Back to GetFilings.com
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, 2002
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), Yes [X] No [ ]; and (2) has been subject to
such filing requirements for the past 90 days, Yes [ ] No[X].
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [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,
2003 was $-0-. As of February 28, 2003, 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.
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
Page
Number
PART I
Item 1. Business........................................................1
Item 2. Properties.....................................................16
Item 3. Legal Proceedings..............................................18
Item 4. Submission of Matters to a Vote of Security Holders............18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................19
Item 6. Selected Financial Data........................................19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....32
Item 8. Financial Statements and Supplementary Data....................34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................61
PART III
Item 10. Advisory Committee Members, Directors and Executive Officers
of the Registrant..............................................62
Item 11. Executive Compensation.........................................64
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................68
Item 13. Certain Relationships and Related Transactions.................69
PART IV
Item 14. Controls and Procedures........................................75
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K............................................................75
I
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 Existing 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 Donald C. Graham and/or
certain entities controlled by Mr. Graham and his family. Since March 30, 2001
the Company's operations have included the operations of Masko Graham Spolka
Z.O.O. ("Masko Graham") as a result of acquiring an additional 1% interest, for
a total interest of 51%, in a joint venture. 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.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Annual 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 Company's 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 container 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 (as hereinafter defined) 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.
1
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 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, Canada and Mexico; Europe; and South America.
Each operating segment includes three major service lines: Food and Beverage,
Household and Personal Care, and Automotive Lubricants.
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 and currently
operates 57 plants throughout North America, Europe and South America. The
Company's primary strategy 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
products companies in each category that it 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.
From fiscal 1998 through fiscal 2002 the Company has grown its net
sales at a compounded annual growth rate of over 10% as a result of its
capital investment and focus on the high growth food and beverage conversions
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. More than 40% 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 substantially 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 2002, the
Company's top 20 customers comprised over 82% 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 volume
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, 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
2
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 also one of only three domestic market participants
that are leading large-scale product conversions to hot-fill PET containers.
From fiscal 1998 through fiscal 2002, the Company's food and beverage
container sales have grown at a compound annual growth rate of over 22%,
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 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 $270 million of capital invested in the hot-fill PET food
and beverage container 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, in alphabetical order, Arizona Beverages Company, LLC ("Arizona"),
Clement-Pappas & Company, Inc. ("Clement-Pappas"), Group Danone ("Danone"),
Hershey Foods Corporation ("Hershey's"), Hi-Country Foods Corporation
("Hi-Country"), The Minute Maid Company ("Minute Maid"), Mrs. Clark's Foods,
L.C. ("Mrs. Clarks"), Ocean Spray Cranberries, Inc. ("Ocean Spray"), PepsiCo,
Inc. ("PepsiCo"), 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, 2002, 2001 and 2000 the Company generated
approximately 56.9%, 55.4% and 49.4%, respectively, of its net sales from the
food and beverage container business.
Household and Personal Care. In the household and personal care
container 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 liquid fabric care
detergents, which are packaged in plastic containers, capture an increasing
share from powdered detergents, which are predominantly packaged in paper-based
containers. The Company's largest customers in this sector include, in
alphabetical order, Colgate-Palmolive Company ("Colgate-Palmolive"), The Dial
Corp. ("Dial"), The Procter and Gamble Company ("Procter & Gamble") and Unilever
NV ("Unilever"). For the years ended December 31, 2002, 2001 and 2000, the
Company generated approximately 20.5%, 22.6% and 25.0%, respectively, of its net
sales from the household and personal care container business.
Automotive Lubricants. 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 80%
market share in the United States, based on 2002 unit sales. The Company has
been producing automotive lubricants containers since the conversion to plastic
began over 20 years ago and over the years has expanded its market share and
maintained margins by partnering with its customers to improve product quality
and jointly 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 South 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. 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, in alphabetical order, Ashland, Inc.
