
arrangements, which include on-site manufacturing facilities.
Since the beginning of 1998, the Company has grown its net sales at a
compounded annual growth rate of over 16% as a result of its aggressive
7
capital investment and focus on the high growth food and beverage market
which is growing rapidly due to the accelerating conversion trend from glass,
paper and metal containers to plastic packaging. With leading positions in
each of its core businesses, the Company believes it is well positioned to
continue to benefit from the plastic conversion trend that is still emerging
on a global basis and offers the Company opportunities for attractive margins
and returns on investment.
The Company has an extensive blue-chip customer base that includes
many of the world's largest branded consumer products companies.
Approximately one-third of its manufacturing plants are located on-site at
its customers' manufacturing facilities, which the company believes provides
a competitive advantage in maintaining and growing customer relationships.
The majority of the Company's sales are made pursuant to long-term customer
contracts, which include resin pass-through provisions that mitigate the
effect of resin price movements on the Company's profitability. The
Company's containers are made from various plastic resins, including
polyethylene terephthalate, or PET, high-density polyethylene, or HDPE, and
polypropylene, or PP. In 2000, the Company's top 20 customers comprised over
77% of its net sales and have been its customers for an average of 15 years.
The combination of leading technology, product innovation, efficient
manufacturing operations and strong customer relationships, including on-site
facilities, has enabled the Company to consistently generate strong growth,
margins and returns on invested capital.
Food and Beverage. The Company produces containers for shelf-stable,
refrigerated and frozen juices, non-carbonated juice drinks, teas, isotonics,
yogurt and nutritional drinks, soups, toppings, sauces, jellies and jams.
The Company's business focuses on major consumer products companies that
emphasize distinctive, high-performance packaging in their selected business
lines that are undergoing rapid conversion to plastic from other packaging
materials. Management believes, based on internal estimates, that the
Company has the leading domestic market position for plastic containers for
juice, frozen concentrate, pasta sauce and yogurt drinks and the leading
position in Europe for plastic containers for yogurt drinks. Management
believes that this leadership position creates significant opportunity for
the Company to participate in the anticipated conversion to plastic in the
wider nutritional drink market. The Company is one of only three domestic
market participants that are leading large-scale product conversions to hot-
fill PET containers.
8
Over the last three fiscal years, the Company's food and beverage
sales have grown at a compound annual growth rate of over 38%, benefiting
primarily from the rapid market conversion to plastic containers. As a
result of technological innovations, PET containers can be used in "hot-fill"
food and beverage applications where the container must withstand filling
temperatures of over 180 degrees Fahrenheit in an efficient and cost-
effective manner. The Company has been a leader in the conversion of multi-
serve juices that has occurred during the last few years, and it helped to
initiate the conversion of containers for single-serve juice drinks, frozen
juice concentrate and wide-mouth PET containers for sauces, jellies and jams.
The highly customized hot-fill PET containers allow for the shipment and
display of food and beverage products in a non-refrigerated state, in
addition to possessing the structural integrity to withstand extreme filling
conditions. The Company's oxygen barrier PET container coating and multi-
layer barrier technologies also extend the shelf life and protect the quality
and flavor of its customers' products.
With over $230 million of capital invested in the hot-fill PET food
and beverage business since the beginning of 1997, the Company has been a
major participant in this rapidly growing area. Given the strength of its
existing customer base, recent capital investments and technological and
design capabilities, the Company believes it is well positioned to benefit
from the estimated 60% of the domestic hot-fill food and beverage market that
has yet to convert to plastic. In addition, management believes that
significant conversion opportunities exist in hot-fill product lines that
have just begun to convert to plastic, and from international conversion
opportunities.
The Company's largest customers in the food and beverage business
include Clement-Pappas & Company, Inc. ("Clement-Pappas"), Group Danone
("Danone"), Hershey Foods Corporation ("Hersheys"), Hi-Country Foods
Corporation ("Hi-Country"), The Minute Maid Company ("Minute Maid"),
Northland Cranberries, Inc. ("Northland Cranberries"), Ocean Spray
Cranberries, Inc. ("Ocean Spray"), The Quaker Oats Company ("Quaker Oats"),
Tree Top Inc. ("Tree Top"), Tropicana Products, Inc. ("Tropicana") and Welch
Foods, Inc. ("Welch's"). For the years ended December 31, 1998, 1999 and
2000 the Company generated approximately 37.6%, 45.1% and 48.9%,
respectively, of its net sales from the food and beverage business.
Household and Personal Care. In the household and personal care
business, the Company is a leading supplier of plastic containers for
products such as liquid fabric care, dish care, hard-surface cleaners, hair
care and body wash. The Company continues to benefit as products such as
9
liquid fabric care detergents, hard-surface cleaners and liquid automatic
dishwashing detergents, which are packaged in plastic containers, capture an
increasing share from powdered detergents and cleaners, which are
predominantly packaged in paper-based containers. The Company also expects
rapid growth in demand for household and personal care plastic containers
internationally to be a key contributor to its business. The Company's
largest customers in this sector include Colgate-Palmolive Company ("Colgate-
Palmolive"), The Dial Corp. ("Dial"), Henkel KGaA ("Henkel"), Johnson &
Johnson ("J&J"), L'Oreal S.A. ("L'Oreal"), The Procter and Gamble Company
("Procter & Gamble") and Unilever NV ("Unilever"). For the years ended
December 31, 1998, 1999 and 2000 the Company generated approximately 30.3%,
25.9% and 25.3%, respectively, of its net sales from the household and
personal care business.
Automotive. Management believes, based on internal estimates, that
the Company is the number one supplier of one quart/one liter HDPE motor oil
containers in the United States, Canada, and Brazil, supplying most of the
motor oil producers in these countries, with an approximate 74% market share
in the United States, based on 2000 unit sales. The Company has been
producing motor oil containers since the conversion to plastic began 23 years
ago and has expanded its market share and maintained margins by partnering
with its customers to improve product quality and reduce costs through design
improvement, reduced container weight and manufacturing efficiencies. The
Company's joint product design and cost efficiency initiatives with its
customers have also strengthened its service and customer relationships.
The Company has expanded operations into portions of Latin America to
take advantage of the growth resulting from the ongoing conversion from
composite cans to plastic containers for motor oil as well as the increasing
number of motor vehicles per person in that region. Management anticipates
similar growth opportunities for the Company in other economically developing
markets where the use of motorized vehicles is rapidly growing, including
Asia and other regions in Latin America. The Company also manufactures
containers for other automotive products, such as antifreeze and automatic
transmission fluids.
The Company is a supplier of such containers to many of the top
domestic producers of motor oil, including Ashland, Inc. ("Ashland", producer
of Valvoline motor oil), Castrol Inc. ("Castrol"), Chevron Corporation
("Chevron"), Equilon Enterprises LLC ("Equilon", an alliance between Texaco
Inc., "Texaco", and Shell Oil Company, "Shell"), Pennzoil-Quaker State
Company ("Pennzoil-Quaker State", the result of the merger between Pennzoil
Products Company, "Pennzoil", and The Quaker State Corporation, "Quaker
10
State"), and Sun Company, Inc. ("Sun Company"). For the years ended December
31, 1998, 1999, and 2000 the Company generated approximately 32.1%, 29.0% and
25.8%, respectively, of its net sales from the automotive container business.
Additional information regarding business segments is provided in
Note 20 of the Notes to Financial Statements.
Products and Raw Materials
PET containers, which are transparent, are utilized for products
where glasslike clarity is valued and shelf stability is required, such as
carbonated soft drinks, juice, juice drinks and teas. HDPE containers, which
are nontransparent, are utilized to package products such as motor oil,
fabric care, dish care and personal care products, certain food products,
chilled juices and frozen juice concentrates.
PET and HDPE resins constitute the primary raw materials used to make
the Company's products. These materials are available from a number of
suppliers, and the Company is not dependent upon any single supplier. The
Company maintains, as management believes, an adequate inventory to meet
demands, but there is no assurance that this will be true in the future. The
Company's gross profit has historically been substantially unaffected by
fluctuations in resin prices because industry practice permits substantially
all changes in resin prices to be passed through to customers through
appropriate changes in product pricing. However, a sustained increase in
resin prices, to the extent that those costs are not passed on to the end-
consumer, would make plastic containers less economical for the Company's
customers, and could result in a slower pace of conversions to plastic
containers.
Through its wholly owned subsidiary, Graham Recycling Company, L.P.,
the Company operates one of the largest HDPE bottles-to-bottles recycling
plants in the world, and more than 65% of its North American HDPE units
produced contain recycled HDPE bottles. The recycling plant is located near
the Company's headquarters in York, Pennsylvania.
Customers
Substantially all of the Company's sales are made to major branded
consumer products companies located in the United States and abroad. The
Company's customers demand a high degree of packaging design and engineering
11
to accommodate complex container shapes, performance and material
requirements and quick and reliable delivery. As a result, many customers
opt for long-term contracts, many of which have terms of one to ten years. A
majority of the Company's top 20 customers are under long-term contracts.
The Company's contracts typically contain provisions allowing for price
adjustments based on the market price of resins and colorants and the cost of
energy and labor, among other factors.
