**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q/A**

 

**(Amendment No. 1)**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2005**

 

**COMMISSION FILE NUMBER: 1-13182**

 

**Graphic Packaging Corporation**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                             | ** ** | **58-2205241**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. employer    |
| incorporation or organization)           |       | identification no.) |
|                                     |       |                |
| **814  Livingston Court**                |       |                |
| **Marietta,  Georgia**                   | ** ** | **30067**           |
| (Address of principal executive offices) |       | (Zip Code)          |

 

**(770) 644-3000**

(Registrant’stelephone 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

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý  No o

 

Asof April 29, 2005, there were 198,602,294 shares of the registrant’s CommonStock, par value $0.01 per share, outstanding.

 

 

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**Explanatory Note**

 

Graphic PackagingCorporation (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A toits Quarterly Report on Form 10-Q for the period ended March 31, 2005(“Amendment No. 1”) to restate the previously issued financial statements forthe period ended March 31, 2005 to reflect corrections in accounting fordeferred taxes. The restatement is discussed in more detail in Note 10 to theaccompanying restated financial statements beginning on page 13 and waspreviously announced by the Company in its Current Report on Form 8-K filed onAugust 3, 2005. This Amendment No. 1 does not purport to provide a generalupdate or discussion of developments with respect to the Company subsequent toMay 9, 2005, the date that the Company originally filed its Form 10-Q for theperiod ended March 31, 2005. Such disclosures are contained in subsequentfilings with the U.S. Securities and Exchange Commission and should be read inconjunction with this report.

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                 | ** ** | **As Restated** | ** ** | **As Restated**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                 | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| **ASSETS**                                                                                                                                                                                 | ** ** | ** **      | ** ** | ** **       | ** ** |
| Current Assets:                                                                                                                                                                            | ** ** | ** **      | ** ** | ** **       | ** ** |
| Cash and Equivalents                                                                                                                                                                       |       | $               | 8.3        |             | $          | 7.3 |   |
| Receivables,  Less Allowance for Doubtful Accounts of $1.4 and $1.8 at March 31, 2005 and  December 31, 2004, respectively                                                                 |       | 239.7           |       | 214.9            |       |
| Inventories                                                                                                                                                                                |       | 307.6           |       | 301.2            |       |
| Prepaid Expenses                                                                                                                                                                           |       | 24.7            |       | 14.9             |       |
|                                                                                                                                                                                       |       |            |       |             |       |
| Total Current  Assets                                                                                                                                                                      |       | 580.3           |       | 538.3            |       |
| Property, Plant  and Equipment, Net of Accumulated Depreciation of $1,119.6 and $1,078.7 at  March 31, 2005 and December 31, 2004, respectively                                            |       | 1,632.6         |       | 1,649.0          |       |
| Goodwill                                                                                                                                                                                   |       | 643.4           |       | 643.4            |       |
| Intangible  Assets, Net of Accumulated Amortization of $68.3 and $65.1 at March 31, 2005  and December 31, 2004, respectively                                                              |       | 163.8           |       | 166.6            |       |
| Other Assets                                                                                                                                                                               |       | 112.6           |       | 114.0            |       |
|                                                                                                                                                                                       |       |            |       |             |       |
| Total Assets                                                                                                                                                                               |       | $               | 3,132.7    |             | $          | 3,111.3 |   |
|                                                                                                                                                                                       |       |            |       |             |       |
| **LIABILITIES**                                                                                                                                                                            | ** ** | ** **      | ** ** | ** **       | ** ** |
| Current  Liabilities:                                                                                                                                                                      | ** ** | ** **      | ** ** | ** **       | ** ** |
| Short-Term Debt                                                                                                                                                                            |       | $               | 13.7       |             | $          | 14.2 |   |
| Accounts Payable  and Other Accrued Liabilities                                                                                                                                            |       | 355.9           |       | 401.8            |       |
| Total Current  Liabilities                                                                                                                                                                 |       | 369.6           |       | 416.0            |       |
|                                                                                                                                                                                       |       |            |       |             |       |
| Long Term Debt,  Less Current Portion                                                                                                                                                      |       | 2,085.2         |       | 2,011.0          |       |
| Other Noncurrent  Liabilities                                                                                                                                                              |       | 308.7           |       | 297.4            |       |
| Total  Liabilities                                                                                                                                                                         |       | 2,763.5         |       | 2,724.4          |       |
|                                                                                                                                                                                       |       |            |       |             |       |
| **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; 198,602,294 and  198,586,108 shares issued and outstanding at March 31, 2005 and December 31,  2004, respectively |       | 2.0             |       | 2.0              |       |
| Capital in  Excess of Par Value                                                                                                                                                            |       | 1,169.4         |       | 1,169.2          |       |
| Unearned  Compensation                                                                                                                                                                     |       | (0.4            | )          | (0.4             | )          |
| Accumulated  Deficit                                                                                                                                                                       |       | (739.1          | )          | (709.5           | )          |
| Minimum Pension  Liability Adjustment                                                                                                                                                      |       | (65.2           | )          | (65.2            | )          |
| Accumulated  Derivative Instruments Gain (Loss)                                                                                                                                            |       | 7.4             |       | (9.0             | )          |
| Cumulative  Currency Translation Adjustment                                                                                                                                                |       | (4.9            | )          | (0.2             | )          |
| Total  Shareholders’ Equity                                                                                                                                                           |       | 369.2           |       | 386.9            |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                                           |       | $               | 3,132.7    |             | $          | 3,111.3 |   |