("Ashland," producer of Valvoline motor oil), Castrol North America ("Castrol,"
3
an affiliated company of BP plc), ChevronTexaco Corporation ("ChevronTexaco")
and Shell Oil Products US ("Shell," producer of Shell, Pennzoil and Quaker State
motor oils). For the years ended December 31, 2002, 2001, and 2000 the Company
generated approximately 22.6%, 22.0% and 25.6%, respectively, of its net sales
from the automotive lubricants 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 generally 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, some 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. Management
believes that the Company maintains 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 73% 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. The Company's customers demand a high degree of
packaging design and engineering 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
up 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 in some cases 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, 2002 the Company's largest customer,
PepsiCo, accounted for 16.4% of the Company's total net sales and was the only
customer that accounted for over 10% of its net sales for the year. For the
year ended December 31, 2002 the Company's twenty largest customers, who
accounted for over 82% of net sales, were, in alphabetical order:
4
Company
Customer (1) Business Customer Since (1)
- ------------ -------- ------------------
Arizona Food and Beverage Late 1990s
Ashland (2) Automotive Early 1970s
Castrol Automotive Late 1960s
ChevronTexaco Automotive Early 1970s
Clement-Pappas Food and Beverage Mid 1990s
Colgate-Palmolive Household and Personal Care Mid 1980s
Danone Food and Beverage Late 1970s
Dial Household and Personal Care Early 1990s
Hershey's Food and Beverage Mid 1980s
Hi-Country Food and Beverage Late 1990s
Minute Maid Food and Beverage Late 1990s
Mrs. Clark's Foods Food and Beverage Mid 1990s
Ocean Spray Food and Beverage Early 1990s
PepsiCo (3) Food and Beverage Early 2000s
Quaker Oats Food and Beverage Late 1990s
Tropicana Food and Beverage Mid 1980s
Petrobras Distribuidora S.A. Automotive Early 1990s
Procter & Gamble Household and Personal Care Early 1980s
Shell (4) Automotive Early 1970s
Pennzoil-Quaker State Automotive Early 1970s
Tree Top Food and Beverage Early 1990s
Unilever Household and Personal Care, Early 1970s
Food and Beverage
Welch's Food and Beverage Early 1990s
(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.
(3) PepsiCo includes Quaker Oats and Tropicana
(4) Shell includes Pennzoil-Quaker State
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 22 plants outside of the United States are located
in Argentina (2), Belgium (1), Brazil (4), Canada (2), France (4), Germany (2),
Hungary (1), Mexico (2), Poland (2), Spain (1) and Turkey (1).
Argentina and Brazil. In Brazil, the Company has three on-site plants
for motor oil packaging, including one for Petrobras Distribuidora S.A., the
national oil company of Brazil. The Company also has an off-site plant in Brazil
for its motor oil and agricultural and chemical container businesses. 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 July 1999. 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
produced for Brazilian customers from its Argentine operations to the Company's
Brazilian facilities and consolidated business in Argentina, resulting in the
closure of one facility.
Mexico. In December 1999, 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 an on-site plant in each of Belgium, France,
Germany, Hungary, Poland and Spain and six off-site plants in France, Germany,
5
Poland and Turkey, 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 51% owned joint venture in Poland, the
Company manufactures HDPE containers for household and personal care and liquid
food products.
Canada. The Company has one off-site facility and one on-site facility
in Canada to service Canadian and northern U.S. customers. Both facilities are
near Toronto. These facilities produce products for all three of the Company's
target end-use markets.
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,
Constar International Inc., Consolidated Container Company LLC, Plastipak, Inc.,
Silgan Holdings Inc., Amcor Limited, Pechiney Plastic Packaging, Inc. and Alpla
Werke Alwin Lehner GmbH. Several of these competitors are larger and have
greater financial and other resources than the Company. 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; Levittown, Pennsylvania; Maryland Heights, Missouri;
Mississauga, Ontario, Canada; Rancho Cucamonga, California; Paris, France;
Buenos Aires, Argentina; Sao Paulo, Brazil; 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.
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
design and conversion successes over the past few years include:
o 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;
o hot-fill PET wide-mouth jars for Ragu pasta sauce, Seneca applesauce and
Welch's jellies and jams;
o HDPE frozen juice container for Welch's in the largely unconverted metal
and paper-composite can markets; and
o 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;
6
o the Stand-up, Pop-up extruded HDPE tube for Unilever's South American hair
care products; and
o blow molded polypropylene pots for Danone's spoonable yogurts in Europe.