In many cases, the Company is the sole supplier of its customers'
custom plastic container requirements nationally, regionally or for a
specific brand. For the year ended December 31, 2000 the Company's largest
customer, Unilever, accounted for 11.4% of the Company's total net sales. On
December 4, 2000 PepsiCo, Inc. announced a proposed acquisition of Quaker
Oats. The Company currently provides plastic containers to Quaker Oats,
PepsiCo and to Tropicana, an existing unit of PepsiCo, Inc. Had the three
entities been combined for all of calendar year 2000, they would have
accounted for approximately 12% of the Company's total net sales. For
the year ended December 31, 2000 the Company's twenty largest customers,
who accounted for over 77% of net sales, were, in alphabetical order:
Customer(1) Business Company Customer
Since(1)
- ----------- -------- ----------------
Ashland(2) Automotive Early 1970's
Castrol Automotive Late 1960's
Chevron Automotive Early 1970's
Clement Pappas Food and Beverage Mid 1990's
Colgate-Palmolive Household and Personal Care Mid 1980's
Danone Food and Beverage Late 1970's
Dial Household and Personal Care Early 1990's
Equilon Automotive Early 1970's
Hershey's Food and Beverage Mid 1980's
Hi-Country Food and Beverage Late 1990's
Northland Cranberries Food and Beverage Late 1990's
Ocean Spray Food and Beverage Early 1990's
Pennzoil-Quaker State Automotive Early 1970's
Petrobras Distribuidora S.A. Automotive Early 1990's
Procter & Gamble Household and Personal Care Early 1980's
Quaker Oats Food and Beverage Late 1990's
Tree Top Food and Beverage Early 1990's
Tropicana Food and Beverage Mid 1980's
Unilever Household and Personal Care, Early 1970's
Food and Beverage
Welch's Food and Beverage Early 1990's
(1) These companies include their predecessors, if applicable, and the
dates may reflect customer relationships initiated by predecessors to
the Company or entities acquired by the Company.
(2) Ashland is the producer of Valvoline motor oil.
12
International Operations
The Company has significant operations outside the United States in
the form of wholly owned subsidiaries, cooperative joint ventures and other
arrangements. The Company has 26 plants located in countries outside of the
United States, including Argentina (2), Belgium (1), Brazil (5), Canada (4),
France (4), Germany (2), Hungary (1), Italy (2), Poland (2), Spain (1),
Turkey (1), and the United Kingdom (1).
Argentina, Brazil and Mexico. In Brazil, the Company operates four
on-site plants for motor oil packaging, including one for Petrobras
Distribuidora S.A., the national oil company of Brazil. The Company also
operates an off-site plant in Brazil for its motor oil and agricultural and
chemical businesses. On April 30, 1997, the Company acquired 80% of certain
assets and assumed 80% of certain liabilities of Rheem-Graham Embalagens
Ltda. in Brazil, which is now known as Graham Packaging do Brasil Industria e
Comercio S.A. ("Graham Packaging do Brazil"). In February 1998, the Company
acquired the residual 20% ownership interest in Graham Packaging do Brasil.
In Argentina, the Company purchased 100% of the capital stock of Dodisa,
S.A., Amerpack, S.A., Lido Plast, S.A. and Lido Plast San Luis, S.A. In April
2000, Dodisa, S.A., Amerpack, S.A., and Lido Plast, S.A. were dissolved
without liquidation and merged into Graham Packaging Argentina, S.A. In June
2000, in order to maximize efficiency, the Company shifted some of the volume
from its Argentine operations produced for Brazilian customers to the
Company's Brazilian facilities and closed one of the facilities in Argentina.
In Mexico, the Company entered into a joint venture agreement with Industrias
Innopack, S.A. de C.V. to manufacture, sell and distribute custom plastic
containers in Mexico, the Caribbean and Central America.
Europe. The Company has on-site plants in Belgium, Germany, Hungary,
Poland and Spain and ten off-site plants in France, Germany, Italy, Poland,
Turkey and the United Kingdom, for the production of plastic containers for
liquid food, household and personal care, automotive and agricultural
chemical products. Through Masko Graham Spolka Z.O.O., a 50% owned joint
venture in Sulejowek, Poland, HDPE containers are manufactured for household
and personal care and liquid food products. On March 30, 2001 the Company
purchased an additional 1% interest in Masko Graham Joint Venture.
Canada. The Company has three off-site facilities and one on-site
facility in Canada to service Canadian and northern U.S. customers. Three are
near Toronto, Ontario and one is near Montreal, Quebec. The Canadian
facilities produce products for all three of the Company's target end-use
markets. In the first quarter of 2001 the Company announced the closing of
13
its facility in Anjou, Quebec, Canada where manufacturing operations are
expected to cease during the second quarter of 2001.
Competition
The Company faces substantial regional and international competition
across its product lines from a number of well-established businesses. The
Company's primary competitors include Owens-Illinois, Inc., Ball Corporation,
Crown Cork & Seal Company, Inc., Consolidated Container Company LLC (which
was formed in 1999 by combining the former Franklin Plastics and Plastic
Containers owned by Suiza Foods Corporation and Reid Plastics), Plastipak,
Inc., Silgan Holdings Inc., Schmalbach-Lubeca Plastic Containers USA Inc.,
Rexham Packaging (who acquired American National Can, Inc. in 2000),
Logoplaste S.A. and Alpla Werke Alwin Lehner GmbH. Several of these
competitors are larger and have greater financial and other resources than
the Company has. Management believes that the Company's long-term success is
dependent on its ability to provide superior levels of service, its speed to
market and its ability to develop product innovations and improve its
production technology and expertise. Other important competitive factors
include rapid delivery of products, production quality and price.
Marketing and Distribution
The Company's sales are made through its own direct sales force;
agents or brokers are not utilized to conduct sales activities with customers
or potential customers. Sales activities are conducted from the Company's
corporate headquarters in York, Pennsylvania and from field sales offices
located in Houston, Texas; Cincinnati, Ohio; Levittown, Pennsylvania;
Burlington, Ontario; Mississauga, Ontario; Rancho Cucamonga, California;
Paris, France; Buenos Aires, Argentina; Sao Paulo, Brazil; Milan, Italy; and
Sulejowek, Poland. The Company's products are typically delivered by truck,
on a daily basis, in order to meet customers' just-in-time delivery
requirements, except in the case of on-site operations. In many cases, the
Company's on-site operations are integrated with its customers' manufacturing
operations so that deliveries are made, as needed, by direct conveyance to
the customers' filling lines.
14
Superior Product Design and Development Capabilities
The Company's ability to develop new, innovative containers to meet
the design and performance requirements of its customers has established the
Company as a market leader. The Company has demonstrated significant
success in designing innovative plastic containers that require customized
features such as complex shapes, reduced weight, handles, grips, view
stripes, pouring features and graphic intensive customized labeling, and
often must meet specialized performance and structural requirements such as
hot-fill capability, recycled material usage, oxygen barriers, flavor
protection and multi-layering. In addition to increasing demand for its
customers' products, the Company believes that its innovative packaging
stimulates consumer demand and drives further conversion to plastic
packaging. Consequently, the Company's strong design capabilities have been
especially important to its food and beverage customers, who generally use
packaging to differentiate and add value to their brands while spending less
on promotion and advertising. The Company has been awarded significant
contracts based on these unique product design capabilities that management
believes sets it apart from its competition. Some of the Company's recent
design and conversion successes include:
- - hot-fill PET 16 ounce containers with oxygen barrier coating for
conversion from glass bottles of Tropicana Season's Best brand, Pepsi's
Dole brand and Welch's brand juices;
- - hot-fill PET wide-mouth jars for Ragu pasta sauce, Seneca applesauce and
Welch's jellies and jams;
- - HDPE frozen juice container for Welch's in the largely unconverted metal
and paper-composite can markets; and
- - the debut of single and multi-serve, brand-distinctive, custom plastic
beverages packages, such as: Gatorade 10 ounce, Danimals 100 milliliter
and 93 milliliter yogurt drinks, Snapple 20 ounce and Tropicana Twister
1.75 liter containers.
The Company's innovative designs have been recognized, through
various awards, by a number of customers and industry organizations.
Management believes the Company's design and development capabilities,
coupled with the support of Graham Engineering in the design of blow molding
wheels and recycling systems, has positioned the Company as the packaging
design and development leader in the industry. Pursuant to the Equipment
Sales Agreement, Graham Engineering will continue to provide engineering,
15
consulting and other services and sell to the Company certain proprietary
blow molding wheels. Over the past several years the Company has received
and has filed for numerous patents. See "--The Recapitalization";"--
Intellectual Property"; and "Certain Relationships and Related Transactions--
Certain Business Relationships--Equipment Sales Agreement" (Item 13).
Manufacturing
A critical component of the Company's strategy is to locate
manufacturing plants on site, reducing expensive shipping and handling
charges and increasing production and distribution efficiencies. The Company
is a leader in providing on-site manufacturing arrangements, with
approximately one-third of its 60 facilities on site at customer and vendor
facilities. Within the 60 plants, the Company operates over 400 production
lines. The Company sometimes dedicates particular production lines within a
plant to better service customers. The plants generally operate 24 hours a
day, five to seven days a week, although not every production line is run
constantly. When customer demand requires, the plants run seven days a week.
In the blow molding process used for HDPE applications, resin pellets
are blended with colorants or other necessary additives and fed into the
extrusion machine, which uses heat and pressure to form the resin into a
round hollow tube of molten plastic called a parison. Bottle molds mounted
radially on a wheel capture the parison as it leaves the extruder. Once
inside the mold, air pressure is used to blow the parison into the bottle
shape of the mold. In the 1970's, the Company introduced the Graham Wheel.
