**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**COMMISSION FILE NUMBER: 1-13182**

 

**Graphic Packaging Corporation**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **58-2205241**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. employer  identification no.) |
|                                                            |       |                                  |
| **814  Livingston Court  Marietta, Georgia**                    | ** ** | **30067**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |
|                                                            |       |                                  |
| **(770) 644-3000**                                              |
| Registrant’s telephone number, including area  code:       |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes ý   No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).

Yes o  No ý

 

Asof November 1, 2004, there were 198,578,608 shares of the registrant’sCommon Stock, par value $0.01 per share, outstanding.

 

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

2

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Amountsin Millions, Except Share Amounts)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                     | ** ** | **Sept. 30,  2004** | ** ** | **Dec. 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| **ASSETS**                                                                                                                                                                                     | ** ** | ** **          | ** ** | ** **         | ** ** |
| Current Assets:                                                                                                                                                                                | ** ** | ** **          | ** ** | ** **         | ** ** |
| Cash and  Equivalents                                                                                                                                                                          |       | $                   | 25.9       |               | $          | 17.5 |   |
| Receivables,  Less Allowance for Doubtful Accounts of $2.2 and $4.4 at September 30, 2004  and December 31, 2003, respectively                                                                 |       | 236.4               |       | 198.5              |       |
| Inventories                                                                                                                                                                                    |       | 298.2               |       | 306.9              |       |
| Prepaid Expenses                                                                                                                                                                               |       | 15.1                |       | 15.1               |       |
|                                                                                                                                                                                           |       |                |       |               |       |
| Total Current  Assets                                                                                                                                                                          |       | 575.6               |       | 538.0              |       |
| Property, Plant  and Equipment, Net of Accumulated Depreciation of $1,028.0 and $908.4 at  September 30, 2004 and December 31, 2003, respectively                                              |       | 1,655.7             |       | 1,722.9            |       |
| Goodwill                                                                                                                                                                                       |       | 643.4               |       | 624.3              |       |
| Intangible  Assets, Net of Accumulated Amortization of $61.7 and $38.0 at September 30,  2004 and December 31, 2003, respectively                                                              |       | 169.6               |       | 192.3              |       |
| Other Assets                                                                                                                                                                                   |       | 120.6               |       | 122.8              |       |
|                                                                                                                                                                                           |       |                |       |               |       |
| Total Assets                                                                                                                                                                                   |       | $                   | 3,164.9    |               | $          | 3,200.3 |   |
|                                                                                                                                                                                           |       |                |       |               |       |
| **LIABILITIES**                                                                                                                                                                                | ** ** | ** **          | ** ** | ** **         | ** ** |
| Current  Liabilities:                                                                                                                                                                          | ** ** | ** **          | ** ** | ** **         | ** ** |
| Short-Term Debt                                                                                                                                                                                |       | $                   | 42.7       |               | $          | 38.4 |   |
| Accounts Payable  and Other Accrued Liabilities                                                                                                                                                |       | 319.2               |       | 346.7              |       |
| Total Current  Liabilities                                                                                                                                                                     |       | 361.9               |       | 385.1              |       |
|                                                                                                                                                                                           |       |                |       |               |       |
| Long Term Debt,  Less Current Portion                                                                                                                                                          |       | 2,083.2             |       | 2,116.2            |       |
| Other Noncurrent  Liabilities                                                                                                                                                                  |       | 225.2               |       | 210.0              |       |
| Total  Liabilities                                                                                                                                                                             |       | 2,670.3             |       | 2,711.3            |       |
|                                                                                                                                                                                           |       |                |       |               |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                                  |       |                |       |               |       |
| Preferred Stock,  Par Value $0.01 Per Share; 50,000,000 Shares Authorized;  No Shares Issued or Outstanding                                                                                    |       | —              |       | —             |       |
| Common Stock,  Par Value $0.01 Per Share; 500,000,000 Shares Authorized;  198,578,608 and 198,378,110 Shares Issued and Outstanding at September 30,  2004 and December 31, 2003, respectively |       | 2.0                 |       | 2.0                |       |
| Capital in  Excess of Par Value                                                                                                                                                                |       | 1,169.2             |       | 1,168.5            |       |
| Unearned Compensation                                                                                                                                                                          |       | (0.4                | )          | —             |       |
| Accumulated  Deficit                                                                                                                                                                           |       | (604.7              | )          | (598.0             | )          |
| Minimum Pension  Liability Adjustment                                                                                                                                                          |       | (59.1               | )          | (60.2              | )          |
| Accumulated  Derivative Instruments Loss                                                                                                                                                       |       | (1.0                | )          | (12.7              | )          |
| Cumulative  Currency Translation Adjustment                                                                                                                                                    |       | (11.4               | )          | (10.6              | )          |
| Total  Shareholders’ Equity                                                                                                                                                               |       | 494.6               |       | 489.0              |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                                               |       | $                   | 3,164.9    |               | $          | 3,200.3 |   |

 

The accompanying notes are an integral part of the CondensedConsolidated Financial Statements.

 

3

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Amountsin Millions, Except Per Share Amounts)**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
|                                                                        |       |                   |       |                  |       |   |   |   |   |
| Net Sales                                                                   |       | $                      | 617.2      |                  | $          | 478.1 |   | $ | 1,799.4 |   | $ | 1,114.7 |   |
| Cost of Sales                                                               |       | 513.0                  |       | 396.7                 |       | 1,508.1 |   | 912.9 |   |
| Selling, General  and Administrative                                        |       | 48.6                   |       | 44.7                  |       | 146.0 |   | 105.4 |   |
| Research,  Development and Engineering                                      |       | 2.1                    |       | 2.1                   |       | 6.9 |   | 5.4 |   |
| Other Expense,  Net                                                         |       | 6.5                    |       | 1.5                   |       | 28.0 |   | 3.7 |   |
| Income from  Operations                                                     |       | 47.0                   |       | 33.1                  |       | 110.4 |   | 87.3 |   |
| Loss on Early  Extinguishment of Debt                                       |       | —                 |       | (45.3                 | )          | — |   | (45.3 | ) |
| Interest Income                                                             |       | 0.1                    |       | 0.1                   |       | 0.3 |   | 0.3 |   |
| Interest Expense                                                            |       | (38.5                  | )          | (39.7                 | )          | (112.6 | ) | (107.5 | ) |
| Income (Loss)  before Income Taxes and Equity in Net Earnings of Affiliates |       | 8.6                    |       | (51.8                 | )          | (1.9 | ) | (65.2 | ) |
| Income Tax  Expense                                                         |       | (3.6                   | )          | (1.4                  | )          | (6.0 | ) | (4.8 | ) |
| Equity in Net  Earnings of Affiliates                                       |       | 0.5                    |       | 0.4                   |       | 1.2 |   | 1.1 |   |
| Net Income  (Loss)                                                          |       | $                      | 5.5        |                  | $          | (52.8 | ) | $ | (6.7 | ) | $ | (68.9 | ) |
|                                                                        |       |                   |       |                  |       |   |   |   |   |
| Income (Loss)  Per Share - Basic                                            |       | $                      | 0.03       |                  | $          | (0.32 | ) | $ | (0.03 | ) | $ | (0.52 | ) |
| Income (Loss)  Per Share - Diluted                                          |       | $                      | 0.03       |                  | $          | (0.32 | ) | $ | (0.03 | ) | $ | (0.52 | ) |
|                                                                        |       |                   |       |                  |       |   |   |   |   |
| Weighted Average  Number of Shares Outstanding - Basic                      |       | 198.6                  |       | 163.8                 |       | 198.5 |   | 131.4 |   |
| Weighted Average  Number of Shares Outstanding - Diluted                    |       | 203.1                  |       | 163.8                 |       | 198.5 |   | 131.4 |   |

 

The accompanying notes are an integral part of the CondensedConsolidated Financial Statements.

 

4

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

**(Amountsin Millions)**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| Net Income  (Loss)                                          |       | $                      | 5.5        |                  | $          | (52.8 | ) | $ | (6.7 | ) | $ | (68.9 | ) |
| Other  Comprehensive Income (Loss):                         |       |                   |       |                  |       |   |   |   |   |
| Minimum Pension  Liability Adjustment, Net of Tax of $0     |       | —                 |       | —                |       | 1.1 |   | — |   |
| Derivative  Instruments Gain (Loss), Net of Tax of $0       |       | 5.9                    |       | (6.1                  | )          | 11.7 |   | (5.6 | ) |
| Foreign Currency  Translation Adjustments, Net of Tax of $0 |       | 3.0                    |       | 3.3                   |       | (0.8 | ) | 10.9 |   |
|                                                        |       |                   |       |                  |       |   |   |   |   |
| Comprehensive  Income (Loss)                                |       | $                      | 14.4       |                  | $          | (55.6 | ) | $ | 5.3 |   | $ | (63.6 | ) |

 

The accompanying notes are an integral part of the CondensedConsolidated Financial Statements.

 

5

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amountsin Millions)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **Sept. 30,  2004**   | ** ** | **Sept. 30,  2003** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                  |       |   |   |
| Net Loss                                                                           |       | $                     | (6.7       | ) | $ | (68.9 | ) |
| Noncash Items  Included in Net Loss:                                               |       |                  |       |   |   |
| Depreciation and  Amortization                                                     |       | 173.0                 |       | 104.9 |   |
| Loss on Early  Extinguishment of Debt                                              |       | —                |       | 16.7 |   |
| Deferred Income  Taxes                                                             |       | (1.1                  | )          | 0.2 |   |
| Pension,  Postemployment and Postretirement Benefits Expense, Net of Contributions |       | 17.9                  |       | 13.4 |   |
| Equity in Net  Earnings of Affiliates, Net of Dividends                            |       | (0.2                  | )          | (0.5 | ) |
| Amortization of  Deferred Debt Issuance Costs                                      |       | 6.5                   |       | 5.5 |   |
| Loss on  Retirement of Assets                                                      |       | 7.3                   |       | — |   |
| Other, Net                                                                         |       | (2.4                  | )          | 11.6 |   |
| Changes in  Operating Assets & Liabilities:                                    |       |                  |       |   |   |
| Receivables                                                                        |       | (35.3                 | )          | 3.6 |   |
| Inventories                                                                        |       | 5.2                   |       | (4.8 | ) |
| Prepaid Expenses                                                                   |       | 3.4                   |       | (1.4 | ) |
| Accounts Payable  and Other Accrued Liabilities                                    |       | (24.0                 | )          | (20.3 | ) |
| Other Noncurrent  Liabilities                                                      |       | (2.1                  | )          | 1.7 |   |
| Net Cash  Provided by Operating Activities                                         |       | 141.5                 |       | 61.7 |   |
|                                                                               |       |                  |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                  |       |   |   |
| Purchases of  Property, Plant and Equipment                                        |       | (103.4                | )          | (75.9 | ) |
| Acquisition Fees                                                                   |       | —                |       | (91.8 | ) |
| Cash Acquired in  Merger                                                           |       | —                |       | 6.1 |   |
| Proceeds from  Sales of Assets, Net of Selling Costs                               |       | 11.8                  |       | — |   |
| Change in Other  Assets                                                            |       | (11.4                 | )          | 3.0 |   |
| Net Cash Used in  Investing Activities                                             |       | (103.0                | )          | (158.6 | ) |
|                                                                               |       |                  |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                  |       |   |   |
| Borrowing under  Revolving Credit Facilities                                       |       | 452.7                 |       | 343.0 |   |
| Payments on Revolving  Credit Facilities                                           |       | (473.5                | )          | (305.3 | ) |
| Proceeds from  Issuance of Debt                                                    |       | —                |       | 2,125.0 |   |
| Increase in Debt  Issuance Costs                                                   |       | —                |       | (55.2 | ) |
| Premium Paid on  Early Extinguishment of Debt                                      |       | —                |       | (28.6 | ) |
| Payments on Debt                                                                   |       | (9.9                  | )          | (1,980.4 | ) |
| Issuance of  Common Stock                                                          |       | 0.4                   |       | 0.2 |   |
| Repurchases of  Redeemable Common Stock                                            |       | —                |       | (1.0 | ) |
| Net Cash (Used  in) Provided by Financing Activities                               |       | (30.3                 | )          | 97.7 |   |
| Effect of  Exchange Rate Changes on Cash                                           |       | 0.2                   |       | 0.1 |   |
| Net Increase in  Cash and Equivalents                                              |       | 8.4                   |       | 0.9 |   |
| Cash and Equivalents  at Beginning of Period                                       |       | 17.5                  |       | 13.8 |   |
| Cash and  Equivalents at End of Period                                             |       | $                     | 25.9       |   | $ | 14.7 |   |

 

The accompanying notes are an integral part of the CondensedConsolidated Financial Statements.

 

6

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**GRAPHIC PACKAGING CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**NOTE 1 - ORGANIZATION AND BASISOF PRESENTATION**

 

On August 8, 2003, the corporation formerly known as Graphic PackagingInternational Corporation merged with and into Riverwood Acquisition Sub LLC, awholly owned subsidiary of Riverwood Holding, Inc. (“Riverwood Holding”), withRiverwood Acquisition Sub LLC as the surviving entity (the “Merger”). At theclosing of the Merger, one share of common stock of Riverwood Holding wasexchanged for each share of common stock of Graphic Packaging InternationalCorporation. After the Merger, (1) RIC Holding, Inc. merged into GraphicPackaging Holdings, Inc. which was renamed GPI Holding, Inc., (2) thecorporation formerly known as Graphic Packaging Corporation merged intoRiverwood International Corporation (“RIC”) which was renamed Graphic PackagingInternational, Inc. (“Graphic Packaging International”), and (3) RiverwoodAcquisition Sub LLC merged into Riverwood Holding which was renamed GraphicPackaging Corporation.

 

References to the “Company” are to Riverwood Holding and itssubsidiaries for periods prior to the Merger and to Graphic PackagingCorporation and its subsidiaries for periods after the Merger. Graphic PackagingInternational Corporation and its subsidiaries for periods prior to the Mergerare referred to herein as “Graphic.”

 

For accounting purposes, the Merger was accounted for as a purchase bythe Company. Under the purchase method of accounting, the assets andliabilities of Graphic were recorded, as of the date of the closing of theMerger, at their respective fair values and added to those of the Company. Thedifference between the purchase price and the fair market values of the assetsacquired and liabilities assumed of Graphic was recorded as goodwill. Thehistorical financial statements of Riverwood Holding became the historicalfinancial statements of Graphic Packaging Corporation. Note 2 provides summaryunaudited pro forma information and information pertaining to the Merger.