The Company's innovative designs have also been recognized, through
various awards, by a number of customers and industry organizations, including
the Company's Coca-Cola Quatro bottle (2002 Mexican Packaging Association) and
Sabritas (PepsiCo) Be-Light bottle (2002 Mexican Packaging Association).
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 an agreement (the "Equipment
Sales Agreement"), Graham Engineering provides engineering, consulting and other
services and sells 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 over 40% of its 57
facilities on-site at customer and vendor facilities. Within the 57 plants, the
Company operates over 375 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. The Company's manufacturing historically has not
been subject to large seasonal fluctuations.
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
1970s, the Company introduced the Graham Wheel. The Graham Wheel is an
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 an injection molding machine that uses heat and
pressure to mold a test tube shaped parison or "preform." The preform is then
fed into a blow molder where it is re-heated to allow it to be formed through a
stretch blow molding process into a final 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 injection molders and 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 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 its products.
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
7
for custom PET containers. The Company is also pursuing development initiatives
in barrier technologies to strengthen its position in the food and beverage
container 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 for 2000 were $163.4 million, for 2001 $74.3
million and for 2002 $92.4 million. Management believes that capital investment
to maintain and upgrade property, plant and equipment is important to remain
competitive. Management estimates that on average the annual capital
expenditures required to maintain the Company's facilities are approximately $30
million per year. For the fiscal year 2003, the Company expects to incur
approximately $130 million of capital expenditures.
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 $150.0 million aggregate principal amount of their 8 3/4% Senior
Subordinated Notes Due 2008, Series A (the "Fixed Rate Senior Subordinated Old
Notes"), and $75.0 million 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 "Offerings")
pursuant to Rule 144A under the Securities Act of $169.0 million 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 ("Registration Rights Agreements").
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 $150.0 million
aggregate principal amount of their 8 3/4% Senior Subordinated Notes Due 2008,
Series B (the "Fixed Rate Senior Subordinated Exchange Notes"), and $75.0
million 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 $169.0
million aggregate principal amount at maturity of their 10 3/4% Senior Discount
Notes Due 2009, Series B (the "Senior Discount Exchange Notes" and, together
8
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, 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:
o A change in the name of Holdings to Graham Packaging Holdings Company;
o The contribution by Holdings of substantially all of its assets and
liabilities to the Operating Company, which was renamed "Graham Packaging
Company, L.P.";
o 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");
o The initial borrowing by the Operating Company of $403.5 million (the "Bank
Borrowings") in connection with a new senior credit agreement (the
"Existing 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));
o The repayment by the Operating Company of substantially all of the then
existing indebtedness and accrued interest of Holdings and its subsidiaries
(approximately $264.9 million);
o 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;
o The redemption by Holdings of certain partnership interests in Holdings
held by the Graham Entities for $429.6 million;
o The purchase by the Equity Investors of certain partnership interests in
Holdings held by the Graham Entities for $208.3 million;
o The repayment by the Graham Entities of $21.2 million owed to Holdings
under certain promissory notes;
o The recognition of additional compensation expense under an equity
appreciation plan;
o The payment of certain bonuses and other cash payments and the granting of
certain equity awards to senior and middle level Management;
o The execution of various other agreements among the parties; and
o 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 its affiliate (which acted as two of the 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 as
herein defined (see "Certain Risks of the Business"). The sole purpose of CapCo
II is to act as co-obligor of the Senior Discount Notes and as co-guarantor with
Holdings under
9
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 date of the
Recapitalization (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
adequacy of the Management awards.
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 (1) .................................... 225.0
Senior Discount Notes ............................................ 100.6
Equity investments and retained equity (2) ....................... 245.0
Repayment of Promissory notes .................................... 21.2
Available cash ................................................... 1.7
--------
Total ....................................................... $ 997.0
========
USES OF FUNDS:
Repayment of existing indebtedness (3) ........................... $ 264.9
Redemption by Holdings of existing partnership interests ......... 429.6
Purchase by Equity Investors of existing partnership interests ... 208.3
Partnership interests retained by Continuing Graham Entities ..... 36.7
Payments to Management ........................................... 15.4
Transaction costs and expenses ................................... 42.1
--------
Total ....................................................... $ 997.0
========
(1) Included $150.0 million of Fixed Rate Senior Subordinated Old Notes and
$75.0 million of Floating Rate Senior Subordinated Old Notes.