The Graham Wheel is a single parison, electro-mechanical rotary blow molding
technology designed for its speed, reliability and ability to use virgin
resins, high barrier resins and recycled resins simultaneously without
difficulty. The Company has achieved very low production costs, particularly
in plants housing Graham Wheels. While certain of the Company's competitors
also use wheel technology in their production lines, the Company has
developed a number of proprietary improvements which Management believes
permit the Company's wheels to operate at higher speeds and with greater
efficiency in the manufacture of containers with one or more special
features, such as multiple layers and in-mold labeling.
In the stretch blow molding process used for hot-fill PET
applications, resin pellets are fed into a Husky injection molding machine
that uses heat and pressure to mold a test tube shaped parison or "preform."
The preform is then fed into a Sidel blow molder where it is re-heated to
allow it to be formed through a stretch blow molding process into a final
16
container. During this re-heat and blow process, special steps are taken to
induce the temperature resistance needed to withstand high temperatures on
customer filling lines. Management believes that the Husky injection molders
and Sidel blow molders used by the Company are widely recognized as the
leading technologies for high speed production of hot-fill PET containers and
have replaced less competitive technologies used initially in the manufacture
of hot-fill PET containers. Management believes that equipment for the
production of cold-fill containers can be refitted to accommodate the
production of hot-fill containers. However, such refitting has only been
accomplished at a substantial cost and has proven to be substantially less
efficient than the Company's equipment for producing hot-fill PET containers.
The Company maintains a program of quality control with respect to
suppliers, line performance and packaging integrity for its containers. The
Company's production lines are equipped with various types of automatic
inspection machines that electronically inspect containers. Additionally,
product samples are inspected and tested by Company employees on the
production line for proper dimensions and performance and are also inspected
and audited after packaging. Containers that do not meet quality standards
are crushed and recycled as raw materials. The Company monitors and updates
its inspection programs to keep pace with modern technologies and customer
demands. Quality control laboratories are maintained at each manufacturing
facility to test characteristics of the products and compliance with quality
standards.
The Company has highly modernized equipment in its plants, consisting
primarily of rotational wheel systems and shuttle systems, both of which are
used for HDPE and PP blow molding, and injection-stretch blow molding systems
for custom PET containers. The Company is also pursuing development
initiatives in barrier technologies to strengthen its position in the food
and beverage business. In the past, the Company has achieved substantial
cost savings in its manufacturing process by productivity and process
enhancements, including increasing line speeds, utilizing recycled products,
reducing scrap and optimizing plastic volume requirements for each product's
specifications.
Total capital expenditures, excluding acquisitions, for 1998, 1999
and 2000 were approximately $133.9 million, $171.0 million and $163.4
million, respectively. Management believes that capital investment to
maintain and upgrade property, plant and equipment is important to remain
competitive. Management estimates that the annual capital expenditures
required to maintain the Company's current facilities are currently
17
approximately $30 million per year. Additional capital expenditures beyond
this amount will be required to expand capacity.
For the fiscal year 2001, the Company expects to incur approximately
$110 million of capital expenditures. However, total capital expenditures
for 2001 will depend on the size and 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 its Senior
Credit Agreement.
The 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 Graham Entities, and (iii) BMP/Graham Holdings
Corporation, a Delaware corporation ("Investor LP") formed by Blackstone
Capital Partners III Merchant Banking Fund L.P. (together with its
affiliates, "Blackstone"), 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.
On February 2, 1998, as part of the Recapitalization, the Operating
Company and GPC Capital Corp. I ("CapCo I" and, together with the Operating
Company, the "Company Issuers") consummated an offering (the "Senior
Subordinated Offering") pursuant to Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"), of their Senior Subordinated Notes
Due 2008, consisting of $150,000,000 aggregate principal amount of their 8
3/4% Senior Subordinated Notes Due 2008, Series A (the "Fixed Rate Senior
Subordinated Old Notes"), and $75,000,000 aggregate principal amount of their
Floating Interest Rate Subordinated Term Securities Due 2008, Series A
("FIRSTS"SM) (the "Floating Rate Senior Subordinated Old Notes" and, together
with the Fixed Rate Senior Subordinated Old Notes, the "Senior Subordinated
Old Notes"). ("FIRSTS" is a service mark of DB Alex. Brown LLC (formerly BT
Alex. Brown Incorporated)).
On February 2, 1998, as part of the Recapitalization, Holdings and
GPC Capital Corp. II ("CapCo II" and, together with Holdings, the "Holdings
Issuers", which when referred to with the Company Issuers will collectively
be referred to as the "Issuers") consummated an offering (the "Senior
Discount Offering" and, together with the Senior Subordinated Offering, the
18
"Offerings") pursuant to Rule 144A under the Securities Act of $169,000,000
aggregate principal amount at maturity of their 10 3/4% Senior Discount Notes
Due 2009, Series A (the "Senior Discount Old Notes" and, together with the
Senior Subordinated Old Notes, the "Old Notes").
In connection with the Recapitalization, the Issuers entered into
Registration Rights Agreements with the Initial Purchasers of the Old Notes,
pursuant to which the Issuers agreed to exchange the respective issues of Old
Notes for Notes having the same terms but registered under the Securities Act
and not containing the restrictions on transfer that are applicable to the
Old Notes.
Pursuant to the related Registration Rights Agreement, on September
8, 1998, the Company Issuers consummated exchange offers (the "Senior
Subordinated Exchange Offers"), pursuant to which the Company Issuers issued
$150,000,000 aggregate principal amount of their 8 3/4% Senior Subordinated
Notes Due 2008, Series B (the "Fixed Rate Senior Subordinated Exchange
Notes"), and $75,000,000 aggregate principal amount of their Floating
Interest Rate Subordinated Term Securities Due 2008, Series B (the "Floating
Rate Senior Subordinated Exchange Notes" and, together with the Fixed Rate
Senior Subordinated Exchange Notes, the "Senior Subordinated Exchange
Notes"), which were registered under the Securities Act, in exchange for
equal principal amounts of Fixed Rate Senior Subordinated Old Notes and
Floating Rate Senior Subordinated Old Notes, respectively. The Senior
Subordinated Old Notes and the Senior Subordinated Exchange Notes are herein
collectively referred to as the "Senior Subordinated Notes." Pursuant to the
applicable Registration Rights Agreement, on September 8, 1998, the Holdings
Issuers consummated an exchange offer (the "Senior Discount Exchange Offer"),
pursuant to which the Holdings Issuers issued $169,000,000 aggregate
principal amount at maturity of their 10 3/4% Senior Discount Notes Due 2009,
Series B (the "Senior Discount Exchange Notes" and, together with the Senior
Discount Old Notes, the "Senior Discount Notes"), which were registered under
the Securities Act, in exchange for an equal principal amount at maturity of
Senior Discount Old Notes.
The Senior Subordinated Notes were issued under an Indenture dated as
of February 2, 1998 (the "Senior Subordinated Indenture") between the Company
Issuers, Holdings, as guarantor, and United States Trust Company of New York,
as Trustee. The Senior Discount Notes (together with the Senior Subordinated
Notes, the " Notes") were issued under an Indenture dated as of February 2,
1998 (the "Senior Discount Indenture" and together with the Senior
Subordinated Indenture, the "Indentures") between the Holdings Issuers and
The Bank of New York, as Trustee. The Senior Subordinated Old Notes were,
19
and the Senior Subordinated Exchange Notes are, fully and unconditionally
guaranteed by Holdings on a senior subordinated basis.
The other 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 Entities to the Operating Company
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 "Graham Contribution");
- The initial borrowing by the Operating Company of $403.5 million (the
"Bank Borrowings") in connection with the Senior Credit Agreement
entered into by and among the Operating Company, Holdings and a
syndicate of lenders (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and
Capital Resources" (Item 7));
- The repayment by the Operating Company of substantially all of the
existing indebtedness and accrued interest of Holdings and its
subsidiaries (approximately $264.9 million);
- The distribution by the Operating Company to Holdings of all of the
remaining net proceeds of the Bank Borrowings and the Senior
Subordinated Offering (other than amounts necessary to pay certain
fees and expenses and payments to Management) which, in aggregate,
were approximately $313.7 million;
- The redemption by Holdings of certain partnership interests in
Holdings held by the Graham Entities for $429.6 million;
- The purchase by the Equity Investors of certain partnership interests
in Holdings held by the Graham Entities for $208.3 million;
- The repayment by the Graham Entities of $21.2 million owed to
Holdings under certain 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
20
- The payment of a $6.2 million tax distribution by the Operating
Company on November 2, 1998 to certain Graham Entities for tax
periods prior to the Recapitalization.
Upon the consummation of the Recapitalization, Investor LP owned an
81% limited partnership interest in Holdings, Investor GP owned a 4% general
partnership interest in Holdings, and the Continuing Graham Entities retained
a 1% general partnership interest and a 14% limited partnership interest in
Holdings. Upon the consummation of the Recapitalization, Holdings owned a
99% limited partnership interest in the Operating Company, and GPC Opco GP
LLC ("Opco GP"), a wholly owned subsidiary of Holdings, owned a 1% general
partnership interest in the Operating Company. Following the consummation of
the Recapitalization, certain members of Management owned an aggregate of
approximately 3% of the outstanding common stock of Investor LP, which
constitutes approximately a 2.6% interest in Holdings. In addition, an
affiliate of DB Alex. Brown LLC and Deutsche Bank AG (which acted as Initial
Purchasers of the Old Notes in the Offerings) acquired approximately a 4.8%
equity interest in Investor LP. See "Security Ownership of Certain
Beneficial Owners and Management" (Item 12).
