UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004



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FORM 10-Q



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(Mark One)

|[ x ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|----- | ----------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007



Commission file number:  333-53603-03

GRAHAM PACKAGING HOLDINGS COMPANY

(Exact name of registrant as specified in its charter)



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Pennsylvania
        
        23-2553000(State or other jurisdication ofincorporation or organization)
        
        (I.R.S. Employer Identificaton No.)




2401 Pleasant Valley RoadYork, Pennsylvania
        
        17402(Address of principal executive offices)
        
        (Zip Code)




(717) 849-8500(Registrants telephone number, including area code)




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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesxNo  o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o    Accelerated filer o    Non- accelerated filerx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    Nox

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 August 1, 2007 was $-0-.






GRAHAM PACKAGING HOLDINGS COMPANY



INDEX





Page NumberPART I.  FINANCIAL INFORMATIONItem
        1:
        Financial Statements:CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)   At June 30, 2007 and December 31, 2006
        3CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)   For the three and six months ended June 30, 2007 and 2006
        4CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)   For the six months ended June 30, 2007 and 2006
        5NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
        6Item
        2:
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        27Item
        3:
        Quantitative and Qualitative Disclosures About Market Risk
        39Item
        4:
        Controls and Procedures
        40




PART II. OTHER INFORMATIONItem
        1:
        Legal Proceedings
        42Item
        1A:
        Risk Factors
        42Item
        6:
        Exhibits
        42Signature
        43








2




PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)





June 30,2007
        
        December 31,2006(In thousands)ASSETSCurrent assets:Cash and cash equivalents
        
        $
        37,647
        
        $
        13,327Accounts receivable, net
        
        
        277,231
        
        
        240,692Inventories
        
        
        249,471
        
        
        238,941Deferred income taxes
        
        
        15,423
        
        
        15,409Prepaid expenses and other current assets
        
        
        53,246
        
        
        64,870Total current assets
        
        
        633,018
        
        
        573,239Property, plant and equipment, net
        
        
        1,390,264
        
        
        1,426,012Intangible assets, net
        
        
        75,912
        
        
        78,511Goodwill
        
        
        305,761
        
        
        303,394Other non-current assets
        
        
        58,204
        
        
        60,781Total assets
        
        $
        2,463,159
        
        $
        2,441,937LIABILITIES AND PARTNERS CAPITAL (DEFICIT)Current liabilities:Accounts payable
        
        $
        220,068
        
        $
        206,672Accrued expenses
        
        
        205,419
        
        
        194,837Current portion of long-term debt
        
        
        30,634
        
        
        32,308Total current liabilities
        
        
        456,121
        
        
        433,817Long-term debt
        
        
        2,504,287
        
        
        2,514,579Deferred income taxes
        
        
        30,243
        
        
        28,538Other non-current liabilities
        
        
        85,151
        
        
        62,759Commitments and contingent liabilities (see Notes 10 and 11)
        
        
        
        
        
        Partners capital (deficit):General partners
        
        
        (31,729
        )
        
        (30,965
        )Limited partners
        
        
        (609,748
        )
        
        (595,148
        )Notes and interest receivable for ownership interests
        
        
        (3,345
        )
        
        (3,295
        )Accumulated other comprehensive income
        
        
        32,179
        
        
        31,652Total partners capital (deficit)
        
        
        (612,643
        )
        
        (597,756
        )Total liabilities and partners capital (deficit)
        
        $
        2,463,159
        
        $
        2,441,937








See accompanying notes to condensed consolidated financial statements.



3






GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)





Three Months EndedJune 30,
        
        Six Months EndedJune 30,2007
        
        2006
        
        2007
        
        2006(In thousands)Net sales
        
        $
        650,969
        
        $
        653,282
        
        $
        1,272,754
        
        $
        1,298,289Cost of goods sold
        
        
        552,766
        
        
        569,372
        
        
        1,094,391
        
        
        1,145,261Gross profit
        
        
        98,203
        
        
        83,910
        
        
        178,363
        
        
        153,028Selling, general and administrative expenses
        
        
        33,097
        
        
        33,205
        
        
        68,282
        
        
        64,339Impairment charges
        
        
        
        
        
        1,112
        
        
        
        
        
        1,112Net loss on disposal of fixed assets
        
        
        891
        
        
        514
        
        
        2,456
        
        
        1,094Operating income
        
        
        64,215
        
        
        49,079
        
        
        107,625
        
        
        86,483Interest expense, net
        
        
        51,977
        
        
        54,025
        
        
        107,700
        
        
        104,410Other expense, net
        
        
        592
        
        
        51
        
        
        702
        
        
        88Income (loss) before income taxes
        
        
        11,646
        
        
        (4,997
        )
        
        (777
        )
        
        (18,015
        )Income tax provision
        
        
        6,515
        
        
        10,269
        
        
        9,707
        
        
        7,237Net income (loss)
        
        $
        5,131
        
        $
        (15,266
        )
        $
        (10,484
        )
        $
        (25,252
        )Net income (loss) allocated to general partners
        
        $
        257
        
        $
        (763
        )
        $
        (524
        )
        $
        (1,263
        )Net income (loss) allocated to limited partners
        
        $
        4,874
        
        $
        (14,503
        )
        $
        (9,960
        )
        $
        (23,989
        )








See accompanying notes to condensed consolidated financial statements.



4




GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)





Six Months EndedJune 30,2007
        
        2006(In thousands)Operating activities:Net loss
        
        $
        (10,484
        )
        $
        (25,252
        )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
        
        
        101,684
        
        
        100,711Amortization of debt issuance fees
        
        
        9,696
        
        
        7,302Net loss on disposal of fixed assets
        
        
        2,456
        
        
        1,094Impairment charges
        
        
        
        
        
        1,112Stock compensation expense
        
        
        294
        
        
        140Foreign currency transaction loss (gain)
        
        
        889
        
        
        (1,067
        )Interest on receivable for ownership interests
        
        
        (50
        )
        
        (96
        )Changes in operating assets and liabilities:Accounts receivable
        
        
        (34,249
        )
        
        (26,286
        )Inventories
        
        
        (9,243
        )
        
        48,549Prepaid expenses and other current assets
        
        
        7,041
        
        
        (4,309
        )Other non-current assets
        
        
        (5,071
        )
        
        (535
        )Other non-current liabilities
        
        
        12,640
        
        
        2,146Accounts payable and accrued expenses
        
        
        35,753
        
        
        49,150Net cash provided by operating activities
        
        
        111,356
        
        
        152,659Investing activities:Cash paid for property, plant and equipment
        
        
        (67,838
        )
        
        (93,771
        )Proceeds from sale of property, plant and equipment
        
        
        1,043
        
        
        5,096Acquisitions of/investments in businesses, net of cash acquired
        
        
        
        
        
        (197
        )Net cash used in investing activities
        
        
        (66,795
        )
        
        (88,872
        )Financing activities:Proceeds from issuance of long-term debt
        
        
        554,781
        
        
        447,726Payment of long-term debt
        
        
        (567,600
        )
        
        (523,628
        )Buyout of partnership units
        
        
        (3,140
        )
        
        Debt issuance fees
        
        
        (4,500
        )
        
        (1,000
        )Net cash used in financing activities
        
        
        (20,459
        )
        
        (76,902
        )Effect of exchange rate changes on cash and cash equivalents
        
        
        218
        
        
        848Increase (decrease) in cash and cash equivalents
        
        
        24,320
        
        
        (12,267
        )Cash and cash equivalents at beginning of period
        
        
        13,327
        
        
        26,684Cash and cash equivalents at end of period
        
        $
        37,647
        
        $
        14,417Supplemental disclosuresCash paid for interest, net of amounts capitalized
        
        $
        109,317
        
        $
        84,639Cash paid for taxes
        
        
        7,108
        
        
        8,967Non-cash investing and financing activities:Capital leases
        
        
        533
        
        
        






See accompanying notes to condensed consolidated financial statements.



5




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1.
        Basis of Presentation


The accompanying unaudited condensed consolidated financial statements of Graham Packaging Holdings Company (Holdings), a Pennsylvania limited partnership, have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements.  All entities and assets owned by Holdings are referred to collectively with Holdings as the Company.  Graham Packaging Company, L.P., Holdings wholly-owned subsidiary, is referred to as the Operating Company.  In the opinion of the management of the Company
(Management), all adjustments (consisting only of usual recurring adjustments considered necessary for a fair presentation) are reflected in the condensed consolidated financial statements.  The condensed consolidated balance sheet as of December 31, 2006 is derived from audited financial statements.  The condensed consolidated financial statements and notes included in this report should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2006.  The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.

Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 155, Accounting for Certain Hybrid Financial Instruments  an Amendment of FASB Statements No. 133 and 140.  SFAS 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders election.  SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140.  This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006.  The Company adopted SFAS 155 on January 1, 2007, and its adoption has not had a significant impact on the Companys financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements.  This statement establishes a single authoritative definition of fair value, sets out a framework to classify the source of information used in fair value measurements, identifies additional factors that must be disclosed about assets and liabilities measured at fair value based on their placement in the new framework and modifies the long-standing accounting presumption that the transaction price of an asset or liability equals its initial fair value.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  Therefore, the Company will adopt SFAS 157 on January 1, 2008.  The Company is currently in the process of assessing the impact of the adoption of SFAS 157 on its financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115.  Under SFAS 159, companies may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period.  SFAS 159 is effective as of the beginning of a companys first fiscal year that begins after November 15, 2007.  Therefore, the Company may adopt SFAS 159 on January 1, 2008.  The Company is currently in the process of assessing the impact of the adoption of SFAS 159 on its financial statements.

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes and transitional requirements upon adoption of FIN 48.  The Company adopted FIN 48 effective January 1, 2007 which resulted in an increase in the Companys other non-current liabilities for unrecognized tax benefits of $4.8 million, with a corresponding decrease in partners capital.  See Note 9 for additional discussion
regarding the impact of the Companys adoption of FIN 48.



6




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented  in the Income Statement (That Is, Gross versus Net Presentation).  EITF 06-3 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed.  EITF 06-3 was effective January 1, 2007.  The Company presents these taxes on a net basis for all periods presented.

Derivatives

During 2004, the Company entered into four interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 3.89%, on $700.0 million of term loans. During 2005, the Company entered into three additional interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 4.43%, on $225.0 million of term loans. The interest rate swaps are accounted for as cash flow hedges. The hedges are highly effective as defined in SFAS 133, Accounting for Derivative Instruments and Hedging Activities.  The effective portion of the cash flow hedges is recorded in other comprehensive income (OCI) and was an unrealized loss of $2.2 million for the three months ended June 30, 2007 as compared
to an unrealized gain of $2.1 million for the three months ended June 30, 2006 and was an unrealized loss of $5.2 million for the six months ended June 30, 2007 as compared to an unrealized gain of $5.4 million for the six months ended June 30, 2006.  100% of the amount recorded within accumulated OCI as of June 30, 2007 is expected to be recognized in interest expense in the next twelve months.

Comprehensive Income

Changes in fair value of derivatives designated and accounted for as cash flow hedges, amortization of prior service costs and unrealized actuarial losses included in net periodic benefit costs for pension and post-retirement plans and foreign currency translation adjustments are included in OCI and added with net income (loss) to determine total comprehensive income (loss).

Option Plans

In 2004, the FASB issued SFAS 123(R), Share-Based Payment. SFAS 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS 123(R), companies are to (1) use fair value to measure stock-based compensation awards and (2) cease using the intrinsic value method of accounting, which Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, allowed and resulted in no expense for many awards of stock options for which the exercise price of the option equaled the price of the underlying stock at the grant date. In addition, SFAS 123(R) retains the modified grant date model from SFAS 123. Under that model, compensation cost is measured at the fair value of an award on the grant
date and adjusted to reflect estimated forfeitures and the outcome of certain conditions over the requisite service period of the award. The fair value of an award is not re-measured after its initial estimation on the grant date (except in the case of a liability award or if the award is modified). The Company adopted SFAS 123(R) on January 1, 2006 using the prospective method.  In accordance with SFAS 123(R), the Company applied this statement prospectively to awards issued, modified, repurchased or cancelled after January 1, 2006.  The adoption of SFAS 123(R) has not had a significant impact on the Companys financial statements.