(2) 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 its affiliate, 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).
(3) Included $264.5 million of existing indebtedness and $0.4 million of
accrued interest.
10
Employees
As of December 31, 2002, the Company had approximately 3,900 employees,
2,400 of whom were located in the United States. Approximately 80% of the
Company's employees are hourly wage employees, 52% of whom are represented by
various labor unions and are covered by various collective bargaining agreements
that expire between March 2003 and September 2006. 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 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 some cases, joint and several,
liability on responsible parties for the investigation and cleanup of
contaminated soil, groundwater and buildings, 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.
Based on existing information Management believes that it is not reasonably
likely that losses related to known environmental liabilities, in aggregate,
will 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
2002 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 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 plastic packaging, result
in greater costs for plastic packaging manufacturers or otherwise impact the
Company's business. Some consumer products companies, including some of the
Company's customers, 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 73% 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. Others could, however, obtain knowledge of this
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 licensing arrangements and other agreements authorizing it to use 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 ranges from 9 to 20 years. In some cases the
licenses granted to the Company are perpetual and in other cases the term of the
license is related to the life of the patent associated with the license. The
Company also has licensed or sublicensed some of its intellectual property
rights to third parties. See also "Certain Relationships and Related
Transactions" (Item 13).
11
Certain Risks of the Business
Substantial Leverage. Upon the consummation of the Recapitalization,
the Issuers' became highly leveraged. All of the existing indebtedness under the
Existing Credit Agreement was refinanced on February 14, 2003 when the Operating
Company, Holdings, CapCo I and a syndicate of lenders entered into a new senior
credit agreement (the "Senior Credit Agreement"). The Senior Credit Agreement
includes two term loans to the Operating Company with initial term loan
commitments totaling up to $670.0 million (the "Term Loans" or "Term Loan
Facilities") and a $150.0 million revolving credit facility (the "Revolving
Credit Facility"). The Indentures (as defined) permit the Issuers to incur
additional indebtedness, subject to certain limitations. After giving effect to
the February 14, 2003 Senior Credit Agreement, the annual debt service
requirements for the Company are as follows: 2003--$8.0 million; 2004--$7.3
million; 2005--$28.0 million; 2006--$52.2 million; and 2007--$56.0 million. The
Company can incur $90.0 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 refinance existing indebtedness or 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) some 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 the maturity of the
Notes; (v) the Issuers may be substantially more leveraged than some 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 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. After giving effect to the February 14, 2003 Senior Credit
Agreement, the Operating Company will be required to make the following
scheduled principal payments on the Term Loans under the Senior Credit
Agreement: 2003--$2.5 million; 2004--$5.0 million; 2005--$25.0 million;
2006--$50.0 million; 2007--$50.0 million; 2008--$235.0 million; and 2009--$134.5
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) 50% 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,
subject to reduction to 0% based on the leverage ratio of the Issuer 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 are payable on
the earlier of (i) February 14, 2008 and (ii) the Term Loan maturity date.
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
12
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
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 the payment of cash interest on
the Senior Discount Notes or any notes issued pursuant to the refinancing of 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 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.
13
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"). 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
Guarantee in evaluating an investment in the Senior Subordinated 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, investments or acquisitions, engage in
mergers or consolidations, engage in 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 those
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 that 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
22 plants outside of the United States are located in Argentina (2), Belgium
(1), Brazil (4), Canada (2), France (4), Germany (2), Hungary (1), Mexico (2),
Poland (2), Spain (1) and Turkey (1). As a result, the Company is subject to
risks associated with operating in foreign countries, including fluctuations in
currency exchange rates (recently in Argentina in particular), 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 some 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 South America have not had a material
impact on the Company's 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, HDPE and other 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
14
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 and decreases 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 sufficient
amounts of resin from any of its suppliers, or if a conflict with Iraq causes a
substantial increase in oil prices, and as a result an increase in resin prices,
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 PepsiCo, the Company's largest customer, collectively accounted for
approximately 16.4% of the Company's net sales for the year ended December 31,
2002. PepsiCo'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. The Company is not the sole supplier of plastic packaging
to PepsiCo. Additionally, in 2002 the Company's top 20 customers comprised over
82% of its net sales. The Company's existing customers' purchase orders and
contracts typically vary from two to ten years. Prices under these arrangements
are tied to market standards and therefore vary with market conditions. The
contracts, including those with PepsiCo, 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, although in the past the Company's customers have not purchased
amounts under supply contracts that in the aggregate are materially lower than
what we have expected, the Company faces the risk that in the future customers
will not continue to purchase amounts that meet the Company's expectations. If
any of the Company's largest customers terminated its relationship with the
Company, the Company would lose a significant source of revenues and profits.