CapCo I, a wholly owned subsidiary of the Operating Company, and
CapCo II, a wholly owned subsidiary of Holdings, were incorporated in
Delaware in January 1998. The sole purpose of CapCo I is to act as co-
obligor of the Senior Subordinated Notes and as co-borrower under the Senior
Credit Agreement. The sole purpose of CapCo II is to act as co-obligor of
the Senior Discount Notes and as co-guarantor with Holdings under the Senior
Credit Agreement. CapCo I and CapCo II have only nominal assets, do not
conduct any operations and did not receive any proceeds of the Offerings.
Accordingly, investors in the Notes must rely on the cash flow and assets of
the Operating Company or the cash flow and assets of Holdings, as the case
may be, for payment of the Notes.
Pursuant to the Recapitalization Agreement, the Graham Entities have
agreed that neither they nor their affiliates will, subject to certain
exceptions, for a period of five years from and after the Closing, 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.
The Recapitalization Agreement contains various representations,
warranties, covenants and conditions. The representations and warranties
generally did not survive the Closing. The Graham Entities have agreed to
indemnify Holdings in respect of any claims by Management with respect to the
21
adequacy of the Management awards and, subject to a limit of $12.5 million on
payments by the Graham Entities, 50% of certain specified environmental costs
in excess of $5.0 million.
Pursuant to the Recapitalization Agreement, upon the Closing,
Holdings entered into the Equipment Sales Agreement, the Consulting Agreement
and Partners Registration Rights Agreement (each as defined) described under
"Certain Relationships and Related Transactions" (Item 13).
SUMMARY OF SOURCES AND USES OF FUNDS
The following table sets forth a summary of the sources and uses of
the funds associated with the Recapitalization.
AMOUNT
-------------
(In Millions)
SOURCES OF FUNDS:
Bank Borrowings $ 403.5
Senior Subordinated Notes 225.0
Senior Discount Notes 100.6
Equity investments and retained equity 245.0
Repayment of Promissory notes 21.2
Available cash 1.7
----------
Total $ 997.0
==========
USES OF FUNDS:
Repayment of existing indebtedness $ 264.9
Redemption by Holdings of existing partnership interests 429.6
Purchase by Equity Investors of existing partnership 208.3
interests
Partnership interests retained by Continuing Graham 36.7
Entities
Payments to Management 15.4
Transaction costs and expenses 42.1
----------
Total $ 997.0
==========
22
Included $150.0 million of Fixed Rate Senior Subordinated Old Notes
and $75.0 million of Floating Rate Senior Subordinated Old Notes.
Included a $208.3 million equity investment made by Blackstone and
Management in the Equity Investors and a $36.7 million retained
partnership interest of the Continuing Graham Entities. In addition,
an affiliate of DB Alex. Brown LLC and Bankers Trust International
PLC, two of the Initial Purchasers, acquired approximately a 4.8%
equity interest in Investor LP. See "Security Ownership of Certain
Beneficial Owners and Management" (Item 12).
Included $264.5 million of existing indebtedness and $0.4 million of
accrued interest.
Employees
As of December 31, 2000, the Company had approximately 4,000
employees, 2,400 of which were located in the United States. Approximately
79% of the Company's employees are hourly wage employees, 43% of whom are
represented by various labor unions and are covered by various collective
bargaining agreements that expire between February, 2001 and April, 2004.
During the past three years, the Company's subsidiaries in France, Graham
Packaging France, S.A.S. and Graham Emballages Plastiques S.A. have
experienced labor stoppages on several occasions, none of which exceeded two
days in duration. Management believes that it enjoys good relations with the
Company's employees.
Environmental Matters
The Company's operations, both in the U.S. and abroad, are subject to
national, state, provincial and/or local laws and regulations that impose
limitations and prohibitions on the discharge and emission of, and establish
standards for the use, disposal, and management of, certain materials and
waste, and impose liability for the costs of investigating and cleaning up,
and certain damages resulting from, present and past spills, disposals, or
other releases of hazardous substances or materials. Environmental Laws can
be complex and may change often, capital and operating expenses to comply can
be significant, and violations may result in substantial fines and penalties.
In addition, environmental laws such as the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, also known as
"Superfund" in the United States, impose strict, and in certain
circumstances, joint and several, liability on responsible parties for the
investigation and cleanup of contaminated soil, groundwater and buildings,
23
and liability for damages to natural resources, at a wide range of
properties. Contamination at properties formerly owned or operated by the
Company as well as at properties the Company currently owns or operates, and
properties to which hazardous substances were sent by the Company, may result
in liability for the Company under environmental laws. The Company is not
aware of any material noncompliance with the environmental laws currently
applicable to it and is not the subject of any material claim for liability
with respect to contamination at any location. Management believes that it
is not reasonably possible that losses related to existing environmental
liabilities, in aggregate, could be material to the Company's financial
position, results of operations and liquidity. For its operations to comply
with environmental laws, the Company has incurred and will continue to incur
costs, which were not material in fiscal 2000 and are not expected to be
material in the future.
A number of governmental authorities both in the U.S. and abroad have
considered, are expected to consider, or have passed legislation aimed at
reducing the amount of disposed plastic wastes. Those programs have
included, for example, mandating certain rates of recycling and/or the use of
recycled materials, imposing deposits or taxes on plastic packaging material,
and/or requiring retailers or manufacturers to take back packaging used for
their products. That legislation, as well as voluntary initiatives similarly
aimed at reducing the level of plastic wastes, could reduce the demand for
certain plastic packaging, result in greater costs for plastic packaging
manufacturers, or otherwise impact the Company's business. Some consumer
products companies (including certain customers of the Company) have
responded to these governmental initiatives and to perceived environmental
concerns of consumers by using bottles made in whole or in part of recycled
plastic. The Company operates one of the largest HDPE bottles-to-bottles
recycling plants in the world and more than 65% of its HDPE units produced in
North America contain materials from recycled HDPE bottles. The Company
believes that to date these initiatives and developments have not materially
adversely affected the Company.
Intellectual Property
The Company holds various patents and trademarks. While in the aggregate
the patents are of material importance to its business, the Company believes
that its business is not dependent upon any one patent or trademark. The
Company also relies on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain its
competitive position. There can be no assurance, however, that others will
24
not obtain knowledge of such proprietary know-how through independent
development or other access by legal means. In addition to its own patents
and proprietary know-how, the Company is a party to certain licensing
arrangements and other agreements which authorize it to use certain other
proprietary processes, know-how and related technology and/or to operate
within the scope of certain patents owned by other entities. The duration
of the Company's licenses generally range from 9 to 20 years. In some cases
the licenses granted to the Company are perpetual and in other cases the term
is related to the life of the patents associated with the licenses. The
Company also has licensed or sublicensed certain of its intellectual property
rights to third parties. Also see "Certain Relationships and Related
Transactions" (Item 13).
Certain Risks of the Business
Substantial Leverage. Upon the consummation of the Recapitalization,
the Operating Company and Holdings became highly leveraged. The Senior
Credit Agreement, as amended by the Amendments (as defined below), includes
four term loans to the Operating Company with initial term loans totaling up
to $570.0 million, a $155.0 million Revolving Credit Facility, and a $100.0
million Growth Capital Revolving Credit Facility. The Indentures (as
defined) permit the Issuers to incur additional indebtedness, subject to
certain limitations. The annual debt service requirements for the Company
are as follows: 2001--$27.4 million; 2002--$27.2 million; 2003--$29.7
million; 2004--$220.8 million; and 2005--$67.2 million. The Company can incur
$75 million in additional indebtedness beyond the amount of the Senior Credit
Agreement. The Company does not anticipate that this additional indebtedness
would be expressly subordinated to other indebtedness. Accordingly, if
incurred at the Operating Company level, such additional indebtedness would
be senior to the Operating Company's Senior Subordinated Notes, and the
Senior Discount Notes of Holdings would be structurally subordinated to such
additional indebtedness.
The Issuers' high degree of leverage could have important
consequences to the holders of the Notes, including, but not limited to, the
following: (i) the Issuers' ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Issuers' cash flow from operations must be dedicated to the
payment of principal and interest on their indebtedness, thereby reducing the
funds available to the Issuers for other purposes, including capital
expenditures necessary for maintenance of the Company's facilities and for
the growth of its businesses; (iii) certain of the Issuers' borrowings are
and will continue to be at variable rates of interest, which exposes the
Issuers to the risk of increased interest rates; (iv) the indebtedness
outstanding under the Senior Credit Agreement is secured and matures prior to
25
the maturity of the Notes; (v) the Issuers may be substantially more
leveraged than certain of their competitors, which may place the Issuers at a
competitive disadvantage; and (vi) the Issuers' substantial degree of
leverage, as well as the covenants contained in the Indentures and the Senior
Credit Agreement, may hinder their ability to adjust rapidly to changing
market conditions and could make them more vulnerable in the event of a
downturn in general economic conditions or in their business.