 

Graphic Packaging Corporation and GPI Holding, Inc., its wholly-ownedsubsidiary, conduct no significant business and have no independent assets oroperations other than their ownership of Graphic Packaging International. GraphicPackaging Corporation and GPI Holding, Inc. fully and unconditionally guaranteesubstantially all of the debt of Graphic Packaging International.

 

The Condensed Consolidated Financial Statements of the Company includedherein have been prepared by the Company without an audit, pursuant to therules and regulations of the Securities and Exchange Commission (the “SEC”).Certain information and footnote disclosures normally included in the financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. In the opinion of management, all adjustments,consisting of normal recurring adjustments necessary for a fair presentation ofthe financial position, results of operations and cash flows for the interimperiods presented have been made. The Condensed Consolidated Balance Sheet asof December 31, 2003 was derived from audited financial statements.

 

**NOTE 2 – MERGER**

 

The Merger was consummated primarily to create a value-added paperboardpackaging company. Prior to the consummation of the Merger, Riverwood Holdinghad two classes of common stock. There were 9.0 million shares of Class Acommon stock, par value $0.01, authorized with 7.0 million shares outstandingat August 8, 2003. There were 3.0 million shares of Class B common stock, parvalue $0.01, authorized with 0.5 million shares outstanding at August 8, 2003.In connection with the Merger, the Company’s Board of Directors approved a15.21-to-one stock split. At the time, the Class A and Class B common stockwere reclassified as one class of common stock, par value $0.01. Immediatelyafter the stock split, there were 500.0 million shares of common stockauthorized with 114.8 million shares outstanding. The aggregate par value ofthe issued common stock was increased by $1.1 million as a result of keepingthe par value price $0.01. Accordingly, Capital in Excess of Par Value wasdecreased $1.1 million. In connection with the Merger, the shareholders ofGraphic Packaging International Corporation received one share of the Company’scommon stock and associated shareholder rights for each share of GraphicPackaging

 

7

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International Corporation common stock and associated shareholderrights they owned prior to the Merger. Accordingly, Capital in Excess of ParValue increased $419.5 million.

 

The Company determined that the relative outstanding share ownershipand the designation of certain senior management positions required the Companyto be the acquiring entity for accounting purposes, resulting in the historicalfinancial statements of Riverwood Holding becoming the historical financialstatements of Graphic Packaging Corporation. The assets and liabilities of theacquired business are included in the condensed consolidated balance sheets at September30, 2004 and December 31, 2003. Results of Graphic have been included in thecondensed consolidated statements of operations beginning August 9, 2003,through September 30, 2003. The purchase price for the acquisition, includingtransaction costs, has been allocated to the assets acquired and liabilitiesassumed based on the estimated fair market values at the date of the Merger.Goodwill is allocated entirely to the paperboard packaging segment and is notdeductible for tax purposes. The stock-for-stock exchange resulted in theissuance of approximately 83.4 million shares of common stock to fund thepurchase price of $469.8 million. The final purchase price allocation is asfollows:

 
| **(Amounts in Millions)**                                                                      | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|
| Current assets                                                                                 |       | $          | 209.6      |   |
| Property, plant  & equipment                                                               |       | 480.3      |       |
| Goodwill                                                                                       |       | 375.4      |       |
| Intangible  assets                                                                             |       | 162.0      |       |
| Other assets                                                                                   |       | 20.0       |       |
| Total assets  aquired                                                                          |       | $          | 1,247.3    |   |
|                                                                                           |       |       |       |
| Accounts payable  and accrued expenses                                                         |       | $          | 150.5      |   |
| Total debt                                                                                     |       | 496.6      |       |
| Pension and  other post-retirement liabilities, assumed merger related liabilities, and  other |       | 130.4      |       |
| Total  Liabilities assumed                                                                     |       | $          | 777.5      |   |

 

See also Note 9 – RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES.

 

**Selected Unaudited Pro Forma Combined FinancialInformation**

 

The following unauditedpro forma combined financial information is presented to show the estimatedeffect of the Merger and the Related Financing Transactions (as defined herein)and represents the Company’s pro forma combined financial information for thethree and nine months ended September 30, 2003 as if the Merger and RelatedFinancing Transactions had occurred on January 1, 2003. The unaudited pro formacombined financial information includes adjustments directly attributable tothe Merger and the Related Financing Transactions that are expected to have acontinuing impact on the Company. The pro forma adjustments are based uponavailable information and certain assumptions that management believes arereasonable.

 

8

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The following financing transactions (the “Related FinancingTransactions”) were entered into in connection with the Merger:

 

• The entering into andborrowing under the Senior Secured Credit Agreement, dated as of August 8,2003, among Graphic Packaging International and the several lender partiesthereto (the “Senior Secured Credit Agreement”), which provides for aggregatemaximum borrowings of $1.6 billion under (i) a term loan facility (the “TermLoan Facility”) providing for term loans in an aggregate principal amount of$1.275 billion in two tranches, consisting of Tranche A term loans and TrancheB term loans, and (ii) a revolving credit facility (the “Revolving CreditFacility”) providing for up to $325 million in revolving loans (includingstandby and commercial letters of credit) outstanding at anytime, to GraphicPackaging International.

 

• Theissuance and sale of $425 million in aggregate principal amount of 8.5% seniornotes due 2011 (the “Senior Notes”) and $425 million in aggregate principalamount of 9.5% senior subordinated notes due 2013 (the “Senior SubordinatedNotes”).

 

• The repayment of alloutstanding amounts under each of RIC’s and Graphic’s prior senior securedcredit facilities and the termination of all commitments under thosefacilities.

 

• The consummation of tenderoffers and consent solicitations for all of RIC’s 10 5/8% senior notes due 2007(the “Senior Notes due 2007”) and 10 7/8% senior subordinated notes due 2008(the “Senior Subordinated Notes due 2008” and, together with the Senior Notesdue 2007, the “Prior RIC Notes”), which closed concurrently with the Merger.The Company redeemed all Prior RIC Notes that were not tendered pursuant to thetender offers.

 

• The consummation of ananticipatory change of control tender offer and consent solicitation for all ofGraphic’s 8 5/8% senior subordinated notes due 2012 (the “Prior Graphic Notes”)made in anticipation of the change of control offer required by the indenturegoverning the Prior Graphic Notes. Out of $300.0 million in aggregate principalamount of Prior Graphic Notes outstanding, approximately $299.1 million inaggregate principal amount of Prior Graphic Notes were tendered in the anticipatorychange of control tender offer. On September 15, 2003, the Company completedthe change of control offer required pursuant to the indenture governing thePrior Graphic Notes. As of September 30, 2004 and December 31, 2003, $0.8million in principal amount of the Prior Graphic Notes was outstanding.

 

The pro forma financial information was prepared using the purchasemethod of accounting, with the Company treated as the acquirer for accountingpurposes. Under purchase accounting, the total cost of the Merger is allocatedto the tangible and intangible assets acquired and liabilities assumed basedupon their respective fair values at the effective date of the Merger. Theallocation of the cost of the Merger has been made based upon currentlyavailable information and management’s estimates.

 

The pro forma financialinformation is based on the Company’s actual financial results for the periodindicated and the historical results of Graphic from the beginning of theperiod presented through the date of the Merger. The pro forma financialinformation has been prepared in accordance with accounting principlesgenerally accepted in the United States of America and is provided forcomparison and analysis purposes only. The unaudited pro forma combinedfinancial information does not purport to represent the combined company’sresults of operations or financial condition had the Merger and RelatedFinancing Transactions actually occurred as of such dates or of the resultsthat the combined company would have achieved after the Merger. The unauditedpro forma combined financial information is as follows:

 

9

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**Combined Company**

**Unaudited Condensed Pro Forma Combined Statement of Operations**

**For the Three Months Ended September 30, 2003**

**(Amounts in Millions, Except Per Share Amounts)**

** **
| ** **                                                                  | ** ** | **Company** | ** ** | **Graphic** | ** ** | **Pro Forma  Adjustments** |     | **Condensed Pro  Forma Combined** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|----------------------------|----------|-----------------------------------|------------|
| Net Sales                                                                   |       | $           | 478.1      |        | $          | 114.9                      |     | $                                 | (7.6       | )**(A)** | $ | 585.4 |   |
| Cost of Sales                                                               |       | 396.7       |       | 103.1       |       | (14.7                      | )**(A)** | 484.9                             |       |
|                                                                        | ** ** |        | ** ** |        | ** ** | (0.2                       | )**(B)** |                              |       |
| Selling, General  and Administrative, Research, Development and Engineering |       | 48.3        |       | 8.7         |       | 4.2                        | **(B)**  | 61.2                              |       |
| Income from  Operations                                                     |       | 33.1        |       | 3.1         |       | 3.1                        |     | 39.3                              |       |
| Interest  Expense, Net                                                      |       | (39.6       | )          | (3.9        | )          | 4.0                        | **(C)**  | (39.5                             | )          |
| Loss on Early  Extingushment of Debt                                        |       | (45.3       | )          | (1.3        | )          | —                     |     | (46.6                             | )          |
| Loss before  Income Taxes and Equity in Net Earnings of Affiliates          |       | (51.8       | )          | (2.1        | )          | 7.1                        |     | (46.8                             | )          |
| Income Tax  (Expense) Benefit                                               |       | (1.4        | )          | 0.2         |       | —                     |     | (1.2                              | )          |
| Loss before  Equity in Net Earnings of Affiliates                           |       | (53.2       | )          | (1.9        | )          | 7.1                        |     | (48.0                             | )          |
| Equity in Net  Earnings of Affiliates                                       |       | 0.4         |       | —      |       | —                     |     | 0.4                               |       |
| Net Loss                                                                    |       | (52.8       | )          | (1.9        | )          | 7.1                        |     | (47.6                             | )          |
| Preferred Stock  Dividends Declared                                         |       | —      |       | 1.1         |       | (1.1                       | )**(D)** | —                            |       |
| Net Loss  Attributable to Common Stockholders                               |       | $           | (52.8      | )           | $          | (3.0                       | )        | $                                 | 8.2        |   | $ | (47.6 | ) |
|                                                                        |       |        |       |        |       |                       |     |                              |       |
| Loss Per Share -  Basic                                                     |       | $           | (0.32      | )           |       |                       |     |                              | $          | (0.24 | ) |
| Loss Per Share -  Diluted                                                   |       | $           | (0.32      | )           |       |                       |     |                              | $          | (0.24 | ) |
|                                                                        |       |        |       |        |       |                       |     |                              |       |
| Weighted Average  Number of Shares Outstanding:                             |       |        |       |        |       |                       |     |                              |       |
| Basic                                                                       |       | 163.8       |       |        |       |                       |     | 198.3                             |       |
| Diluted                                                                     |       | 163.8       |       |        |       |                       |     | 198.3                             |       |

 

10

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**CombinedCompany**

**UnauditedCondensed Pro Forma Combined Statement of Operations**

**For the Ninemonths ended September 30, 2003**

**(Amounts inMillions, Except Per Share Amounts)**

 
| ** **                                                                  | ** ** | **Company** | ** ** | **Graphic** | ** ** | **Pro Forma  Adjustments** |     | **Condensed Pro  Forma Combined** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|----------------------------|----------|-----------------------------------|------------|
| Net Sales                                                                   |       | $           | 1,114.7    |        | $          | 650.8                      |     | $                                 | (38.0      | )**(A)** | $ | 1,727.5 |   |
| Cost of Sales                                                               |       | 912.9       |       | 581.7       |       | (45.0                      | )**(A)** | 1,448.3                           |       |
|                                                                        | ** ** |        | ** ** |        | ** ** | (1.3                       | )**(B)** | ** **                        |       |
| Selling, General  and Administrative, Research, Development and Engineering |       | 114.5       |       | 44.0        |       | 18.0                       | **(B)**  | 176.5                             |       |
| Income from  Operations                                                     |       | 87.3        |       | 25.1        |       | (9.7                       | )        | 102.7                             |       |
| Interest  Expense, Net                                                      |       | (107.2      | )          | (23.0       | )          | 18.4                       | **(C)**  | (111.8                            | )          |
| Loss on Early  Extinguishment of Debt                                       |       | (45.3       | )          | (1.3        | )          | —                     |     | (46.6                             | )          |
| (Loss) Income  before Income Taxes and Equity in Net Earnings of Affiliates |       | (65.2       | )          | 0.8         |       | 8.7                        |     | (55.7                             | )          |
| Income Tax  Expense                                                         |       | (4.8        | )          | (1.0        | )          | —                     |     | (5.8                              | )          |
| Loss before  Equity in Net Earnings of Affiliates                           |       | (70.0       | )          | (0.2        | )          | 8.7                        |     | (61.5                             | )          |
| Equity in Net  Earnings of Affiliates                                       |       | 1.1         |       | —      |       | —                     |     | 1.1                               |       |
| Net Loss                                                                    |       | (68.9       | )          | (0.2        | )          | 8.7                        |     | (60.4                             | )          |
| Preferred Stock  Dividends Declared                                         |       | —      |       | 6.1         |       | (6.1                       | )**(D)** | —                            |       |
| Net Loss  Attributable to Common Stockholders                               |       | $           | (68.9      | )           | $          | (6.3                       | )        | $                                 | 14.8       |   | $ | (60.4 | ) |
|                                                                        |       |        |       |        |       |                       |     |                              |       |
| Loss Per Share -  Basic                                                     |       | $           | (0.52      | )           |       |                       |     |                              | $          | (0.30 | ) |
| Loss Per Share -  Diluted                                                   |       | $           | (0.52      | )           |       |                       |     |                              | $          | (0.30 | ) |
|                                                                        |       |        |       |        |       |                       |     |                              |       |
| Weighted Average  Number of Shares Outstanding:                             |       |        |       |        |       |                       |     |                              |       |
| Basic                                                                       |       | 131.4       |       |        |       |                       |     | 198.3                             |       |
| Diluted                                                                     |       | 131.4       |       |        |       |                       |     | 198.3                             |       |

 

11

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Adjustments in the unaudited condensed pro forma combined financialstatements are as follows:

 

----

**(A)** RIC sold coated unbleachedkraft paperboard (“CUK”) folding boxboard to Graphic for use in certain cartonsmanufactured by Graphic. This pro forma adjustment eliminates the intercompany salesand cost of sales of $7.6 million and $38.0 million for the three months and ninemonths ended September 30, 2003, respectively, related to this activity. Costof Sales also includes an adjustment of approximately $7.0 million for thethree and nine months ended September 30, 2003 to eliminate the effect of theincrease in fair value of inventory which was recorded as an addition to Costof Sales as a non-recurring item in the third quarter of 2003.