 

The accompanying notesare an integral part of the Condensed Consolidated Financial Statements.

 

2

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **As Restated**        | ** ** | **As Restated** | ** ** |
| ** **                                                         | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net Sales                                                          |       | $                      | 583.0      |   | $ | 575.9 |   |
| Cost of Sales                                                      |       | 515.8                  |       | 486.9 |   |
| Selling, General  and Administrative                               |       | 47.7                   |       | 48.2 |   |
| Research,  Development and Engineering                             |       | 2.3                    |       | 2.4 |   |
| Other Expense,  Net                                                |       | 4.9                    |       | 11.7 |   |
| Income from  Operations                                            |       | 12.3                   |       | 26.7 |   |
| Interest Income                                                    |       | 0.1                    |       | 0.1 |   |
| Interest Expense                                                   |       | (37.2                  | )          | (38.0 | ) |
| Loss before  Income Taxes and Equity in Net Earnings of Affiliates |       | (24.8                  | )          | (11.2 | ) |
| Income Tax  Expense                                                |       | (4.9                   | )          | (6.3 | ) |
| Equity in Net  Earnings of Affiliates                              |       | 0.1                    |       | 0.3 |   |
| Net Loss                                                           |       | $                      | (29.6      | ) | $ | (17.2 | ) |
|                                                               |       |                   |       |   |   |
| Loss Per Share -  Basic                                            |       | $                      | (0.15      | ) | $ | (0.09 | ) |
| Loss Per Share -  Diluted                                          |       | $                      | (0.15      | ) | $ | (0.09 | ) |
|                                                               |       |                   |       |   |   |
| Weighted Average  Number of Shares Outstanding - Basic             |       | 198.6                  |       | 198.4 |   |
| Weighted Average  Number of Shares Outstanding - Diluted           |       | 198.6                  |       | 198.4 |   |

 

The accompanying notesare an integral part of the Condensed Consolidated Financial Statements.

 

3

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**

**(Amountsin Millions)**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three  Months Ended** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **As  Restated**        | ** ** | **As Restated** | ** ** |
| ** **                                            | ** ** | **March  31,**          | ** ** | **March  31,** | ** ** |
| ** **                                            | ** ** | **2005**                | ** ** | **2004** |   |
| Net Loss                                              |       | $                       | (29.6      | ) | $ | (17.2 | ) |
| Other  Comprehensive Income (Loss):                   |       |                    |       |   |   |
| Derivative  Instruments Gain (Loss), Net of Tax of $0 |       | 16.4                    |       | (1.1 | ) |
| Currency  Translation Adjustments, Net of Tax of $0   |       | (4.7                    | )          | (1.1 | ) |
| Comprehensive  Loss                                   |       | $                       | (17.9      | ) | $ | (19.4 | ) |

 

The accompanying notesare an integral part of the Condensed Consolidated Financial Statements.