Ability to Service Debt. The Issuers' ability to make scheduled
payments or to refinance their obligations with respect to their indebtedness
will depend on their financial and operating performance, which, in turn, is
subject to prevailing economic conditions and to certain financial, business
and other factors beyond their control. If the Issuers' cash flow and
capital resources are insufficient to fund their respective debt service
obligations, they may be forced to reduce or delay planned expansion and
capital expenditures, sell assets, obtain additional equity capital or
restructure their debt. There can be no assurance that the Issuers'
operating results, cash flow and capital resources will be sufficient for
payment of their indebtedness. In the absence of such operating results and
resources, the Issuers could face substantial liquidity problems and might be
required to dispose of material assets or operations to meet their respective
debt service and other obligations, and there can be no assurance as to the
timing of such sales or the proceeds which the Issuers could realize
therefrom. In addition, because the Operating Company's obligations under
the Senior Credit Agreement will bear interest at floating rates, an increase
in interest rates could adversely affect, among other things, the Operating
Company's ability to meet its debt service obligations. In the future, the
Operating Company will be required to make the following scheduled principal
payments on the Term Loans under the Senior Credit Agreement: 2001--$20.0
million; 2002--$25.0 million; 2003--$27.5 million; 2004--$93.0 million; 2005-
- -$64.9 million; 2006--$242.7 million; and 2007--$74.0 million. The Term Loan
Facilities under the Senior Credit Agreement shall be prepaid, subject to
certain conditions and exceptions, with (i) 100% of the net proceeds of any
incurrence of indebtedness, subject to certain exceptions, by Holdings or its
subsidiaries, (ii) 75% of the net proceeds of issuances of equity, subject to
certain exceptions, after the Closing by Holdings or any of its subsidiaries,
(iii) 100% of the net proceeds of certain asset dispositions, (iv) 50% of the
annual excess cash flow (as such term is defined in the Senior Credit
Agreement) of Holdings and its subsidiaries on a consolidated basis and (v)
100% of the net proceeds from any condemnation and insurance recovery events,
subject to certain reinvestment rights. Outstanding balances under the
Revolving Credit Facility and Growth Capital Revolving Credit Facility are
payable in 2004.
26
Additionally, if the Issuers were to sustain a decline in their
operating results or available cash, they could experience difficulty in
complying with the covenants contained in the Senior Credit Agreement, the
Indentures or any other agreements governing future indebtedness. The
failure to comply with such covenants could result in an event of default
under these agreements, thereby permitting acceleration of such indebtedness
as well as indebtedness under other instruments that contain cross-
acceleration and cross-default provisions.
Holding Company Structure; Structural Subordination of Senior
Discount Exchange Notes. Holdings is a holding company which has no
significant assets other than its direct and indirect partnership interests
in the Operating Company. CapCo II, a wholly owned subsidiary of Holdings,
was formed for the purpose of serving as a co-issuer of the Senior Discount
Notes and has no operations or assets from which it will be able to repay the
Senior Discount Notes. Accordingly, the Holdings Issuers must rely entirely
upon distributions from the Operating Company to generate the funds necessary
to meet their obligations, including the payment of accreted value or
principal and interest on the Senior Discount Notes. The Senior Subordinated
Indenture and the Senior Credit Agreement contain significant restrictions on
the ability of the Operating Company to distribute funds to Holdings. There
can be no assurance that the Senior Subordinated Indenture, the Senior Credit
Agreement or any agreement governing indebtedness that refinances such
indebtedness or other indebtedness of the Operating Company will permit the
Operating Company to distribute funds to Holdings in amounts sufficient to
pay the Accreted Value or principal or interest on the Senior Discount Notes
when the same become due (whether at maturity, upon acceleration or
otherwise).
The only significant assets of Holdings are its partnership interests
in the Operating Company. All such interests are pledged by Holdings as
collateral under the Senior Credit Agreement. Therefore, if Holdings were
unable to pay the Accreted Value or principal or interest on the Senior
Discount Notes, the ability of the holders of the Senior Discount Notes to
proceed against the partnership interests of the Operating Company to satisfy
such amounts would be subject to the prior satisfaction in full of all
amounts owing under the Senior Credit Agreement. Any action to proceed
against such partnership interests by or on behalf of the holders of Senior
Discount Notes would constitute an event of default under the Senior Credit
Agreement entitling the lenders thereunder to declare all amounts owing
thereunder to be immediately due and payable, which event would in turn
constitute an event of default under the Senior Subordinated Indenture,
entitling the holders of the Senior Subordinated Notes to declare the
27
principal and accrued interest on the Senior Subordinated Notes to be
immediately due and payable. In addition, as secured creditors, the lenders
under the Senior Credit Agreement would control the disposition and sale of
the Operating Company partnership interests after an event of default under
the Senior Credit Agreement and would not be legally required to take into
account the interests of unsecured creditors of Holdings, such as the holders
of the Senior Discount Notes, with respect to any such disposition or sale.
There can be no assurance that the assets of Holdings after the satisfaction
of claims of its secured creditors would be sufficient to satisfy any amounts
owing with respect to the Senior Discount Notes.
The Senior Discount Notes will be effectively subordinated to all
existing and future claims of creditors of Holdings' subsidiaries, including
the lenders under the Senior Credit Agreement, the holders of the Senior
Subordinated Notes and trade creditors. As described above, the rights of
the Holdings Issuers and their creditors, including the holders of the Senior
Discount Notes, to realize upon the assets of Holdings or any of its
subsidiaries upon any such subsidiary's liquidation (and the consequent
rights of the holders of the Senior Discount Notes to participate in the
realization of those assets) will be subject to the prior claims of the
lenders under the Senior Credit Agreement and the creditors of Holdings'
subsidiaries including in the case of the Operating Company, the lenders
under the Senior Credit Agreement and the holders of the Senior Subordinated
Notes. In such event, there may not be sufficient assets remaining to pay
amounts due on any or all of the Senior Discount Notes then outstanding.
Under the Senior Credit Agreement, the Operating Company is subject to
restrictions on the payment of dividends or other distributions to Holdings;
provided that, subject to certain limitations, the Operating Company may pay
dividends or other distributions to Holdings (i) in respect of overhead, tax
liabilities, legal, accounting and other professional fees and expenses, (ii)
to fund purchases and redemptions of equity interests of Holdings or Investor
LP held by 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 payments on the Senior Discount Notes.
The Senior Subordinated Notes and all amounts owing under the Senior
Credit Agreement will mature prior to the maturity of the Senior Discount
Notes. The Senior Discount Indenture requires that any agreements governing
indebtedness that refinances the Senior Subordinated Notes or the Senior
Credit Agreement not contain restrictions on the ability of the Operating
28
Company to make distributions to Holdings that are more restrictive than
those contained in the Senior Subordinated Indenture or the Senior Credit
Agreement, respectively. There can be no assurance that if the Operating
Company is required to refinance the Senior Subordinated Notes or any amounts
under the Senior Credit Agreement, it will be able to do so upon acceptable
terms, if at all.
Subordination of Senior Subordinated Notes and Holdings Guarantee.
The Senior Subordinated Notes are unsecured obligations of the Company
Issuers that are subordinated in right of payment to all Senior Indebtedness
of the Company Issuers, including all indebtedness under the Senior Credit
Agreement. The Indentures and the Senior Credit Agreement will permit the
Operating Company to incur additional Senior Indebtedness, provided that
certain conditions are met, and the Operating Company expects from time to
time to incur additional Senior Indebtedness. In the event of the
insolvency, liquidation, reorganization, dissolution or other winding up of
the Company Issuers or upon a default in payment with respect to, or the
acceleration of, or if a judicial proceeding is pending with respect to any
default under, any Senior Indebtedness, the lenders under the Senior Credit
Agreement and any other creditors who are holders of Senior Indebtedness must
be paid in full before a holder of the Senior Subordinated Notes may be paid.
Accordingly, there may be insufficient assets remaining after such payments
to pay principal or interest on the Senior Subordinated Notes. In addition,
under certain circumstances, no payments may be made with respect to the
principal of or interest on the Senior Subordinated Notes if a default exists
with respect to certain Senior Indebtedness. CapCo I, a wholly owned
subsidiary of the Operating Company, was formed solely for the purpose of
serving as a co-issuer of the Senior Subordinated Notes and has no operations
or assets from which it will be able to repay the Senior Subordinated Notes.
Accordingly, the Company Issuers must rely entirely upon the cash flow and
assets of the Operating Company to generate the funds necessary to meet their
obligations, including the payment of principal and interest on the Senior
Subordinated Notes.
The Senior Subordinated Notes are fully and unconditionally
guaranteed by Holdings on a senior subordinated basis. The Holdings
Guarantee is subordinated to all senior indebtedness of Holdings and
effectively subordinated to all indebtedness and other liabilities (including
but not limited to trade payables) of Holdings' subsidiaries. Because the
Holdings Guarantee will be subordinated in right of payment to all senior
indebtedness of Holdings and effectively subordinated to all indebtedness and
other liabilities (including trade payables) of Holdings' subsidiaries
(including the Operating Company), investors should not rely on the Holdings
29
Guarantee in evaluating an investment in the Senior Subordinated Exchange
Notes.