Additionally, the loss of one of its largest customers could result in the
Company having excess capacity if it is unable to replace that customer. This
could result in the Company having excess overhead and fixed costs. This could
also result in the Company's selling, general and administrative expenses and
capital expenditures representing increased portions of its revenues.
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 management of the
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 significant to the business of the Company. To
date, certain affiliates of the Graham Entities have provided 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. The
obligations of Holdings to make payments to the Graham affiliates under the
Equipment Sales 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,
15
such court could void such 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.
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 have resulted 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 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 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, the Company has incurred indebtedness to finance past
acquisitions, and would likely incur additional indebtedness to finance future
acquisitions, 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 57 plants located in Argentina,
Belgium, Brazil, Canada, France, Germany, Hungary, Mexico, Poland, Spain, Turkey
and the United States. Twenty-four of the Company's plants are located on-site
at customer and vendor facilities. The Company's operations in Poland and Mexico
are pursuant to joint venture arrangements in which the Company owns slightly
more than a 50% interest. 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.
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.
16
On-site Size
Location Or Off-site Leased/Owned (Sq. ft.)
- -------- ----------- ------------ ---------
U.S. Packaging Facilities (a)
- -----------------------------
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. Evansville, Indiana Off-site Leased 146,720
11. Rancho Cucamonga, California Off-site Leased 143,063
12. Santa Ana, California Off-site Owned 127,680
13. Muskogee, Oklahoma Off-site Leased 125,000
14. Woodridge, Illinois Off-site Leased 124,137
15. Atlanta, Georgia Off-site Leased 112,400
16. Cincinnati, Ohio Off-site Leased 111,669
17. Bradford, Pennsylvania Off-site Leased 90,350
18. Berkeley, Missouri Off-site Owned 75,000
19. Jefferson, Louisiana Off-site Leased 72,407
20. Cambridge, Ohio On-site Leased 57,000
21. Port Allen, Louisiana On-site Leased 56,721
22. Shreveport, Louisiana On-site Leased 56,400
23. Richmond, California Off-site Leased 54,985
24. Houston, Texas Off-site Owned 52,500
25. Newell, West Virginia On-site Leased 50,000
26. Lakeland, Florida Off-site Leased 49,000
27. New Kensington, Pennsylvania On-site Leased 48,000
28. N. Charleston, South Carolina On-site Leased 45,000
29. Darlington, South Carolina On-site Leased 43,200
30. Bradenton, Florida On-site Leased 33,605
31. Vicksburg, Mississippi On-site Leased 31,200
32. Bordentown, New Jersey On-site Leased 30,000
33. West Jordan, Utah On-site Leased 25,573
34. Wapato, Washington Off-site Leased 20,300
Canadian Packaging Facilities (f)
- ---------------------------------
35. Mississauga, Ontario Off-site Owned 78,416
36. Toronto, Ontario On-site (c) 5,000
Mexican Packaging Facilities
- ----------------------------
37. Mexicali (d) Off-site Leased 59,700
38. Irapuato (d) On-site Leased 58,130
European Packaging Facilities (f)
- ---------------------------------
39. Assevent, France Off-site Owned 186,000
40. Noeux les Mines, France Off-site Owned 120,000
41. Sulejowek, Poland (b) Off-site Owned 83,700
42. Bad Bevensen, Germany Off-site Owned/Leased (e) 80,000
43. Meaux, France Off-site Owned 80,000
44. Aldaia, Spain On-site Leased 75,350
17
45. Istanbul, Turkey Off-site Owned 50,000
46. Villecomtal, France On-site Leased 22,790
47. Rotselaar, Belgium On-site Leased 15,070
48. Bierun, Poland (b) On-site Leased 10,652
49. Genthin, Germany On-site Leased 6,738
50. Nyirbator, Hungary On-site Leased 5,000
South American Packaging Facilities
- -----------------------------------
51. Sao Paulo, Brazil Off-site Leased 70,290
52. Buenos Aires, Argentina Off-site Owned 33,524
53. Rio de Janeiro, Brazil On-site Owned/Leased (e) 25,840
54. Rio de Janeiro, Brazil On-site Leased 16,685
55. Rio de Janeiro, Brazil On-site (c) 11,000
56. San Luis, Argentina Off-site Owned 8,070
Graham Recycling
- ----------------
57. York, Pennsylvania Off-site Owned 44,416
Administrative Facilities
- -------------------------
o York, Pennsylvania N/A Leased 83,373
o Blyes, France N/A Leased 9,741
o Rueil, Paris, France N/A Leased 4,300
o Mexico City, Mexico N/A Leased 360
(a) Substantially all of the Company's domestic tangible and intangible assets
are pledged as collateral pursuant to the terms of the Senior Credit
Agreement.
(b) This facility is owned by Masko Graham, in which the Company holds a 51%
interest through Graham Packaging Poland L.P.
(c) The Company operates these on-site facilities without leasing the space we
occupy.
(d) This facility is leased by Industrias Graham Innopack S.de.R.L.de C.V., in
which Graham Packaging Latin America, LLC holds a 50% interest.
(e) The building is owned and the land is leased.
(f) The Company currently has on the market for sale its vacant facilities
located in Burlington, Ontario, Canada and Wrexham, United Kingdom.
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 these matters, experience to
date and discussions with counsel, that ultimate liability from the Company's
various litigation matters 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 2002.
18
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.
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 $150.0 million aggregate
principal amount of their Fixed Rate Senior Subordinated Old Notes and $75.0
million 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 $169.0 million 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 and an
affiliate, 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
$6.75 million. 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 $3.99 million. 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 $150.0 million aggregate principal amount of their Fixed Rate Senior
Subordinated Exchange Notes and $75.0 million 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 $169.0 million
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 consolidated
financial data for the Company for and at the end of each of the years in the
five-year period ended December 31, 2002, which are derived from the Company's
audited financial statements. The combined financial statements of the Company
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
19
conjunction with "Management's Discussion and 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,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In millions)
STATEMENT OF OPERATIONS DATA:
Net sales (1) $ 906.7 $ 923.1 $ 842.6 $ 731.6 $ 602.4
Gross profit (1) 164.1 151.9 134.5 142.7 115.4
Selling, general and administrative expenses 63.8 58.2 56.2 48.0 37.8
Impairment charges (2) 5.1 38.0 21.1 -- --
Special charges and unusual items (3) -- 0.2 1.1 4.6 24.2
------- ------- ------- ------ ------
Operating income 95.2 55.5 56.1 90.1 53.4
Recapitalization expenses (4) -- -- -- -- 11.8
Interest expense, net 81.8 98.5 101.7 87.5 68.0
Other expense (income) 0.1 0.2 0.2 (0.7) (0.2)
Minority interest 1.7 0.5 (0.6) (0.5) --
Income tax provision (5) 4.0 0.3 0.4 2.5 1.1
Extraordinary loss (6) -- -- -- -- 0.7
------- ------- ------- ------ ------
Net income (loss) (7) $ 7.6 $ (44.0) $ (45.6) $ 1.3 $(28.0)
======= ======= ======= ====== ======
OTHER DATA:
Cash flows from:
Operating activities $ 92.4 $ 52.5 $ 90.9 $55.5 $ 41.8
Investing activities (96.6) (77.2) (164.7) (181.8) (181.2)
Financing activities 1.3 24.3 78.4 126.2 139.7
Adjusted EBITDA (8) 198.2 171.5 153.7 149.1 117.8
Capital expenditures (excluding acquisitions) 92.4 74.3 163.4 171.0 133.9
Investments (including acquisitions) (9) -- 0.2 0.1 10.3 45.2
Depreciation and amortization (10) 75.8 71.7 66.2 53.2 39.3
Ratio of earnings to fixed charges (11) 1.1x -- -- 1.0x --
BALANCE SHEET DATA:
Working capital (deficit) (12) $ 9.6 $ (10.4) $(23.5) $ 10.6 $ (5.5)
Total assets 798.3 758.6 821.3 741.2 596.7
Total debt 1,070.6 1,052.4 1,060.2 1,017.1 875.4
Partners' capital (deficit) (460.3) (485.1) (464.4) (458.0) (438.8)
(1) Net sales increase or decrease based on fluctuations in resin prices.
Consistent with industry practice and/or as permitted under the Company's
agreements with its customers, substantially all resin price changes are
passed through to customers by means of corresponding changes in product
pricing. Therefore, the Company's dollar gross profit has been
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.
(2) Includes impairment charges recorded on long-lived assets of $5.1 million,
$28.9 million and $16.3 million for the years ended December 31, 2002,
2001 and 2000, respectively, and goodwill of $9.1 million and $4.8 million
for the years ended December 31, 2001 and 2000, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations" (Item 7) for a further discussion.
(3) Includes compensation costs related to the Recapitalization, global
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.
(4) Includes transaction fees, expenses and costs associated with the
termination of the interest rate collar and swap agreements as a result of
the Recapitalization.
(5) 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 their distributive share of the income of
Holdings. 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.
20
(6) Represents cost incurred, including the write-off of unamortized debt
issuance fees, in connection with the early extinguishment of debt.
(7) Effective June 28, 1999, the Company changed its method of valuing
inventories for its domestic operations from the last-in, first-out
("LIFO") method to the first-in, first-out ("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 increased net loss
for the year ended December 31, 1998 by $2.0 million.
(8) 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 Senior Credit Agreement and Indentures as earnings before
minority interest, extraordinary items, interest expense, interest income,
income taxes, depreciation and amortization expense, impairment charges,
the ongoing $1.0 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 certain non-recurring charges. Adjusted EBITDA is
included in this Annual Report on Form 10-K because covenants in Holdings'
and the Operating Company's debt agreements are tied to ratios based on
that measure. While Adjusted EBITDA and similar measures are frequently
used as measures of operations and the ability to meet debt service
requirements, 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
Statements and Supplementary Data" (Item 8), including the related notes
thereto.
Adjusted EBITDA is calculated as follows:
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In millions)
Income (loss) before extraordinary item $ 7.6 $ (44.0) $ (45.6) $ 1.3 $ (27.3)
Interest expense, net 81.8 98.5 101.7 87.5 68.0
Income tax expense 4.0 0.3 0.4 2.5 1.1
Depreciation and amortization 75.8 71.7 66.2 53.2 39.3
Impairment charges 5.1 38.0 21.1 -- --
Fees paid pursuant to the Blackstone monitoring agreement 1.0 1.0 1.0 1.0 1.0
Equity in loss (earnings) of joint venture -- 0.2 (0.1) (0.3) (0.3)
Special charges and unusual items/certain non-recurring charges (a)(b) 21.2 5.3 9.6 4.6 24.2
Recapitalization (income) expenses -- -- -- (0.2) 11.8
Minority interest 1.7 0.5 (0.6) (0.5) --
------- ------- ------- ------- -------
Adjusted EBITDA $ 198.2 $ 171.5 $ 153.7 $ 149.1 $ 117.8
======= ======= ======= ======= =======
(a) The year ended December 31, 2002 includes certain non-recurring
charges including global reorganization costs ($18.2 million) and
costs related to the postponement of the equity offering and
concurrent transactions ($3.0 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
Senior Credit Agreement and Indentures. These startup costs were $4.7
million, $4.2 million, $8.4 million, $4.4 million and $2.6 million for
the years ended December 31, 2002, 2001, 2000, 1999 and 1998,
respectively.
(9) In April 1997, the Company acquired 80% of the operating assets and
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,
21
the Company acquired 51% of the operating assets of PlasPET Florida, Ltd.
The Company became the general partner on July 6, 1999, and on October 9,
2001 acquired the remaining 49%. The total purchase price for the 100%
interest, excluding direct costs of the acquisition, net of liabilities
assumed, was $3.1 million. 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. On March 30, 2001, the Company
acquired an additional 1% interest in Masko Graham, bringing the Company's
total interest to 51%. The total purchase price for the 51% interest,
excluding direct costs of the acquisition, net of liabilities assumed, was
$1.3 million. Amounts shown under the caption "Investments (including
acquisitions)" represent cash paid, net of cash acquired in the
acquisitions. These transactions were accounted for under the purchase
method of accounting. Results of operations are included since the
respective dates of the acquisitions.
(10) Depreciation and amortization excludes amortization of debt issuance fees,
which is included in interest expense, net, and impairment charges.
(11) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, minority interest,
income from equity investees and extraordinary items, plus fixed charges
and amortization of capitalized interest less interest capitalized. Fixed
charges include interest expense on all indebtedness, interest capitalized,
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 $44.2 million, $49.1 million and $28.7 million for the years ended
December 31, 2001, 2000 and 1998, respectively.
(12) 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
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 and currently
operates 57 plants throughout North America, Europe and South America. The
Company's primary strategy is to operate in select markets that will position it
to benefit from the growing conversion to high performance plastic packaging
from more commodity-type 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
products companies in each category that it 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.
Management believes that critical success factors to the Company's
business are its ability to:
o serve the complex packaging demands of its customers which include
some of the world's largest branded consumer products companies;
o forecast trends in the packaging industry across product lines and
geographic territories (including those specific to the rapid
conversion of packaging products from glass, metal and paper to
plastic); and
o make the correct investments in plant and technology necessary to
satisfy the two factors mentioned above.
Management believes that the area with the greatest opportunity for
growth continues to be in producing containers for the food and beverage market
because of the continued conversion to plastic packaging, including the demand
for containers for juices, juice drinks, nutritional beverages, sports drinks,
teas, yogurt drinks, snacks and other food products. Since the beginning of
1997, the Company has invested over $270 million in capital expenditures to
expand its technology, machinery and plant structure to prepare for what it
believed would be the growth in the hot-fill PET area. For the year ended
December 31, 2002, the Company's sales of hot-fill PET containers grew to $323.9
million from $70.2 million in 1996. More recently, the Company has been a
22
leading participant in the rapid growth of the yogurt drinks market where the
Company manufactures containers using polyolefin resins. Since the beginning of
1999, the Company has invested over $140 million in capital expenditures in
the polyolefin area of the food and beverage market. For the year ended December
31, 2002, the Company's sales of polyolefin containers grew to $171.8 million
from $117.7 million in 1999.
Excluding business impacted by the European restructuring, the
Company's household and personal care container business continues to grow, as
package conversion trends continue from other packaging forms in some of its
product lines. The Company continues to benefit as liquid fabric care
detergents, which are packaged in plastic containers, capture an increased share
from powdered detergents, which are predominantly packaged in paper-based
containers. The Company has upgraded its machinery to new larger, more
productive blow molders to standardize production lines, improve flexibility and
reduce manufacturing costs.
The Company's North American one quart motor oil container business is
in a mature industry. The Company has been able to partially offset pricing
pressures by renewing or extending contracts, improving manufacturing
efficiencies, line speeds, labor efficiency and inventory management and
reducing container weight and material spoilage. Unit volume in the one quart
motor oil industry decreased approximately 1% in 2002 as compared to 2001;
annual volumes declined an average of approximately 1% to 2% in prior years.
Management believes that the domestic one quart motor oil business will continue
to decline approximately 1% to 2% annually for the next several years but
believes there are significant volume opportunities for automotive product
business in foreign countries, particularly in South America. In 2002 the
Company was awarded 100% of Shell's (Shell, Pennzoil and Quaker State branded
motor oils) U.S. one quart volume requirements. This award includes supplying
from a facility on-site with Pennzoil-Quaker State in Newell, West Virginia.
ExxonMobil also awarded the Company in 2002 100% of its one quart volume
requirements for one of its U.S. filling plants, located in Port Allen,
Louisiana. ExxonMobil was not a U.S. customer prior to this award.
The Company currently operates 22 facilities, either on its own or
through joint ventures, in Argentina, Belgium, Brazil, Canada, France, Germany,
Hungary, Mexico, Poland, Spain and Turkey. Over the past few years, the Company
has expanded its international operations with the addition of new plants in
France, Belgium, Spain, Poland and Mexico. On March 30, 2001 the Company
increased its interest in Masko Graham, the Company's Polish operation, from 50%
to 51%.
Changes in international economic conditions require that the Company
continually review its operations and make restructuring changes when it is
deemed appropriate. In the past few