The Company continued to account for equity based compensation to employees for awards outstanding as of January 1, 2006 using the intrinsic value method prescribed in APB 25.  SFAS 123 established accounting and disclosure requirements using a fair value based method of accounting for equity based employee compensation plans. The exercise prices of all unit options were equal to or greater than the fair market value of the units on the dates of the grants and, accordingly, no compensation cost has been recognized under the provisions of APB 25. Under SFAS 123, compensation cost is measured at the grant date based on the value of the award and is recognized over the service (or vesting) period.  There were no options granted during the six months ended June 30, 2007 or the six months ended June 30, 2006.



7




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





A summary of the changes in the option units outstanding under the option plans for the six months ended June 30, 2007 is as follows:



UnitsUnderOption
        
        WeightedAverageExercisePrice
        
        WeightedAverageRemainingContractual Term(in years)
        
        AggregateIntrinsic Value(in millions)Outstanding at January 1, 2007
        
        1,778.4
        
        $
        36,150Granted
        
        
        
        
        Exercised
        
        
        
        
        Forfeited
        
        (330.8
        )
        
        40,504Outstanding at June 30, 2007
        
        1,447.6
        
        
        35,155
        
        6.7
        
        $
        3.6Vested or expected to vest
        
        1,225.8
        
        
        36,850Exercisable at June 30, 2007
        
        592.5
        
        
        34,454
        
        3.7
        
        
        N/A






Reclassifications

Certain reclassifications have been made to the 2006 financial statements to conform to the 2007 presentation, including the following:


        a reclassification to reflect as a separate line item within operating income on the Condensed Consolidated Statements of Operations the net loss on disposal of fixed assets; amounts for this line item were previously included predominantly in cost of goods sold; amounts (in thousands) were $514 and $1,094 for the three and six months ended June 30, 2006, respectively.




2.
        Debt Arrangements




Long-term debt consisted of the following:





June 30,2007
        
        December 31,2006(In thousands)Term loans
        
        $
        1,870,312
        
        $
        1,819,861Revolving Credit Facility
        
        
        
        
        
        56,000Foreign and other revolving credit facilities
        
        
        4,299
        
        
        7,174Senior Notes
        
        
        250,000
        
        
        250,000Senior Subordinated Notes
        
        
        375,000
        
        
        375,000Capital leases
        
        
        34,254
        
        
        37,607Other
        
        
        1,056
        
        
        1,2452,534,921
        
        
        2,546,887Less amounts classified as current
        
        
        30,634
        
        
        32,308$
        2,504,287
        
        $
        2,514,579






8




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





In connection with the acquisition of the blow molded plastic container business of Owens-Illinois, Inc. (O-I Plastic) on October 7, 2004, the Operating Company, Holdings, GPC Capital Corp. I, Holdings wholly-owned subsidiary (CapCo I), and a syndicate of lenders entered into a first-lien credit agreement (the Credit Agreement) and a second-lien credit agreement (the Second-Lien Credit Agreement and, together with the Credit Agreement, the Credit Agreements).  Pursuant to its terms, on March 30, 2007, the Credit Agreement was amended in order to, among other things, increase the Term Loan B facility provided under the Credit Agreement by approximately $305.0 million (the Amendment).  Proceeds of the Amendment were used to pay off the Second-Lien Credit Agreement ($250.0 million), with $50.0 million being used to
reduce outstanding borrowings on the existing revolving credit facility provided for under the Credit Agreement and approximately $5.0 million being used to pay fees and expenses.  The Amendment also eliminated one of the Companys financial ratio covenants, increased the maximum allowable leverage under another financial ratio covenant and waived any potential excess cash flow payment required for the year ended December 31, 2006.  After giving effect to the Amendment, the Credit Agreement consists of a senior secured term loan B to the Operating Company totaling $1,870.3 million (the Term Loan or Term Loan Facility) and a $250.0 million revolving credit facility (the Revolving Credit Facility).  The obligations of the Operating Company under the Credit Agreement are guaranteed by Holdings and certain other subsidiaries of Holdings.  After giving effect to the Amendment to the Credit Agreement, the Term Loan is payable in quarterly
installments and requires payments of $14.1 million in 2007 and $18.7 million in each of 2008, 2009 and 2010 and $1,804.8 million in 2011.  The Revolving Credit Facility expires on October 7, 2010.  Availability under the Companys Revolving Credit Facility as of June 30, 2007 was $239.7 million (as reduced by $10.3 million of outstanding letters of credit).  Interest under the Credit Agreement is payable at (a) the Alternate Base Rate (ABR) (the higher of the Prime Rate or the Federal Funds Rate plus 0.50%) plus a margin ranging from 1.00% to 1.75%; or (b) the Eurodollar Rate (the applicable interest rate offered to banks in the London interbank eurocurrency market) plus a margin ranging from 2.00% to 2.75%.  A commitment fee of 0.50% is due on the unused portion of the revolving loan commitment.  In addition, the Credit Agreement contains certain affirmative and negative covenants as to the operations and financial condition of the Company,
as well as certain restrictions on the payment of dividends and other distributions to Holdings.  As of June 30, 2007, the Company was in compliance with all covenants.

Substantially all domestic tangible and intangible assets of the Company are pledged as collateral pursuant to the terms of the Credit Agreement.

The acquisition of O-I Plastic and the related refinancing of the indebtedness of the Company also included the issuance of $250.0 million in Senior Notes of the Operating Company and $375.0 million in Senior Subordinated Notes of the Operating Company (collectively, the Notes). The Notes are unconditionally guaranteed, jointly and severally, by Holdings and domestic subsidiaries of the Operating Company and mature on October 7, 2012 (Senior Notes) and October 7, 2014 (Senior Subordinated Notes). Interest on the Senior Notes is payable semi-annually at 8.50% and interest on the Senior Subordinated Notes is payable semi-annually at 9.875%.



3.
        Sales Concentration


The Company had sales to one customer, PepsiCo, which exceeded 10% of total sales for the six months ended June 30, 2007 and 2006.  The Companys sales to PepsiCo, approximately 100% of which were made in North America, were 15.6% and 18.3% of total sales for the six months ended June 30, 2007 and 2006, respectively.



4.
        Inventories


Inventories consisted of the following:



June 30,2007
        
        December 31,2006(In thousands)Finished goods
        
        $
        175,983
        
        $
        175,362Raw materials and parts
        
        
        73,488
        
        
        63,579$
        249,471
        
        $
        238,941






9




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





5.
        Impairment Charges


In 2006, due to a change in the ability to utilize certain assets in the United States, the Company evaluated the recoverability of these assets.  For these assets to be held and used, the Company determined that the undiscounted cash flows were below the carrying value of these long-lived assets.  Accordingly, the Company adjusted the carrying value of these long-lived assets to their estimated fair value in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, resulting in impairment charges of $1.1 million for the three and six months ended June 30, 2006.



6.
        Intangible Assets, Net


The gross carrying amount and accumulated amortization of the Companys intangible assets subject to amortization as of June 30, 2007 were as follows:



Gross CarryingAmount
        
        AccumulatedAmortization
        
        Net
        
        Weighted AverageAmortizationPeriod(In thousands)Patented technology
        
        $
        24,980
        
        $
        (6,133
        )
        $
        18,847
        
        11 yearsCustomer relationships
        
        
        42,270
        
        
        (6,892
        )
        
        35,378
        
        18 yearsLicensing agreements
        
        
        28,000
        
        
        (7,000
        )
        
        21,000
        
        11 yearsNon-compete agreements
        
        
        1,544
        
        
        (857
        )
        
        687
        
        5 yearsTotal
        
        $
        96,794
        
        $
        (20,882
        )
        $
        75,912






The gross carrying amount and accumulated amortization of the Companys intangible assets subject to amortization as of December 31, 2006 were as follows:



Gross CarryingAmount
        
        AccumulatedAmortization
        
        Net
        
        Weighted AverageAmortizationPeriod(In thousands)Patented technology
        
        $
        23,982
        
        $
        (5,011
        )
        $
        18,971
        
        11 yearsCustomer relationships
        
        
        41,982
        
        
        (5,559
        )
        
        36,423
        
        18 yearsLicensing agreements
        
        
        28,000
        
        
        (5,727
        )
        
        22,273
        
        11 yearsNon-compete agreements
        
        
        1,544
        
        
        (700
        )
        
        844
        
        5 yearsTotal
        
        $
        95,508
        
        $
        (16,997
        )
        $
        78,511




Amortization expense for the six months ended June 30, 2007 and 2006 was $3.8 million and $3.9 million, respectively.  Estimated aggregate amortization expense for 2007 and each of the next five years ending December 31 is as follows (in millions):



2007
        
        $
        7.42008
        
        
        7.42009
        
        
        7.32010
        
        
        7.12011
        
        
        7.02012
        
        
        7.0






10




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





7.
        Goodwill


The changes in the carrying amount of goodwill were as follows:



NorthAmericaSegment
        
        EuropeSegment
        
        SouthAmericaSegment
        
        Total(In thousands)Balance at December 31, 2006
        
        $
        284,840
        
        $
        15,827
        
        $
        2,727
        
        $
        303,394Foreign currency translation adjustments
        
        
        208
        
        
        498
        
        
        96
        
        
        802Other adjustments*
        
        
        1,565
        
        
        
        
        
        
        
        
        1,565Balance at June 30, 2007
        
        $
        286,613
        
        $
        16,325
        
        $
        2,823
        
        $
        305,761




* Settlement of tax audit of purchase price allocation and tax adjustment related to opening balance of pension liability.



8.
        Accrued Expenses


Accrued expenses consisted of the following:



June 30,2007
        
        December 31,2006(In thousands)Accrued employee compensation and benefits
        
        $
        64,455
        
        $
        58,491Accrued interest
        
        
        23,701
        
        
        34,885Accrued sales allowance
        
        
        27,102
        
        
        20,254Other
        
        
        90,161
        
        
        81,207$
        205,419
        
        $
        194,837






For the year ended December 31, 2006, the Company incurred costs of employee termination benefits in the United States of $1.6 million, which included the legal liability of severing 46 employees, all of which were terminated by June 30, 2007.  Substantialy all of the cash payments for these termination benefits are expected to be made by September 30, 2007.  For the year ended December 31, 2006, the Company also incurred costs of employee termination benefits in the United States of $5.3 million related to the separation of its Chief Executive Officer and Chief Financial Officer on December 3, 2006.  Substantially all of the cash payments for these termination benefits are expected to be made by December 31, 2009.  For the year ended December 31, 2005, the Company incurred costs of employee termination benefits in the United States of $2.3 million, which included the legal liability of
severing 16 employees, all of which were terminated by June 30, 2007.  Substantially all of the cash payments for these termination benefits are expected to be made by December 31, 2007.  For the year ended December 31, 2005, the Company incurred costs of employee termination benefits in France of $3.8 million, which included the legal liability of severing 37 employees, all of which were terminated by June 30, 2007.  Substantially all of the cash payments for these termination benefits are expected to be made by December 31, 2007.  Additional employee termination benefits were incurred in 2002 and 2003 in France and North America; the remaining cash payments for these benefits are expected to be made by December 31, 2007.