Restrictive Debt Covenants. The Senior Credit Agreement and the
Indentures contain a number of significant covenants that, among other
things, restrict the ability of the Issuers to dispose of assets, repay other
indebtedness, incur additional indebtedness, pay dividends, prepay
subordinated indebtedness (including, in the case of the Senior Credit
Agreement, the Notes), incur liens, make capital expenditures and make
certain investments or acquisitions, engage in mergers or consolidations,
engage in certain transactions with affiliates and otherwise restrict the
activities of the Issuers. In addition, under the Senior Credit Agreement,
the Operating Company is required to satisfy specified financial ratios and
tests. The ability of the Operating Company to comply with such provisions
may be affected by events beyond the Operating Company's control, and there
can be no assurance that the Operating Company will meet those tests. The
breach of any of these covenants could result in a default under the Senior
Credit Agreement. In the event of any such default, depending upon the
actions taken by the lenders, the Issuers could be prohibited from making any
payments of principal or interest on the Notes. In addition, the lenders
could elect to declare all amounts borrowed under the Senior Credit
Agreement, together with accrued interest, to be due and payable and could
proceed against the collateral securing such indebtedness. If the Senior
Indebtedness were to be accelerated, there can be no assurance that the
assets of the Operating Company would be sufficient to repay in full that
indebtedness and the other indebtedness of the Operating Company.
Risks Associated with International Operations. The Company has
significant operations outside the United States in the form of wholly owned
subsidiaries, cooperative joint ventures and other arrangements. The
Company's 26 plants outside of the United States are located in Argentina
(2), Belgium (1), Brazil (5), Canada (4), France (4), Germany (2), Hungary
(1), Italy (2), Poland (2), Spain (1), Turkey (1), and the United Kingdom
(1). As a result, the Company is subject to risks associated with operating
in foreign countries, including fluctuations in currency exchange rates,
imposition of limitations on conversion of foreign currencies into dollars or
remittance of dividends and other payments by foreign subsidiaries,
imposition or increase of withholding and other taxes on remittances and
other payments by foreign subsidiaries, labor relations problems,
hyperinflation in certain foreign countries and imposition or increase of
investment and other restrictions by foreign governments or the imposition of
environmental or employment laws. To date, the above risks in Europe, North
America and Latin America have not had a material impact on the Company's
30
operations, but no assurance can be given that such risks will not have a
material adverse effect on the Company in the future.
Exposure to Fluctuations in Resin Prices and Dependence on Resin
Supplies. The Company depends on large quantities of PET and HDPE resins in
manufacturing its products. One of its primary strategies is to grow the
business by capitalizing on the conversion from glass, metal and paper
containers to plastic containers. A sustained increase in resin prices, to
the extent that those costs are not passed on to the end-consumer, would make
plastic containers less economical for the Company's customers, and could
result in a slower pace of conversions to plastic containers. Historically,
the Company has passed through substantially all increases in the cost of
resins to its customers through contractual provisions and standard industry
practice; however, if the Company is not able to do so in the future and
there are sustained increases in resin prices, the Company's operating
margins could be affected adversely. Furthermore, if the Company cannot
obtain resin from any of its suppliers, the Company may have difficulty
obtaining alternate sources quickly and economically, and its operations and
profitability may be impaired.
Dependence on Significant Customer. All product lines the Company
provides to Unilever, the Company's largest customer, collectively accounted
for approximately 11.4% of the Company's net sales for the year ended December
31, 2000. Unilever's termination of its relationship with the Company could
have a material adverse effect upon the Company's business, financial
position or results of operations. On December 4, 2000 PepsiCo, Inc.
announced a proposed acquisition of Quaker Oats. The Company currently
provides plastic containers to Quaker Oats, PepsiCo and to Tropicana, an
existing unit of PepsiCo, Inc. Had the three entities been combined for all
of calendar year 2000, they would have accounted for approximately 12% of the
Company's total net sales. Additionally, in 2000 the Company's top 20
customers comprised over 77% of its net sales. The Company's existing
customers' purchase orders and contracts typically vary from one to ten
years. Prices under these arrangements are tied to market standards and
therefore vary with market conditions. The contracts generally are
requirements contracts which do not obligate the customer to purchase any
given amount of product from the Company. Accordingly, despite the existence
of supply contracts with its customers, the Company faces the risk that
customers will not purchase the amounts that the Company expects pursuant to
its customers' supply contracts.
Dependence on Key Personnel. The success of the Company depends to a
large extent on a number of key employees, and the loss of the services
provided by them could have a material adverse effect on the Company's
ability to operate its business and implement its strategies effectively. In
particular, the loss of the services provided by G. Robinson Beeson, Scott G.
Booth, John A. Buttermore, John E. Hamilton, Roger M. Prevot, Ashok Sudan and
Philip R. Yates, among others, could have a material adverse effect on the
31
Company. The Company does not maintain "key" person insurance on any of its
executive officers.
Relationship with Graham Affiliates. The relationship of the Company
with Graham Engineering and Graham Capital Corporation ("Graham Capital"), or
their successors or assigns, is material to the business of the Company. To
date, certain affiliates of the Graham Entities have provided important
equipment, technology and services to Holdings and its subsidiaries. Upon
the Recapitalization, Holdings entered into the Equipment Sales Agreement (as
defined) with Graham Engineering, pursuant to which Graham Engineering will
provide the Company with the Graham Wheel and related technical support, and
the Consulting Agreement (as defined in Item 13) with Graham Capital,
pursuant to which Graham Capital will provide the Company with certain
consulting services. The obligations of Holdings to make payments to the
Graham affiliates under the Equipment Sales Agreement and the Consulting
Agreement would be unsubordinated obligations of Holdings. Accordingly, such
obligations would be pari passu with the Senior Discount Notes and would be
structurally subordinated to the Senior Subordinated Notes. If any such
agreements were terminated prior to their scheduled terms or if the relevant
Graham affiliate fails to comply with any such agreement, the business,
financial condition and results of operations of the Company could be
materially and adversely affected.
Fraudulent Conveyance. In connection with the Recapitalization, the
Operating Company made a distribution to Holdings of $313.7 million of the
net proceeds of the Senior Subordinated Offering and the Bank Borrowings, and
Holdings redeemed certain partnership interests held by the Graham Entities
for $429.6 million (without giving effect to payment by the Graham Entities
of $21.2 million owed to Holdings under certain promissory notes). If a
court in a lawsuit brought by an unpaid creditor of one of the Issuers or a
representative of such creditor, such as a trustee in bankruptcy, or one of
the Issuers as a debtor-in-possession, were to find under relevant federal
and state fraudulent conveyance statutes that such Issuer had (a) actual
intent to defraud or (b) did not receive fair consideration or reasonably
equivalent value for the distribution from the Operating Company to Holdings
or for incurring the debt, including the Notes, in connection with the
financing of the Recapitalization, and that, at the time of such incurrence,
such Issuer (i) was insolvent, (ii) was rendered insolvent by reason of such
incurrence, (iii) was engaged in a business or transaction for which the
assets remaining with such Issuer constituted unreasonably small capital or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court could void such
Issuer's obligations under the Notes, subordinate the Notes to other
32
indebtedness of such Issuer or take other action detrimental to the holders
of the Notes.
The measure of insolvency for these purposes varies depending upon
the law of the jurisdiction being applied. Generally, however, a company
would be considered insolvent for these purposes if the sum of the company's
debts (including contingent debts) were greater than the fair saleable value
of all the company's property, or if the present fair saleable value of the
company's assets were less than the amount that would be required to pay its
probable liability on its existing debts as they become absolute and matured.
Moreover, regardless of solvency or the adequacy of consideration, a court
could void an Issuer's obligations under the Notes, subordinate the Notes to
other indebtedness of such Issuer or take other action detrimental to the
holders of the Notes if such court determined that the incurrence of debt,
including the Notes, was made with the actual intent to hinder, delay or
defraud creditors.
The Issuers believe that the indebtedness represented by the Notes
was incurred for proper purposes and in good faith without any intent to
hinder, delay or defraud creditors, that the Issuers received reasonably
equivalent value or fair consideration for incurring such indebtedness, that
the Issuers were prior to the issuance of the Notes and, after giving effect
to the issuance of the Notes and the use of proceeds in connection with the
Recapitalization, continued to be, solvent under the applicable standards
(notwithstanding the negative net worth and insufficiency of earnings to
cover fixed charges for accounting purposes that will result from the
Recapitalization) and that the Issuers have and will have sufficient capital
for carrying on their businesses and are and will be able to pay their debts
as they mature. There can be no assurance, however, as to what standard a
court would apply in order to evaluate the parties' intent or to determine
whether the Issuers were insolvent at the time, or rendered insolvent upon
consummation, of the Recapitalization or the sale of the Notes or that,
regardless of the method of valuation, a court would not determine that an
Issuer was insolvent at the time, or rendered insolvent upon consummation, of
the Recapitalization.
In rendering their opinions in connection with the Offerings, counsel
for the Issuers and counsel for the Initial Purchasers did not express any
opinion as to the applicability of federal or state fraudulent conveyance
laws.
Control by Blackstone. Since the consummation of the
Recapitalization, Blackstone has indirectly controlled approximately 80% of
33
the general partnership interests in Holdings. Pursuant to the Holdings
Partnership Agreement (as defined), holders of a majority of the general
partnership interests generally have the sole power, subject to certain
exceptions, to take actions on behalf of Holdings, including the appointment
of management and the entering into of mergers, sales of substantially all
assets and other extraordinary transactions. There can be no assurance that
the interests of Blackstone will not conflict with the interests of holders
of the Notes.