 

4

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amountsin Millions)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **As Restated**        | ** ** | **As Restated** | ** ** |
| ** **                                                                         | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                   |       |   |   |
| Net Loss                                                                           |       | $                      | (29.6      | ) | $ | (17.2 | ) |
| Noncash Items  Included in Net Loss:                                               |       |                   |       |   |   |
| Depreciation and  Amortization                                                     |       | 52.4                   |       | 57.5 |   |
| Deferred Income  Taxes                                                             |       | 4.8                    |       | 4.8 |   |
| Pension,  Postemployment and Postretirement Benefits Expense, Net of Contributions |       | 7.0                    |       | 6.5 |   |
| Equity in Net  Earnings of Affiliates, Net of Dividends                            |       | 0.9                    |       | 0.7 |   |
| Amortization of  Deferred Debt Issuance Costs                                      |       | 2.0                    |       | 2.1 |   |
| Loss on  Retirement of Assets                                                      |       | 0.7                    |       | 3.0 |   |
| Other, Net                                                                         |       | 1.6                    |       | 0.1 |   |
| Changes in  Operating Assets & Liabilities:                                    |       |                   |       |   |   |
| Receivables                                                                        |       | (27.3                  | )          | (35.0 | ) |
| Inventories                                                                        |       | (9.8                   | )          | (3.7 | ) |
| Prepaid Expenses                                                                   |       | —                 |       | 1.6 |   |
| Accounts Payable  and Other Accrued Liabilities                                    |       | (41.2                  | )          | (42.5 | ) |
| Other Noncurrent  Liabilities                                                      |       | 2.9                    |       | 0.1 |   |
| Net Cash Used in  Operating Activities                                             |       | (35.6                  | )          | (22.0 | ) |
|                                                                               |       |                   |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                   |       |   |   |
| Purchases of  Property, Plant and Equipment                                        |       | (33.3                  | )          | (45.0 | ) |
| Change in Other  Assets                                                            |       | (4.4                   | )          | (3.9 | ) |
| Net Cash Used in  Investing Activities                                             |       | (37.7                  | )          | (48.9 | ) |
|                                                                               |       |                   |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                   |       |   |   |
| Borrowing under  Revolving Credit Facilities                                       |       | 161.7                  |       | 176.8 |   |
| Payments on  Revolving Credit Facilities                                           |       | (88.1                  | )          | (112.8 | ) |
| Payments on Debt                                                                   |       | (0.4                   | )          | (0.3 | ) |
| Other                                                                              |       | 1.3                    |       | — |   |
| Issuance of  Common Stock                                                          |       | —                 |       | 0.2 |   |
| Net Cash  Provided by Financing Activities                                         |       | 74.5                   |       | 63.9 |   |
| Effect of  Exchange Rate Changes on Cash                                           |       | (0.2                   | )          | — |   |
| Net Increase  (Decrease) in Cash and Equivalents                                   |       | 1.0                    |       | (7.0 | ) |
| Cash and  Equivalents at Beginning of Period                                       |       | 7.3                    |       | 17.5 |   |
| Cash and  Equivalents at End of Period                                             |       | $                      | 8.3        |   | $ | 10.5 |   |

 

The accompanying notesare an integral part of the Condensed Consolidated Financial Statements.

 

5

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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. Riverwood Acquisition Sub LLC then merged into Riverwood Holding,which was renamed Graphic Packaging Corporation. After the Merger, (1) RIC Holding,Inc. merged into Graphic Packaging Holdings, Inc., which was renamed GPIHolding, Inc. and (2) the corporation formerly known as Graphic PackagingCorporation merged into Riverwood International Corporation (“RIC”) which wasrenamed Graphic Packaging International, Inc. (“Graphic Packaging International”).

 

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. GraphicPackaging International Corporation and its subsidiaries for periods prior tothe Merger are 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.

 

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.Graphic Packaging Corporation and GPI Holding, Inc. fully and unconditionallyguarantee substantially all of the debt of Graphic Packaging International.