 

**(B)**The amortization of theidentifiable intangible assets (customer relationships, patents and proprietarytechnology) is reflected as a pro forma adjustment to the unaudited condensedpro forma combined statement of operations. The Company is amortizing theestimated fair value of the identifiable intangibles of approximately $162.0million on a straight-line basis over an average estimated useful life ofeighteen years except for non-compete agreements which have an estimated usefullife of approximately one year. Depreciation expense would have decreased by$0.2 million and $1.3 million for the three months and nine months endedSeptember 30, 2003, respectively, as a result of the Company revising thedepreciable asset lives and the fair value of the property purchased in theMerger. The net effect of this increased amortization and decreaseddepreciation of $4.0 million and $16.7 million for the three months and ninemonths ended September 30, 2003, respectively, is reflected in the unauditedcondensed pro forma combined statement of operations as follows:

 
| **(Amounts in Millions)**                                                                                   | ** ** | **Three Months Ended  September 30, 2003** | ** ** | **Nine Months Ended  September 30, 2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| Cost of Sales                                                                                               |       | $                                          | (0.2       | )                                         | $          | (1.3 | ) |
| Selling, General  and Administrative, Research, Development and Engineering                                 |       | 4.2                                        |       | 18.0                                      |       |
|                                                                                                        |       |                                       |       |                                      |       |
| Total Net  Additional Amortization and Depreciation of Intangible Assets and Property,  Plant and Equipment |       | $                                          | 4.0        |                                      | $          | 16.7 |   |

 

**(C)** In connection with theMerger, substantially all of RIC’s and Graphic’s then outstanding indebtednesswas redeemed, repurchased or otherwise repaid and replaced with borrowingsunder the Senior Secured Credit Agreement and indebtedness under the SeniorNotes and Senior Subordinated Notes. Excluding hedges and amortization offinancing costs, the pro forma interest expense adjustments reflect an averagevariable interest rate of 3.9% for the combined company’s new bank debt and ablended fixed rate of 9.0% on the combined company’s Senior Notes and SeniorSubordinated Notes.

 

**(D)** To reflectthe new equity structure of the Company, including conversion of $100 millionof Graphic’s convertible preferred stock into common stock (accordingly thereare no preferred stock dividends declared).

 

**NOTE 3 — SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

For a summary of the Company’s significant accounting policies, pleaserefer to the Company’s Annual Report on Form 10-K for the year ended December31, 2003.

 

The preparation of the Condensed Consolidated Financial Statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the Condensed Consolidated FinancialStatements and the reported amounts of revenues and expenses during thereporting period. Actual amounts could differ from those estimates.

 

The Company’s Condensed Consolidated Financial Statements include allsubsidiaries in which the Company has the ability to exercise direct orindirect control over operating and financial policies. Intercompanytransactions and balances are eliminated in consolidation.

 

12

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The Company has reclassified the presentation of certain prior periodinformation to conform to the current presentation format.

 

As permitted by Statement of Financial Accounting Standards (“SFAS”)No. 123 *“Accounting for Stock-Based Compensation,”*the Company continues to apply intrinsic value accounting for its stock optionplans under Accounting Principles Board Opinion No. 25 (“APB 25”), *“Accounting for Stock Issued to Employees.”* Compensationcost for stock options, if any, is measured as the excess of the market priceof the Company’s common stock at the date of grant over the exercise price tobe paid by the grantee to acquire the stock. The Company has adopteddisclosure-only provisions of SFAS No. 123 and SFAS No. 148, *“Accounting for Stock-Based Compensation—Transition and Disclosure—anAmendment of FASB Statement No. 123.”* If the Company had elected torecognize compensation expense based upon the fair value at the grant dates forawards under these plans, the Company’s Net Income (Loss) would have been asfollows:

 
| ** **                                                                                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions, Except  Per Share Amounts)**                                                                                                         | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| Net Income  (Loss), As Reported                                                                                                                              |       | $                      | 5.5        |                  | $          | (52.8 | ) | $ | (6.7 | ) | $ | (68.9 | ) |
| Add: Stock-Based  Employee Compensation Expense Included in Reported Net Income (Loss), Net of  Related Tax Effects                                          |       | 1.3                    |       | 0.4                   |       | 3.7 |   | 1.0 |   |
|                                                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| (Deduct) Add:  Total Stock-Based Employee Compensation (Expense) Income Determined Under  Fair Value Based Method for All Awards, Net of Related Tax Effects |       | (1.3                   | )          | (0.5                  | )          | (8.1 | ) | 0.1 |   |
|                                                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Adjusted Net  Income (Loss)                                                                                                                                  |       | $                      | 5.5        |                  | $          | (52.9 | ) | $ | (11.1 | ) | $ | (67.8 | ) |
|                                                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Income (Loss)  Per Basic Share-As Reported                                                                                                                   |       | $                      | 0.03       |                  | $          | (0.32 | ) | $ | (0.03 | ) | $ | (0.52 | ) |
| Income (Loss)  Per Basic Share-As Adjusted                                                                                                                   |       | $                      | 0.03       |                  | $          | (0.32 | ) | $ | (0.06 | ) | $ | (0.52 | ) |
|                                                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Income (Loss)  Per Diluted Share-As Reported                                                                                                                 |       | $                      | 0.03       |                  | $          | (0.32 | ) | $ | (0.03 | ) | $ | (0.52 | ) |
| Income (Loss)  Per Diluted Share-As Adjusted                                                                                                                 |       | $                      | 0.03       |                  | $          | (0.32 | ) | $ | (0.06 | ) | $ | (0.52 | ) |

 

13

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The following table displays the intangible assets that continue to besubject to amortization and aggregate amortization expense as well asintangible assets not subject to amortization as of September 30, 2004 andDecember 31, 2003:

 
| ** **                        | ** ** | **As of September 30, 2004** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| **(Amounts in Millions)**         | ** ** | **Gross Carrying  Amount**   | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| Amortizable  Intangible Assets:   |       |                         |       |   |   |   |   |
| Customer  Relationships           |       | $                            | 109.9      |   | $ | 6.0 |   | $ | 103.9 |   |
| Non-Compete  Agreements           |       | 23.3                         |       | 22.4 |   | 0.9 |   |
| Patents,  Trademarks and Licenses |       | 98.1                         |       | 33.3 |   | 64.8 |   |
|                              |       | $                            | 231.3      |   | $ | 61.7 |   | $ | 169.6 |   |
|                              |       |                         |       |   |   |   |   |
| Unamortizable  Intangible Assets: |       |                         |       |   |   |   |   |
| Goodwill                          |       | $                            | 643.4      |   | — |   | $ | 643.4 |   |

 
| ** **                        | ** ** | **As of December 31, 2003** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| Amortizable  Intangible Assets:   |       |                        |       |   |   |   |   |
| Customer  Relationships           |       | $                           | 109.9      |   | $ | 2.0 |   | $ | 107.9 |   |
| Non-Compete  Agreements           |       | 23.3                        |       | 7.3 |   | 16.0 |   |
| Patents,  Trademarks and Licenses |       | 97.1                        |       | 28.7 |   | 68.4 |   |
|                              |       | $                           | 230.3      |   | $ | 38.0 |   | $ | 192.3 |   |
|                              |       |                        |       |   |   |   |   |
| Unamortizable  Intangible Assets: |       |                        |       |   |   |   |   |
| Goodwill                          |       | $                           | 624.3      |   | — |   | $ | 624.3 |   |

 

The Company recorded amortization expense of $6.8 million and $1.5 millionfor the three months ended September 30, 2004 and 2003, respectively, and $23.7million and $3.4 million for the nine months ended September 30, 2004 and 2003,respectively, relating to intangible assets subject to amortization. TheCompany expects amortization expense to be approximately $27 million for 2004and approximately $12 million for each of the following four fiscal years.

 

**NOTE 4 — INVENTORIES**

 

The major classes ofinventories were as follows:

 
| **(Amounts in Millions)** | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------|------------|-------------------------|------------|------------------------|------------|
| Finished goods            |       | $                       | 159.9      |                   | $          | 172.8 |   |
| Work-in progress          |       | 19.6                    |       | 22.6                   |       |
| Raw materials             |       | 76.3                    |       | 66.0                   |       |
| Supplies                  |       | 42.4                    |       | 45.5                   |       |
|                      |       | $                       | 298.2      |                   | $          | 306.9 |   |

 

Raw materials andconsumables used in the production process such as wood chips and chemicals arevalued at purchase cost on a first-in, first-out (“FIFO”) basis upon receipt.Work in progress and finished goods inventories are valued at the cost of rawmaterial consumed plus direct manufacturing costs (such as labor, utilities andsupplies) as incurred and a proportion of manufacturing overhead.

 

14

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**NOTE 5 — CONTINGENCIES ANDCOMMITMENTS**

 

The Company is subject to a broad range of foreign, federal, state andlocal environmental, health and safety laws and regulations, including thosegoverning discharges to air, soil and water, the management, treatment anddisposal of hazardous substances, the management, treatment and disposal ofsolid and hazardous wastes, the investigation and remediation of contaminationresulting from historical site operations and releases of hazardous substances,and the health and safety of employees. The Company’s potential environmentalliabilities and obligations may result in significant costs, which couldnegatively impact its financial condition and results of operations. Inaddition, capital expenditures may be necessary for the Company to comply withsuch laws and regulations, including the U.S. Environmental Protection Agency’sregulations mandating stringent controls on air and water discharges from pulpand paper mills (referred to herein as the “cluster rules”). Any failure tocomply with environmental, health and safety laws or any permits andauthorizations required thereunder could subject the Company to fines, correctiveaction or other sanctions. In addition, some of the Company’s current andformer facilities are the subject of environmental investigations and remediationsresulting from historical operations and the release of hazardous substances orother constituents. Some current and former facilities have a history ofindustrial usage for which investigation and remediation obligations may beimposed in the future or for which indemnification claims may be assertedagainst the Company. The Company cannot predict with certainty futureinvestigation or remediation costs or future costs relating to historical usageor indemnification claims. Also, potential future closures or sales offacilities may necessitate further investigation and may result in futureremediation at those facilities. The Company will continue to review and reviseits estimate of potential, contingent environmental liabilities related topast, present and future operations as additional information related to itsenvironmental liabilities is obtained.

 

The federal Comprehensive Environmental Response, Compensation andLiability Act (“CERCLA”) establishes liability for waste generators, current andformer site owners and operators and others in connection with release ofhazardous substances. In several instances, the Company has been identified asa Potentially Responsible Party (“PRP”) under CERCLA and similar state lawswith respect to remediation of sites at which hazardous substances have beenreleased. At many of these sites, the liability of the Company has beenresolved through settlement with other PRPs and/or appropriate regulatoryagencies. The remaining sites which are currently known and at which Graphic’sliability is not resolved are believed by the Company not to be material.

 

The Company is involved in investigation and remediation projects forcertain properties that it currently owns or formerly owned or operated,including the specific sites discussed below. The Company has also receiveddemands arising out of alleged contamination of various properties currently orformerly operated by it, and at certain waste disposal sites. The Companybelieves that these potential liabilities are not material.

 

**North Portland, Oregon Facility.**  The presence of contamination in soils on andgroundwater beneath the North Portland facility has been identified at levelsexceeding Oregon state screening limits. Current information indicates that thecontamination is naturally attenuating, is confined and/or is the result ofoff-site contamination which has migrated to groundwater beneath the facility.The facility is listed on the Oregon Confirmed Release List; however, thefacility is under no current order or agreement to conduct additionalinvestigation and/or remediation at this time. The EPA has determined that itwill require no further action at the site. The Company believes it is probablethat additional investigation will be required at the facility by the State of Oregon,although it is not possible to predict a time table for additional action.Based on current information, the Company believes that no active remediationwill be required as a result of any additional investigation at the facility.

 

**Kalamazoo Paperboard Mill and Carton Plant.**  The Kalamazoo facilities and adjacentproperties have long histories of industrial and commercial usages. Portions ofthe property on which the mill is located have been found to containcontamination exceeding Michigan state screening levels. Restrictive covenantsrestricting land usage in portions of the mill property where contamination hasbeen identified have been recorded to address contamination in those areas. TheCompany believes that there is a reasonable possibility that some or all of thecontamination which has been identified at the facility will be determined tobe the result of past activities unrelated to the Company’s operations;however, further investigation will be necessary to make a final determination.Although the Company is not under any current order or agreement to conductadditional site investigation, the Company plans to submit an Interim RemedialAction Plan (“IRAP”) to investigate and address the presence of contamination atthe mill during the fourth quarter of

 

15

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2004. The IRAP will be conducted over a five (5) year period. There isnot sufficient information available to determine whether any additionalinvestigation or remediation will be required after completion of the IRAP noris there sufficient information to reasonably estimate the cost of anyadditional investigation or remediation beyond the requirements of the IRAP.

 

The Company is a party to a number of lawsuits arising in the ordinaryconduct of its business. Although the timing and outcome of these lawsuitscannot be predicted with certainty, the Company does not believe thatdisposition of these lawsuits will have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

**NOTE 6 — BUSINESS SEGMENTINFORMATION**

 

The Company reports itsresults in two business segments: paperboard packaging andcontainerboard/other. These segments are evaluated by the chief operatingdecision maker based primarily on income from operations. The Company’sreportable segments are based upon strategic business units that offerdifferent products. The paperboard packaging business segment includes theproduction and sale of paperboard for its beverage multiple packaging andconsumer products packaging businesses from its West Monroe, Louisiana, Macon,Georgia, Kalamazoo, Michigan and Norrköping, Sweden mills; carton convertingfacilities in the United States, Europe, Brazil and Canada; and the design,manufacture and installation of packaging machinery related to the assembly ofcartons. The containerboard/other business segment primarily includes theproduction and sale of linerboard, corrugating medium and kraft paper frompaperboard mills in the United States.