Risks Associated with Possible Future Acquisitions. The Company's
future growth may be a function, in part, of acquisitions of other consumer
goods packaging businesses. To the extent that it grows through acquisition,
the Company will face the operational and financial risks commonly
encountered with that type of a strategy. The Company would also face
certain operational risks, such as, failing to assimilate the operations and
personnel of the acquired businesses, disrupting the Company's ongoing
business, dissipating the Company's limited management resources and
impairing relationships with employees and customers of the acquired business
as a result of changes in ownership and management. Additionally, in order
to finance acquisitions, the Company would likely incur additional
indebtedness, as permitted under the Senior Credit Agreement and the
Indentures, in which case it would also face certain financial risks
associated with the incurring of additional indebtedness to make an
acquisition, such as reducing its liquidity, access to capital markets and
financial stability.
Item 2. Properties
The Company currently owns or leases 60 plants located in Argentina,
Belgium, Brazil, Canada, France, Germany, Hungary, Italy, Poland, Spain,
Turkey, the United Kingdom and the United States. Twenty-one of the Company's
plants are located on site at customer and vendor facilities. The Company's
operation in Sulejowek, Poland during 2000 was pursuant to a joint venture
arrangement in which the Company owns a 50% interest. In 1999, the Company
consolidated and relocated its corporate headquarters to a facility located in
York, Pennsylvania. The Company believes that its plants, which are of varying
ages and types of construction, are in good condition, are suitable for the
Company's operations and generally are expected to provide sufficient
capacity to meet the Company's requirements for the foreseeable future.
34
The following table sets forth the location of the Company's plants
and administrative facilities, whether on-site or off-site, whether leased or
owned, and their approximate current square footage.
On Site Size
Location Or Off Site Leased/Owned (Sq. ft.)
- -------- ----------- ------------ ---------
U.S. Packaging Facilities
1. York, Pennsylvania Off Site Owned 395,554
2. Maryland Heights, Missouri Off Site Owned 308,961
3. Holland, Michigan Off Site Leased 218,128
4. York, Pennsylvania Off Site Leased 210,370
5. Selah, Washington On Site Owned 170,553
6. Atlanta, Georgia On Site Leased 165,000
7. Montgomery, Alabama Off Site Leased 150,143
8. Emigsville, Pennsylvania Off Site Leased 148,300
9. Levittown, Pennsylvania Off Site Leased 148,000
10. Rancho Cucamonga, California Off Site Leased 143,063
11. Santa Ana, California Off Site Owned 127,680
12. Muskogee, Oklahoma Off Site Leased 125,000
13. Woodridge, Illinois Off Site Leased 124,137
14. Atlanta, Georgia Off Site Leased 112,400
15. Cincinnati, Ohio Off Site Leased 111,669
16. Bradford, Pennsylvania Off Site Leased 90,350
17. Berkeley, Missouri Off Site Owned 75,000
18. Jefferson, Louisiana Off Site Leased 58,799
19. Cambridge, Ohio On Site Leased 57,000
20. Port Allen, Louisiana On Site Leased 56,721
21. Shreveport, Louisiana On Site Leased 56,400
22. Richmond, California Off Site Leased 54,985
23. Houston, Texas Off Site Owned 52,500
24. Lakeland, Florida Off Site Leased 49,000
25. New Kensington, Pennsylvania On Site Leased 48,000
26. N. Charleston, South Carolina On Site Leased 45,000
27. Darlington, South Carolina On Site Leased 43,200
28. Bradenton, Florida On Site Leased 33,605
29. Vicksburg, Mississippi On Site Leased 31,200
30. Bordentown, New Jersey On Site Leased 30,000
31. Tulsa, Oklahoma On Site Leased 28,500
32. Wapato, Washington Off Site Leased 20,300
33. Rancho Cucamonga, California Off Site Leased 17,179
35
Canadian Packaging Facilities
34. Burlington, Ontario, Canada Off Site Owned 145,200
35. Mississauga, Ontario, Canada Off Site Owned 78,416
36. Anjou, Quebec, Canada Off Site Owned 44,875
37. Toronto, Ontario, Canada On Site 5,000
European Packaging Facilities
38. Assevent, France Off Site Owned 186,000
39. Noeux les Mines, France Off Site Owned 120,000
40. Wrexham, United Kingdom Off Site Owned 120,000
41. Campochiaro, Italy Off Site Owned 93,200
42. Blyes, France Off Site Owned 89,000
43. Sulejowek, Poland Off Site Owned 83,700
44. Bad Bevensen, Germany Off Site Owned/Leased 80,000
45. Meaux, France Off Site Owned 80,000
46. Aldaia, Spain On Site Leased 75,350
47. Sovico (Milan), Italy Off Site Leased 74,500
48. Istanbul, Turkey Off Site Owned 50,000
49. Rotselaar, Belgium On Site Leased 15,070
50. Bierun, Poland On Site Leased 10,652
51. Genthin, Germany On Site Leased 6,738
52. Nyirbator, Hungary On Site Leased 5,000
Latin American Packaging Facilities
53. Sao Paulo, Brazil Off Site Leased 66,092
54. Buenos Aires, Argentina Off Site Owned 33,524
55. Rio de Janeiro, Brazil On Site Owned/Leased 22,604
56. Rio de Janeiro, Brazil On Site Leased 16,685
57. Rio de Janeiro, Brazil On Site 11,000
58. San Luis, Argentina Off Site Owned 8,070
59. Santos, Brazil On Site Leased 5,800
Graham Recycling
60. York, Pennsylvania Off Site Owned 44,416
Administrative Facilities
- York, Pennsylvania N/A Leased 70,071
- Burlington, Ontario, Canada N/A Owned 4,800
- Rueil, Paris, France N/A Leased 4,300
- Sao Paulo, Brazil N/A Leased 3,800
36
Substantially all of the Company's domestic tangible and intangible
assets are pledged as collateral pursuant to the terms of the Senior
Credit Agreement and Amendments
This facility is leased by PlasPET Florida, Ltd., in which the Company
holds a 51% interest
The Company expects to close this facility during the second quarter of
2001
This facility was owned by the Masko Graham Joint Venture during 2000,
in which the Company holds a 50% interest
Currently under construction
These on-site facilities are operated without leasing the space occupied
The building is owned; land is leased
Contributed to the Operating Company as part of the Graham Contribution.
With respect to the Berkeley, Missouri facility (location 17 in the
table above), a manufacturing warehouse and parcel of land, the latter
two of which are not listed in the table above, were contributed to the
Operating Company as part of the Graham Contribution.
Item 3. Legal Proceedings
The Company is party to various litigation matters arising in the
ordinary course of business. The ultimate legal and financial liability of
the Company with respect to such 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 Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Because Holdings is a limited partnership, equity interests in
Holdings take the form of general and limited partnership interests. There
is no established public trading market for any of the general or limited
partnership interests in Holdings.
There are two owners of general partner interests in Holdings:
Investor GP and Graham Packaging Corporation. The limited partnership
interests in Holdings are owned by Investor LP and a Graham family entity.
See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
Opco GP is the sole owner of a general partnership interest in the
Operating Company, and Holdings is the sole owner of a limited partnership
interest in the Operating Company.
The Operating Company owns all of the outstanding capital stock of
CapCo I. Holdings owns all of the outstanding capital stock of CapCo II.
Holdings has made distributions to its partners totaling the amounts
set forth in the Statements of Partners' Capital (Deficit) included in
Item 8 of this Report, during the periods indicated therein.
Under the Senior Credit Agreement, the Operating Company is subject
to restrictions on the payment of dividends and other distributions to
Holdings, as described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Liquidity and Capital
Resources."
As indicated under Item 1, "Business---The Recapitalization", upon
the Closing of the Recapitalization, (i) certain limited and general
partnership interests in Holdings held by the Graham Entities were redeemed
by Holdings for $429.6 million, and (ii) certain limited and general
partnership interests in Holdings held by the Graham Entities were purchased
by the Equity Investors for $208.3 million.
As indicated under Item 1, "Business---The Recapitalization", upon
the Closing of the Recapitalization on February 2, 1998, the Company Issuers
consummated an offering pursuant to Rule 144A under the Securities Act of
their Senior Subordinated Notes Due 2008, consisting of $150,000,000
38
aggregate principal amount of their Fixed Rate Senior Subordinated Old Notes
and $75,000,000 aggregate principal amount of their Floating Rate Senior
Subordinated Old Notes. On February 2, 1998, as part of the
Recapitalization, the Holdings Issuers also consummated an offering pursuant
to Rule 144A under the Securities Act of $169,000,000 aggregate principal
amount at maturity of their Senior Discount Old Notes. Pursuant to the
Purchase Agreement dated January 23, 1998 (the "Purchase Agreement"), the
Initial Purchasers, DB Alex. Brown LLC, Bankers Trust International PLC,
Lazard Freres & Co. LLC and Salomon Brothers Inc, purchased the Senior
Subordinated Old Notes at a price of 97.0% of the principal amount, for a
discount of 3% from the initial offering price of 100% or a total discount of
$6,750,000. Pursuant to the Purchase Agreement, the Initial Purchasers
purchased the Senior Discount Old Notes at a price of 57.173% of the
principal amount for a discount of 2.361% from the initial offering price of
59.534% or a total discount of $3,990,090. Pursuant to the Purchase
Agreement, the Issuers also reimbursed the Initial Purchasers for certain
expenses. Pursuant to the Senior Subordinated Exchange Offers, on September
8, 1998, the Company Issuers exchanged $150,000,000 aggregate principal
amount of their Fixed Rate Senior Subordinated Exchange Notes and $75,000,000
aggregate principal amount of their Floating Rate Senior Subordinated
Exchange Notes for equal principal amounts of Fixed Rate Senior Subordinated
Old Notes and Floating Rate Senior Subordinated Old Notes, respectively.