 

The Company’sCondensed Consolidated Financial Statements include all subsidiaries in whichthe Company has the ability to exercise direct or indirect control overoperating and financial policies. Intercompany transactions and balances areeliminated in consolidation.

 

In the Company’sopinion, the accompanying financial statements contain all normal recurringadjustments necessary to present fairly the financial position, results ofoperations and cash flows for the interim periods. The Company has condensed oromitted certain notes and other information from the interim financialstatements presented in this Quarterly Report on Form 10-Q. Therefore, thesefinancial statements should be read in conjunction with the Company’s AnnualReport on Form 10-K for the year ended December 31, 2004, as amended.  In addition, the preparation of the CondensedConsolidated Financial Statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe Condensed Consolidated Financial Statements and the reported amounts ofrevenues and expenses during the reporting period. Actual amounts could differfrom those estimates.

 

The Company hasreclassified the presentation of certain prior period information to conform tothe current presentation format.

 

6

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**NOTE 2 — SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

For a summary ofthe Company’s significant accounting policies, please refer to the Company’sAnnual Report on Form 10-K/A for the year ended December 31, 2004.

 

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 Loss would have been as follows:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **As Restated**        | ** ** | **As Restated** | ** ** |
| ** **                                                                                                                                    | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions, Except Per Share Amounts)**                                                                                           | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Net Loss, As  Reported                                                                                                                        |       | $                      | (29.6      | ) | $ | (17.2 | ) |
|                                                                                                                                          |       |                   |       |   |   |
| Add: Stock-Based  Employee Compensation Expense Included in Reported Net Loss, Net of Related  Tax Effects                                    |       | 1.4                    |       | 0.2 |   |
|                                                                                                                                          |       |                   |       |   |   |
| Deduct: Total  Stock-Based Employee Compensation Expense Determined Under Fair Value Based  Method for All Awards, Net of Related Tax Effects |       | (0.8                   | )          | (2.4 | ) |
| Adjusted Net  Loss                                                                                                                            |       | $                      | (29.0      | ) | $ | (19.4 | ) |
|                                                                                                                                          |       |                   |       |   |   |
| Loss Per Basic  Share-As Reported                                                                                                             |       | $                      | (0.15      | ) | $ | (0.09 | ) |
| Loss Per Basic  Share-As Adjusted                                                                                                             |       | $                      | (0.15      | ) | $ | (0.10 | ) |
|                                                                                                                                          |       |                   |       |   |   |
| Loss Per Diluted  Share-As Reported                                                                                                           |       | $                      | (0.15      | ) | $ | (0.09 | ) |
| Loss Per Diluted  Share-As Adjusted                                                                                                           |       | $                      | (0.15      | ) | $ | (0.10 | ) |

 

**NOTE 3— INVENTORIES**

 

The major classes ofinventories were as follows:

 
| ** **                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|---------------|------------|------------------|------------|
| **(Amounts in Millions)** | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| Finished goods            |       | $             | 170.3      |             | $          | 166.9 |   |
| Work-in progress          |       | 19.5          |       | 14.9             |       |
| Raw materials             |       | 73.1          |       | 76.2             |       |
| Supplies                  |       | 44.7          |       | 43.2             |       |
| Total                     |       | $             | 307.6      |             | $          | 301.2 |   |

 

Raw materials and consumables used in the productionprocess such as wood chips and chemicals are valued at purchase cost on afirst-in, first-out (“FIFO”) basis upon receipt. Work in progress and finishedgoods inventories are valued at the cost of raw material consumed plus directmanufacturing costs (such as labor, utilities and supplies) as incurred and allocatedmanufacturing overhead.