 

Business segment information is as follows:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions)**       | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| NET SALES:                      |       |                   |       |                  |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 590.7      |                  | $          | 459.0 |   | $ | 1,731.9 |   | $ | 1,054.1 |   |
| Containerboard/Other            |       | 26.5                   |       | 19.1                  |       | 67.5 |   | 60.6 |   |
|                            |       | $                      | 617.2      |                  | $          | 478.1 |   | $ | 1,799.4 |   | $ | 1,114.7 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                   |       |                  |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 67.0       |                  | $          | 48.5 |   | $ | 185.3 |   | $ | 130.5 |   |
| Containerboard/Other            |       | (3.7                   | )          | (5.9                  | )          | (19.2 | ) | (19.0 | ) |
| Corporate                       |       | (16.3                  | )          | (9.5                  | )          | (55.7 | ) | (24.2 | ) |
|                            |       | $                      | 47.0       |                  | $          | 33.1 |   | $ | 110.4 |   | $ | 87.3 |   |

 

**NOTE 7 — FINANCIAL INSTRUMENTS, DERIVATIVES ANDHEDGING ACTIVITIES**

 

The Company is exposed to fluctuations in interest rates on itsvariable debt, fluctuations in foreign currency transaction cash flows andvariability in cash flows attributable to certain commodity purchases. TheCompany actively monitors these fluctuations and periodically uses derivatives andother financial instruments to hedge exposures to interest, commodity andcurrency risks. The Company’s use of derivative instruments may result inshort-term gains or losses and may increase volatility in its earnings. Inaddition, these instruments involve, to varying degrees, elements of market andcredit risk in excess of the amounts recognized in the Condensed ConsolidatedBalance Sheets. The Company does not trade or use derivative instruments withthe objective of earning financial gains on interest or currency rates, nordoes it use leveraged instruments or instruments where there are no underlyingexposures identified.

 

16

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*Interest Rate Risk*

 

The Company uses interest rate swaps to manage interest rate risks onfuture income caused by interest rate changes on its variable rate Term Loanfacility. The differential to be paid or received under these agreements isrecognized as an adjustment to interest expense related to the debt. At September30, 2004, theCompany had interest rate swap agreements with a notional amount of $770million, which expire on various dates from 2005 to 2007 under which theCompany will pay fixed rates of 1.89% to 3.27% and receive three-month LIBOR.

 

During the nine months ended September 30, 2004, there wasapproximately $2.4 million determined to be the ineffective portion related tochanges in the fair value of the interest rate swap agreements. Additionally,there were no amounts excluded from the measure of effectiveness.

 

*Commodity Risk*

 

To manage risks associated with future variability in cash flows andprice risk attributable to certain commodity purchases, the Company enteredinto fixed price natural gas contracts designed to effectively hedge prices fora portion of its natural gas requirements at its U.S. mills through January2005. These contracts are not accounted for as derivative instruments underSFAS No. 133*, Accounting for Derivative Instruments and HedgingActivities, as amended by SFAS No. 137, Accounting for Derivative Instrumentsand Hedging Activities—Deferral of the Effective Date of FASB Statement No.133, and SFAS No. 138, Accounting for Certain Derivative Instruments andCertain Hedging Activities* (‘‘SFAS No. 133’’), as they qualify forthe normal purchase exemption.

 

In addition, during the third quarter of 2004, the Company entered intonatural gas swap contracts to hedge prices for a portion of its natural gasrequirements through December 2005. Such contracts are designated as cash flowhedges and are accounted for by deferring the quarterly change in fair value ofthe outstanding contracts in Accumulated Derivative Instruments Loss. On thedate a contract matures, the resulting gain or loss is reclassified into Costof Sales concurrently with the recognition of the commodity purchased. Theineffective portion of the swap contracts change in fair value, if any, wouldbe recognized in earnings. During the nine months ended September 30, 2004,there was no material ineffective portion related to changes in fair value ofnatural gas swap contracts. Additionally, there were no amounts excluded fromthe measure of effectiveness.

 

*Foreign Currency Risk*

 

The Company enters into forward exchange contracts to manage risksassociated with future variability in cash flows resulting from anticipatedforeign currency transactions adversely affected by changes in exchange rates.Gains/losses, if any, related to these contracts are recognized in income whenthe anticipated transaction affects income.

 

At September 30, 2004 and December 31, 2003, multiple forward exchangecontracts existed that expire on various dates from 2004 to 2005. Thosepurchased forward exchange contracts outstanding at September 30, 2004, whenmeasured in U.S. dollars at September 30, 2004 exchange rates, had notionalamounts totaling approximately $176.2 million. Those purchased forward exchangecontracts outstanding at December 31, 2003, when measured in U.S. dollars atDecember 31, 2003 exchange rates, had notional amounts totaling approximately$141.7 million.

 

No amounts were reclassified to earnings during the nine months ended September30, 2004 in connection with forecasted transactions that were no longerconsidered probable of occurring and there was no material ineffective portionrelated to changes in the fair value of foreign currency forward contracts.Additionally, there were no amounts excluded from the measure of effectiveness.

 

17

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*Derivatives not Designated as Hedges*

 

The Company enters into forward exchange contracts to effectively hedgesubstantially all accounts receivable and certain accounts payable resultingfrom transactions denominated in foreign currencies in order to manage risksassociated with foreign currency transactions adversely affected by changes inexchange rates. At September 30, 2004 and December 31, 2003, multiple foreigncurrency forward exchange contracts existed, with maturities ranging up to sixmonths. Those forward currency exchange contracts outstanding at September 30,2004, when aggregated and measured in U.S. dollars at September 30, 2004exchange rates, had net notional amounts totaling approximately $29.6 million.Those forward currency exchange contracts outstanding at December 31, 2003,when aggregated and measured in U.S. dollars at December 31, 2003 exchangerates, had net notional amounts totaling approximately $29.3 million. Generally,unrealized gains and losses resulting from these contracts are recognized inoperations and approximately offset corresponding unrealized gains and lossesrecognized on the hedged accounts receivable or payable. These contracts arepresently being and will continue to be marked to market through the incomestatement.

 

*Accumulated Derivative Instruments Loss*

 

The following is a reconciliation of changes in the fair value of theinterest rate swap agreements and foreign currency forward contracts which havebeen recorded as Accumulated Derivative Instruments Loss in the accompanyingCondensed Consolidated Balance Sheet at September 30, 2004 and at September 30,2003 and as Derivative Instruments Loss in the accompanying CondensedConsolidated Statements of Comprehensive Income (Loss) for the nine monthsended September 30, 2004 and 2003.

 
| **(Amounts in millions)**            | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1                |       | $        | (12.7      | )        | $          | (6.1 | ) |
| Reclassification  to earnings        |       | (6.6     | )          | 0.6      |       |
| Current period  change in fair value |       | 18.3     |       | (6.2     | )          |
| Balance at  September 30             |       | $        | (1.0       | )        | $          | (11.7 | ) |

 

The balance recorded in Accumulated Derivative Instruments Loss at September30, 2004 is expected to be reclassified into future earnings, contemporaneouslywith and offsetting changes in the related hedged exposure. The actual amountthat will be reclassified to future earnings over the next twelve months mayvary from this amount as a result of changes in market conditions.

 

18

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**Note 8 – PENSIONS AND OTHERPOSTRETIREMENT BENEFITS**

 

The Company maintainsdefined benefit pension plans for its U.S. employees. Benefits are based onyears of service and average base compensation levels over a period of years.The Company’s funding policies with respect to its U.S. pension plans are tocontribute funds to trusts as necessary to at least meet the minimum fundingrequirements of the U.S. Internal Revenue Code. Plan Assets are investedprimarily in equities and fixed income securities.

 

The pension expenserelated to the U.S. plans consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions)**       | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| Service  Cost                   |       | $                      | 3.7        |                  | $          | 2.5 |   | $ | 10.6 |   | $ | 5.8 |   |
| Interest  Cost                  |       | 7.4                    |       | 5.8                   |       | 21.7 |   | 14.3 |   |
| Expected  Return on Plan Assets |       | (8.2                   | )          | (9.7                  | )          | (22.0 | ) | (18.0 | ) |
| Amortizations:                  |       |                   |       |                  |       |   |   |   |   |
| Prior  Service Cost             |       | 1.0                    |       | 0.4                   |       | 1.9 |   | 1.1 |   |
| Actuarial  Loss                 |       | —                 |       | 4.9                   |       | 1.8 |   | 7.0 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Net  Periodic Pension Cost      |       | $                      | 3.9        |                  | $          | 3.9 |   | $ | 14.0 |   | $ | 10.2 |   |

 

The Company disclosed inits financial statements for the year ended December 31, 2003 that, due tocertain minimum regulatory requirements, the Company may be required to makecontributions to its U.S. pension plans. The contributions were contingent uponfinal pension funding proposals separately approved by both houses of the U.S.Congress as well as the completion of the Company’s 2004 valuation by itsactuaries. The legislative actions have now been passed and the 2004 valuationhas been completed. The Company estimates that no contributions to its U.S.pension plans will be required to be paid in 2004.

 

The Company maintainsinternational defined benefit pension plans that are both noncontributory andcontributory and are funded in accordance with applicable local laws.  The pension or termination benefits are basedprimarily on years of service and the employees’ compensation. Plan assets areinvested primarily in equities and fixed income securities.

 

19

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The pension expenserelated to the international plans consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions)**       | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| Service  Cost                   |       | $                      | —     |                  | $          | — |   | $ | 0.1 |   | $ | 0.1 |   |
| Interest  Cost                  |       | 1.6                    |       | 1.3                   |       | 4.7 |   | 3.9 |   |
| Expected  Return on Plan Assets |       | (1.5                   | )          | (1.1                  | )          | (4.5 | ) | (3.4 | ) |
| Amortizations:                  |       |                   |       |                  |       |   |   |   |   |
| Actuarial  Loss                 |       | 0.2                    |       | 0.1                   |       | 0.6 |   | 0.3 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Net  Periodic Pension Cost      |       | $                      | 0.3        |                  | $          | 0.3 |   | $ | 0.9 |   | $ | 0.9 |   |

 

For its internationalpension plans, the Company contributed $0.4 million in the third quarter of2004 for a total of $3.4 million for the nine months ended September 30,2004 and expects to contribute a total of $3.6 million in 2004.

 

The Company sponsorspostretirement health care plans that provide medical and life insurancecoverage to eligible salaried and hourly retired U.S. employees and theirdependents. No postretirement medical benefits are offered to salaried employeeswho began employment after December 31, 1993.

 

The other postretirementbenefits expense consisted of the following:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts  in Millions)**                 | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| Service  Cost                              |       | $                      | 0.3        |                  | $          | 0.2 |   | $ | 0.7 |   | $ | 0.4 |   |
| Interest  Cost                             |       | 1.2                    |       | 0.7                   |       | 2.7 |   | 1.6 |   |
| Amortizations:                             |       |                   |       |                  |       |   |   |   |   |
| Prior  Service Cost                        |       | —                 |       | —                |       | (0.1 | ) | (0.1 | ) |
| Actuarial  Loss                            |       | —                 |       | —                |       | 0.2 |   | 0.2 |   |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Net  Periodic Postretirement Benefits Cost |       | $                      | 1.5        |                  | $          | 0.9 |   | $ | 3.5 |   | $ | 2.1 |   |

 

In December 2003, President Bush signed into lawthe Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“theAct”). The Act expands Medicare primarily by adding a prescription drug benefitfor Medicare-eligible individuals beginning in 2006. Pursuant to guidanceprovided in FASB Staff Position SFAS No. 106-1, *“Accountingfor Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of**2003”*(“SFASNo. 106-1”), the Company chose to defer recognition of the Act, and,accordingly, postretirement benefit obligations and net periodic postretirementbenefit cost do not reflect any potential impact of the legislation. In May2004, the FASB issued Staff Position SFAS No. 106-2, *“Accountingand Disclosure Requirements Related to the Medicare Prescription DrugImprovement and Modernization Act of 2003”* (SFAS No. 106-2”), whichsupercedes SFAS No. 106-1. SFAS No. 106-2 provides additional authoritative guidance on theaccounting for the federal subsidy. TheCompany has not yet determined that the prescription drug benefits underits postretirement plan is actuariallyequivalent to the Medicare Part D benefit and thus the postretirement benefitcost does not reflect any amount associated with the subsidy.

 

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**Note 9 – RESTRUCTURING CHARGESAND IMPAIRMENT LOSSES**

 

The Company adopted aplan in the first quarter of 2004 to restructure its operations by closingfacilities, relocating equipment and severing employees in an effort to betterposition the Company to operate in the current business environment. Componentsof the restructuring charges for the nine months ended September 30, 2004are as follows:

 
| **(Amounts  in Millions)**                                             | ** ** | **Nine Months Ended  Sept. 30, 2004** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| Restructuring  Charges:                                                |       |                                  |       |
| Equipment  Removal Costs                                               |       | $                                     | 1.4        |   |
| Facility  Restoration and Carrying Costs                               |       | 0.7                                   |       |
| Severance  of Employees and Other Employee Termination-Related Charges |       | 4.2                                   |       |
|                                                                   |       |                                  |       |
| Total  Restructuring Charges                                           |       | $                                     | 6.3        |   |

 

The initial purchase price allocation of $7.2 millionrecorded at March 31, 2004 was reduced by $0.9 million in the secondquarter of 2004 primarily for facility restoration and carrying costs as abuilding was sold sooner than anticipated. Through September 30, 2004, theCompany has made payments for severance and other employee termination-relatedcharges in the amount of $1.1 million and for equipment removal and facilitiesrestoration in the amount of $0.7 million, both of which reduced the initialreserve detailed above. The Company anticipates the majority of cash paymentsto be made under the restructuring plan will  occurin the second and third quarters of 2005. The restructuring activitiesdescribed herein are expected to be completed by the end of 2005 and affectonly the paperboard packaging segment. As of September 30, 2004, theCompany had approximately $4.5 million accrued for restructuring, as follows:

 
| ** **                                                             | ** ** | **Balance at  January 1,** | ** ** | **Adjustments  (Statement of  Operations Impact)** | ** ** | **Cash**     | ** ** | **Purchase  Price** | ** ** | ** **     | ** ** | **Balance at  Sept. 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------------|------------|--------------|------------|---------------------|------------|----------------|------------|---------------------------|------------|
| **(Amounts  in Millions)**                                             | ** ** | **2004**                        | ** ** | **Expense**                                        | ** ** | **Reversal** | ** ** | **Payments**        | ** ** | **Allocation** | ** ** | **Reclassification**      | ** ** | **2004** | ** ** |
| Equipment  Removal Costs                                               |       | $                               | —     |                                               | $          | —       |       | $                   | —     |           | $          | (0.6                      | )          | $ | 1.4 |   | $ | — |   | $ | 0.8 |   |
| Facility  Restoration and Carrying Costs                               |       | —                          |       | —                                             |       | —       |       | (0.1                | )          | 0.7            |       | —                    |       | 0.6 |   |
|                                                                   |       |                            |       |                                               |       |         |       |                |       |           |       |                      |       |   |   |
| Severance  of Employees and Other Employee Termination-Related Charges |       | —                          |       | —                                             |       | —       |       | (1.1                | )          | 4.2            |       | —                    |       | 3.1 |   |
| Total                                                                  |       | $                               | —     |                                               | $          | —       |       | $                   | —     |           | $          | (1.8                      | )          | $ | 6.3 |   | $ | — |   | $ | 4.5 |   |

 

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**Note 10 – SUBSEQUENT EVENT**

 

On October 1, 2004, Graphic PackagingInternational, a wholly-owned subsidiary of the Company, entered into the FirstAmendment (the “First Amendment”) to the $1.6 billion Senior Secured CreditAgreement dated August 8, 2003 among Graphic Packaging International andthe several lenders from time to time parties thereto (the “Original CreditAgreement”). The First Amendment consolidates Graphic Packaging International’s$142.5 million Term Loan A and $1,113.8 million Term Loan B under the OriginalCredit Agreement into one $1,256.3 million Term Loan C, but does not change anyof the terms of  Graphic Packaging International’s $325.0 millionrevolving credit facility under the Original Credit Agreement. The FirstAmendment reduces the interest rate on Graphic Packaging International’s termloans by 25 basis points and provides a step-down provision that automaticallyreduces the interest rate if Graphic Packaging International achieves aleverage ratio (as defined in the Original Credit Agreement) below 4.75 to1.00. The new Term Loan C is payable in equal installments of $6.3 millionon December 31 and June 30 of each year through December 31,2009, with a final payment of $1,187.2 million due on August 8,2010.  Graphic Packaging International’s affirmative and negativecovenants, including but not limited to limitations on additional indebtedness,asset sales, capital expenditures, acquisitions and other types oftransactions, remain the same as under the Original Credit Agreement. Consistentwith the terms of the Original Credit Agreement, an uncured breach of suchcovenants or Graphic Packaging International’s representations and warranties,in addition to any failure to pay principal and interest when due, are eventsthat may cause all amounts under the Credit Agreement (as amended by the FirstAmendment) to become due and payable immediately. The guarantees andcollateral supporting the new Term Loan C remain the same as under the OriginalCredit Agreement.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

The Company is a leadingprovider of paperboard packaging solutions to multinational consumer productscompanies. The Company has vertically integrated operations enabling it tooffer customers paperboard, cartons and packaging machines, either as anintegrated solution or separately.

 

The Company’s objectiveis to expand its position as a leading provider of paperboard packaging solutions.To achieve this objective, the Company is implementing strategies to expandmarket share in its current markets and to identify and penetrate new markets;to capitalize on the Company’s and Graphic’s complementary customerrelationships, business competencies, and mills and converting assets; todevelop and market innovative products and applications; to continue to reducecosts by focusing on operational improvements and identified operatingsynergies from the Merger; and to use anticipated future free cash flows to reduce debt.

 

**The Merger**

** **

The Merger was accounted for as a purchase by theCompany. Under the purchase method of accounting, the assets and liabilities ofGraphic were recorded, as of the date of the closing of the Merger, at theirrespective fair values and added to those of the Company.

 

The Company is ahead of schedule in mergerintegration and in realizing the initial estimate of approximately $52 millionof annual synergies by the third year after the closing of the Merger,primarily due to integration of the Company’s paperboard production into itscarton converting system, more effective leveraging of the Company’s purchasingpower, disciplined reduction of excess overhead and rationalization of theCompany’s manufacturing capacity. Asof September 30, 2004, the Company achievedan annualized rate of$72million of synergies. As part of the Company’smanufacturing rationalization initiatives, the Company announced in January 2004its plans to close its Garden Grove, CA converting plant, and in May 2004announced plans to close its Bow, NH and Clinton, MS converting plants. Inaddition, the Company announced it is expanding certain of its existing sites,including Fort Smith, AR and Lumberton, NC, and as a result expects to make expenditures of approximately $20 million to $25 millionthrough 2005. By the end of 2006, the Company estimates that it will realize anadditional $19 million in annual synergies, improved cost structures andincreased productivity as a result of these manufacturing rationalizationinitiatives. The Company cannot make assurances as to the amount or timing offuture synergies, if any, that may be realized. Potential difficulties inrealizing such projected synergies include, among other things, the integrationof personnel, the combination of different corporate cultures and theintegration of facilities.

 

For additional discussion of the Merger and the impactof the Merger on the Company’s financial condition and results of operations,see Note 1, Note 2 and Note 9 in Notes to Condensed Consolidated FinancialStatements.

 

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**Segment Information**

 

The Company reports itsresults in two business segments: paperboard packaging andcontainerboard/other. Business segment information is as follows:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts  in Millions)**      | ** ** | **Sept. 30,  2004**    | ** ** | **Sept. 30,  2003**   | ** ** | **Sept. 30,  2004** | ** ** | **Sept. 30,  2003** | ** ** |
| NET  SALES:                     |       |                   |       |                  |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 590.7      |                  | $          | 459.0 |   | $ | 1,731.9 |   | $ | 1,054.1 |   |
| Containerboard/Other            |       | 26.5                   |       | 19.1                  |       | 67.5 |   | 60.6 |   |
|                            |       | $                      | 617.2      |                  | $          | 478.1 |   | $ | 1,799.4 |   | $ | 1,114.7 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| INCOME  (LOSS) FROM OPERATIONS: |       |                   |       |                  |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 67.0       |                  | $          | 48.5 |   | $ | 185.3 |   | $ | 130.5 |   |
| Containerboard/Other            |       | (3.7                   | )          | (5.9                  | )          | (19.2 | ) | (19.0 | ) |
| Corporate                       |       | (16.3                  | )          | (9.5                  | )          | (55.7 | ) | (24.2 | ) |
|                            |       | $                      | 47.0       |                  | $          | 33.1 |   | $ | 110.4 |   | $ | 87.3 |   |

 

**Significant Factors That ImpactThe Company’s Business**

 

The Company’s net sales, income from operations, cash flows fromoperations and financial condition are influenced by a variety of factors, manyof which are beyond its control.

 

*Sales.* TheCompany sells its packaging products primarily to major consumer productcompanies in traditionally non-cyclical industries, such as beverage, food andother consumer products, and has long-term relationships with major companies,including Altria Group, Anheuser-Busch, General Mills, Miller Brewing Company,Coors Brewing Company, and numerous Coca-Cola and Pepsi bottling companies. TheCompany’s products are used primarily in the following end-use markets:

 

•beverage, including beer, soft drinks, water and juices;

 

•food, including cereal, desserts, frozen and microwavable foods, and pet foods;

 

•prepared foods, including snacks, quick serve foods in restaurants and foodservice products;

 

•household products, including dishwasher and laundry detergent, sporting goods,health care and beauty aids, and tissues and papers; and

 

•tobacco, including flip top boxes and long cartons.

 

The Company historicallyexperienced stable pricing for its integrated beverage multiple packagingproducts and moderately cyclical pricing for its other product offerings.Because some products can be packaged in different types of materials, theCompany’s sales are affected by competition from other manufacturers’ coatedunbleached kraft paperboard, or CUK board, and other substrates — solidbleached sulfate, or SBS, recycled clay coated news, or CCN, and,internationally, white lined chipboard, or WLC — as well as by general marketconditions. Graphic’s sales historically were driven primarily by consumerbuying habits in the markets its customers serve. New product introductions andpromotional activity by Graphic’s customers and Graphic’s introduction of newpackaging products also impacted its sales. The Company’s containerboardbusiness is subject to conditions in the cyclical worldwide commoditypaperboard markets which have a significant impact on containerboard sales.

 

The Company works to maintain market share throughefficiency, product innovation and strategic sourcing to its customers;however, pricing and other competitive pressures may occasionally result in theloss of a customer relationship.

 

Packaging machinery placements during the first nine months of 2004increased approximately 108% compared to the first nine months of 2003partially due to the timing of shipments. The Company expects

 

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packaging machinery placements for 2004 to be approximately 60% higherwhen compared to 2003. The Company has been and will continue to be selectivein future packaging machinery placements to ensure appropriate returns on theCompany’s investments.

 

*Cost of Sales*. The Company’s costof sales consists primarily of energy, pine pulpwood, hardwood, chemicals,recycled fibers, purchased paperboard, paper, aluminum foil, ink, plastic filmsand resins, depreciation expense and labor. Energy, including natural gas, fueloil and electricity, represents a significant portion of the Company’smanufacturing costs. The Company continues to benegatively impacted by inflationary pressures on energy, fiber and chemicals. Duringthe first nine months of 2004, the Company experienced a significant increasein its energy costs compared to the prior year period, principally at itsmills, of approximately $9 million on a pro forma basisrepresenting an approximate 11% increase. The Company hasentered into contracts designed to mitigate the impact of future cost increasesfor a portion of its natural gas requirement, primarily at its U.S. millsthrough December 2005. The Company will continue to evaluate its positionregarding natural gas purchase commitments. The Company believes that higherenergy costs will continue to negatively impact its results for 2004 and beyond. During the first ninemonths of 2004, the Company also experienced a significant increase in itsfiber costs compared to the prior year period, principally at its mills, ofapproximately $7 million on a pro forma basis. Sincenegotiated contracts and the market largely determine the pricing for itsproducts, the Company is limited in its ability to pass through to itscustomers any energy or other cost increases that the Company may incur in thefuture.

 

*Commitment to Cost Reduction*.In light of increasing margin pressure throughout the paperboard packagingindustry, the Company has programs in place that are designed to reduce costs,improve productivity and increase profitability. The Company is continuing toimplement a global continuous improvement initiative that uses statisticalprocess control to help design and manage many types of activities, includingproduction and maintenance. This includes a Six Sigma process focused onreducing variable and fixed manufacturing and administrative costs. During thefirst nine months of 2004, the Company achieved approximately $19 million inannualized cost savings through its continuous improvement initiative.

 

The Company is also implementing an initiative designed to enhance thecompetitiveness of its beverage multiple packaging converting operations. Thisinitiative is expected to add new manufacturing technology, add press capacityand consolidate certain beverage carton converting operations. The Companyexpects to make expenditures of approximately $70 million to $75 million through2005 and to realize cost savings relative to 2002 from this initiative ofapproximately $39 million annually by 2005. The Company has spent approximately$61 million of the projected capital investment through September 30, 2004.

 

The Company continues to evaluate its current operations and assetswith a view to rationalizing its operations and improving profitability. TheCompany is continuing to focus on reducing working capital and increasingliquidity.

 

**Critical Accounting Policies**

 

The preparation of Condensed Consolidated Financial Statements inconformity with generally accepted accounting principles in the United Statesrequires the Company to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. These estimates andassumptions are based on historical experience and various other factors thatare believed to be reasonable under the circumstances. Actual results coulddiffer from these estimates under different assumptions or conditions.

 

The Company believes thefollowing accounting policies are the most critical because these policiesrequire significant judgment or involve complex estimations that are importantto the portrayal of the Company’s financial conditions and operating results:

 

•Revenue Recognition — The Company receives revenue from the sales ofmanufactured products, the leasing of packaging machinery, and the servicing ofpackaging machinery. The Company recognizes sales revenue when the followingcriteria are met: persuasive evidence of an agreement exists, delivery hasoccurred or services have been rendered, the Company’s price to the buyer isfixed and determinable, and collectibility is reasonably assured. Delivery isnot considered to have occurred until the customer takes title and assumes therisks and rewards of ownership. The timing of revenue recognition is largelydependent on shipping terms. Revenue is recorded at the time of shipment forterms designated as free on board (“f.o.b.”) shipping point. For sales transactionsdesignated f.o.b. destination, revenue is recorded when the product isdelivered to the customer’s delivery site. The Company recognizes revenues onits annual and multi-year carton supply contracts as the shipment occurs inaccordance with the shipping terms discussed above.

 

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Payments from packaging machinery use agreements are recognized on astraight-line basis over the term of the agreements. Service revenue onpackaging machinery is recorded at the time of service.

 

Discounts and allowancesare comprised of trade allowances, cash discounts, and sales returns. Cashdiscounts and sales returns are estimated using historical experience. Tradeallowances are based on the estimated obligations and historical experience.Rebates are determined based on the quantity purchased and are recorded at thetime of sale.

 

•Collectibility of Accounts Receivable — The Company estimates losses foruncollectible accounts based on the aging of accounts receivable and theevaluation of the likelihood of success in collecting the receivables.Typically, allowances are needed for disputed accounts, customers that arehaving financial problems or bankruptcies.

 

•Inventory Costing — The Company’s inventories are stated at the lower of costor market with cost determined principally by the first-in, first-out (‘‘FIFO’’)basis (see Note 4 in Notes to the Condensed Consolidated Financial Statements).Average cost basis is used to determine the cost of supplies inventories. Rawmaterials and consumables used in the production process such as wood chips andchemicals are valued at purchase cost on a FIFO basis upon receipt. Work inprogress and finished goods inventories are valued at the cost of raw materialconsumed plus direct manufacturing costs (such as labor, utilities andsupplies) as incurred and a proportion of manufacturing overhead. Inventoriesare stated net of an allowance for slow-moving and obsolete inventory, which isbased on estimates. If the condition of the inventories or the state of theCompany’s business were to deteriorate, additional allowances may be requiredwhich would reduce income.

 

•Self-Insurance Reserves — The Company is self-insured for certain lossesrelating to workers’ compensation claims and employee medical and dentalbenefits. Provisions for expected losses are recorded based on the Company’sestimates, on an undiscounted basis, of the aggregate liabilities for knownclaims and estimated claims incurred but not reported. The Company has purchasedstop-loss coverage or insurance with deductibles in order to limit its exposureto significant claims. The Company also has an extensive safety program inplace to minimize its exposure to workers’ compensation claims. Self-insuredlosses are accrued based upon estimates of the aggregate uninsured claimsincurred using certain actuarial assumptions followed in the insurance industryand historical experience.

 

•Retirement-Related Benefits — The Company sponsors defined benefit plans (the “Plans”)for eligible employees and retirees. The effect of the Plans on the CondensedConsolidated Financial Statements is subject to many assumptions. The Companybelieves that the most critical assumptions are (1) the discount rate, (2) therate of increase in future compensation levels and (3) the expected long-termrate of return on plan assets. The projected unit credit cost method is usedfor valuation purposes. See Note 8 in Notes to Condensed Consolidated FinancialStatements.

 

• Goodwill Valuation — The Companyestimates the value of its goodwill using the discounted cash flow method ofvaluation on an annual basis. The Company’s cash flows are generated by itsoperations and are used to fund working capital needs, debt service and capitalspending. The Company discounts these cash flows using its weighted averagecost of capital. Changes in borrowing rates, which are impacted by market ratefluctuations, would impact discounted cash flow calculations. Other factors,such as significant operating losses or acquisitions of new operations, wouldalso impact discounted cash flow calculations.

 

• Recovery of Long-Lived Assets— The Company reviews long-lived assets (including property, plant andequipment and intangible assets) for impairment whenever events or changes inbusiness circumstances, such as the closure of a plant, indicate that thecarrying value of an asset may not be fully recoverable by undiscounted cashflows. Measurement of the impairment loss, if any, is based on the fair valueof the asset, which is generally determined by the discounting of futureestimated cash flows, or in the case of real estate, determining market value.The Company evaluates the recovery of its long-lived assets by analyzingoperating results and considering significant events or changes in the businessenvironment that may have triggered impairment.

 

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•Deferred Tax Asset Valuation Allowance — The Company estimates therealizability of deferred tax assets, by estimating the projected reversal ofoffsetting deferred tax liability amounts and future taxable income. Asdiscussed above in “Goodwill Valuation,” significant operating losses oracquisitions of operations would impact projected taxable income used toestimate the reversal of deferred tax balances.

 

• Legal Accruals — The Companyestimates the amount of potential exposure it may have with respect tolitigation, claims and assessments, based upon analyses prepared by in-houseand outside counsel, and records reserves when management believes it isprobable that a loss will occur and the amount of loss is reasonably estimable.While there can be no assurance as to the ultimate outcome of any currentlawsuits, claims or investigations relating to such uncertainties, the Companydoes not believe that such uncertainties will have a material adverse impact onits results of operations, cash flows or financial condition. However, futureuncertainties may have a material adverse impact on results of operations, cashflows or financial condition.

 

•Environmental Expenditures and Remediation Liabilities — Environmentalexpenditures that relate to current operations are expensed or capitalized asappropriate. Expenditures that relate to an existing condition caused by pastoperations, and which do not contribute to current or future revenuegeneration, are expensed. Liabilities are recorded when remedial efforts areprobable and the costs can be reasonably estimated. Typically, environmentalexpenditures relate to the maintenance and upgrading of equipment as well asthe installation of new equipment that is necessary in order to comply withenvironmental laws.

 

• BusinessCombinations—The Company, in assessing the fair market value of assets acquiredand liabilities assumed in the Merger, has used certain estimates andassumptions that were based, in part, upon independent third-party appraisalsand valuations.

 

**RESULTS OFOPERATIONS**

 

The Merger was accounted for as a purchase by theCompany. Thus, the Company’s results of operations for the three and ninemonths ended September 30, 2003 include the results of Graphic beginning August 9,2003 through September 30, 2003. The Company’s results of operations forthe three months and nine months ended September 30, 2004 include the resultsof Graphic. Accordingly, amounts for the three months and nine months ended September 30,2004 are not comparable to those for the three months and nine months ended September 30,2003. See Note 2 in Notes to Condensed Consolidated Financial Statements.

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**                         | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|
| **(Amounts  in Millions)**             | ** ** | **Sept. 30,  2004**    | ** ** | **Increase  (Decrease)  From  Prior  Period** | ** ** | **Sept. 30,  2003** | ** ** | **Sept. 30,  2004** | ** ** | **Increase  (Decrease)  From  Prior  Period** | ** ** | **Sept. 30,  2003** | ** ** |
| Net  Sales                             |       | $                      | 617.2      |                                          | 29.1       | % | $ | 478.1 |   | $ | 1,799.4 |   | 61.4 | % | $ | 1,114.7 |   |
| Cost  of Sales                         |       | 513.0                  |       | 29.3                                          |       | 396.7 |   | 1,508.1 |   | 65.2 |   | 912.9 |   |
| Gross  Profit                          |       | 104.2                  |       | 28.0                                          |       | 81.4 |   | 291.3 |   | 44.4 |   | 201.8 |   |
| Selling,  General and Administrative   |       | 48.6                   |       | 8.7                                           |       | 44.7 |   | 146.0 |   | 38.5 |   | 105.4 |   |
| Research,  Development and Engineering |       | 2.1                    |       | —                                        |       | 2.1 |   | 6.9 |   | 27.8 |   | 5.4 |   |
| Other  Expense, Net                    |       | 6.5                    |       | 333.3                                         |       | 1.5 |   | 28.0 |   | 656.8 |   | 3.7 |   |
| Income  from Operations                |       | $                      | 47.0       |                                          | 42.0       | % | $ | 33.1 |   | $ | 110.4 |   | 26.5 | % | $ | 87.3 |   |
|                                        |            |                        |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**THIRD QUARTER 2004 COMPARED WITH THIRDQUARTER 2003**

 

**Net Sales**

 

The Company’s Net Salesin the third quarter of 2004 increased by $139.1 million, or 29.1%, to $617.2million from $478.1 million in the third quarter of 2003, due primarily to theinclusion of an additional 39 days in 2004 of Graphic’s paperboard packaging businesswhich resulted in increased Net Sales of $138.6 million.

 

27

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Foreign currency exchangerates positively impacted Net Sales by $8.9 million. These increases weresomewhat offset by lower pricing in the Company’s North American marketsprimarily as a result of increased market competitiveness.

 

**Gross Profit**

** **

The Company’s Gross Profit in the third quarter of 2004 increased by $22.8million, or 28.0%, to $104.2 million from $81.4 million in the third quarter of2003. The Company’s gross profit margin decreased to 16.9% in the third quarterof 2004 from 17.0% in the third quarter of 2003. The decrease in gross profit marginwas due primarily to lower pricing in North American markets as a result ofincreased market competitiveness, lower margin product mix in North Americanmarkets including the addition of Graphic’s paperboard packaging business, andinflationary pressures primarily on energy, chemicals and fiber. In addition, unfavorablemanufacturing variances contributed to the decline in gross profit margin asthe market movement to adopt the Fridge Vendor® beverage carton is occurringfaster than anticipated. The Company expects that its production costs will belower once it completes the beverage multiple packaging converting operationsinitiative. The decrease in gross profit margin was somewhat offset byworldwide cost reductions resulting from the Company’s cost reductioninitiatives.

 

**Selling, Generaland Administrative**

** **

Selling, General andAdministrative expenses increased by $3.9 million, or 8.7%, to $48.6 million inthe third quarter of 2004 from $44.7 million in the third quarter of 2003, dueprimarily to higher incentive compensation expenses, inflation and higherconsulting fees primarily associated with Sarbanes-Oxley compliance efforts. Asa percentage of Net Sales, Selling, General and Administrative expenses were 7.9%in the third quarter of 2004 versus 9.3% in the third quarter of 2003.

 

**Research,Development and Engineering**

** **

Research, Development and Engineering expenses remained constant at$2.1 million in the third quarter of 2004 and 2003.

 

**Other Expense, Net**

** **

Other Expense, Net was $6.5 million in the third quarter of 2004 ascompared to $1.5 million in the third quarter of 2003. This change wasprincipally due to the inclusion of anadditional 39 days in 2004 of Graphic’s paperboard packaging business whichresulted in higher amortization expense of $2.7 million due tothe effects of purchase accounting in connection with the Merger and non-cashcharges of approximately $2.4 million recorded in the third quarter of 2004associated with the retirement of certain equipment.

 

**Income fromOperations**

** **

Primarily as a result of the factors discussed above, the Company’sIncome from Operations in the third quarter of 2004 increased by $13.9 million, or 42.0%, to $47.0 millionfrom $33.1 million in the third quarter of 2003, while its operating margin increasedto 7.6% in the third quarter of 2004from 6.9% in the third quarter of 2003.

 

**Fluctuations inU.S. Currency Exchange Rates**

** **

The weakening of the U.S.dollar currency exchange rates as compared to certain currencies including theeuro, other European currencies and the Japanese yen had a $8.9 million impacton Net Sales, while there was a modest impact on Gross Profit, Income fromOperations, and operating expenses during the third quarter of 2004.

 

28

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**FIRST NINE MONTHS 2004 COMPAREDWITH FIRST NINE MONTHS 2003**

 

**Net Sales**

 

The Company’s Net Salesin the first nine months of 2004 increased by $684.7 million, or 61.4%, to $1,799.4million from $1,114.7 million in the first nine months of 2003, due primarily tothe inclusion of an additional 221 days in 2004 of Graphic’s paperboardpackaging business which resulted in increased Net Sales of $690.2 million.Foreign currency exchange rates positively impacted Net Sales by $31.8 million.These increases were somewhat offset by lower pricing in the Company’s NorthAmerican markets primarily as a result of increased market competitiveness.

 

**Gross Profit**

** **

The Company’s Gross Profit in the first nine months of 2004 increasedby $89.5 million, or 44.4%, to $291.3 million from $201.8 million in the firstnine months of 2003. The Company’s gross profit margin decreased to 16.2% inthe first nine months of 2004 from 18.1% in the first nine months of 2003. Thedecrease in gross profit margin was due primarily to lower pricing in NorthAmerican markets as a result of increased market competitiveness, lower marginproduct mix in North American markets including the addition of Graphic’spaperboard packaging business, and inflationary pressures primarily on energy, chemicalsand fiber. In addition, unfavorable manufacturing variances contributed to thedecline in gross profit margin as the market movement to adopt the FridgeVendor® beverage carton is occurring faster than anticipated. The Companyexpects that its production costs will be lower once it completes the beveragemultiple packaging converting operations initiative. The decrease in grossprofit margin was somewhat offset by worldwide cost reductions resulting fromthe Company’s cost reduction initiatives.

 

**Selling, Generaland Administrative**

** **

Selling, General andAdministrative expenses increased by $40.6 million, or 38.5%, to $146.0 millionin the first nine months of 2004 from $105.4 million in the first nine monthsof 2003, due primarily to the inclusion of an additional 221 days in 2004 ofGraphic’s Selling, General and Administrative expenses of $24.0 million, higherincentive compensation expenses, inflation and higher consulting fees primarilyassociated with Sarbanes-Oxley compliance efforts. As a percentage of NetSales, Selling, General and Administrative expenses were 8.1% in the first ninemonths of 2004 versus 9.5% in the first nine months of 2003.

 

**Research,Development and Engineering**

** **

Research, Development and Engineering expenses increased by $1.5million, or 27.8%, to $6.9 million in the first nine months of 2004 from $5.4million in the first nine months of 2003, due primarily to the inclusion of anadditional 221 days in 2004 of Graphic’s Research, Development and Engineeringexpenses of $2.5 million, somewhat offset by lower investment related to theCompany’s products and packaging machinery.

 

**Other Expense, Net**

** **

Other Expense, Net was $28.0 million in the first nine months of 2004as compared to $3.7 million in the first nine months of 2003. This change wasprincipally due to the inclusion of anadditional 221 days in 2004 of Graphic’s paperboard packaging business whichresulted in higher amortization expense of $17.7 million dueto the effects of purchase accounting in connection with the Merger andnon-cash charges of approximately $7.3 million recorded in the first ninemonths of 2004 associated with the retirement of certain equipment, somewhatoffset by the charge of approximately $1.9 million recorded in the first ninemonths of 2003 to write off deferred costs associated with the withdrawal ofthe proposed initial public offering of the Company’s common stock.

 

**Income fromOperations**

** **

Primarily as a result of the factors discussed above, the Company’sIncome from Operations in the first nine months of 2004 increased by $23.1 million,or 26.5%, to $110.4 million from $87.3 millionin the first nine months of 2003, while its operating margin decreased to 6.1%in the first nine months of 2004 from 7.8% in the first nine months of 2003.

 

29

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**Fluctuations inU.S. Currency Exchange Rates**

** **

The weakening of the U.S.dollar currency exchange rates as compared to certain currencies including the euro,other European currencies and the Japanese yen had a $31.8 million impact onNet Sales, while there was a modest impact on Gross Profit, Income fromOperations, and operating expenses during the first nine months of 2004.

 

**LOSS ON EARLY EXTINGUISHMENT OFDEBT, INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NETEARNINGS OF AFFILIATES**

 

**Loss on Early Extinguishment ofDebt**

 

In connection with the Merger, the Company enteredinto the Related Financing Transactions (as defined herein). In 2003, theCompany recorded a non-cash charge to earnings of approximately $16.7 million,related to the write-off of remaining debt issuance costs on its prior seniorsecured credit facilities and the Prior RIC Notes (as defined herein), and alsorecorded a charge of approximately $28.6 million, related to the call premiumpaid upon redemption of the Prior RIC Notes.

 

**Interest Income**

 

Interest Income remained constant at $0.3 million in the first ninemonths of 2004 and 2003.

 

**Interest Expense**

 

Interest Expenseincreased by $5.1 million to $112.6 million in the first nine months of 2004from $107.5 million in the first nine months of 2003, due primarily to higherdebt balances following the Merger. Interest Expense was also affected byhigher average interest rates due to the fact that the Company’s minor share ofunhedged floating rate debt was tied to increasing market interest rates. Theincrease was somewhat offset by lower interest rates on the new Senior andSenior Subordinated notes.

 

**Income Tax Expense**

 

During the first ninemonths of 2004, the Company recognized an Income Tax Expense of $6.0 million onLoss before Income Taxes and Equity in Net Earnings of Affiliates of $1.2million. During the first nine months of 2003, the Company recognized an IncomeTax Expense of $4.8 million on Loss before Income Taxes and Equity in NetEarnings of Affiliates of $65.2 million. Income Tax Expense for the first ninemonths of 2004 and 2003 was due primarily to income earned in certain foreigncountries where no valuation allowance is recorded. In addition, the Companyhas determined that certain tax reserves initially established via purchaseaccounting in 2003 are no longer needed, resulting in a reduction in the taxreserve and Goodwill of approximately $0.4 million.

 

**Equity in Net Earnings of Affiliates**

 

Equity in Net Earnings ofAffiliates was $1.2 million in the first nine months of 2004 and $1.1 millionin the first nine months of 2003 and related to the Company’s non-consolidatedjoint venture, Rengo Riverwood Packaging, Ltd.

 

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**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

** **

The Company broadlydefines liquidity as its ability to generate sufficient funds from bothinternal and external sources to meet its obligations and commitments. In addition,liquidity includes the ability to obtain appropriate debt and equity financingand to convert into cash those assets that are no longer required to meetexisting strategic and financial objectives. Therefore, liquidity cannot beconsidered separately from capital resources that consist of current orpotentially available funds for use in achieving long-range business objectivesand meeting debt service commitments.

 

**Cash Flows**

** **

Cash and Equivalents increased by approximately $8.4million in the first nine months of 2004. Cash provided by operating activitiesin the first nine months of 2004 totaled $141.5 million, compared to cashprovided by operating activities of $61.7 million in the first nine months of2003. This improvement was principally due to an increase in operating cashflow before changes in operating assets and liabilities, somewhat offset byunfavorable changes in receivables and accounts payable and other accruedliabilities, as a result of the additional working capital needs following theMerger and timing differences. Cash used in investing activities in the firstnine months of 2004 totaled $103.0 million, compared to $158.6 million in thefirst nine months of 2003. This change was principally due to approximately$91.8 million in expenses and fees in the first nine months of 2003 related tothe Merger and the net proceeds of $11.8 million generated in the first ninemonths of 2004 from the sale of assets, principally the Company’s Garden Grove,California plant ($9.2 million) and the Ft. Atkinson, Wisconsin plant ($2.2million), somewhat offset by an increase in purchases of property, plant andequipment of approximately $27.5 million (see “—Capital Expenditures”) in thefirst nine months of 2004. Cash used in financing activities in the first ninemonths of 2004 totaled $30.3 million, compared to cash provided of $97.7million in the first nine months of 2003. This change was principally due tonet payments under the Company’s revolving credit facilities in the first ninemonths of 2004 as well as the net effect resulting from the Related FinancingTransactions in the first nine months of 2003. Depreciation and amortizationduring the first nine months of 2004 totaled approximately $173.0 million andis expected to be approximately $230 million in 2004.

 

**Liquidity andCapital Resources**

** **

The Company’s liquidityneeds arise primarily from debt service on its substantial indebtedness andfrom the funding of its capital expenditures, ongoing operating costs andworking capital.

 

The following financingtransactions (the “Related Financing Transactions”) were entered into inconnection with the Merger:

 

•The entering into and borrowing under the Senior Secured Credit Agreement,dated as of August 8, 2003, among Graphic Packaging International, Inc.and the several lender parties thereto (the “Senior Secured Credit Agreement”),which provides for aggregate maximum borrowings of $1.6 billion under (i) aterm loan facility (the “Term Loan Facility”) providing for term loans in anaggregate principal amount of $1.275 billion in two tranches, consisting ofTranche A term loans and Tranche B term loans, and (ii) a revolving creditfacility (the “Revolving Credit Facility”) providing for up to $325 million inrevolving loans (including standby and commercial letters of credit)outstanding at anytime, to Graphic Packaging International.

 

• The issuance and sale of $425million in aggregate principal amount of 8.5% senior notes due 2011 (the “SeniorNotes”) and $425 million in aggregate principal amount of 9.5% seniorsubordinated notes due 2013 (the “Senior Subordinated Notes”).

 

•The repayment of all outstanding amounts under each of RIC’s and Graphic’sprior senior secured credit facilities and the termination of all commitmentsunder those facilities.

 

•The consummation of tender offers and consent solicitations for all of RIC’s 105/8% senior notes due 2007 (the “Senior Notes due 2007”) and 10 7/8% seniorsubordinated notes due 2008 (the “Senior Subordinated Notes due 2008” and,together with the Senior Notes due 2007, the “Prior RIC Notes”), which closedconcurrently with the Merger. The Company redeemed all Prior RIC Notes thatwere not tendered pursuant to the tender offers.

 

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•The consummation of an anticipatory change of control tender offer and consentsolicitation for all of Graphic’s 8 5/8% senior subordinated notes due 2012(the “Prior Graphic Notes”) made in anticipation of the change of control offerrequired by the indenture governing the Prior Graphic Notes. Out of $300.0million in aggregate principal amount of Prior Graphic Notes outstanding,approximately $299.1 million in aggregate principal amount of Prior GraphicNotes were tendered in the anticipatory change of control tender offer. On September 15,2003, the Company completed the change of control offer required pursuant tothe indenture governing the Prior Graphic Notes. As of September 30, 2004and December 31, 2003, $0.8 million in principal amount of the PriorGraphic Notes was outstanding.

 

As of September 30,2004, the Company had outstanding $2.1 billion of long-term debt, consistingprimarily of $850 million aggregate principal amount of Senior Notes and SeniorSubordinated Notes, $1,256 million of term loans under the Term Loan Facilityand other debt issues and facilities.

 

On October 1, 2004, Graphic PackagingInternational, a wholly-owned subsidiary of the Company, entered into the FirstAmendment (the “First Amendment”) to the $1.6 billion Senior Secured CreditAgreement  dated August 8, 2003among Graphic Packaging International and the several lenders from time to timeparties thereto (the “Original Credit Agreement”). The First Amendmentconsolidates Graphic Packaging International’s $142.5 million Term Loan A and$1,113.8 million Term Loan B under the Original Credit Agreement into one$1,256.3 million Term Loan C, but does not change any of the terms of Graphic Packaging International’s $325.0 million revolving credit facilityunder the Original Credit Agreement. The First Amendment reduces theinterest rate on Graphic Packaging International’s term loans by 25 basispoints and provides a step-down provision that automatically reduces theinterest rate if Graphic Packaging International achieves a leverage ratio (as definedin the Original Credit Agreement) below 4.75 to 1.00. The new Term Loan Cis payable in equal installments of $6.3 million on December 31 and June 30of each year through December 31, 2009, with a final payment of $1,187.2million due on August 8, 2010.  Graphic Packaging International’saffirmative and negative covenants, including but not limited to limitations onadditional indebtedness, asset sales, capital expenditures, acquisitions andother types of transactions, remain the same as under the Original CreditAgreement. Consistent with the terms of the Original Credit Agreement, anuncured breach of such covenants or Graphic Packaging International’srepresentations and warranties, in addition to any failure to pay principal andinterest when due, are events that may cause all amounts under the CreditAgreement (as amended by the First Amendment) to become due and payableimmediately. The guarantees and collateral supporting the new Term Loan Cremain the same as under the Original Credit Agreement.

 

The loans under theSenior Secured Credit Agreement bear interest at fluctuating rates based uponthe interest rate option elected by the Company. The loans under the Term LoanFacility bore interest as of September 30, 2004 at an average rate per annumof 4.4%. The Senior Notes and the Senior Subordinated Notes bear interest atrates of 8.5% and 9.5%, respectively. The loans under the Revolving CreditFacility were paid off during the third quarter.

 

Interest expense in 2004is expected to be approximately $150 million, including approximately $9million of non-cash amortization of deferred debt issuance costs. During thefirst nine months of 2004, cash paid for interest was approximately $114million.

 

At September 30, 2004, the Company and its U.S. and internationalsubsidiaries had the following commitments, amounts outstanding and amountsavailable under revolving credit facilities:

 
| **(Amounts  in Millions)** | ** ** | **Total Amount of  Commitments** | ** ** | **Total Amount  Outstanding** | ** ** | **Total Amount  Available (A)** | ** ** |
|----------------------------|------------|----------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Revolving  Credit Facility |       | $                                | 325.0      |                          | $          | —                          |       | $ | 314.1 |   |
| International  Facilities  |       | 19.2                             |       | 12.7                          |       | 6.5                             |       |
|                       |       | $                                | 344.2      |                          | $          | 12.7                            |       | $ | 320.6 |   |

 

**Note:**

 

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(A)      In accordance with its debtagreements, the Company’s availability under its Revolving Credit Facility hasbeen reduced by the amount of standby letters of credit issued of approximately$10.9 million as of September 30, 2004. These letters of credit are usedas security against its self-insurance obligations, workers’ compensationobligations and an outstanding note payable. These letters of credit expire atvarious dates through 2005 unless extended.

 

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Principal and interest payments under the Term Loan Facility and theRevolving Credit Facility, together with principal and interest payments on theSenior Notes and the Senior Subordinated Notes, represent significant liquidityrequirements for the Company. Based upon current levels of operations,anticipated cost-savings and expectations as to future growth, the Company believesthat cash generated from operations, together with amounts available under itsRevolving Credit Facility and other available financing sources, will beadequate to permit the Company to meet its debt service obligations, capitalexpenditure program requirements, ongoing operating costs and working capitalneeds, although no assurance can be given in this regard. The Company’s futurefinancial and operating performance, ability to service or refinance its debtand ability to comply with the covenants and restrictions contained in its debtagreements (see “—Covenant Restrictions”), will be subject to future economicconditions and to financial, business and other factors, many of which arebeyond the Company’s control and will be substantially dependent on the sellingprices and demand for the Company’s products, raw material and energy costs,and the Company’s ability to successfully implement its overall business andprofitability strategies.

 

The Company expects that its working capital and business needs willrequire it to continue to have access to the Revolving Credit Facility or asimilar revolving credit facility after the maturity date in 2009, and that theCompany accordingly will have to extend, renew, replace or otherwise refinancesuch facility at or prior to such date. No assurance can be given that it willbe able to do so. The Company has in the past refinanced and in the future mayseek to refinance its debt prior to the respective maturities of such debt.

 

The Company uses interestrate swaps to manage interest rate risks on future income caused by interestrate changes on its variable rate Term Loan Facility. The differential to bepaid or received under these agreements is recognized as an adjustment tointerest expense related to the debt. At September 30, 2004 the Companyhad interest rate swap agreements with a notional amount of $770 million, whichexpire on various dates from 2005 to 2007 under which the Company will payfixed rates of 1.89% to 3.27% and receive three-month LIBOR.

 

Effective as of December 31, 2003, the Company had approximately$1.3 billion of net operating loss carryforwards (“NOLs”). These NOLs generallymay be used by the Company to offset taxable income earned in subsequenttaxable years. However, the Company’s ability to use these NOLs to offset itsfuture taxable income may be subject to significant limitation as a result ofcertain shifts in ownership due to direct or indirect transfers of the Company’scommon stock by one or more 5-percent stockholders, or issuances or redemptionsof the Company’s common stock, which, when taken together with previous changesin ownership of the Company’s common stock, constitute an ownership changeunder the Internal Revenue Code. Imposition of any such limitation on the useof NOLs could have an adverse effect on the Company’s future after tax freecash flow.

 

**Covenant Restrictions**

 

The Senior Secured CreditAgreement, which governs the Term Loan Facility and the Revolving CreditFacility, imposes restrictions on the Company’s ability to make capitalexpenditures and both the Senior Secured Credit Agreement and the indenturesgoverning the Senior Notes and Senior Subordinated Notes (the “Notes”) limitthe Company’s ability to incur additional indebtedness. Such restrictions, togetherwith the highly leveraged nature of the Company, could limit the Company’sability to respond to market conditions, meet its capital spending program,provide for unanticipated capital investments or take advantage of businessopportunities. The covenants contained in the Senior Secured Credit Agreement,among other things, restrict the ability of the Company to dispose of assets,incur additional indebtedness, incur guarantee obligations, prepay otherindebtedness, make dividend and other restricted payments, create liens, makeequity or debt investments, make acquisitions, modify terms of indentures underwhich the Notes are issued, engage in mergers or consolidations, change thebusiness conducted by the Company and its subsidiaries, make capital expendituresand engage in certain transactions with affiliates.

 

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The financial covenantsin the Senior Secured Credit Agreement specify, among other things, thefollowing requirements for each four quarter period ending during the followingtest periods:

 
| **Test Period**                                 | ** ** | **Consolidated  Debt to  Credit Agreement EBITDA  Leverage Ratio(A)** | ** ** | **Credit  Agreement  EBITDA to Consolidated  Interest Expense Ratio(A)** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| October 1, 2003 - December 30, 2004   |       | 6.40 to 1.00                                                          |       | 2.00 to 1.00                                                             |       |
| December 31, 2004 - December 30, 2005 |       | 6.15 to 1.00                                                          |       | 2.25 to 1.00                                                             |       |
| December 31, 2005 - December 30, 2006 |       | 5.75 to 1.00                                                          |       | 2.35 to 1.00                                                             |       |
| December 31, 2006 - December 30, 2007 |       | 5.25 to 1.00                                                          |       | 2.50 to 1.00                                                             |       |
| December 31, 2007 - December 30, 2008 |       | 4.75 to 1.00                                                          |       | 2.75 to 1.00                                                             |       |
| December 31, 2008 - June 30, 2010     |       | 4.50 to 1.00                                                          |       | 2.90 to 1.00                                                             |       |

 

Note:

 

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(A) See “—Credit Agreement EBITDA” below.

 

At September 30,2004, the Company was in compliance with the financial covenants in the SeniorSecured Credit Agreement. The Company’s ability to comply in future periodswith the financial covenants in the Senior Secured Credit Agreement will dependon its ongoing financial and operating performance, which in turn will besubject to economic conditions and to financial, business and other factors,many of which are beyond the Company’s control and will be substantiallydependent on the selling prices for the Company’s products, raw material andenergy costs, and the Company’s ability to successfully implement its overallbusiness and profitability strategies. If a violation of any of the covenantsoccurred, the Company would attempt to get a waiver or an amendment from itslenders, although no assurance can be given that the Company would besuccessful in this regard. The Senior Secured Credit Agreement and theindentures governing the Senior Subordinated Notes and the Senior Notes havecovenants as well as certain cross-default or cross-acceleration provisions;failure to comply with these covenants in any agreement could result in aviolation of such agreement which could, in turn, lead to violations of otheragreements pursuant to such cross-default or cross-acceleration provisions.

 

The Senior Secured CreditAgreement is collateralized by substantially all of the Company’s domesticassets.

 

**Credit Agreement EBITDA**

** **

The table below sets forthEBITDA as defined in the Company’s Senior Secured Credit Agreement, which isreferred to in this report as “Credit Agreement EBITDA.” CreditAgreement EBITDA as presented below is a financial measure that is used in theSenior Secured Credit Agreement. Credit Agreement EBITDA is not a defined termunder accounting principles generally accepted in the United States and shouldnot be considered as an alternative to income from operations or net income asa measure of operating results or cash flows as a measure of liquidity. CreditAgreement EBITDA differs from the term “EBITDA” (earnings before interestexpense, income tax expense, and depreciation and amortization) as it iscommonly used. In addition to adjusting net income to exclude interest expense,income tax expense, and depreciation and amortization, Credit Agreement EBITDAalso adjusts net income by excluding certain other items and expenses, asspecified below. The Company’s definition of Credit Agreement EBITDA may differfrom that of other similarly titled measures at other companies. The SeniorSecured Credit Agreement requires the Company to comply with a specifiedconsolidated debt to Credit Agreement EBITDA leverage ratio and a specifiedCredit Agreement EBITDA to consolidated interest expense ratio for specifiedperiods, as described in the preceding section, “Covenant Restrictions.”