Pursuant to the Senior Discount Exchange Offer, on September 8, 1998, the
Holdings Issuers exchanged $169,000,000 aggregate principal amount at
maturity of their Senior Discount Exchange Notes for an equal principal
amount of Senior Discount 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.
Item 6. Selected Financial Data
The following table sets forth certain selected historical financial
data for the Company for and at the end of each of the years in the five-year
period ended December 31, 2000 and are derived from the Company's audited
financial statements. The combined financial statements as of December 31,
1996 and 1997 and for each of the two years in the period ended December 31,
1997 have been restated for the change in accounting for inventory costs as
described in note (7) to the following table. The combined financial
statements of the Company (as defined in Note 1 to the Financial Statements
(Item 8)) have been prepared for periods prior to the Recapitalization to
include Holdings and its subsidiaries on a combined basis and for periods
subsequent to the Recapitalization, on a consolidated basis. The following
table should be read in conjunction with "Management's Discussion and
39
Analysis of Financial Condition and Results of Operations" (Item 7) and the
consolidated financial statements of the Company, including the related notes
thereto, included under Item 8.
Year Ended December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In millions)
INCOME STATEMENT DATA
Net sales $459.7 $521.7 $588.1 $716.1 $824.6
Gross profit 77.0 84.7 115.4 142.7 135.1
Selling, general and administrative expenses 35.5 34.9 37.8 48.0 56.8
Impairment charges --- --- --- --- 21.1
Special charges and unusual items 7.0 24.4 24.2 4.6 1.1
------ ------ ------ ------ ------
Operating income 34.5 25.4 53.4 90.1 56.1
Recapitalization expenses --- --- 11.8 --- ---
Interest expense, net 14.5 13.4 68.0 87.5 101.7
Other (income) expense, net (1.0) 0.7 (0.2) (0.7) 0.2
Minority interest --- 0.2 --- (0.5) (0.6)
Income tax provision --- 0.6 1.1 2.5 0.4
Extraordinary loss --- --- 0.7 --- ---
------ ------ ------ ------ ------
Net income (loss) $ 21.0 $ 10.5 $(28.0) $ 1.3 $(45.6)
====== ====== ====== ====== ======
OTHER DATA:
Cash flows from:
Operating activities $68.0 $66.9 $41.8 $ 55.5 $ 90.9
Investing activities (32.8) (72.3) (181.2) (181.8) (164.7)
Financing activities (34.6) 9.5 139.7 126.2 78.4
Adjusted EBITDA 90.4 90.1 117.7 149.1 153.7
Capital expenditures (excluding 31.3 53.2 133.9 171.0 163.4
acquisitions)
Investments (including acquisitions) 1.2 19.0 45.2 10.3 0.1
Depreciation and amortization 48.2 41.0 39.3 53.2 66.2
Ratio of earnings to fixed charges 2.2x 1.6x --- 1.0x ---
BALANCE SHEET DATA:
Working capital (deficit) $ 18.7 $ 4.4 $ (5.5) $ 10.6 $(23.5)
Total assets 340.5 387.5 596.7 741.2 821.3
Total debt 240.5 268.5 875.4 1,017.1 1,060.2
Partners' capital (deficit) 18.5 2.3 (438.8) (458.0) (464.4)
Net sales increase or decrease based on fluctuations in resin prices as
industry practice and the Company's agreements with its customers permit
40
substantially all price changes to be passed through to customers by
means of corresponding changes in product pricing. Therefore, the
Company's dollar gross profit is substantially unaffected by
fluctuations in resin prices. However, a sustained increase in resin
prices, to the extent that those costs are not passed on to the end-
consumer, would make plastic containers less economical for the
Company's customers, and could result in a slower pace of conversions to
plastic containers.
Includes impairment charges recorded on certain long-lived assets ($16.3
million) and goodwill ($4.8 million) (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" (Item 7) for a further discussion).
Includes compensation costs related to the Company's 1998
recapitalization, restructuring, systems conversion, aborted acquisition
and legal costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (Item 7) and "Financial Statements
and Supplementary Data" (Item 8), including the related notes thereto.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (Item 7) and "Financial Statements and
Supplementary Data" (Item 8), including the related notes thereto.
As a limited partnership, Holdings is not subject to U.S. federal income
taxes or most state income taxes. Instead, such taxes are assessed to
Holdings' partners based on the income of Holdings. Holdings made tax
distributions to its partners to reimburse them for such tax
liabilities. The Company's foreign operations are subject to tax in
their local jurisdictions. Most of these entities have historically had
net operating losses and recognized minimal tax expense.
Represents cost incurred, including the write-off of unamortized debt
issuance fees, in connection with the early extinguishment of debt.
Effective June 28, 1999, the Company changed its method of valuing
inventories for its domestic operations from the LIFO method to the FIFO
method as over time it more closely matches revenues with costs. The
FIFO method more accurately reflects the costs related to the actual
physical flow of raw materials and finished goods inventory.
Accordingly, the Company believes the FIFO method of valuing inventory
will result in a better measurement of operating results. All
previously reported results have been restated to reflect the
retroactive application of the accounting change as required by
generally accepted accounting principles. The accounting change
41
decreased net income for the year ended December 31, 1996 by $0.2
million, increased net income for the year ended December 31, 1997 by
$0.3 million and increased net loss for the year ended December 31, 1998
by $2.0 million.
In April 1997, the Company acquired 80% of certain assets and assumed
80% of certain liabilities of Rheem-Graham Embalagens Ltda. for $20.3
million (excluding direct costs of the acquisition). The remaining 20%
was purchased in February 1998. In July 1998, the Company acquired
selected plastic container manufacturing operations of Crown, Cork &
Seal located in France, Germany, the United Kingdom and Turkey for $38.9
million (excluding direct costs of the acquisition), net of liabilities
assumed. 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 $1.1 million (excluding direct costs of the
acquisition), net of liabilities assumed. On July 1, 1999, the Company
acquired selected companies located in Argentina for $8.1 million
(excluding direct costs of the acquisition), net of liabilities assumed.
These transactions were accounted for under the purchase method of
accounting. Results of operations are included since the dates of
acquisition.
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 defined in the Company's two existing indentures as earnings before
minority interest, extraordinary items, interest expense, interest
income, income taxes, depreciation and amortization expense, the
ongoing $1 million per year fee paid pursuant to the Blackstone
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 is included in this Report to provide additional
information with respect to the ability of Holdings and the Operating
Company to satisfy their debt service, capital expenditure and working
capital requirements and because certain covenants in Holdings' and the
Operating Company's borrowing arrangements are tied to similar measures.
While Adjusted EBITDA and similar measures are frequently used as a
measure of operations and the ability to meet debt service requirement,
these terms are not necessarily comparable to other similarly titled
captions of other companies due to the potential inconsistencies in the
method of calculation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Item 7) and "Financial
42
Statements and Supplementary Data (Item 8), including the related notes
thereto.
Adjusted EBITDA is calculated as follows:
Year Ended December 31,
---------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In millions)
Income (loss) before extraordinary item $ 21.0 $ 10.5 $(27.3) $ 1.3 $(45.6)
Interest expense, net 14.5 13.4 68.0 87.5 101.7
Income tax expense -- 0.6 1.1 2.5 0.4
Depreciation and amortization 48.2 41.0 39.3 53.2 66.2
Impairment charges - - - - 21.1
Fees paid pursuant to the Blackstone monitoring agreement -- -- 1.0 1.0 1.0
Equity income in earnings of joint venture (0.3) (0.2) (0.3) (0.3) (0.1)
Non-cash compensation -- 0.2 -- -- --
Special charges and unusual items/certain non-recurring charges (A) 7.0 24.4 24.2 4.6 9.6
Recapitalization expenses -- -- 11.8 (0.2) --
Minority interest -- 0.2 -- (0.5) (0.6)
------ ------ ------- ------ ------
Adjusted EBITDA (B) $ 90.4 $ 90.1 $ 117.8 $149.1 $ 153.7
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(A) For the year ended December 31, 2000 includes special charges and
unusual items related to compensation costs related to the
Company's 1998 recapitalization ($1.1 million) and certain non-
recurring charges including costs related to a postponed initial
public offering ($1.5 million), global restructuring costs ($6.0
million) and other costs ($1.0 million). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" (Item 7) and "Financial Statements and Supplementary
Data" (Item 8), including the related notes thereto.
(B) Does not include project startup costs, which are treated as non-
recurring in accordance with the definition of EBITDA under the
Company's Senior Credit Agreement. These startup costs were $8.4
million and $4.4 million for the years ended December 31, 2000 and
1999, respectively.
Investments include the acquisitions made by the Company in the United
States, France, the United Kingdom, Brazil, Argentina, Germany and
Turkey described in note (8) above. Amounts shown under this caption
represent cash paid, net of cash acquired in the acquisitions.
43
Depreciation and amortization excludes amortization of debt issuance
fees, which is included in interest expense, net.
For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, minority interest
and extraordinary items, plus fixed charges. Fixed charges include
interest expense on all indebtedness, amortization of debt issuance
fees, and one-third of rental expense on operating leases representing
that portion of rental expense deemed to be attributable to interest.
Earnings were insufficient to cover fixed charges by $26.3 million for
the year ended December 31, 1998 and by $45.8 million for the year ended
December 31, 2000.
Working capital is defined as current assets, less cash and cash
equivalents, minus current liabilities, less current maturities of long-
term debt.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview