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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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
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(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 15,
2004 was $-0-. As of February 15, 2004, 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.
I
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
PAGE
NUMBER
PART I
Item 1. Business.......................................................1
Item 2. Properties....................................................15
Item 3. Legal Proceedings.............................................16
Item 4. Submission of Matters to a Vote of Security Holders...........17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................18
Item 6. Selected Financial Data.......................................19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....33
Item 8. Financial Statements and Supplementary Data...................34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..........................................71
Item 9A. Controls and Procedures.......................................71
PART III
Item 10. Advisory Committee Members, Directors and Executive Officers of
the Registrant................................................72
Item 11. Executive Compensation........................................74
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................................78
Item 13. Certain Relationships and Related Transactions................79
PART IV
Item 14. Principal Accountant Fees and Services........................85
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K......................................................85
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 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 then 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 similar
terminology. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, expectations may prove to have
been incorrect. Important factors that could cause actual results to differ
materially from the Company's expectations include, without limitation:
o the restrictive covenants contained in instruments governing indebtedness
of the Company;
o the high degree of leverage and substantial debt service obligations of the
Operating Company and Holdings;
o the Company's exposure to fluctuations in resin prices and its dependence
on resin supplies;
o risks associated with the Company's international operations;
o 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;
o the majority of the Company's sales are made pursuant to requirements
contracts;
o a decline in the domestic motor oil business;
o a decline in prices of plastic packaging;
o risks associated with environmental regulation;
o the possibility that Blackstone's interests will conflict with the
Company's interests;
o 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;
o risks associated with possible future acquisitions;
o risks associated with a significant portion of the Company's employees
being covered by collective bargaining agreements; and
o the Company's dependence on blow molding equipment providers.
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 maintains a website at www.grahampackaging.com. The Company makes
available on its website, free of charge, its annual reports on Form 10-K and
quarterly reports on Form 10-Q as soon as practical after the Company files
these reports with the U.S. Securities and Exchange Commission.
The Company is organized and managed on a geographical basis 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 56 manufacturing facilities 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 2003, the Company grew 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 facilities are located on-site at its customers' plants, 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 2003, the Company's top 20 customers
comprised over 84% 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.
2
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
for plastic containers for yogurt drinks. Management believes that this
leadership position creates significant opportunities for the Company to
participate in the anticipated conversion to plastic in the broader 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 2003, the Company's food and beverage
container sales grew at a compound annual growth rate of 20.0%, 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, the use of MonosorbTM oxygen scavenger and multi-layer
barrier technologies also extend the shelf life and protect the quality and
flavor of its customers' products.
The Company has established itself as the market leader in the
value-added segment for hot-fill PET juice containers. 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 like snack foods and
adult nutritional beverages.
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"), Coca Cola North America
("CCNA"), Group Danone ("Danone"), Hershey Foods Corporation ("Hershey's"), Mrs.
Clark's Foods, L.C. ("Mrs. Clark's"), Ocean Spray Cranberries, Inc. ("Ocean
Spray"), Old Orchard Brands LLC ("Old Orchard"), 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, 2003, 2002 and 2001, the Company generated approximately
58.5%, 56.9% and 55.4%, 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") and Unilever NV ("Unilever"). For the years ended December 31,
2003, 2002 and 2001, the Company generated approximately 19.6%, 20.5% and 22.6%,
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 86%
market share in the United States, based on 2003 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.
3
Management anticipates similar growth opportunities for the Company in
economically developing markets where the use of motorized vehicles is 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,"
an affiliated company of BP plc), ChevronTexaco Corporation ("ChevronTexaco"),
ExxonMobil Corporation ("ExxonMobil"), Petrobras Distribuidora S.A.
("Petrobras") and Shell Oil Products US ("Shell," producer of Shell, Pennzoil
and Quaker State motor oils). For the years ended December 31, 2003, 2002, and
2001, the Company generated approximately 21.9%, 22.6% and 22.0%, 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 processed foods, 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 and some food products, such as yogurt
drinks, 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 68% of its HDPE units produced in the United States
and Canada contain materials from 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, some of which have terms 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, 2003, the Company had sales to three customers which exceeded 10%
of total sales. The Company's sales were 14.6%, 11.0% and 10.6% of total sales
for the year ended December 31, 2003 to PepsiCo, Danone and Dial, respectively.
For the year ended December 31, 2003, the Company's twenty largest customers,
who accounted for over 84% of net sales, were, in alphabetical order:
4
COMPANY CUSTOMER
CUSTOMER (1) BUSINESS 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
CCNA Food and Beverage Late 1990s
Colgate-Palmolive Household and Personal Care Mid 1980s
Danone Food and Beverage Late 1970s
Dial Household and Personal Care Early 1990s
ExxonMobil Automotive Early 2000s
Hershey's Food and Beverage Mid 1980s
Mrs. Clark's Food and Beverage Mid 1990s
Ocean Spray Food and Beverage Early 1990s
Old Orchard Food and Beverage Late 1990s
PepsiCo (3) Food and Beverage Early 2000s
Quaker Oats Food and Beverage Late 1990s
Tropicana Food and Beverage Mid 1980s
Petrobras Automotive Early 1990s
Shell (4) Automotive Early 1970s
Pennzoil-Quaker State Automotive Early 1970s
Tree Top Food and Beverage Early 1990s
Unilever Household and Personal Care, Food Early 1970s
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 has 21 manufacturing facilities located in countries
outside of the United States, including Argentina (3), Belgium (1), Brazil (4),
Canada (2), France (3), Hungary (1), Mexico (3), Poland (2), Spain (1) and
Turkey (1).
Argentina and Brazil. In Brazil, the Company has three on-site plants
for the production of motor oil containers, including one for Petrobras
Distribuidora S.A., the national oil company of Brazil. The Company also has an
off-site plant in Brazil for the production of motor oil and agricultural and
chemical containers. 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 its Brazilian facilities and consolidated business in Argentina,
resulting in the closure of one facility. In Argentina, the Company currently
has two off-site plants for the production of tube containers, pharmaceuticals
and household and personal care products and an on-site plant for the production
of food and beverage containers.
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. The Company has an off-site plant and two on-site plants in Mexico for
the production of food and beverage containers.
5
Europe. The Company has an on-site plant in each of Belgium, France,
Hungary, Poland and Spain and four off-site plants in France, Poland and Turkey,
for the production of plastic containers for all three of the Company's target
end-use markets. Through Masko Graham Spolka Z.O.O., an approximately 58% owned
joint venture in Poland, the Company manufactures HDPE containers primarily 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 containers 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 Alpla Werke Alwin Lehner GmbH, Amcor
Limited, Ball Corporation, Consolidated Container Company LLC, Constar
International Inc., Owens-Illinois, Inc., Pechiney Plastic Packaging, Inc.,
Plastipak, Inc. and Silgan Holdings Inc. 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 generally 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 Monosorb(TM) oxygen scavenger for
Tropicana Season's Best brand, Pepsi's Dole brand aND Welch's brand juices;
o hot-fill PET and polypropylene wide-mouth jars for Ragu pasta sauce, Seneca
applesauce, Welch's jellies and jams and Signature fruit slices;
o HDPE frozen juice container for Welch's and Old Orchard in the largely
unconverted metal and paper-composite can markets;
o a true wide-mouth PET juice carafe for Tropicana's Pure Premium;
o a multi-layer HDPE canister for Frito-Lay's Stax product;
6
o a 29oz. liquid laundry detergent bottle for Dial's penetration of dollar
stores;
o the Company's Flexa TubeTM 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 Flexa Tube(TM) (2003 Dupont Award, 2003 Ameristar Award and 2003
Food & Drug Packaging Award), 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 "--Intellectual Property".
MANUFACTURING
A critical component of the Company's strategy is to locate
manufacturing facilities 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
56 operating manufacturing facilities on-site at customer and vendor facilities.
Within these 56 plants, the Company operates over 400 production lines. The
Company sometimes dedicates particular production lines within a plant to better
service customers. The plants generally operate 24 hours a day, five to seven
days a week, although not every production line is run constantly. When customer
demand requires, the plants run seven days a week. 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.
7
The Company has highly modernized equipment in its plants, consisting
primarily of rotational wheel systems and shuttle systems, both of which are
used for HDPE and PP blow molding, and injection-stretch blow molding systems
for value-added 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 through productivity and process
enhancements, including increasing line speeds, utilizing recycled products,
reducing scrap and optimizing plastic volume requirements for each product's
specifications.
Total capital expenditures, excluding acquisitions, for 2003, 2002 and
2001 were $91.8 million, $92.4 million and $74.3 million, respectively.
Management believes that capital expenditures 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 current facilities are approximately $25 million per year. For 2004,
the Company expects to make capital expenditures, exlcuding acquisitions, of
approximately $130 million.
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.
In 1998, the Operating Company and GPC Capital Corp. I ("CapCo I" and,
together with the Operating Company, the "Company Issuers") consummated an
offering 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 B and $75.0 million aggregate principal amount of their FloatiNG
Interst Rate Subordinated Term Securities Due 2008, Series B ("FIRSTS" SM, a
service mark of DB Alex. Brown LLC (formerly BT Alex. Brown Incorporated)).
In 1998, 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 of $169.0 million aggregate principal amount at maturity of their 10
3/4% Senior Discount Notes Due 2009, Series B.
The $225.0 million 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 The Bank of New York
(formerly 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 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 in
connection with a new senior credit agreement entered into by and among the
Operating Company, Holdings and a syndicate of lenders;
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);
8
o The distribution by the Operating Company to Holdings of all of the
remaining net proceeds of the bank borrowings and the Senior Subordinated
Notes (other than amounts necessary to pay certain fees and expenses and
payments to Management) 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
constituted approximately a 2.5% 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 Indentures) 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 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.
9
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 Notes and $75.0
million of Floating Rate Senior Subordinated 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.
EMPLOYEES
As of December 31, 2003, the Company had approximately 3,900 employees,
2,700 of which were located in North America, 800 of which were located in
Europe and 400 of which were located in South America. Approximately 81% of the
Company's employees are hourly wage employees, 53% of whom are represented by
various labor unions and are covered by various collective bargaining agreements
that expire between March 2004 and June 2008. In North America, 79% of the
Company's employees are hourly employees, 34% of whom are represented by various
labor unions. In Europe, 83% of the Company's employees are hourly employees,
89% of whom are represented by various labor unions. In South America, 87% of
the Company's employees are hourly employees, 100% of whom are represented by
various labor unions. 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, regulated 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
10
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,
liquidity or cash flows. For its operations to comply with environmental laws,
the Company has incurred and will continue to incur costs, which were not
material in fiscal 2003 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 68% of its HDPE
units produced in the United States and Canada contain materials from recycled
HDPE bottles. Management believes that to date the Company has not materially
adversely been affected by these initiatives and developments.
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 5 to 17 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 some of its intellectual property rights to third
parties. See also "Certain Relationships and Related Transactions" (Item 13).
CERTAIN RISKS OF THE BUSINESS
Restrictive Debt Covenants. On February 14, 2003 the Operating Company,
Holdings, CapCo I and a syndicate of lenders entered into a senior credit
agreement (the "Senior Credit Agreement"). The Senior Credit Agreement consists
of a term loan to the Operating Company with an initial term loan commitment
totaling $570.0 million (the "Term Loan" or "Term Loan Facility") and a $150.0
million revolving credit facility (the "Revolving Credit Facility"). 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, 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 and 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
any collateral securing that indebtedness.
11
Substantial Leverage. The Issuers are highly leveraged. As of December
31, 2003, the Issuers had consolidated indebtedness of $1,097.4 million and
partners' deficit of $421.5 million and the Issuers' annual net interest expense
for 2003 was $96.6 million. As of December 31, 2003, $664.0 million of the
Issuers' total indebtedness was incurred under floating interest rates
arrangements, $400.0 million of which was subject to interest rate swaps which
fixed the interest rate. As a result, as of December 31, 2003, $264.0 million of
the Issuers' indebtedness was subject to floating interest rates. A 1% increase
in interest rates would increase the Issuers' annual interest payments on this
debt by approximately $2.6 million. Availability under the Issuers' Revolving
Credit Facility as of December 31, 2003 was $133.7 million. The Issuers intend
to fund their operating activities and capital expenditures in part through
borrowings under the Issuers' Revolving Credit Facility. The Issuers' Senior
Credit Agreement and Indentures permit the Issuers to incur additional
indebtedness, subject to certain limitations. All loans outstanding under the
Revolving Credit Facility are scheduled to be repaid in February 2008 or, if
earlier, the maturity of the Term Loan Facility, and scheduled annual principal
repayments for the Term Loan under the Senior Credit Agreement are as follows:
o 2004 - $4.0 million
o 2005 - $20.0 million
o 2006 - $45.0 million
o 2007 - $45.0 million
o 2008 - $200.0 million
o 2009 - $200.0 million
o 2010 - $54.0 million
The Term Loan Facility and Revolving Credit Facility will become due on
July 15, 2007 if the Issuers' Senior Subordinated Notes have not been refinanced
by January 15, 2007. The Term Loan Facility will become due on July 15, 2008 if
the existing 10 3/4% Senior Discount Notes of Holdings have not been refinanced
by January 15, 2008.
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 business; (iii) some of the Issuers' borrowings are and will
continue to be at variable rates of interest, which expose the Issuers to the
risk of increased interest rates; (iv) the Issuers may be substantially more
leveraged than some of their competitors, which may place the Issuers at a
competitive disadvantage; and (v) the Issuers' substantial degree of leverage
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.
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
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 there is a substantial
increase in oil or natural gas 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.
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 has
21 manufacturing facilities located in countries outside of the United States,
including Argentina (3), Belgium (1), Brazil (4), Canada (2), France (3),
Hungary (1), Mexico (3), Poland (2), Spain (1) and Turkey (1). As a result, the
Company is subject to risks associated with operating in foreign countries,
12
including fluctuations in currency exchange rates, imposition of limitations on
conversion of foreign currencies into dollars or remittance of dividends and
other payments by foreign subsidiaries, imposition or increase of withholding
and other taxes on remittances and other payments by foreign subsidiaries, labor
relations problems, hyperinflation in some foreign countries and imposition or
increase of investment and other restrictions by foreign governments or the
imposition of environmental or employment laws. The Company typically prices its
products in its foreign operations in local currencies. As a result, an increase
in the value of the dollar relative to the local currencies of profitable
foreign subsidiaries can have a negative effect on the Company's profitability.
Exchange rate fluctuations decreased comprehensive income by $10.4 million for
the year ended December 31, 2001, increased comprehensive income by $12.5
million for the year ended December 31, 2002 and increased comprehensive income
by $24.5 million for the year ended December 31, 2003. The above-mentioned risks
in Europe, North America and South America may hurt the Company's ability to
generate revenue in those regions in the future.
Dependence on Significant Customer. PepsiCo is the Company's largest
customer and all product lines the Company provides to PepsiCo collectively
accounted for approximately 14.6% of the Company's net sales for the year ended
December 31, 2003. For the year ended December 31, 2003, each of Danone and Dial
also accounted for more than 10% of the Company's net sales. If any of PepsiCo,
Danone or Dial terminated its relationship with the Company, it 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 any of these companies. Additionally, in 2003 the Company's top 20 customers
comprised over 84% of its net sales. 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 the
Company's 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.
Customer Requirements. The majority of the Company's sales are made
pursuant to long-term customer purchase orders and contracts. 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 its customers have not
purchased amounts under supply contracts that in the aggregate are materially
lower than what the Company has expected, the Company faces the risk that in the
future customers will not continue to purchase amounts that meet its
expectations.
Declining Domestic Motor Oil Business. Management forecasts that the
domestic one quart motor oil business will decline between 2% to 3% measured by
unit volume per year for the next five years due to several factors, including,
but not limited to, the decreased need of motor oil changes in new automobiles
and the growth in retail automotive fast lubrication and fluid maintenance
service centers such as Jiffy Lube Service Centers. The Company's domestic
automotive lubricants business generated net sales of $193.6 million for the
year ended December 31, 2003, which accounted for approximately 20% of total net
sales. The Company could experience further declines in domestic demand for
plastic packaging for motor oil.
Reduced Prices. The Company operates in a competitive environment. In
the past, the Company has encountered pricing pressures in its markets. The
Company could experience further declines in prices of plastic packaging.
Although the Company has been able over time to partially offset pricing
pressures by reducing its cost structure and making the manufacturing process
more efficient, the Company may not be able to continue to do so in the future.
Environmental Liabilities. The Company must comply with a variety of
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, regulated 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. These domestic and international
environmental laws can be complex and may change often, the compliance expenses
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 specified 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. As a
result, contamination at properties that the Company formerly owned or operated,
13
as well as contamination at properties that it currently owns or operates, as
well as contamination at properties to which it sent hazardous substances, may
result in liability under environmental laws. As a manufacturer, the Company has
an inherent risk of liability under environmental laws, both with respect to
ongoing operations and with respect to contamination that may have occurred in
the past on its properties or as a result of its operations. The Company could,
in the future, incur a material liability resulting from the costs of complying
with environmental laws or any claims concerning noncompliance, or liability
from contamination.