 

Borrowings under theSenior Secured Credit Agreement are a key source of the Company’s liquidity.The Company’s ability to borrow under the Senior Secured Credit Agreement isdependent on, among other things, its compliance with the financial ratiocovenants referred to in the preceding section. Failure to comply with thesefinancial ratio covenants would result in a violation of the Senior SecuredCredit Agreement and, absent a waiver or amendment from the lenders under suchagreement, permit the acceleration of all outstanding borrowings under theSenior Secured Credit Agreement.

 

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The calculation of Credit Agreement EBITDA for theperiods indicated is set forth below. Credit Agreement EBITDA for the ninemonths ended September 30, 2004 is calculated in accordance with theSenior Secured Credit Agreement. Credit Agreement EBITDA for the twelve monthsended September 30, 2004 and December 31, 2003 is calculated on a proforma basis giving effect to the Merger in accordance with the Senior SecuredCredit Agreement. Credit Agreement EBITDA for the nine months ended September 30,2003 is also calculated on a pro forma basis giving effect to the Merger as ifthe Senior Secured Credit Agreement was in effect with respect to such period.See Note 2 in Notes to Condensed Consolidated Financial Statements for selectedunaudited pro forma combined financial information giving effect to the Merger.

 
| ** **                                                   | ** ** | **Nine Months Ended**      | ** ** | **Twelve Months Ended**       | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| **(Amounts  in Millions)**                                   | ** ** | **Sept. 30, 2004  Actual** | ** ** | **Sept. 30, 2003  Pro Forma** | ** ** | **Sept. 30, 2004  Pro Forma** | ** ** | **Dec. 31, 2003  Pro Forma** | ** ** |
| Unaudited  Combined Loss Attributable to Common Stockholders |       | $                          | (6.7       | )                             | $          | (60.4 | ) | $ | (20.7 | ) | $ | (74.4 | ) |
| Income  Tax Expense                                          |       | 6.0                        |       | 5.8                           |       | 2.7 |   | 2.5 |   |
| Interest  Expense, Net                                       |       | 112.3                      |       | 111.8                         |       | 148.6 |   | 148.1 |   |
| Depreciation  and Amortization                               |       | 173.0                      |       | 159.4                         |       | 228.5 |   | 214.9 |   |
| Equity  in Net Earnings of Affiliates                        |       | (1.2                       | )          | (1.1                          | )          | (1.4 | ) | (1.3 | ) |
| Other  Non-Cash Charges (A)                                  |       | 26.9                       |       | 17.1                          |       | 41.6 |   | 31.8 |   |
| Merger  Related Expenses                                     |       | 4.9                        |       | 11.2                          |       | 6.8 |   | 13.1 |   |
| Dividends  from Equity Investments                           |       | 1.1                        |       | 0.7                           |       | 1.1 |   | 0.7 |   |
| Loss  on Early Extinguishment of Debt                        |       | —                     |       | 46.6                          |       | — |   | 46.6 |   |
| Credit  Agreement EBITDA (B)                                 |       | $                          | 316.3      |                          | $          | 291.1 |   | $ | 407.2 |   | $ | 382.0 |   |

 

**Notes:**

 

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(A) Other non-cashcharges include non-cash charges for pension, postretirement and postemploymentbenefits, and amortization of premiums on hedging contracts deducted indetermining net income.

 

(B) Credit AgreementEBITDA is calculated in accordance with the definitions contained in theCompany’s Senior Secured Credit Agreement. Credit Agreement EBITDA is definedas consolidated net income before consolidated interest expense, non-cashexpenses and charges, total income tax expense, depreciation expense, expenseassociated with amortization of intangibles and other assets, non-cashprovisions for reserves for discontinued operations, extraordinary, unusual ornon-recurring gains or losses or charges or credits, gain or loss associatedwith sale or write-down of assets not in the ordinary course of business, andany income or loss accounted for by the equity method of accounting.

 

**CapitalExpenditures**

** **

The Company’s capitalspending for the first nine months of 2004 was approximately $103.4 million, up36.2% from $75.9 million for the first nine months of 2003. During the firstnine months of 2004, the Company had capital spending of approximately $44.3million for improving process capabilities, approximately $33.0 million for itsbeverage multiple packaging converting operations initiative, approximately $18.9million for manufacturing packaging machinery, approximately $3.1 million forthe expansion of its Fort Smith, AR and Lumberton, NC converting plants andapproximately $4.1 million for compliance with cluster rules. Total capitalspending for 2004 is expected to be approximately $150 million and is expectedto relate principally to improving the Company’s process capabilities includingthe Company’s beverage multiple packaging converting operations initiative andthe expansion of its Fort Smith, AR and Lumberton, NC converting plants (approximately$120 million), the production of packaging machinery (approximately $24million) and environmental cluster rules compliance (approximately $6 million).Between October 1, 2004 and the end of 2005, the Company anticipates thatit will spend approximately $16 million at its U.S. mills to comply with thecluster rules. The Company is accelerating certain capital driven costreduction projects that it anticipates will deliver benefits in 2004 and 2005.

 

**Seasonality**

 

The Company’s net sales, income from operations and cash flows fromoperations are subject to moderate seasonality, with demand usually increasingin the spring and summer due to the seasonality of the worldwide beveragemultiple packaging markets.

 

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**Environmental Matters**

 

The Company is subject toa broad range of foreign, federal, state and local environmental, health andsafety laws and regulations, including those governing discharges to air, soiland water, the management, treatment and disposal of hazardous substances, themanagement, treatment and disposal of solid and hazardous wastes, theinvestigation and remediation of contamination resulting from historical siteoperations and releases of hazardous substances, and the health and safety ofemployees. The Company’s potential environmental liabilities and obligationsmay result in significant costs, which could negatively impact its financialcondition and results of operations. In addition, capital expenditures may benecessary for the Company to comply with such laws and regulations, includingthe U.S. Environmental Protection Agency’s regulations mandating stringentcontrols on air and water discharges from pulp and paper mills, or the clusterrules. Any failure to comply with environmental, health and safety laws or anypermits and authorizations required thereunder could subject the Company tofines, corrective action or other sanctions. In addition, some of the Company’scurrent and former facilities are the subject of environmental investigationsand remediations resulting from historical operations and the release ofhazardous substances or other constituents. Some current and former facilitieshave a history of industrial usage for which investigation and remediationobligations may be imposed in the future or for which indemnification claimsmay be asserted against the Company. The Company cannot predict with certaintyfuture investigation or remediation costs or future costs relating tohistorical usage or indemnification claims. Also, potential future closures orsales of facilities may necessitate further investigation and may result infuture remediation at those facilities. The Company will continue to review andrevise its estimate of potential, contingent environmental liabilities relatedto past, present and future operations as additional information related to itsenvironmental liabilities is obtained.

 

The federal ComprehensiveEnvironmental Response, Compensation and Liability Act (“CERCLA”) establishesliability for waste generators, current and former site owners and operatorsand others in connection with release of hazardous substances. In severalinstances, the Company has been identified as a Potentially Responsible Party (“PRP”)under CERCLA and similar state laws with respect to remediation of sites atwhich hazardous substances have been released. At many of these sites, theliability of the Company has been resolved through settlement with other PRPsand/or appropriate regulatory agencies. The remaining sites which are currentlyknown and at which Graphic’s liability is not resolved are believed by theCompany not to be material.

 

The Company is involvedin investigation and remediation projects for certain properties that itcurrently owns or formerly owned or operated, including the specific sitesdiscussed below. The Company has also received demands arising out of allegedcontamination of various properties currently or formerly operated by it, andat certain waste disposal sites. The Company believes that these potentialliabilities are not material.

 

**North Portland, Oregon Facility.**  The presence of contamination in soils on andgroundwater beneath the North Portland facility has been identified at levelsexceeding Oregon state screening limits. Current information indicates that thecontamination is naturally attenuating, is confined and/or is the result ofoff-site contamination which has migrated to groundwater beneath the facility.The facility is listed on the Oregon Confirmed Release List; however, thefacility is under no current order or agreement to conduct additionalinvestigation and/or remediation at this time. The EPA has determined that itwill require no further action at the site. The Company believes it is probablethat additional investigation will be required at the facility by the State of Oregon,although it is not possible to predict a time table for additional action.Based on current information, the Company believes that no active remediationwill be required as a result of any additional investigation at the facility.

 

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**Kalamazoo Paperboard Mill andCarton Plant.**  TheKalamazoo facilities and adjacent properties have long histories of industrialand commercial usages. Portions of the property on which the mill is locatedhave been found to contain contamination exceeding Michigan state screeninglevels. Restrictive covenants restricting land usage in portions of the millproperty where contamination has been identified have been recorded to addresscontamination in those areas. The Company believes that there is a reasonablepossibility that some or all of the contamination which has been identified atthe facility will be determined to be the result of past activities unrelatedto the Company’s operations; however, further investigation will be necessaryto make a final determination. Although the Company is not under any currentorder or agreement to conduct additional site investigation, the Company plansto submit an Interim Remedial Action Plan (“IRAP”) to investigate and addressthe presence of contamination at the mill during the fourth quarter of 2004.The IRAP will be conducted over a five (5) year period. There is not sufficientinformation available to determine whether any additional investigation orremediation will be required after completion of the IRAP nor is theresufficient information to reasonably estimate the cost of any additionalinvestigation or remediation beyond the requirements of the IRAP.

 

**Information Concerning Forward-Looking Statements**

** **

Certain statements of theCompany’s expectations, including, but not limited to, statements regarding thereduction of debt, production efficiency improvements, synergies from the Merger,energy, chemical and fiber costs, depreciation and amortization, interestexpense, capital expenditures and the outcome of litigation and environmentalproceedings in this report constitute “forward-looking statements” as definedin the Private Securities Litigation Reform Act of 1995. Such statements arebased on currently available operating, financial and competitive informationand are subject to various risks and uncertainties that could cause actualresults to differ materially from the Company’s historical experience and itspresent expectations. These risks and uncertainties include, but are notlimited to, the Company’s ability to implement its business strategies andachieve forecast synergies from the Merger, the Company’s substantial amount ofdebt, continuing pressure for lower cost products, increases and volatility inraw materials and energy costs, rising labor costs, the Company’s ability to pass these increased costson to its customers, unfavorable currency translationmovements and other risks of conducting business internationally, and theimpact of regulatory and litigation matters, including those that impact theCompany’s ability to protect and use its intellectual property. Undue relianceshould not be placed on such forward-looking statements, as such statementsspeak only as of the date on which they are made. Additional informationregarding these and other risks is contained in the Company’s other periodicfilings with the SEC.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISK**

 

To manage risksassociated with future variability in cash flows and price risk attributable tocertain commodity purchases, the Company entered into fixed price natural gascontracts designed to effectively hedge prices for a portion of its natural gasrequirements at its U.S. mills through January 2005. These contracts arenot accounted for as derivative instruments under SFAS No. 133*,* as they qualify for the normal purchase exemption.

 

In addition, during thethird quarter of 2004, the Company entered into natural gas swap contracts tohedge prices for a portion of its natural gas requirements through December 2005.Such contracts are designated as cash flow hedges and are accounted for bydeferring the quarterly change in fair value of the outstanding contracts inAccumulated Derivative Instruments Loss. On the date a contract matures, theresulting gain or loss is reclassified into Cost of Sales concurrently with therecognition of the commodity purchased. The ineffective portion of the swapcontracts change in fair value, if any, would be recognized in earnings. Duringthe nine months ended September 30, 2004, there was no materialineffective portion related to changes in fair value of natural gas swapcontracts. Additionally, there were no amounts excluded from the measure ofeffectiveness.

 

Fora discussion of certain market risks related to the Company, see Part II, Item7A, “Quantitative and Qualitative Disclosure about Market Risk”, in the Company’sAnnual Report on Form 10-K for the fiscal period ended December 31, 2003. SeeNote 7 in Notes to Condensed Consolidated Financial Statements and Management’sDiscussion and Analysis of Financial Condition and Results of Operations “-Liquidityand Capital Resources”.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

The Company’s managementhas carried out an evaluation, with the participation of its chief executiveofficer and chief financial officer, of the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 of the SecuritiesExchange Act of 1934. Based upon management’s evaluation, the Company’s chiefexecutive officer and chief financial officer have concluded that the Company’sdisclosure controls and procedures were effective as of September 30, 2004.There was no change in the Company’s internal control over financial reportingthat occurred during the Company’s last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

The Company is a party to a number of lawsuits arisingin the ordinary conduct of its business. Although the timing and outcome ofthese lawsuits cannot be predicted with certainty, the Company does not believethat disposition of these lawsuits will have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

During the third quarterof 2004, there were no matters submitted to a vote of security holders.

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

a)              Exhibit Index

 
| **Exhibit Number** | ** ** | **Description**                                                                                   | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------------------------|------------|
|               |       |                                                                                              |       |
| 3.2                |       | Amended and Restated  By-laws of Graphic Packaging Corporation.                                   |       |
|               |       |                                                                                              |       |
| 31.1               |       | Certification required  by Rule 13a-14(a).                                                        |       |
|               |       |                                                                                              |       |
| 31.2               |       | Certification required  by Rule 13a-14(a).                                                        |       |
|               |       |                                                                                              |       |
| 32.1               |       | Certification required  by Section 1350 of Chapter 63 of Title 18 of the United States Code. |       |
|               |       |                                                                                              |       |
| 32.2               |       | Certification required  by Section 1350 of Chapter 63 of Title 18 of the United States Code. |       |

 
| b. Reports on Form 8-K. |   |
|-------------------------|--------|
|                    |   |   |   |
|                    |   | Reports on Form 8-K  filed with the SEC: |   |
|                    |   |   |   |
|                    |   |   | September 29, 2004  reporting the appointment of David W. Scheible to the position of Chief  Operating Officer effective October 1, 2004. |   |
|                    |   |   |   |   |
|                    |   | Reports on Form 8-K  furnished to the SEC on: |   |
|                    |   |   |   |   |
|                    |   |   | August 5, 2004  reporting the Registrant’s second quarter 2004 results. |   |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| GRAPHIC PACKAGING  CORPORATION |   |                                                                   |                  |
|--------------------------------|--------|------------------------------------------------------------------------|-----------------------|
| (Registrant)                   |   |                                                                   |                  |
|                           |   |                                                                   |                  |
| /s/  STEPHEN A. HELLRUNG       |   | Senior Vice President,  General                                        |                  |
| Stephen A. Hellrung            |   | Counsel and Secretary                                                  | November 4, 2004 |
|                           |   |                                                                   |                  |
| /s/  JOHN T. BALDWIN           |   | Senior Vice President  and                                             |                  |
| John T. Baldwin                |   | Chief Financial Officer  (Principal  Financial and Accounting Officer) | November 4, 2004 |
|                                |        |                                                                        |                       |  |

 

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