11




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





The following table reflects a rollforward of these costs, $2.5 million of which is included in other non-current liabilities and the remainder of which is included in accrued employee compensation and benefits (in thousands):



2002/2003FranceReductionin Force
        
        2003NorthAmericaReductionin Force
        
        2005UnitedStatesReductionin Force
        
        2005FranceReductionin Force
        
        2006UnitedStatesReductionin Force
        
        2006CEO/CFOSeparations
        
        TotalReserves at December 31, 2006
        
        $
        293
        
        $
        240
        
        $
        458
        
        $
        779
        
        $
        936
        
        $
        5,128
        
        $
        7,834Increase (decrease) in reserves
        
        
        
        
        
        
        
        
        3
        
        
        43
        
        
        (1
        )
        
        
        
        
        45Cash payments
        
        
        (47
        )
        
        (120
        )
        
        (240
        )
        
        (476
        )
        
        (587
        )
        
        (842
        )
        
        (2,312
        )Reserves at June 30, 2007
        
        $
        246
        
        $
        120
        
        $
        221
        
        $
        346
        
        $
        348
        
        $
        4,286
        
        $
        5,567




In addition to the above costs, as of December 31, 2006, the Company had accrued payments made on January 5, 2007 to Philip R. Yates and John E. Hamilton, the Companys former Chief Executive Officer and Chief Financial Officer, for the repurchase of all of their outstanding partnership units and unit options, pursuant to separation agreements dated as of December 3, 2006.  The gross amounts accrued and paid to Mr. Yates and Mr. Hamilton were $2,744,236 and $667,528, respectively.



9.
        Income Taxes


Holdings and the Operating Company, as limited partnerships, do not pay U.S. federal income taxes under the provisions of the Internal Revenue Code, as the applicable income or loss is included in the tax returns of the partners. However, certain U.S. subsidiaries acquired as part of O-I Plastic are corporations and are subject to U.S. federal and state income taxes. The Companys foreign operations are subject to tax in their local jurisdictions. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.  The Company previously established a valuation
allowance with respect to certain deferred tax assets. During the first six months of 2007, the valuation allowance was increased approximately $7.6 million, in principal part, due to losses in the U.S. subsidiaries.

The Company adopted FIN 48 effective January 1, 2007. The transition adjustments of $4.8 million were shown as a reduction to partners capital.

The Company had $4.8 million of net Unrecognized Tax Benefits (UTB) as of January 1, 2007 (of which $1.8 million was interest and penalties) and $6.4 million as of June 30, 2007 (of which $3.2 million was interest and penalties). All of the UTB, if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTB may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. The Company does not expect that statute expirations will result in any decrease of any UTB over the next twelve months.  At this time an estimate of the possible outcome of any changes cannot be made.

Upon adoption of FIN 48, the Company has elected to begin treating interest and penalties related to taxes as a component of income tax expense and as a result has reported $1.1 million and $1.4 million in the aggregate related to interest and penalty exposure as income tax expense in the income statement for the three and six months ended June 30, 2007, respectively.  The Companys prior policy was to treat interest related to tax issues as interest expense and to record penalties as other expenses.



12




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





The Company has operations in sixteen countries and files income tax returns in approximately forty tax jurisdictions, in some cases for multiple legal entities per jurisdiction. Generally, the Company has open tax years subject to tax audit scrutiny on average of between three years to six years in these taxing jurisdictions. The US corporate subsidiaries have open tax years from 2001 forward for federal and certain state tax purposes. The US corporate subsidiaries are currently under Federal audit for 2004 and 2005.  There is an ongoing audit in Mexico which may result in future changes to reported tax. The Company has evaluated the need for additional tax contingencies for these audits as part of computing its UTB.



10.
        Commitments


The Company is party to various capital and operating leases involving real property and equipment. Total rent expense for operating leases amounted to $13.5 million and $27.6 million for the three and six months ended June 30, 2007, respectively, and $14.1 million and $27.7 million for the three and six months ended June 30, 2006, respectively.

On July 9, 2002, the Company and Graham Engineering Corporation (Graham Engineering), an affiliated company, executed a First Amendment to the equipment sales, services and license agreement (the Equipment Sales Agreement) to, among other things, (i) permit the Company to purchase certain extrusion blow molding wheel systems from a third party under certain circumstances if Graham Engineering is provided the opportunity to bid on supplying the same equipment; (ii) clarify that the Companys exclusivity rights under the Equipment Sales Agreement do not apply to certain new generations of Graham Engineering equipment; (iii) in the event of the sale of Graham Engineering to a competitor, provide the Company the option to require the transfer of the existing agreement or obtain a perpetual, royalty-free license to make and use wheel equipment and components; (iv)
provide Graham Engineering with the ability to terminate the Equipment Sales Agreement if an arbitrator determines that the Company has purchased certain high output extrusion blow molding equipment from another supplier in breach of the Equipment Sales Agreement; and (v) obligate the Company, retroactive to January 1, 2002, and subject to certain credits and carry-forwards, to make payments for products and services to Graham Engineering in the amount of at least $12.0 million per calendar year, or else pay to Graham Engineering a shortfall payment.

Subsequently, on January 13, 2004, the parties executed a Second Amendment to the Equipment Sales Agreement.  Such amendment removed restrictions originally placed upon the Company with respect to the Companys use of Graham Engineering technology to manufacture containers at blow molding plants co-located with dairies or dairy-focused facilities.

The Equipment Sales Agreement terminates on December 31, 2007, unless mutually extended by the parties.



11.
        Contingencies and Legal Proceedings


On November 3, 2006, the Company filed a complaint with the Supreme Court of the State of New York against Owens-Illinois, Inc. and OI Plastic Products FTS, Inc. (collectively, OI).  The complaint alleges certain misrepresentations by OI in connection with the Companys 2004 purchase of O-I Plastic and seeks damages in excess of $30 million.  In December 2006, OI filed an Answer and Counterclaim, seeking to rescind a Settlement Agreement entered into between OI and the Company in April 2005, and disgorgement of more than $39 million paid by OI to the Company in compliance with that Settlement Agreement.  The Company filed a Motion to Dismiss the Counterclaim in July 2007.  The litigation is proceeding.

The Company is party to various other 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.



13




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





12.
        Condensed Guarantor Data


On October 7, 2004, the Operating Company and CapCo I co-issued $250.0 million aggregate principal amount of 8.5% Senior Notes due 2012 and $375.0 million aggregate principal amount of 9.875% Senior Subordinated Notes due 2014. The notes were issued under Indentures issued on October 7, 2004. Holdings and the domestic subsidiaries of the Operating Company have fully and unconditionally guaranteed these notes. These guarantees are both joint and several. Both the Operating Company and CapCo I are 100%-owned subsidiaries of Holdings.

The following unaudited condensed consolidating financial statements present the financial position, results of operations and cash flows of Holdings, the Operating Company, guarantor domestic subsidiaries of the Operating Company, non-guarantor subsidiaries and CapCo I.





14




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2007

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedASSETSCurrent assets:Cash and cash equivalents
        
        $
        
        
        $
        23,213
        
        $
        1
        
        $
        14,433
        
        $
        
        
        $
        
        
        $
        37,647Accounts receivable, net
        
        
        
        
        
        94,395
        
        
        106,448
        
        
        76,388
        
        
        
        
        
        
        
        
        277,231Inventories
        
        
        
        
        
        93,427
        
        
        108,006
        
        
        48,038
        
        
        
        
        
        
        
        
        249,471Deferred income taxes
        
        
        
        
        
        
        
        
        11,838
        
        
        3,585
        
        
        
        
        
        
        
        
        15,423Prepaid expenses and other current assets
        
        
        
        
        
        16,419
        
        
        11,163
        
        
        25,664
        
        
        
        
        
        
        
        
        53,246Total current assets
        
        
        
        
        
        227,454
        
        
        237,456
        
        
        168,108
        
        
        
        
        
        
        
        
        633,018Property, plant and equipment, net
        
        
        
        
        
        561,428
        
        
        540,263
        
        
        288,573
        
        
        
        
        
        
        
        
        1,390,264Intangible assets, net
        
        
        
        
        
        5,398
        
        
        63,866
        
        
        6,648
        
        
        
        
        
        
        
        
        75,912Goodwill
        
        
        
        
        
        9,246
        
        
        235,924
        
        
        60,591
        
        
        
        
        
        
        
        
        305,761Net intercompany
        
        
        
        
        
        1,166,508
        
        
        
        
        
        
        
        
        
        
        
        (1,166,508
        )
        
        Investment in subsidiaries
        
        
        
        
        
        311,640
        
        
        278,022
        
        
        
        
        
        
        
        
        (589,662
        )
        
        Other non-current assets
        
        
        
        
        
        51,624
        
        
        315
        
        
        6,265
        
        
        
        
        
        
        
        
        58,204Total assets
        
        $
        
        
        $
        2,333,298
        
        $
        1,355,846
        
        $
        530,185
        
        $
        
        
        $
        (1,756,170
        )
        $
        2,463,159LIABILITIES AND PARTNERS CAPITAL (DEFICIT)Current liabilities:Accounts payable
        
        $
        
        
        $
        88,585
        
        $
        82,607
        
        $
        48,876
        
        $
        
        
        $
        
        
        $
        220,068Accrued expenses
        
        
        
        
        
        103,615
        
        
        42,924
        
        
        58,880
        
        
        
        
        
        
        
        
        205,419Current portion of long-term debt
        
        
        
        
        
        26,151
        
        
        
        
        
        4,483
        
        
        
        
        
        
        
        
        30,634Total current liabilities
        
        
        
        
        
        218,351
        
        
        125,531
        
        
        112,239
        
        
        
        
        
        
        
        
        456,121Long-term debt
        
        
        
        
        
        2,503,935
        
        
        
        
        
        352
        
        
        
        
        
        
        
        
        2,504,287Deferred income taxes
        
        
        
        
        
        
        
        
        17,894
        
        
        12,349
        
        
        
        
        
        
        
        
        30,243Other non-current liabilities
        
        
        
        
        
        36,566
        
        
        19,661
        
        
        28,924
        
        
        
        
        
        
        
        
        85,151Investment in subsidiaries
        
        
        425,554
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (425,554
        )
        
        Net intercompany
        
        
        187,089
        
        
        
        
        
        925,038
        
        
        54,381
        
        
        
        
        
        (1,166,508
        )
        
        Commitments and contingent liabilities
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Partners capital (deficit)
        
        
        (612,643
        )
        
        (425,554
        )
        
        267,722
        
        
        321,940
        
        
        
        
        
        (164,108
        )
        
        (612,643
        )Total liabilities and partners capital (deficit)
        
        $
        
        
        $
        2,333,298
        
        $
        1,355,846
        
        $
        530,185
        
        $
        
        
        $
        (1,756,170
        )
        $
        2,463,159






15




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2006

(In thousands)





Graham Packaging HoldingsCompany
        
        Graham PackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedASSETSCurrent assets:Cash and cash equivalents
        
        $
        
        
        $
        1,456
        
        $
        1
        
        $
        11,870
        
        $
        
        
        $
        
        
        $
        13,327Accounts receivable, net
        
        
        
        
        
        83,134
        
        
        85,872
        
        
        71,686
        
        
        
        
        
        
        
        
        240,692Inventories
        
        
        
        
        
        81,170
        
        
        116,371
        
        
        41,400
        
        
        
        
        
        
        
        
        238,941Deferred income taxes
        
        
        
        
        
        
        
        
        11,838
        
        
        3,571
        
        
        
        
        
        
        
        
        15,409Prepaid expenses and other current assets
        
        
        
        
        
        24,832
        
        
        10,747
        
        
        29,291
        
        
        
        
        
        
        
        
        64,870Total current assets
        
        
        
        
        
        190,592
        
        
        224,829
        
        
        157,818
        
        
        
        
        
        
        
        
        573,239Property, plant and equipment, net
        
        
        
        
        
        570,811
        
        
        568,732
        
        
        286,469
        
        
        
        
        
        
        
        
        1,426,012Intangible assets, net
        
        
        
        
        
        4,664
        
        
        66,981
        
        
        6,866
        
        
        
        
        
        
        
        
        78,511Goodwill
        
        
        
        
        
        9,246
        
        
        234,359
        
        
        59,789
        
        
        
        
        
        
        
        
        303,394Net intercompany
        
        
        
        
        
        1,191,899
        
        
        
        
        
        
        
        
        
        
        
        (1,191,899
        )
        
        Investment in subsidiaries
        
        
        
        
        
        319,980
        
        
        273,213
        
        
        
        
        
        
        
        
        (593,193
        )
        
        Other non-current assets
        
        
        
        
        
        58,235
        
        
        523
        
        
        2,023
        
        
        
        
        
        
        
        
        60,781Total assets
        
        $
        
        
        $
        2,345,427
        
        $
        1,368,637
        
        $
        512,965
        
        $
        
        
        $
        (1,785,092
        )
        $
        2,441,937LIABILITIES AND PARTNERS CAPITAL (DEFICIT)Current liabilities:Accounts payable
        
        $
        
        
        $
        81,390
        
        $
        80,246
        
        $
        45,036
        
        $
        
        
        $
        
        
        $
        206,672Accrued expenses
        
        
        
        
        
        105,564
        
        
        41,576
        
        
        47,697
        
        
        
        
        
        
        
        
        194,837Current portion of long-term debt
        
        
        
        
        
        26,504
        
        
        
        
        
        5,804
        
        
        
        
        
        
        
        
        32,308Total current liabilities
        
        
        
        
        
        213,458
        
        
        121,822
        
        
        98,537
        
        
        
        
        
        
        
        
        433,817Long-term debt
        
        
        
        
        
        2,514,174
        
        
        
        
        
        405
        
        
        
        
        
        
        
        
        2,514,579Deferred income taxes
        
        
        
        
        
        
        
        
        17,894
        
        
        10,644
        
        
        
        
        
        
        
        
        28,538Other non-current liabilities
        
        
        
        
        
        28,462
        
        
        18,534
        
        
        15,763
        
        
        
        
        
        
        
        
        62,759Investment in subsidiaries
        
        
        410,667
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (410,667
        )
        
        Net intercompany
        
        
        187,089
        
        
        
        
        
        934,927
        
        
        69,883
        
        
        
        
        
        (1,191,899
        )
        
        Commitments and contingent liabilities
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Partners capital (deficit)
        
        
        (597,756
        )
        
        (410,667
        )
        
        275,460
        
        
        317,733
        
        
        
        
        
        (182,526
        )
        
        (597,756
        )Total liabilities and partners capital (deficit)
        
        $
        
        
        $
        2,345,427
        
        $
        1,368,637
        
        $
        512,965
        
        $
        
        
        $
        (1,785,092
        )
        $
        2,441,937








16




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2007

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedNet sales
        
        $
        
        
        $
        268,032
        
        $
        280,003
        
        $
        126,021
        
        $
        
        
        $
        (23,087
        )
        $
        650,969Cost of goods sold
        
        
        
        
        
        221,518
        
        
        246,208
        
        
        108,127
        
        
        
        
        
        (23,087
        )
        
        552,766Gross profit
        
        
        
        
        
        46,514
        
        
        33,795
        
        
        17,894
        
        
        
        
        
        
        
        
        98,203Selling, general and administrative expenses
        
        
        
        
        
        10,458
        
        
        16,516
        
        
        6,123
        
        
        
        
        
        
        
        
        33,097Net loss (gain) on disposal of fixed assets
        
        
        
        
        
        702
        
        
        505
        
        
        (316
        )
        
        
        
        
        
        
        
        891Operating income
        
        
        
        
        
        35,354
        
        
        16,774
        
        
        12,087
        
        
        
        
        
        
        
        
        64,215Interest expense, net
        
        
        
        
        
        30,838
        
        
        19,799
        
        
        1,340
        
        
        
        
        
        
        
        
        51,977Other (income) expense, net
        
        
        
        
        
        (11,922
        )
        
        (130
        )
        
        402
        
        
        
        
        
        12,242
        
        
        592Equity in (earnings) loss of subsidiaries
        
        
        (5,131
        )
        
        10,121
        
        
        (2,001
        )
        
        
        
        
        
        
        
        (2,989
        )
        
        Income (loss) before income taxes
        
        
        5,131
        
        
        6,317
        
        
        (894
        )
        
        10,345
        
        
        
        
        
        (9,253
        )
        
        11,646Income tax provision
        
        
        
        
        
        1,186
        
        
        276
        
        
        5,053
        
        
        
        
        
        
        
        
        6,515Net income (loss)
        
        $
        5,131
        
        $
        5,131
        
        $
        (1,170
        )
        $
        5,292
        
        $
        
        
        $
        (9,253
        )
        $
        5,131






17




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2007

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedNet sales
        
        $
        
        
        $
        532,643
        
        $
        537,862
        
        $
        249,268
        
        $
        
        
        $
        (47,019
        )
        $
        1,272,754Cost of goods sold
        
        
        
        
        
        445,222
        
        
        480,941
        
        
        215,247
        
        
        
        
        
        (47,019
        )
        
        1,094,391Gross profit
        
        
        
        
        
        87,421
        
        
        56,921
        
        
        34,021
        
        
        
        
        
        
        
        
        178,363Selling, general and administrative expenses
        
        
        
        
        
        24,145
        
        
        31,283
        
        
        12,854
        
        
        
        
        
        
        
        
        68,282Net loss (gain) on disposal of fixed assets
        
        
        
        
        
        1,741
        
        
        1,028
        
        
        (313
        )
        
        
        
        
        
        
        
        2,456Operating income
        
        
        
        
        
        61,535
        
        
        24,610
        
        
        21,480
        
        
        
        
        
        
        
        
        107,625Interest expense, net
        
        
        
        
        
        65,144
        
        
        39,384
        
        
        3,172
        
        
        
        
        
        
        
        
        107,700Other (income) expense, net
        
        
        
        
        
        (11,854
        )
        
        (291
        )
        
        602
        
        
        
        
        
        12,245
        
        
        702Equity in loss (earnings) of subsidiaries
        
        
        10,484
        
        
        16,584
        
        
        (2,346
        )
        
        
        
        
        
        
        
        (24,722
        )
        
        (Loss) income before income taxes
        
        
        (10,484
        )
        
        (8,339
        )
        
        (12,137
        )
        
        17,706
        
        
        
        
        
        12,477
        
        
        (777
        )Income tax provision (benefit)
        
        
        
        
        
        2,145
        
        
        (1,240
        )
        
        8,802
        
        
        
        
        
        
        
        
        9,707Net (loss) income
        
        $
        (10,484
        )
        $
        (10,484
        )
        $
        (10,897
        )
        $
        8,904
        
        $
        
        
        $
        12,477
        
        $
        (10,484
        )






18




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2006

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedNet sales
        
        $
        
        
        $
        277,596
        
        $
        281,163
        
        $
        116,162
        
        $
        
        
        $
        (21,639
        )
        $
        653,282Cost of goods sold
        
        
        
        
        
        233,405
        
        
        254,185
        
        
        103,421
        
        
        
        
        
        (21,639
        )
        
        569,372Gross profit
        
        
        
        
        
        44,191
        
        
        26,978
        
        
        12,741
        
        
        
        
        
        
        
        
        83,910Selling, general and administrative expenses
        
        
        
        
        
        11,960
        
        
        14,437
        
        
        6,808
        
        
        
        
        
        
        
        
        33,205Impairment charges
        
        
        
        
        
        1,112
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,112Net loss (gain) on disposal of fixed assets
        
        
        
        
        
        295
        
        
        439
        
        
        (220
        )
        
        
        
        
        
        
        
        514Operating income
        
        
        
        
        
        30,824
        
        
        12,102
        
        
        6,153
        
        
        
        
        
        
        
        
        49,079Interest expense, net
        
        
        
        
        
        33,564
        
        
        19,113
        
        
        1,348
        
        
        
        
        
        
        
        
        54,025Other (income) expense, net
        
        
        
        
        
        (548
        )
        
        (478
        )
        
        1,077
        
        
        
        
        
        
        
        
        51Equity in loss of subsidiaries
        
        
        15,266
        
        
        11,571
        
        
        2,412
        
        
        
        
        
        
        
        
        (29,249
        )
        
        (Loss) income before income taxes
        
        
        (15,266
        )
        
        (13,763
        )
        
        (8,945
        )
        
        3,728
        
        
        
        
        
        29,249
        
        
        (4,997
        )Income tax provision
        
        
        
        
        
        1,503
        
        
        4,679
        
        
        4,087
        
        
        
        
        
        
        
        
        10,269Net (loss) income
        
        $
        (15,266
        )
        $
        (15,266
        )
        $
        (13,624
        )
        $
        (359
        )
        $
        
        
        $
        29,249
        
        $
        (15,266
        )






19




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedNet sales
        
        $
        
        
        $
        555,103
        
        $
        556,232
        
        $
        227,778
        
        $
        
        
        $
        (40,824
        )
        $
        1,298,289Cost of goods sold
        
        
        
        
        
        468,510
        
        
        514,051
        
        
        203,524
        
        
        
        
        
        (40,824
        )
        
        1,145,261Gross profit
        
        
        
        
        
        86,593
        
        
        42,181
        
        
        24,254
        
        
        
        
        
        
        
        
        153,028Selling, general and administrative expenses
        
        
        
        
        
        24,985
        
        
        26,126
        
        
        13,228
        
        
        
        
        
        
        
        
        64,339Impairment charges
        
        
        
        
        
        1,112
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,112Net loss (gain) on disposal of fixed assets
        
        
        
        
        
        779
        
        
        366
        
        
        (51
        )
        
        
        
        
        
        
        
        1,094Operating income
        
        
        
        
        
        59,717
        
        
        15,689
        
        
        11,077
        
        
        
        
        
        
        
        
        86,483Interest expense, net
        
        
        
        
        
        64,390
        
        
        37,327
        
        
        2,693
        
        
        
        
        
        
        
        
        104,410Other (income) expense, net
        
        
        
        
        
        (888
        )
        
        (558
        )
        
        1,534
        
        
        
        
        
        
        
        
        88Equity in loss of subsidiaries
        
        
        25,252
        
        
        19,964
        
        
        5,385
        
        
        
        
        
        
        
        
        (50,601
        )
        
        (Loss) income before income taxes
        
        
        (25,252
        )
        
        (23,749
        )
        
        (26,465
        )
        
        6,850
        
        
        
        
        
        50,601
        
        
        (18,015
        )Income tax provision (benefit)
        
        
        
        
        
        1,503
        
        
        (1,131
        )
        
        6,865
        
        
        
        
        
        
        
        
        7,237Net (loss) income
        
        $
        (25,252
        )
        $
        (25,252
        )
        $
        (25,334
        )
        $
        (15
        )
        $
        
        
        $
        50,601
        
        $
        (25,252
        )






20




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2007

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedOperating activities:Net cash provided by operating activities
        
        $
        
        
        $
        72,246
        
        $
        26,714
        
        $
        12,396
        
        $
        
        
        $
        
        
        $
        111,356Investing activities:Net cash paid for property, plant and equipment
        
        
        
        
        
        (29,183
        )
        
        (26,225
        )
        
        (11,387
        )
        
        
        
        
        
        
        
        (66,795
        )Acquisition of/investment in a business, net of cash acquired
        
        
        
        
        
        (3,031
        )
        
        
        
        
        3,031
        
        
        
        
        
        
        
        
        Net cash used in investing activities
        
        
        
        
        
        (32,214
        )
        
        (26,225
        )
        
        (8,356
        )
        
        
        
        
        
        
        
        (66,795
        )Financing activities:Proceeds from issuance of long-term debt
        
        
        
        
        
        527,775
        
        
        
        
        
        27,006
        
        
        
        
        
        
        
        
        554,781Payment of long-term debt
        
        
        
        
        
        (538,410
        )
        
        (489
        )
        
        (28,701
        )
        
        
        
        
        
        
        
        (567,600
        )Buyout of partnership units
        
        
        
        
        
        (3,140
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        (3,140
        )Debt issuance fees
        
        
        
        
        
        (4,500
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        (4,500
        )Net cash used in financing activities
        
        
        
        
        
        (18,275
        )
        
        (489
        )
        
        (1,695
        )
        
        
        
        
        
        
        
        (20,459
        )Effect of exchange rate changes on cash and cash equivalents
        
        
        
        
        
        
        
        
        
        
        
        218
        
        
        
        
        
        
        
        
        218Increase in cash and cash equivalents
        
        
        
        
        
        21,757
        
        
        
        
        
        2,563
        
        
        
        
        
        
        
        
        24,320Cash and cash equivalents at beginning of period
        
        
        
        
        
        1,456
        
        
        1
        
        
        11,870
        
        
        
        
        
        
        
        
        13,327Cash and cash equivalents at end of period
        
        $
        
        
        $
        23,213
        
        $
        1
        
        $
        14,433
        
        $
        
        
        $
        
        
        $
        37,647








21




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(In thousands)





GrahamPackagingHoldingsCompany
        
        GrahamPackagingCompany,L.P.
        
        Guarantors
        
        Non-Guarantors
        
        CapCo I
        
        Eliminations
        
        ConsolidatedOperating activities:Net cash provided by operating activities
        
        $
        
        
        $
        116,341
        
        $
        26,470
        
        $
        9,848
        
        $
        
        
        $
        
        
        $
        152,659Investing activities:Net cash paid for property, plant and equipment
        
        
        
        
        
        (50,022
        )
        
        (26,470
        )
        
        (12,183
        )
        
        
        
        
        
        
        
        (88,675
        )Acquisitions of/investments in businesses, net of cash acquired
        
        
        
        
        
        (195
        )
        
        
        
        
        (2
        )
        
        
        
        
        
        
        
        (197
        )Net cash used in investing activities
        
        
        
        
        
        (50,217
        )
        
        (26,470
        )
        
        (12,185
        )
        
        
        
        
        
        
        
        (88,872
        )Financing activities:Proceeds from issuance of long-term debt
        
        
        
        
        
        428,720
        
        
        
        
        
        19,006
        
        
        
        
        
        
        
        
        447,726Payment of long-term debt
        
        
        
        
        
        (500,583
        )
        
        
        
        
        (23,045
        )
        
        
        
        
        
        
        
        (523,628
        )Debt issuance fees
        
        
        
        
        
        (1,000
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        (1,000
        )Net cash used in financing activities
        
        
        
        
        
        (72,863
        )
        
        
        
        
        (4,039
        )
        
        
        
        
        
        
        
        (76,902
        )Effect of exchange rate changes on cash and cash equivalents
        
        
        
        
        
        
        
        
        
        
        
        848
        
        
        
        
        
        
        
        
        848Decrease in cash and cash equivalents
        
        
        
        
        
        (6,739
        )
        
        
        
        
        (5,528
        )
        
        
        
        
        
        
        
        (12,267
        )Cash and cash equivalents at beginning of period
        
        
        
        
        
        11,307
        
        
        1
        
        
        15,376
        
        
        
        
        
        
        
        
        26,684Cash and cash equivalents at end of period
        
        $
        
        
        $
        4,568
        
        $
        1
        
        $
        9,848
        
        $
        
        
        $
        
        
        $
        14,417








22




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





13.
        Comprehensive Income (Loss)


Comprehensive income (loss) for the three and six months ended June 30, 2007 and 2006 was as follows:





Three Months Ended
        
        Six Months EndedJune 30,
        
        June 30,2007
        
        2006
        
        2007
        
        2006(In thousands)Net income (loss)
        
        $
        5,131
        
        $
        (15,266
        )
        $
        (10,484
        )
        $
        (25,252
        )Changes in fair value of derivatives, net of taxes
        
        
        (2,311
        )
        
        2,122
        
        
        (5,164
        )
        
        5,413Change in amortization of prior service costs and unrealized actuarial losses included in net periodic benefit costs for pension and post-retirement plans, net of taxes
        
        
        83
        
        
        (78
        )
        
        (4,682
        )
        
        (73
        )Cumulative translation adjustments, net of taxes
        
        
        9,416
        
        
        4,022
        
        
        10,373
        
        
        6,284Comprehensive income (loss)
        
        $
        12,319
        
        $
        (9,200
        )
        $
        (9,957
        )
        $
        (13,628
        )








23




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





14.
        Segment Information


The Company is organized and managed on a geographical basis in three operating segments:  North America, Europe and South America. Segment information for the three and six months ended June 30, 2007 and 2006, representing the reportable segments currently utilized by the chief operating decision maker, was as follows:



NorthAmerica
        
        
        Europe
        
        
        SouthAmerica
        
        
        Eliminations
        
        
        Total(a)(In thousands)Net sales (b) (c)
        
        Three  months ended June 30, 2007
        
        $
        565,904
        
        $
        68,405
        
        $
        16,795
        
        $
        (135
        )
        $
        650,969Three  months ended June 30, 2006
        
        
        580,384
        
        
        59,000
        
        
        14,011
        
        
        (113
        )
        
        653,282Six months ended June 30,  2007
        
        
        1,105,083
        
        
        136,098
        
        
        33,334
        
        
        (1,761
        )
        
        1,272,754Six months ended June 30,  2006
        
        
        1,152,325
        
        
        116,954
        
        
        29,123
        
        
        (113
        )
        
        1,298,289Operating income
        
        Three  months ended June 30, 2007
        
        
        57,610
        
        
        5,531
        
        
        1,074
        
        
        
        
        
        64,215Three  months ended June 30, 2006
        
        
        43,771
        
        
        4,783
        
        
        525
        
        
        
        
        
        49,079Six months ended June 30,  2007
        
        
        95,473
        
        
        10,345
        
        
        1,807
        
        
        
        
        
        107,625Six months ended June 30,  2006
        
        
        75,489
        
        
        9,343
        
        
        1,651
        
        
        
        
        
        86,483Depreciation and
        
        Three  months ended June 30, 2007
        
        
        45,101
        
        
        5,634
        
        
        1,219
        
        
        
        
        
        51,954amortization
        
        Three  months ended June 30, 2006
        
        
        43,664
        
        
        5,197
        
        
        1,064
        
        
        
        
        
        49,925Six months ended June 30,  2007
        
        
        88,324
        
        
        10,947
        
        
        2,413
        
        
        
        
        
        101,684Six months ended June 30,  2006
        
        
        88,438
        
        
        10,090
        
        
        2,183
        
        
        
        
        
        100,711Interest expense, net
        
        Three  months ended June 30, 2007
        
        
        50,673
        
        
        959
        
        
        345
        
        
        
        
        
        51,977Three  months ended June 30, 2006
        
        
        53,021
        
        
        819
        
        
        185
        
        
        
        
        
        54,025Six months ended June 30,  2007
        
        
        105,452
        
        
        1,577
        
        
        671
        
        
        
        
        
        107,700Six months ended June 30,  2006
        
        
        102,485
        
        
        1,516
        
        
        409
        
        
        
        
        
        104,410Other  (income) expense, net
        
        Three  months ended June 30, 2007
        
        
        (11,896
        )
        
        233
        
        
        11
        
        
        12,244
        
        
        592Three  months ended June 30, 2006
        
        
        (401
        )
        
        331
        
        
        121
        
        
        
        
        
        51Six months ended June 30,  2007
        
        
        (11,776
        )
        
        152
        
        
        82
        
        
        12,244
        
        
        702Six months ended June 30,  2006
        
        
        (534
        )
        
        376
        
        
        246
        
        
        
        
        
        88Income tax provision
        
        Three  months ended June 30, 2007
        
        
        3,600
        
        
        2,437
        
        
        478
        
        
        
        
        
        6,515Three  months ended June 30, 2006
        
        
        8,028
        
        
        2,008
        
        
        233
        
        
        
        
        
        10,269Six months ended June 30,  2007
        
        
        4,452
        
        
        4,694
        
        
        561
        
        
        
        
        
        9,707Six months ended June 30,  2006
        
        
        2,736
        
        
        3,987
        
        
        514
        
        
        
        
        
        7,237Identifiable assets (b) (c)
        
        As  of June 30, 2007
        
        
        2,526,690
        
        
        319,615
        
        
        64,418
        
        
        (447,564
        )
        
        2,463,159As  of December 31, 2006
        
        
        2,494,818
        
        
        303,667
        
        
        63,001
        
        
        (419,549
        )
        
        2,441,937Goodwill
        
        As  of June 30, 2007
        
        
        286,613
        
        
        16,325
        
        
        2,823
        
        
        
        
        
        305,761As  of December 31, 2006
        
        
        284,840
        
        
        15,827
        
        
        2,727
        
        
        
        
        
        303,394Cash paid for property,
        
        Six  months ended June 30, 2007
        
        
        58,363
        
        
        6,192
        
        
        2,240
        
        
        
        
        
        66,795plant and equipment, net  of proceeds from sale of property, plant and equipment and excluding  acquisitions
        
        Six  months ended June 30, 2006
        
        
        78,229
        
        
        7,198
        
        
        3,252
        
        
        (4
        )
        
        88,675






24




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





(a)
        To eliminate intercompany balances, which include investments in the operating segments and inter-segment receivables and payables.(b)
        The Companys net sales for Europe include sales in Poland, France, Rotselaar (Belgium) and Spain which totaled approximately $14.8 million, $13.8 million, $10.9 million and $9.7 million, respectively, for the three months ended June 30, 2007, and approximately $11.0 million, $13.1 million, $9.5 million and $9.0 million, respectively, for the three months ended June 30, 2006. The Companys net sales for Europe include sales in Poland, France, Rotselaar (Belgium) and Spain which totaled approximately $30.6 million, $27.2 million, $22.9 million and $17.8 million, respectively, for the six months ended June 30, 2007, and approximately $22.3 million, $26.1 million, $20.0 million and $17.6 million, respectively, for the six months ended June 30, 2006. Identifiable assets in Poland, France, Rotselaar (Belgium) and
Spain totaled approximately $89.4 million, $117.7 million, $39.4 million and $34.2 million, respectively, as of June 30, 2007, and $82.6 million, $115.8 million, $36.5 million and $37.1 million, respectively, as of December 31, 2006.(c)
        The Companys net sales for North America include sales in Mexico which totaled approximately $34.9 million and $37.4 million for the three months ended June 30, 2007 and 2006, respectively, and $69.2 million and $69.9 million for the six months ended June 30, 2007 and 2006, respectively.  Identifiable assets in Mexico totaled approximately $152.8 million and $146.9 million as of June 30, 2007 and December 31, 2006, respectively. Approximately all of the North America reportable segments remaining net sales and identifiable assets are in the United States.




Product Net Sales Information

The following is supplemental information on net sales by product category:





Three Months Ended
        
        Six Months EndedJune 30,
        
        June 30,2007
        
        2006
        
        2007
        
        2006(In thousands)Food and Beverage
        
        $
        410,118
        
        $
        401,834
        
        $
        785,468
        
        $
        766,868Household
        
        
        124,073
        
        
        116,160
        
        
        255,566
        
        
        256,499Automotive Lubricants
        
        
        66,532
        
        
        72,864
        
        
        130,725
        
        
        147,522Personal Care/Specialty
        
        
        50,246
        
        
        62,424
        
        
        100,995
        
        
        127,400Total Net Sales
        
        $
        650,969
        
        $
        653,282
        
        $
        1,272,754
        
        $
        1,298,289




Note: Based upon a broader product offering and consolidation of production facilities resulting from the acquisition of O-I Plastic, the Company has reviewed and changed its traditional methodology for compiling product category data.  Reclassifications have been made to the 2006 product category data to conform to the 2007 presentation.



15.
        Pension Plans


The components of net periodic pension cost for the Companys U.S. defined benefit pension plans consisted of the following:



Three Months Ended
        
        Six Months EndedJune 30,
        
        June 30,2007
        
        2006
        
        2007
        
        2006(In thousands)Components of net periodic pension cost:Service cost
        
        $
        548
        
        $
        2,597
        
        $
        1,096
        
        $
        5,193Interest cost
        
        
        1,086
        
        
        1,061
        
        
        2,171
        
        
        2,123Expected return on plan assets
        
        
        (1,279
        )
        
        (994
        )
        
        (2,557
        )
        
        (1,989
        )Net amortization and deferral
        
        
        190
        
        
        285
        
        
        380
        
        
        570Net periodic pension cost
        
        $
        545
        
        $
        2,949
        
        $
        1,090
        
        $
        5,897






25




GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





The decrease in net periodic pension cost in the first half of 2007 was primarily attributable to the December 31, 2006 freeze of the Companys hourly and salaried pension plan.

The Company previously disclosed in its financial statements for the year ended December 31, 2006 that it expected to contribute $7.4 million to its pension plans in 2007. As of June 30, 2007, $2.2 million of contributions to its pension plans has been made.

The Company recognized $2.1 million and $0.8 million of expense for its 401(k) plans in the second quarter of 2007 and 2006, respectively, and $4.2 million and $1.7 million in the first half of 2007 and 2006, respectively.  The increase in 401(k) expense is primarily a result of a new 3% contribution to hourly and salaried employees which began January 1, 2007 following the freeze of the Companys hourly and salaried pension plan.





26




Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

All statements other than statements of historical facts included in this Report on Form 10-Q, including statements regarding the future financial position, economic performance and results of operations of the Company, as well as the Companys business strategy, budgets and projected costs and plans and objectives of management for future operations, and the information referred to under Quantitative and Qualitative Disclosures About Market Risk (Part I, Item 3), are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, estimate, anticipate, believe or continue or similar terminology. These forward-looking statements are not historical facts, and are based on
current expectations, estimates and projections about the Companys industry, managements beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Companys control.  Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements.  Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this report.  Readers should carefully review
the risks and uncertainties under Risk Factors(Part I, Item 1A) in the Annual Report on Form 10-K of Graham Packaging Holdings Company (Holdings) for the fiscal year ended December 31, 2006. 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.



Overview

Management believes 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, automotive lubricants and personal care/specialty product categories and, as of the end of June 2007, operated 85 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 value-added plastic packaging from more commodity packaging.

Management believes that critical success factors to the Companys business are its ability to:




        develop its own proprietary technologies that provide a meaningful competitive advantage in the marketplace;
        maintain relationships with and serve the complex packaging demands of its customers which include some of the worlds largest branded consumer products companies;
        forecast trends in the packaging industry across product lines and geographic territories (including those specific to the rapid conversion of packaging products from glass, metal and paper to plastic); and
        make investments in plant and technology necessary to satisfy the three factors mentioned above.






27






Management believes that the area with the greatest opportunity for growth continues to be in producing containers for the food and beverage product category 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, beer and other food products. Since much of the growth in this area has been in the sale of smaller sized containers, over the past few years, the Company has experienced an overall mix shift toward smaller containers. Based on internal estimates, management believes the Company has become a leader in the value-added segment for hot-fill PET juice containers.  Management also believes the Company has recently become a leading participant in the rapidly growing market of yogurt drinks and nutritional beverages where the Company manufactures containers
using polyolefin resins. From the beginning of 2003 through June 30, 2007, the Company has invested over $1,140.0 million in capital expenditures, which includes approximately $658.0 million of purchase price allocations related to the acquisition of the blow molded plastic container business of Owens-Illinois, Inc. (O-I Plastic), in the food and beverage product category.

The Companys household container product category is a product category whose growth in prior years was fueled by conversions from powders to liquids for such products as detergents, household cleaners and automatic dishwashing detergent. Powdered products are typically packaged in paper based containers such as fiber wound cans and paperboard cartons. The Companys strongest position is in fabric care, where management believes the Company is a leader in plastic container design and manufacture. It should be noted the fabric care industry is now offering some brands in a concentrated formula which will negatively impact sales in this product category.  The Company has continually upgraded its machinery, principally in the United States, to new, larger, more productive blow molders in order to standardize production lines, improve flexibility and reduce manufacturing costs.

The Companys North American one quart motor oil container product category is in a mature industry. Unit volume in the one quart motor oil industry decreased approximately 8% in 2006 as compared to 2005.  Prior to 2003 annual volumes declined an average of approximately 1% to 2%. Management believes that the expected rate of decline in one quart motor oil containers is anticipated to be 8% to 10% per year over the next few years as the product category continues to migrate towards the quick-lube market and larger multi-quart packages.

The Companys personal care/specialty product category is a product category that is driven by new product launch and relaunch cycles.  Based on the volume of its sales to many major suppliers of personal care/specialty products, management believes the Company is among the leading suppliers in this product category which includes products for the hair care, skin care, oral care and specialty markets. Management believes that the Companys leading supply position results from its commitment to and reputation in new product development and flexible manufacturing processes and operations.

As of  June 30, 2007, the Company operated 29 manufacturing facilities outside of the United States in Argentina, Belgium, Brazil, Canada, Ecuador, England, Finland, France, Hungary, Mexico, the Netherlands, Poland, Spain, Turkey and Venezuela. Over the past few years, the Company has expanded its international operations with the addition of new plants in Argentina, Mexico and the Netherlands, as well as the acquisition of O-I Plastic, which included plants in Ecuador, England, Finland, Mexico, the Netherlands and Venezuela, and the acquisition of certain Tetra-Pak operations on March 24, 2005, which included plants in Belgium, Brazil and Turkey.

For the six months ended June 30, 2007, 73.8% of the Companys net sales were generated by the top twenty customers.  The majority of the top twenty customers were under long-term contracts with terms up to ten years, while the balance of the top twenty customers represent customers with whom the Company has been doing business for over 20 years on average. Prices under these arrangements are typically tied to market standards and, therefore, vary with market conditions. In general, the contracts are requirements contracts that do not obligate the customer to purchase any given amount of product from the Company. The Company had sales to one customer, PepsiCo, which exceeded 10% of total sales for the six months ended June 30, 2007 and 2006.  The Companys sales to PepsiCo, approximately 100% of which were made in North America, were 15.6% and 18.3% of total sales for the six
months ended June 30, 2007 and 2006, respectively.



28






The largest component of the Companys cost of goods sold is resin costs.  Based on industry data, the following table summarizes average market prices per pound of polyethylene terephthalate (PET) and high-density polyethylene (HDPE) resins in the United States during the three and six months ended June 2007 and 2006:



Three Months Ended
        
        Six Months EndedJune
        
        June2007
        
        2006
        
        2007
        
        2006PET
        
        $
        0.77
        
        $
        0.71
        
        $
        0.74
        
        $
        0.72HDPE
        
        $
        0.68
        
        $
        0.67
        
        $
        0.65
        
        $
        0.70




Changes in the cost of resin are passed through to customers by means of corresponding changes in product pricing in accordance with the Companys agreements with these customers and industry practice.  As resin prices can fluctuate significantly, the Company believes that its gross profit, as well as certain 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.

Holdings and Graham Packaging Company, L.P., Holdings wholly-owned subsidiary (the Operating Company), as limited partnerships, do not pay U.S. federal income taxes under the provisions of the Internal Revenue Code, as the applicable income or loss is included in the tax returns of the partners. However, certain U.S. subsidiaries acquired as part of O-I Plastic are corporations and are subject to U.S. federal and state income taxes. The Companys foreign operations are subject to tax in their local jurisdictions. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary
differences are expected to reverse.



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:



Three Months Ended
        
        Six Months EndedJune 30,
        
        June 30,2007
        
        2006
        
        2007
        
        2006(Dollars in millions)North America
        
        $
        565.8
        
        86.9
        %
        $
        580.3
        
        88.8
        %
        $
        1,104.8
        
        86.8
        %
        $
        1,152.3
        
        88.8
        %Europe
        
        
        68.4
        
        10.5
        
        
        59.0
        
        9.0
        
        
        134.6
        
        10.6
        
        
        116.9
        
        9.0South America
        
        
        16.8
        
        2.6
        
        
        14.0
        
        2.2
        
        
        33.4
        
        2.6
        
        
        29.1
        
        2.2Total Net Sales
        
        $
        651.0
        
        100.0
        %
        $
        653.3
        
        100.0
        %
        $
        1,272.8
        
        100.0
        %
        $
        1,298.3
        
        100.0
        %






29






Three Months Ended
        
        Six Months EndedJune 30,
        
        June 30,2007
        
        2006
        
        2007
        
        2006(Dollars in millions)Food and Beverage
        
        $
        410.1
        
        63.0
        %
        $
        401.8
        
        61.5
        %
        $
        785.5
        
        61.7
        %
        $
        766.9
        
        59.1
        %Household
        
        
        124.1
        
        19.1
        
        
        116.2
        
        17.8
        
        
        255.6
        
        20.1
        
        
        256.5
        
        19.7Automotive Lubricants
        
        
        66.5
        
        10.2
        
        
        72.9
        
        11.2
        
        
        130.7
        
        10.3
        
        
        147.5
        
        11.4Personal Care/Specialty
        
        
        50.3
        
        7.7
        
        
        62.4
        
        9.5
        
        
        101.0
        
        7.9
        
        
        127.4
        
        9.8Total Net Sales
        
        $
        651.0
        
        100.0
        %
        $
        653.3
        
        100.0
        %
        $
        1,272.8
        
        100.0
        %
        $
        1,298.3
        
        100.0
        %






Note: Based upon a broader product offering and consolidation of production facilities resulting from the acquisition of O-I Plastic, the Company has reviewed and changed its traditional methodology for compiling product category data.  Reclassifications have been made to the 2006 product category data to conform to the 2007 presentation.



Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

Net Sales.Net sales for the three months ended June 30, 2007 decreased $2.3 million, or 0.4%, to $651.0 million from $653.3 million for the three months ended June 30, 2006.  The decrease in sales was primarily due to changes in mix and price erosion, partially offset by an increase in resin pricing.  Container units sold increased 0.9%.  On a geographic basis, sales for the three months ended June 30, 2007 in North America decreased $14.5 million, or 2.5%, from the three months ended June 30, 2006, primarily due to changes in mix and price erosion, partially offset by an increase in resin pricing.  North American sales in the food and beverage, automotive lubricants and personal care/specialty product categories contributed $0.2 million, $7.3 million and $11.8 million, respectively, to the decrease, while the household product category increased $4.8 million.
Container units sold in North America increased in the household product category by 10.4%, and decreased in the food and beverage, automotive lubricants and personal care/specialty product categories by 0.5%, 7.0% and 18.2%, respectively.  Sales for the three months ended June 30, 2007 in Europe increased $9.4 million, or 15.9%, from the three months ended June 30, 2006.  The increase in sales was primarily due to favorable exchange rate changes of $5.2 million and higher container units sold of 7.7% compared to the same period last year.  Sales for the three months ended June 30, 2007 in South America increased $2.8 million, or 20.0%, from the three months ended June 30, 2006.  The increase in sales was primarily due to increased volume and favorable exchange rate changes of $1.0 million.

Gross Profit.Gross profit for the three months ended June 30, 2007 increased $14.3 million to $98.2 million from $83.9 million for the three months ended June 30, 2006.  Gross profit for the three months ended June 30, 2007 increased in North America, Europe and South America by $12.5 million, $1.4 million and $0.4 million, respectively, when compared to the three months ended June 30, 2006. Gross profit was favorably impacted by a net decrease in non-recurring charges of $3.3 million, a net decrease in project startup costs of $1.8 million, changes in foreign currency exchange rates of $1.1 million and a net increase in gross profit related to ongoing business of $8.1 million.  The non-recurring charges included expenses incurred in 2007 and 2006 related to restructuring and other non-recurring expenses; additional expenses were incurred in 2006 related to the
hurricanes in the United States in the second half of 2005 and the integration of O-I Plastic.

Selling, General & Administrative Expenses.Selling, general and administrative expenses for the three months ended June 30, 2007 decreased $0.1 million to $33.1 million from $33.2 million for the three months ended June 30, 2006. An increase in compensation-related expenses was offset by decreases in non-recurring charges and development costs.  The non-recurring charges were $4.0 million and $5.7 million for the three months ended June 30, 2007 and 2006, respectively, comprised of expenses relating to global reorganization costs and other costs; additional expenses were incurred in 2006 related to an aborted acquisition and the integration of O-I Plastic.  Selling, general and administrative expenses as a percent of sales were 5.1% of sales for the three months ended June 30, 2007 and 2006.



30






Impairment Charges.There were no impairment charges for the three months ended June 30, 2007 as compared to $1.1 million for the three months ended June 30, 2006.  In 2006, due to a change in the ability to utilize certain assets in the United States, the Company evaluated the recoverability of these assets.  For these assets to be held and used, the Company determined that the undiscounted cash flows were below the carrying value of these long-lived assets.  Accordingly, the Company adjusted the carrying value of these long-lived assets to their estimated fair value in accordance with Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets, resulting in impairment charges of $1.1 million for the three months ended June 30, 2006.

Interest Expense, Net. Interest expense, net decreased $2.0 million to $52.0 million for the three months ended June 30, 2007 from $54.0 million for the three months ended June 30, 2006.  The decrease was primarily related to the write-off of $2.1 million of deferred financing fees in connection with a 2006 amendment to the Companys Credit Agreement in the three months ended June 30, 2006.

Income Tax Provision.Income tax provision decreased $3.8 million to $6.5 million for the three months ended June 30, 2007 from $10.3 million for the three months ended June 30, 2006.  The decrease was primarily related to a smaller valuation allowance on taxable losses in North America due to improved results.

Net Income (Loss).Primarily as a result of the factors discussed above, net income was $5.1 million for the three months ended June 30, 2007 compared to net loss of $15.3 million for the three months ended June 30, 2006.



Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Net Sales.Net sales for the six months ended June 30, 2007 decreased $25.5 million, or 2.0%, to $1,272.8 million from $1,298.3 million for the six months ended June 30, 2006.  The decrease in sales was primarily due to a decrease in resin pricing, changes in mix and price erosion.  Container units sold increased 1.5%.  On a geographic basis, sales for the six months ended June 30, 2007 in North America decreased $47.5 million, or 4.1%, from the six months ended June 30, 2006, primarily due to a decrease in resin pricing, changes in mix and price erosion.  North American sales in the household, automotive lubricants and personal care/specialty product categories contributed $5.1 million, $17.7 million and $26.4 million, respectively, to the decrease, while the food and beverage product category increased $1.7 million.  Container units sold in North America
increased in the food and beverage and household product categories by 0.6% and 5.6%, respectively, and decreased in the automotive lubricants and personal care/specialty product categories by 9.1% and 18.8%, respectively.  Sales for the six months ended June 30, 2007 in Europe increased $17.7 million, or 15.1%, from the six months ended June 30, 2006.  The increase in sales was primarily due to favorable exchange rate changes of $10.4 million and higher container units sold of 9.5% compared to the same period last year.  Sales for the six months ended June 30, 2007 in South America increased $4.3 million, or 14.8%, from the six months ended June 30, 2006.  The increase in sales was primarily due to increased volume and favorable exchange rate changes of $1.4 million.

Gross Profit.Gross profit for the six months ended June 30, 2007 increased $25.4 million to $178.4 million from $153.0 million for the six months ended June 30, 2006.  Gross profit for the six months ended June 30, 2007 increased in North America and Europe by $24.0 million and $1.6 million, respectively, and decreased in South America by $0.2 million when compared to the six months ended June 30, 2006. Gross profit was favorably impacted by approximately $5.5 million by not incurring costs in 2007 which it had incurred in 2006 as a result of the inability to recover all costs related to the extraordinary efforts during the Rita/Katrina hurricane events during the latter half of 2005 to procure PET raw materials and build unusually high inventory levels to make certain the Company met its customers requirements in the short term and build for the peak
isotonic beverage demand in the long term.  Gross profit was also favorably impacted by a net decrease in non-recurring charges of $9.8 million, a net decrease in project startup costs of $2.9 million, changes in foreign currency exchange rates of $1.8 million and a net increase in gross profit related to ongoing business of $5.4 million.  The non-recurring charges included expenses incurred in 2007 and 2006 related to restructuring and other non-recurring expenses; additional expenses were incurred in 2006 related to the hurricanes in the United States in the second half of 2005 and the integration of O-I Plastic.



31






Selling, General & Administrative Expenses.Selling, general and administrative expenses for the six months ended June 30, 2007 increased $4.0 million to $68.3 million from $64.3 million for the six months ended June 30, 2006. The increase was primarily due to increases in non-recurring charges and compensation-related expenses, partially offset by a decrease in development costs.  The non-recurring charges were $7.4 million and $6.9 million for the six months ended June 30, 2007 and 2006, respectively, comprised of expenses relating to global reorganization costs and other costs; additional expenses were incurred in 2006 related to an aborted acquisition and the integration of O-I Plastic.  Selling, general and administrative expenses as a percent of sales increased to 5.4% of sales for the six months ended June 30, 2007 from 5.0% of sales for the six months
ended June 30, 2006.

Impairment Charges.There were no impairment charges for the six months ended June 30, 2007 as compared to $1.1 million for the six months ended June 30, 2006.  In 2006, due to a change in the ability to utilize certain assets in the United States, the Company evaluated the recoverability of these assets.  For these assets to be held and used, the Company determined that the undiscounted cash flows were below the carrying value of these long-lived assets.  Accordingly, the Company adjusted the carrying value of these long-lived assets to their estimated fair value in accordance with SFAS 144, resulting in impairment charges of $1.1 million for the six months ended June 30, 2006.

Interest Expense, Net. Interest expense, net increased $3.3 million to $107.7 million for the six months ended June 30, 2007 from $104.4 million for the six months ended June 30, 2006.  The increase was primarily related to the write-off in the first quarter of 2007 of $4.5 million of deferred financing fees in connection with the March 30, 2007 amendment to the Companys Credit Agreement (as compared to the write-off in the first half of 2006 of $2.1 million of deferred financing fees in connection with a 2006 amendment to the Companys Credit Agreement) and an increase in interest rates (average 90-day LIBOR increased from 4.99% for the six months ended June 30, 2006 to 5.36% for the six months ended June 30, 2007), partially offset by lower debt levels in the six months ended June 30, 2007.

Income Tax Provision.Income tax provision increased $2.5 million to $9.7 million for the six months ended June 30, 2007 from $7.2 million for the six months ended June 30, 2006.  The increase was primarily related to improved results in jurisdictions where the Company has income tax liabilities, principally Mexico and Europe.

Net Income (Loss).Primarily as a result of the factors discussed above, net loss was $10.5 million for the six months ended June 30, 2007 compared to net loss of $25.3 million for the six months ended June 30, 2006.



Effect of Changes in Exchange Rates

In general, the Companys results of operations are affected by changes in foreign exchange rates. Subject to market conditions, the Company prices its products in its foreign operations in local currencies. As a result, a decline in the value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a favorable effect on the profitability of the Company, and an increase in the value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a negative effect on the profitability of the Company. Exchange rate fluctuations increased comprehensive income by $9.4 million for the three months ended June 30, 2007, decreased comprehensive loss by $4.0 million for the three months ended June 30, 2006 and decreased comprehensive loss by $10.4 million and $6.3 million for the six months ended June 30, 2007 and 2006, respectively.



32






Derivatives

During 2004, the Company entered into four interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 3.89%, on $700.0 million of term loans. During 2005, the Company entered into three additional interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 4.43%, on $225.0 million of term loans. The interest rate swaps are accounted for as cash flow hedges. The hedges are highly effective as defined in SFAS 133, Accounting for Derivative Instruments and Hedging Activities.  The effective portion of the cash flow hedges is recorded in other comprehensive income (OCI) and was an unrealized loss of $2.2 million for the three months ended June 30, 2007 as compared
to an unrealized gain of $2.1 million for the three months ended June 30, 2006 and was an unrealized loss of $5.2 million for the six months ended June 30, 2007 as compared to an unrealized gain of $5.4 million for the six months ended June 30, 2006.  100% of the amount recorded within accumulated OCI as of June 30, 2007 is expected to be recognized in interest expense in the next twelve months.



Liquidity and Capital Resources

In the six months ended June 30, 2007, the Company funded, through its operating activities, $66.8 million of investing activities and $20.5 million of financing activities.

In connection with the acquisition of O-I Plastic on October 7, 2004, the Operating Company, Holdings, GPC Capital Corp. I, Holdings wholly-owned subsidiary (CapCo I), and a syndicate of lenders entered into a first-lien credit agreement (the Credit Agreement) and a second-lien credit agreement (the Second-Lien Credit Agreement and, together with the Credit Agreement, the Credit Agreements). Pursuant to its terms, on March 30, 2007, the Credit Agreement was amended in order to, among other things, increase the term loan B facility provided under the Credit Agreement by approximately $305.0 million (the Amendment).  Proceeds of the Amendment were used to pay off the Second-Lien Credit Agreement ($250.0 million), with $50.0 million being used to reduce outstanding borrowings on the existing revolving credit facility provided for
under the Credit Agreement and approximately $5.0 million being used to pay fees and expenses.  The Amendment also eliminated one of the Companys financial ratio covenants, increased the maximum allowable leverage under another financial ratio covenant and waived any potential excess cash flow payment required for the year ended December 31, 2006.   The Credit Agreement consists of a senior secured term loan B to the Operating Company totaling $1,870.3 million (the Term Loan or Term Loan Facility) and a $250.0 million revolving credit facility (the Revolving Credit Facility). The unused availability of the Revolving Credit Facility at June 30, 2007 was $239.7 million (as reduced by $10.3 million of outstanding letters of credit).  The Term Loan is payable in quarterly installments and requires payments of $14.1 million in 2007 and $18.7 million in each of  2008, 2009 and 2010 and $1,804.8 million in 2011. The Company expects to fund scheduled
debt repayments from cash from operations and unused lines of credit. The Revolving Credit Facility expires on October 7, 2010. The obligations of the Operating Company and CapCo I under the Credit Agreement are guaranteed by Holdings and certain other subsidiaries of Holdings. As of June 30, 2007, the Company was in compliance with all covenants.

The acquisition of O-I Plastic and the related refinancing of the indebtedness of the Company also included the issuance of $250.0 million in Senior Notes of the Operating Company and $375.0 million in Senior Subordinated Notes of the Operating Company (collectively the Notes). The Notes are unconditionally guaranteed, jointly and severally, by Holdings and domestic subsidiaries of the Operating Company and mature on October 7, 2012 (Senior Notes) and October 7, 2014 (Senior Subordinated Notes). Interest on the Senior Notes is payable semi-annually at 8.50% and interest on the Senior Subordinated Notes is payable semi-annually at 9.875%.

At June 30, 2007, the Companys total indebtedness was $2,534.9 million.



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The Credit Agreement and the Notes contain a number of significant covenants.  The Company believes that these covenants are material terms of these agreements and that information about the covenants is material to an investors understanding of the Companys financial condition and liquidity. Covenant compliance EBITDA (as defined below) is used to determine the Companys compliance with many of these covenants.  Any breach of covenants in the Credit Agreement that are tied to financial ratios based on covenant compliance EBITDA could result in a default under the Credit Agreement and the lenders could elect to declare all amounts borrowed to be immediately due and payable. Any such acceleration would also result in a default under the Notes. Additionally, these covenants restrict the Companys ability 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 Companys activities. Under the Credit Agreement, the Company is required to satisfy specified financial ratios and tests. The March 30, 2007 Amendment eliminated one of the Companys finacial ratio covenants, increased the maximum allowable leverage under another financial ratio covenant and waived any potential excess cash flow payment required for the year ended December 31, 2006.  As of June 30, 2007, the Company was in compliance with the financial ratios and tests specified in the Credit Agreement.

Covenant compliance EBITDA is defined as EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) further adjusted to exclude non-recurring items, non-cash items and other adjustments required in calculating covenant compliance under the Credit Agreement and the Notes, as shown in the table below. Covenant compliance EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be used as an alternative to net income as an indicator of operating performance or to cash flow as a measure of liquidity. The Company believes that the inclusion of covenant compliance EBITDA in this quarterly report on Form 10-Q is appropriate to provide additional information to investors about the calculation of certain financial covenants in the Credit Agreement and the Notes. Because not all companies use identical
calculations, these presentations of covenant compliance EBITDA may not be comparable to other similarly titled measures of other companies. A reconciliation of net loss to covenant compliance EBITDA is as follows:



Reconciliation of net loss to EBITDA



Four Quarters EndedJune 30, 2007(In millions)Net loss
        
        $
        (105.6
        )Interest income
        
        
        (0.5
        )Interest expense
        
        
        210.8Income tax provision
        
        
        30.0Depreciation and amortization
        
        
        206.5EBITDA
        
        $
        341.2






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Reconciliation of EBITDA to covenant compliance EBITDA



Four Quarters EndedJune 30, 2007(In millions)EBITDA
        
        $
        341.2Impairment charges
        
        
        24.8Other non-cash charges (a)
        
        
        15.2Fees related to monitoring agreements (b)
        
        
        5.0Non-recurring items (c)
        
        
        41.6Covenant compliance EBITDA
        
        $
        427.8






(a)
        Represents the net loss on disposal of fixed assets.(b)
        Represents annual fees paid to Blackstone Management Partners III L.L.C. and a limited partner of Holdings under monitoring agreements.(c)
        The Company is required to adjust EBITDA, as defined above, for the non-recurring items in the table below:




Four Quarters EndedJune 30, 2007(In millions)Reorganization and other costs (i)
        
        $
        25.3Project startup costs (ii)
        
        
        16.3$
        41.6






(i)
        Represents non-recurring costs related to the integration of O-I Plastic, aborted acquisitions, expenses related to the hurricanes in the United States in the second half of 2005, global reorganization costs and other costs.(ii)
        Represents non-recurring costs associated with project startups.




Under the debt agreements, the Companys ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on covenant compliance EBITDA. The Credit Agreement requires that the Company maintain a senior secured debt to covenant compliance EBITDA ratio at a maximum of 5.50x for the most recent four quarter period. For the four quarters ended June 30, 2007, the Operating Companys covenant compliance EBITDA was $427.8 million. The senior secured debt to covenant compliance EBITDA ratio was 4.38x for the four quarters ended June 30, 2007. The ability of the Operating Company to incur additional debt and make certain restricted payments under its Notes is tied to a covenant compliance EBITDA to interest expense ratio of 2.0 to 1, except that the Operating Company may incur certain debt and make certain
restricted payments without regard to the ratio, such as up to $2.2 billion under the Credit Agreement and investments equal to 7.5% of the Operating Companys total assets.

Substantially all of the Companys domestic tangible and intangible assets are pledged as collateral pursuant to the terms of the Credit Agreement.



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Under the Credit Agreement, the Operating Company is subject to restrictions on the payment of dividends or other distributions to Holdings; provided that, subject to certain limitations, the Operating Company may pay dividends or other distributions to Holdings:






        in respect of overhead, tax liabilities, legal, accounting and other professional fees and expenses;  and
        to fund purchases and redemptions of equity interests of Holdings or BMP/Graham Holdings Corporation held by then present or former officers or employees of Holdings, the Operating Company or their subsidiaries 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.




The Company and its subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Companys outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

Cash paid for property, plant and equipment, net of proceeds from sales of property, plant and equipment and excluding acquisitions, for the six months ended June 30, 2007 was $66.8 million. Management believes that capital investment to maintain and upgrade property, plant and equipment is important to remain competitive. Management estimates that on average the annual capital expenditures required to maintain the Companys current facilities are approximately $45 million per year. Additional capital expenditures beyond this amount will be required to expand capacity or improve the cost structure.

For the fiscal year 2007, the Company expects to incur capital investments ranging from $160 million to $175 million. However, total capital investments will depend on the size and timing of growth related opportunities. The Companys principal sources of cash to fund ongoing operations and capital requirements have been and are expected to continue to be net cash provided by operating activities and borrowings under the Credit Agreement.  Management believes that these sources will be sufficient to fund the Companys ongoing operations and its foreseeable capital requirements.

On July 9, 2002, the Company and Graham Engineering Corporation (Graham Engineering), an affiliated company, executed a First Amendment to the equipment sales, services and license agreement (the Equipment Sales Agreement) to, among other things, (i) permit the Company to purchase certain extrusion blow molding wheel systems from a third party under certain circumstances if Graham Engineering is provided the opportunity to bid on supplying the same equipment; (ii) clarify that the Companys exclusivity rights under the Equipment Sales Agreement do not apply to certain new generations of Graham Engineering equipment; (iii) in the event of the sale of Graham Engineering to a competitor, provide the Company the option to require the transfer of the existing agreement or obtain a perpetual, royalty-free license to make and use wheel equipment and components; (iv)
provide Graham Engineering with the ability to terminate the Equipment Sales Agreement if an arbitrator determines that the Company has purchased certain high output extrusion blow molding equipment from another supplier in breach of the Equipment Sales Agreement; and (v) obligate the Company, retroactive to January 1, 2002, and subject to certain credits and carry-forwards, to make payments for products and services to Graham Engineering in the amount of at least $12.0 million per calendar year, or else pay to Graham Engineering a shortfall payment.

Subsequently, on January 13, 2004, the parties executed a Second Amendment to the Equipment Sales Agreement.  Such amendment removed restrictions originally placed upon the Company with respect to the Companys use of Graham Engineering technology to manufacture containers at blow molding plants co-located with dairies or dairy-focused facilities.

The Equipments Sales Agreement terminates on December 31, 2007, unless mutually extended by the parties.



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Off-Balance Sheet Arrangements

Other than operating leases, as of June 30, 2007, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.



Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS 155, Accounting for Certain Hybrid Financial Instruments  an Amendment of FASB Statements No. 133 and 140.  SFAS 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders election.  SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140.  This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006.  The Company adopted SFAS 155 on January 1, 2007, and its adoption has not had a significant impact on the Companys financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements.  This statement establishes a single authoritative definition of fair value, sets out a framework to classify the source of information used in fair value measurements, identifies additional factors that must be disclosed about assets and liabilities measured at fair value based on their placement in the new framework and modifies the long-standing accounting presumption that the transaction price of an asset or liability equals its initial fair value.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  Therefore, the Company will adopt SFAS 157 on January 1, 2008.  The Company is currently in the process of assessing the impact of the adoption of SFAS 157 on its financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115.  Under SFAS 159, companies may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period.  SFAS 159 is effective as of the beginning of a companys first fiscal year that begins after November 15, 2007.  Therefore, the Company may adopt SFAS 159 on January 1, 2008.  The Company is currently in the process of assessing the impact of the adoption of SFAS 159 on its financial statements.

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes and transitional requirements upon adoption of FIN 48.  The Company adopted FIN 48 effective January 1, 2007 which resulted in an increase in the Companys other non-current liabilities for unrecognized tax benefits of $4.8 million, with a corresponding decrease in partners capital.  See Note 9 of the Notes to Condensed
Consolidated Financial Statements (Unaudited) for additional discussion regarding the impact of the Companys adoption of FIN 48.

In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented  in the Income Statement (That Is, Gross versus Net Presentation).  EITF 06-3 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed.  EITF 06-3 was effective January 1, 2007.  The Company presents these taxes on a net basis for all periods presented.



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Change in Critical Accounting Policy

FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes and transitional requirements upon adoption of FIN 48.  Due to the significant amounts involved and judgment required, the Company deems this policy to be critical to its financial statements.

Inherent in determining the Companys effective tax rate are judgments regarding business plans and expectations about future operations.  These judgments include the amount and geographic mix of future taxable income, limitations on usage of net operating loss carry-forwards, potential tax law changes, the impact of ongoing or potential tax audits, earnings repatriation plans and other future tax consequences.

The Company establishes contingencies for certain tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority.  The Company reviews these tax uncertainties in light of the changing facts and circumstances and adjusts them when significant changes warrant it.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following table provides disclosure as of June 30, 2007 for financial instruments that have experienced material changes in fair value since December 31, 2006.





Expected Maturity Date of Interest Rate Swap Agreements at June 30, 2007
        
        Fair Value2007
        
        2008
        
        2009
        
        2010
        
        2011
        
        Thereafter
        
        Total
        
        June 30,2007(Dollars in thousands)Derivatives matched against liabilitiesPay fixed swaps
        $
        650,000
        
        $
        275,000
        
        $
        
        
        $
        
        $
        
        $
        
        $
        925,000
        
        $
        5,702Pay rate
        
        3.98
        %
        
        4.11
        %
        
        
        
        
        
        
        
        
        
        
        4.02
        %Receive rate
        
        5.34
        %
        
        5.33
        %
        
        
        
        
        
        
        
        
        
        
        5.34
        %






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Item 4.
        Controls and Procedures(a)
        Evaluation of Disclosure Controls and ProceduresThe Companys principal executive officer and principal financial officer evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Companys report filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Companys reports
filed under the Exchange Act is accumulated and communicated to management, including the Companys principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.  Based on their evaluation and material weaknesses in the Companys internal controls as described below, the Companys principal executive officer and principal financial officer have concluded the Companys system of disclosure controls and procedures was ineffective as of June 30, 2007.
The Company identified a material weakness in its internal controls related to its income tax accounting as of December 31, 2005.  The Companys tax structure is complex with significant tax jurisdictions located outside of the United States.  The acquisition of O-I Plastic added to the complexity of the tax structure, involved
significant issues with regard to purchase accounting and significantly added to the Companys operations in Mexico.  The Company had insufficient resources to determine that income tax accounting complied with generally accepted accounting principles, particularly as it relates to the tax accounting for the O-I Plastic acquisition and the tax accounting for its Mexican operations.  This deficiency in the design and operation of internal controls could result in misstatements in the reported amount of deferred income tax balances and in the required disclosures of income tax amounts.
In response to the above determination, the Company has implemented certain remedies, including, among other items, the deployment of greater resources in the area of income tax accounting.  The Company hired a tax director and a manager of international tax during the fourth quarter
of 2006 to increase oversight of its income tax accounting and has added two tax professionals to its staff in Mexico.  In addition, the Company has engaged qualified outside consultants to oversee the tax return preparation and the tax accounting reconciliations as well as conducted extensive management reviews for its Mexican operations.  During 2006 and the six months ended June 30, 2007, the Company also reviewed and documented its income tax accounting processes and identified areas to strengthen the design and operation of its tax related controls.  Although these improvements were implemented, the Company has concluded that, as of June 30, 2007, these changes were either not yet fully implemented or not operating effectively for a sufficient period of time in order to reduce the likelihood to remote that a material misstatement in its income tax accounts would occur.  The Company expects to continue to implement additional changes relating to tax resources, training and
policies during the remainder of 2007.






40






During the fourth quarter of 2006, the Company also identified various other deficiencies that, when considered on an aggregate basis, constitute a material weakness.  These deficiencies relate to matters such as segregation of duties and computer system access and approval processes.  These deficiencies in the design and operation of internal controls could result in misstatements in the reported amount of various financial statement amounts.  In order to eliminate certain segregation of duties concerns, the Company has created a separate department to handle certain customer and pricing matters and segregated certain responsibilities relating to the human resources and payroll processes in the first half of 2007.  In addition, the Company is implementing procedures to more closely limit user access to its information
technology systems.  The Company plans to make additional changes in its personnel, policies, systems and procedures during the remainder of 2007 in order to specifically address the deficiencies identified and strengthen its internal controls.
At this time, the Company is not required to issue an internal control report or receive an independent opinion relating to its internal controls from its external auditors.  The Company will be required to issue an internal control report beginning with its 2007 Annual Report on Form 10-K and will be required to receive an independent assessment beginning with its 2008 Annual Report on Form 10-K.(b)
        Changes in Internal ControlsOther than those changes discussed in Item 4 (a) above, there are no changes that could materially affect or are reasonably likely to materially affect the Companys internal control over financial reporting.






41






PART II.
        OTHER INFORMATIONItem 1.
        Legal ProceedingsFor a description of the Companys legal proceedings, see Note 11 of the Notes to Condensed Consolidated Financial Statements (Unaudited), which is incorporated by reference in response to this item.Item 1A.
        Risk FactorsIn addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in Holdings Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect the Companys business, financial condition or future results.  The risk factors in Holdings Annual Report on Form 10-K have not materially changed.  The risks described in Holdings Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Companys business, financial condition and/or operating results.Item 6.
        ExhibitsExhibit 31.1
        Certification required by Rule 15d-14(a).Exhibit 31.2
        Certification required by Rule 15d-14(a).Exhibit 32.1
        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
        Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.



Dated:  August 3, 2007





GRAHAM PACKAGING HOLDINGS COMPANY(Registrant)By:
        /s/ Mark S. BurgessMark S. BurgessChief Financial Officer(chief accounting officer and duly authorized officer)










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