In addition, a number of governmental authorities, both in the United
States and abroad, have considered, or are expected to consider, legislation
aimed at reducing the amount of plastic wastes disposed. Programs have included
mandating certain rates of recycling and/or the use of recycled materials,
imposing deposits or taxes on plastic packaging material and requiring retailers
or manufacturers to take back packaging used for their products. Legislation, as
well as voluntary initiatives similarly aimed at reducing the level of plastic
wastes, could reduce the demand for certain plastic packaging, result in greater
costs for plastic packaging manufacturers or otherwise impact the Company's
business. Some consumer products companies, including some of the Company's
customers, have responded to these governmental initiatives and to perceived
environmental concerns of consumers by using containers made in whole or in part
of recycled plastic. Future legislation and initiatives could adversely affect
the Company in a manner that would be material.
Control by Blackstone. Blackstone indirectly controls 85% of the
partnership interests in Holdings. Pursuant to the Partnership Agreement,
holders of a majority of the 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. For example,
Blackstone could cause the Company to make acquisitions that increase the amount
of its indebtedness or to sell revenue-generating assets, impairing the
Company's ability to make payments under its debt agreements. Additionally,
Blackstone is in the business of making investments in companies and may from
time to time acquire and hold interests in businesses that compete directly or
indirectly with the Company. Blackstone may also pursue acquisition
opportunities that may be complementary to the Company's business, and as a
result, those acquisition opportunities may not be available to the Company.
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 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.
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 acquisitions,
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.
Additionally, the types of acquisitions the Company will be able to
make are limited by the Company's Senior Credit Agreement, which limits the
amount that the Company may pay for an acquisition to $40 million plus
additional amounts based on an unused available capital expenditure limit,
certain proceeds from new equity issuances and other amounts.
Labor Relations. Approximately 43% of the Company's employees worldwide
are covered by collective bargaining or similar agreements which expire at
various times in each of the next several years. Management believes that the
Company has satisfactory relations with its unions and, therefore, anticipates
reaching new agreements on satisfactory terms as the existing agreements expire.
The Company may not be able to reach new agreements without a work stoppage or
strike and any new agreements that are reached may not be reached on terms
satisfactory to it. A prolonged work stoppage or strike at any one of its
manufacturing facilities could have a material adverse effect on its results of
operations.
14
Blow Molding Equipment. Access to blow molding technology is important
to the Company's ability to expand its operations. The Company's primary blow
molding technology is supplied by Graham Engineering and the Sidel Group. If the
Company is unable to obtain new blow molding equipment from either of these
manufacturers, its ability to expand its operations may be materially and
adversely affected in the short-term until alternative sources of technology
could be arranged.
ITEM 2. PROPERTIES
The Company currently owns or leases 57 plants, and currently operates
56 plants, located in Argentina, Belgium, Brazil, Canada, France, 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 a 57.75% interest and slightly more than
a 50% interest in the operations in Poland and Mexico, respectively. 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.
ON-SITE LEASED/ SIZE
LOCATION OR OFF-SITE OWNED (SQUARE FEET)
- -------- ----------- ----- -------------
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 218,168
4. York, Pennsylvania Off-site Leased 210,370
5. Selah, Washington Off-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. Woodridge, Illinois Off-site Leased 129,850
13. Santa Ana, California Off-site Owned 127,680
14. Muskogee, Oklahoma Off-site Leased 125,000
15. Cincinnati, Ohio Off-site Leased 111,669
16. Atlanta, Georgia Off-site Leased 111,600
17. Jefferson, Louisiana Off-site Leased 109,407
18. Casa Grande, Arizona (b) Off-site Leased 100,000
19. Bradford, Pennsylvania Off-site Leased 90,350
20. Berkeley, Missouri Off-site Owned 75,000
21. Cambridge, Ohio On-site Leased 57,000
22. Port Allen, Louisiana On-site Leased 56,721
23. Shreveport, Louisiana On-site Leased 56,400
24. Richmond, California Off-site Leased 55,256
25. Houston, Texas Off-site Owned 52,500
26. Newell, West Virginia On-site Leased 50,000
27. Lakeland, Florida Off-site Leased 49,000
28. New Kensington, Pennsylvania On-site Leased 48,000
29. N. Charleston, South Carolina On-site Leased 45,000
30. Darlington, South Carolina On-site Leased 43,200
31. Bradenton, Florida On-site Leased 33,605
32. Vicksburg, Mississippi On-site Leased 31,200
33. Bordentown, New Jersey On-site Leased 30,000
34. West Jordan, Utah On-site Leased 25,573
35. Wapato, Washington Off-site Leased 20,300
15
Canadian Packaging Facilities
- -----------------------------
36. Mississauga, Ontario Off-site Owned 78,416
37. Toronto, Ontario On-site (c) 5,000
Mexican Packaging Facilities
- ----------------------------
38. Mexicali (d) Off-site Leased 59,700
39. Irapuato On-site (c) 58,130
40. Tlaxcala On-site (c) 5,400
European Packaging Facilities
- -----------------------------
41. Assevent, France Off-site Owned 186,000
42. Sulejowek, Poland (e) Off-site Owned 83,700
43. Meaux, France Off-site Owned 80,000
44. Aldaia, Spain On-site Leased 75,350
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 (e) On-site Leased 10,652
49. Nyirbator, Hungary On-site Leased 5,000
South American Packaging Facilities
- -----------------------------------
50. Sao Paulo, Brazil Off-site Leased 70,290
51. Buenos Aires, Argentina Off-site Owned 33,524
52. Rio de Janeiro, Brazil On-site Owned/Leased(f) 25,840
53. Longchamps, Argentina On-site Owned/Leased(f) 21,530
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 York, Pennsylvania
- Technology Center N/A Leased 80,500
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 not yet operational.
(c) The Company operates these on-site facilities without leasing the space it
occupies.
(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) These facilities are owned by Masko Graham, in which the Company holds a
57.75% interest through Graham Packaging Poland L.P.
(f) The building is owned and the land is leased.
16
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, results of operations or cash flows 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 2003.
17
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;
provided that, subject to certain limitations, the Operating Company may pay
dividends or other distributions to Holdings:
o in respect of overhead, tax liabilities, legal, accounting and other
professional fees and expenses;
o 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 that person's death, disability,
retirement or termination of employment or other circumstances with annual
dollar limitations; and
o to finance the payment of cash interest on the Senior Discount Notes or any
notes issued pursuant to a refinancing of the Senior Discount Notes.
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.
In 1998, the Company Issuers consummated an offering of $225.0 million
aggregate principal amount Senior Subordinated Notes due 2008, consisting of
$150.0 million aggregate principal amount of their 8 3/4% Senior Subordinated
Notes and $75.0 million aggregaTE principal amount of their Floating Rate Senior
Subordinated Notes. The Senior Subordinated Notes are fully and unconditionally
guaranteed by Holdings on a senior subordinated basis. In 1998, the Holdings
Issuers also consummated an offering of $169.0 million aggregate principal
amount at maturity of their Senior Discount Notes due 2009. The Senior Discount
Notes were initially offered at 59.534%.
On May 28, 2003, the Company Issuers issued an additional $100.0
million aggregate principal amount of 8 3/4% SeniOR Subordinated Notes due 2008
pursuant to Rule 144A under the Securities Act of 1933, as amended ("Securities
Act") under the February 2, 1998 Senior Subordinated Indenture (the "Additional
Notes"). The Additional Notes were issued in exchange for, and in full
satisfaction of, $100.0 million aggregate principal amount of Tranche II term
loans then outstanding under the Company's Senior Credit Agreement.
On January 20, 2004, the Company Issuers consummated an exchange offer
pursuant to which the Company Issuers issued $100.0 million aggregate principal
amount of their 8 3/4% Senior Subordinated Notes Due 2008, Series B (the
"Registered Additional Notes"), which were registered under the Securities Act,
in exchange for an equal principal amount of Additional Notes. The Registered
Additional Notes, together with the $225.0 million aggregate principal amount of
notes issued in 1998, are herein collectively referred to as the "Senior
Subordinated Notes."
18
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth the selected historical consolidated
financial data and other operating data of the Company for and at the end of
each of the years in the five-year period ended December 31, 2003, which are
derived from the Company's audited financial statements. The following tables
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Item 7) and the financial
statements included under Item 8.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales (1) .................................. $ 978.7 $ 906.7 $ 923.1 $ 842.6 $ 731.6
Gross profit (1) ............................... 183.0 164.1 151.9 134.5 142.7
Selling, general and administrative expenses ... 66.9 63.8 58.2 56.2 48.0
Impairment charges (2) ......................... 2.5 5.1 38.0 21.1 --
Special charges and unusual items (3)........... -- -- 0.2 1.1 4.6
-------- -------- -------- -------- --------
Operating income ............................... 113.6 95.2 55.5 56.1 90.1
Interest expense, net (4) ...................... 96.6 81.8 98.5 101.7 87.5
Other (income) expense, net .................... (0.3) 0.1 0.2 0.2 (0.7)
Income tax provision ........................... 6.8 4.0 0.3 0.4 2.5
Minority interest 0.8 1.7 0.5 (0.6) (0.5)
------- -------- -------- -------- --------
Net income (loss) .............................. $ 9.7 $ 7.6 $ (44.0) $ (45.6) $ 1.3
======= ======== ======== ======== ========
AS OF DECEMBER 31,
------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets .................................. $ 876.1 $ 798.3 $ 758.6 $ 821.3 $ 741.2
Total debt .................................... 1,097.4 1,070.6 1,052.4 1,060.2 1,017.1
Partners' capital (deficit) ................... (421.5) (460.3) (485.1) (464.4) (458.0)
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
OTHER FINANCIAL DATA:
Cash flows from (used in):
Operating activities ........................ $ 85.7 $ 92.4 $ 52.5 $ 90.9 $ 55.5
Investing activities ........................ (95.9) (96.6) (77.2) (164.7) (181.8)
Financing activities ........................ 8.2 1.3 24.3 78.4 126.2
Depreciation and amortization (6) ............. 71.8 75.8 71.7 66.2 53.2
Capital expenditures (excluding acquisitions) . 91.8 92.4 74.3 163.4 171.0
Investments (including acquisitions) (7) ...... 4.1 -- 0.2 0.1 10.3
Ratio of earnings to fixed charges (8) ........ 1.2x 1.1x -- -- 1.0x
(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 and other assets of $2.5
million, $5.1 million, $28.9 million and $16.3 million for the years ended
December 31, 2003, 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.
19
(3) Includes compensation costs related to the Recapitalization, global
restructuring, systems conversion and other costs.
(4) The year ended December 31, 2003 includes the effects of the refinancing of
the Company's prior senior credit agreement, which resulted in the
write-off of debt issuance fees of $6.6 million.
(5) As a limited partnership, Holdings is not subject to U.S. federal income
taxes or most state income taxes. Instead, 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.
(6) Depreciation and amortization excludes amortization of debt issuance fees,
which is included in interest expense, net, and impairment charges.
(7) On April 26, 1999, 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 for a then total interest of 51%. On December 29, 2003, Masko Graham
redeemed a portion of the shares owned by the minority partners, thereby
increasing the Company's interest by an additional 6.75%, bringing the
Company's total interest to 57.75%. On December 29, 2003, the Company
agreed to buy the remaining shares owned by the minority partners. The
total purchase price for the 100% interest, excluding direct costs of the
acquisition, net of liabilities assumed, is estimated to be approximately
$18.8 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.
(8) 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 and $49.1 million for the years ended December 31, 2001
and 2000, respectively.
20
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 56 manufacturing facilities 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.
Management believes that critical success factors to the Company's
business are its ability to:
o maintain relationships with and 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. The Company has established
itself as a market leader in the value-added segment for hot-fill PET
containers. Recently, the Company has been a 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 $180.0 million in capital expenditures in the polyolefin area of the food
and beverage market. For the year ended December 31, 2003, the Company's sales
of polyolefin containers for the food and beverage market grew to $243.9 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, principally in the United
States, 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. Unit volume in the one quart motor oil industry decreased
approximately 4% in 2003 as compared to 2002; annual volumes declined an average
of approximately 1% to 2% in prior years. Management believes that the domestic
one quart motor oil container business will continue to decline approximately 2%
to 3% annually for the next several years but believes that there are
significant volume opportunities for automotive product business globally.
The Company operates in a competitive environment. In the past, the
Company has encountered pricing pressures in its markets. The Company could
experience further declines in prices of plastic packaging. Although the Company
has been able over time to partially offset pricing pressures by reducing its
cost structure and making the manufacturing process more efficient, the Company
may not be able to continue to do so in the future.
The Company currently operates 21 manufacturing facilities outside of
the United States, either on its own or through joint ventures, in Argentina,
Belgium, Brazil, Canada, France, 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, Mexico and
Argentina. On March 30, 2001, the Company increased its interest in Masko
Graham, the Company's Polish operation, from 50% to 51%, and again on December
29, 2003, from 51% to approximately 58%.
21
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 years, the Company restructured its
operations as follows.
o In its North American operations in 2001, the Company closed its facility
in Anjou, Quebec, Canada and in 2002 closed another plant in Burlington,
Ontario, Canada. Business from these facilities was consolidated into other
North American facilities as a result of these closures.
o In its European operations, the Company committed to restructuring changes
in the United Kingdom, France, Italy and Germany as follows. In 2000, the
Company experienced a decline in its operations in the United Kingdom and
France. In the United Kingdom, this reduction in business was the result of
the loss of a key customer due to a consolidation of its filling
requirements to a smaller number of locations, several of which were not
within an economical shipping distance from the Company's U.K. facilities.
As a result, during the latter portion of 2001, the Company committed to a
plan to close its plant in the United Kingdom. This plant was closed during
2002. During the latter portion of 2001, the Company also committed to a
plan to sell or close certain plants in France. During 2002, one facility
in France was sold. Another facility in France was closed in the second
quarter of 2003. In the third quarter of 2001, the Company experienced a
loss of business at its plant in Sovico, Italy. During the latter portion
of 2001, the Company committed to a plan to sell or close its plants in
Italy. In 2002, the Company sold both of its plants in Italy. During the
latter portion of 2001, as a part of its European restructuring plans, the
Company committed to a plan to sell or close plants in Germany. On March
31, 2003, the Company sold its two German plants.
o In its South American operations in the first half of 2001, the Company
experienced a downturn in financial performance in its operations in
Argentina and, later in 2001, the Company's operations in Argentina were
subjected to the severe downturn in the Argentine economy.
(See "--Results of Operations" for a discussion of impairment charges.)
For the year ended December 31, 2003, 84.4% of the Company's net sales
were generated by the top twenty customers, the majority of which were under
long-term contracts with terms up to ten years; the remainder of which were
generated by customers with whom the Company has been doing business for over 12
years on average. Prices under these arrangements are typically tied to market
standards and, therefore, vary with market conditions. In general, the contracts
are requirements contracts that do not obligate the customer to purchase any
given amount of product from the Company. The Company had sales to one customer
which exceeded 10% of total sales in each of the years ended December 31, 2003,
2002 and 2001. The Company's sales to this customer were 14.6%, 16.4% and 17.4%
for the years ended December 31, 2003, 2002 and 2001, respectively. The Company
also had sales to two other customers which exceeded 10% of total sales for the
year ended December 31, 2003. The Company's sales to these customers were 11.0%
and 10.6% of total sales for the year ended December 31, 2003. For the year
ended December 31, 2003, approximately 78% and 22% of the sales to these three
customers were made in North America and Europe, respectively.
Based on industry data, the following table summarizes average market
prices per pound of PET and HDPE resins in North America during 2003, 2002 and
2001:
YEAR
----
2003 2002 2001
---- ---- ----
PET $0.64 $0.58 $0.65
HDPE 0.50 0.41 0.43
In general, the Company's dollar gross profit is substantially
unaffected by fluctuations in the prices of PET and HDPE resins, the primary raw
materials for the Company's products, because industry practice and the
Company's agreements with its customers permit substantially all resin price
changes to be passed through to customers by means of corresponding changes in
product pricing. Consequently, the Company believes that its cost of goods sold,
as well as other expense items, should not be analyzed solely on a percentage of
net sales basis. 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.
22
The Company does not pay U.S. federal income taxes under the provisions
of the Internal Revenue Code, as the distributive share of the applicable income
or loss is included in the tax returns of its partners. The Company may make tax
distributions to its partners to reimburse them for such tax obligations, if
any. The Company's foreign operations are subject to tax in their local
jurisdictions. Most of these entities have historically incurred net operating
losses.
RESULTS OF OPERATIONS
The following tables set forth the major components of the Company's
net sales and such net sales expressed as a percentage of total net sales:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
(IN MILLIONS)
North America (1) .. $809.6 82.7% $745.0 82.2% $742.5 80.4%
Europe ............. 143.9 14.7 138.5 15.3 154.3 16.7
South America (1) .. 25.2 2.6 23.2 2.5 26.3 2.9
------ ----- ------ ----- ------ -----
Total Net Sales .... $978.7 100.0% $906.7 100.0% $923.1 100.0%
====== ===== ====== ===== ====== =====
(1) Beginning January 1, 2002, the North America segment has included Mexico and
the Latin America segment became the South America segment. 2001 net sales in
Mexico, which are included in South America, are insignificant.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
(IN MILLIONS)
Food and Beverage ............ $573.0 58.5% $515.4 56.9% $511.6 55.4%
Household and Personal Care .. 191.6 19.6 186.0 20.5 208.5 22.6
Automotive Lubricants ........ 214.1 21.9 205.3 22.6 203.0 22.0
------ ----- ------ ----- ------ -----
Total Net Sales .............. $978.7 100.0% $906.7 100.0% $923.1 100.0%
====== ===== ====== ===== ====== =====
2003 COMPARED TO 2002
Net Sales. Net sales for the year ended December 31, 2003 increased
$72.0 million, or 7.9%, to $978.7 million from $906.7 million for the year ended
December 31, 2002. The increase in sales was primarily due to an increase in
resin pricing combined with a 9.6% increase in units sold, principally due to
additional food and beverage container business where units increased by 21.1%.
These increases were partially offset by the Company's restructuring process in
Europe which included the sale or closing of seven non-strategic locations, all
of which were sold or closed as of December 31, 2003. Excluding business
impacted by the European restructuring, sales for the year ended December 31,
2003 would have increased approximately 11% compared to the sales for the year
ended December 31, 2002 and unit volume would have increased approximately 13%.
On a geographic basis, sales for the year ended December 31, 2003 in North
America increased $64.6 million, or 8.7%, from the year ended December 31, 2002
and included higher units sold of 7.1%. North American sales in the food and
beverage business, the household and personal care business and the automotive
lubricants business contributed $38.0 million, $16.0 million and $10.6 million,
respectively, to the increase. Units sold in North America increased by 19.3% in
the food and beverage business, decreased by 16.6% in the household and personal
care business, primarily due to voluntary reductions of low margin business, and
decreased by 2.3% in the automotive lubricants business. Sales for the year
ended December 31, 2003 in Europe increased $5.4 million, or 3.9%, compared to
sales for the year ended December 31, 2002. The increase was primarily due to
exchange rate changes of approximately $21.5 million, partially offset by the
European restructuring. Excluding business impacted by the European
restructuring, sales in Europe for the year ended December 31, 2003 would have
increased approximately $30.2 million, or approximately 27%, compared to the
year ended December 31, 2002. Units sold in Europe increased 14.2% and,
excluding business impacted by the European restructuring, would have increased
approximately 23% compared to the same period last year. Sales in South America
for the year ended December 31, 2003 increased $2.0 million, or 8.6%, from the
year ended December 31, 2002, in part due to an increase in units sold of 9.7%
offset by exchange rate changes of approximately $1.3 million.
23
Gross Profit. Gross profit for the year ended December 31, 2003 increased
$18.9 million to $183.0 million from $164.1 million for the year ended December
31, 2002. Gross profit for the year ended December 31, 2003 increased $0.9
million in North America, increased $19.1 million in Europe and decreased $1.1
million in South America when compared to the year ended December 31, 2002. The
increase in gross profit resulted primarily from an increase in unit volume and
strong operating performance related to ongoing business in Europe of $5.9
million, a net reduction of restructuring and customer consolidation expenses in
North America and Europe of $14.9 million, a net reduction in project costs of
$1.3 million and net exchange rate gains of $3.7 million, offset by a decrease
in gross profit related to ongoing business in North America of $6.8 million.
The decrease in gross profit in North America was due to volume growth and
operational improvements more than offset by competitive pricing and increases
in wages, benefits and other inflationary costs.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2003 increased $3.0
million to $66.8 million from $63.8 million for the year ended December 31,
2002. The increase was primarily due to increases in North America and Europe.
The increase in North America was primarily due to an increase in the allowance
for doubtful accounts of $2.0 million related to potential losses for one of the
Company's larger customers, Hi-Country, against which the Company has filed an
involuntary Chapter 7 bankruptcy petition, expansion into Mexico and an increase
in product development expenses, partially offset by a decrease in
compensation-related expenses and non-recurring charges. The increase in Europe
was primarily due to an increase in expenses due to exchange rates, partially
offset by reductions in non-recurring charges and costs related to locations in
Europe that were sold during 2002 and 2003. The Company's total non-recurring
charges were $4.3 million and $5.6 million for the years ended December 31, 2003
and 2002, respectively, comprised primarily of global reorganization costs ($3.5
million) and other costs ($0.8 million) for the year ended December 31, 2003 and
costs related to the postponed equity offering and concurrent transactions ($3.0
million) and global reorganization costs ($2.6 million) for the year ended
December 31, 2002. Selling, general and administrative expenses as a percent of
sales decreased to 6.8% of sales for the year ended December 31, 2003 from 7.0%
of sales for the year ended December 31, 2002. Excluding non-recurring charges,
selling, general and administrative expenses as a percent of sales remained
constant at 6.4% for both years ended December 31, 2003 and 2002.
Impairment Charges. During 2003, the Company evaluated the
recoverability of its long-lived assets in the following locations (with the
operating segment under which it reports in parentheses) due to indicators of
impairment as follows:
O Germany (Europe) - the Company's commitment to a plan to sell this
location; and
O United States (North America) - a significant change in the ability to
utilize certain assets.
During 2002, the Company evaluated the recoverability of its long-lived
assets in the following locations (with the operating segment under which it
reports in parentheses) due to indicators of impairment as follows:
O Germany (Europe) - the Company's commitment to a plan to sell this
location; and
O Certain plant in Louisiana (North America) - the Company's commitment to a
plan to close this location.
For assets to be held and used, the Company determined that the
undiscounted cash flows were below the carrying value of certain long-lived
assets in these locations. Accordingly, the Company adjusted the carrying values
of these long-lived assets in these locations to their estimated fair values,
resulting in impairment charges of $1.9 million for the year ended December 31,
2003.
For assets to be disposed of, the Company adjusted the carrying values
of these long-lived assets in these locations to the lower of their carrying
values or their estimated fair values less costs to sell, resulting in
impairment changes of $0.6 million and $5.1 million for the years ended December
31, 2003 and 2002, respectively. These assets have no remaining carrying amount
at December 31, 2003. Discrete financial information is not available for these
assets that are held for disposal.
Interest Expense, Net. Interest expense, net increased $14.8 million to
$96.6 million for the year ended December 31, 2003 from $81.8 million for the
year ended December 31, 2002. The increase was primarily related to the
refinancing of the Company's prior Senior Credit Agreement, which resulted in
the write-off of debt issuance fees of $6.6 million and higher LIBOR margins
under the Company's New Senior Credit Agreement, partially offset by a decline
in interest rates.
24
Other (Income) Expense, Net. Other income was $0.3 million for the year
ended December 31, 2003 as compared to other expense of $0.1 million for the
year ended December 31, 2002. The higher income was primarily due to higher
foreign exchange gains in the year ended December 31, 2003 as compared to the
year ended December 31, 2002.
Income Tax Provision. Income tax provision increased $2.8 million to
$6.8 million for the year ended December 31, 2003 from $4.0 million for the year
ended December 31, 2002. The increase was primarily related to increased taxable
earnings in certain of the Company's European and Mexican subsidiaries for the
year ended December 31, 2003 as compared to the year ended December 31, 2002.
Minority Interest. Minority interest decreased $0.9 million to $0.8
million for the year ended December 31, 2003 from $1.7 million for the year
ended December 31, 2002, primarily related to the Company's joint venture in
Mexico.
Net Income (Loss). Primarily as a result of factors discussed above,
net income was $9.7 million for the year ended December 31, 2003 compared to net
income of $7.6 million for the year ended December 31, 2002.
2002 COMPARED TO 2001
Net Sales. Net sales for the year ended December 31, 2002 decreased
$16.4 million, or 1.8%, to $906.7 million from $923.1 million for the year ended
December 31, 2001. The decrease in sales was primarily due to a decrease in
resin pricing combined with the Company's restructuring process in Europe, which
includes the sale or closing of seven non-strategic locations of which four
locations had already been sold or closed in 2002, partially offset by a 7.6%
increase in units sold, principally due to additional food and beverage
container business where units increased by 11.8%. Excluding business impacted
by the European restructuring, sales for the year ended December 31, 2002 would
have increased approximately 3% compared to the sales for the year ended
December 31, 2001 and unit volume would have increased approximately 14%. On a
geographic basis, sales for the year ended December 31, 2002 in North America
increased $2.5 million, or 0.3%, from the year ended December 31, 2001 and
included higher units sold of 9.1%. North American sales in the food and
beverage business and the automotive lubricants business contributed $3.2
million and $4.0 million, respectively, to the increase, while sales in the
household and personal care business were $4.7 million lower. Units sold in
North America increased by 12.3% in the food and beverage business, 1.8% in the
household and personal care business and 7.6% in the automotive lubricants
business. Sales for the year ended December 31, 2002 in Europe decreased $15.8
million, or 10.2%, from the year ended December 31, 2001. The decrease in sales
is primarily due to the European restructuring. Overall, the European sales
reflected a 5.3% increase in units sold. Exchange rate changes increased sales
by approximately $5.5 million. Excluding business impacted by the European
restructuring, sales in Europe for the year ended December 31, 2002 would have
increased approximately $23.2 million compared to sales for the year ended
December 31, 2001 and unit volume in Europe would have increased approximately
25% compared to the same period last year. Sales in South America for the year
ended December 31, 2002 decreased $3.1 million, or 11.8%, for the year ended
December 31, 2001, primarily due to unfavorable exchange rate changes of
approximately $11.0 million, partially offset by a 3.1% increase in units sold
and increased pricing principally due to a pass through of increased costs.
Gross Profit. Gross profit for the year ended December 31, 2002
increased $12.2 million to $164.1 million from $151.9 million for the year ended
December 31, 2001. Gross profit for the year ended December 31, 2002 increased
$15.5 million in North America, decreased $4.1 million in Europe and increased
$0.8 million in South America when compared to the year ended December 31, 2001.
The increase in gross profit resulted primarily from the higher sales volume and
strong operating performance in all three of the Company's geographic segments
being partially offset by restructuring and customer consolidation expenses in
Europe of approximately $15.8 million and exchange rate losses in South America
of approximately $2.3 million.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2002 increased $5.5
million to $63.8 million from $58.3 million for the year ended December 31,
2001. The increase in 2002 selling, general and administrative expenses was
primarily due to an increase in certain non-recurring charges, which were $5.6
million and $1.0 million for the years ended December 31, 2002 and December 31,
25
2001, respectively, comprised primarily of costs related to the postponed equity
offering and concurrent transactions ($3.0 million) and global reorganization
costs ($2.6 million) for the year ended December 31, 2002 and global
reorganization costs ($0.8 million) for the year ended December 31, 2001. As a
percent of sales, selling, general and administrative expenses increased to 7.0%
of sales in 2002 from 6.3% of sales in 2001. Exc