 

7

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**NOTE 4 — CONTINGENCIES AND LEGALMATTERS**

 

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’s(“EPA”) regulations mandating stringent controls on air and water dischargesfrom pulp and paper mills (referred to herein as the “cluster rules”). Anyfailure to comply with environmental, health and safety laws or any permits andauthorizations required thereunder could subject the Company to fines,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 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 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 5 — BUSINESS SEGMENTINFORMATION**

 

TheCompany reports its results 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** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| NET SALES:                      |       |                   |       |   |   |
| Paperboard Packaging            |       | $                      | 559.0      |   | $ | 557.3 |   |
| Containerboard/Other            |       | 24.0                   |       | 18.6 |   |
| Total                           |       | $                      | 583.0      |   | $ | 575.9 |   |
|                            |       |                   |       |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                   |       |   |   |
| Paperboard  Packaging           |       | $                      | 28.9       |   | $ | 52.9 |   |
| Containerboard/Other            |       | (4.2                   | )          | (8.5 | ) |
| Corporate                       |       | (12.4                  | )          | (17.7 | ) |
| Total                           |       | $                      | 12.3       |   | $ | 26.7 |   |

 

8

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**NOTE 6 – FINANCIAL INSTRUMENTS,DERIVATIVES AND HEDGING ACTIVITIES**

 

The Company is exposed to fluctuations in interest rates on itsvariable debt, fluctuations in foreign currency and variability in cash flowsattributable to certain commodity purchases. The Company actively monitorsthese fluctuations and periodically uses derivatives and other financialinstruments to hedge exposures to interest, currency and commodity risks. TheCompany does not trade or use derivative instruments with the objective ofearning financial gains on interest rates, currency rates or commodity pricing,nor does it use leveraged instruments or instruments where there are nounderlying exposures identified.

 

*Interest Rate Risk*

 

The Company uses interest rate swaps to manage interest rate riskscaused by interest rate changes on its variable rate Term Loan facility. Thedifferential to be paid or received under these agreements is recognized as anadjustment to interest expense related to the debt. At March 31, 2005, theCompany had interest rate swap agreements with a notional amount of $990million, which expire on various dates from 2005 to 2008 and under which theCompany will pay fixed rates of 1.89% to 4.53% and receive three-month LIBOR.

 

During the three months ended March 31, 2005, there was no ineffectiveportion related to changes in the fair value of the interest rate swapagreements. Additionally, there were no amounts excluded from the measure of effectiveness.

 

During the three months ended March 31, 2004, there was $0.3 milliondetermined to be the ineffective portion related to changes in the fair valueof the interest rate swap agreements. Additionally, there were no amountsexcluded 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 natural gas swap contracts to hedge prices for a significant portion ofits natural gas requirements through December 2005. Such contracts aredesignated as cash flow hedges and are accounted for by deferring the quarterlychange in fair value of the outstanding contracts in Accumulated DerivativeInstruments Gain (Loss). On the date a contract matures, the resulting gain orloss is reclassified into Cost of Sales concurrently with the recognition ofthe commodity purchased. The ineffective portion of the swap contracts changein fair value, if any, would be recognized in earnings. During the three monthsended March 31, 2005, there was a minimal amount of ineffective portion relatedto changes in fair value of natural gas swap contracts. Additionally, therewere no amounts excluded from the measure of effectiveness. At March 31, 2004,no natural gas swap contracts existed.

 

*Foreign Currency Risk*

 

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

 

At March 31, 2005 and December 31, 2004, multiple forward exchangecontracts existed that expire on various dates throughout 2005. Those purchasedforward exchange contracts outstanding at March 31, 2005, when measured in U.S.dollars at March 31, 2005 exchange rates, had notional amounts totaling $111.9million. Those purchased forward exchange contracts outstanding at December 31,2004, when measured in U.S. dollars at December 31, 2004 exchange rates, hadnotional amounts totaling $154.8 million.

 

9

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No amounts were reclassified to earnings during the first three monthsof 2005 or 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.

 

*Derivatives not Designated as Hedges*

 

The Company enters into forward exchange contracts to effectively hedgesubstantially all accounts receivable resulting from transactions denominatedin foreign currencies in order to manage risks associated with foreign currencytransactions adversely affected by changes in exchange rates. At March 31, 2005and December 31, 2004, multiple foreign currency forward exchange contractsexisted, with maturities ranging up to six months. Those forward currencyexchange contracts outstanding at March 31, 2005, when aggregated and measuredin U.S. dollars at March 31, 2005 exchange rates, had net notional amountstotaling $18.3 million. Those forward currency exchange contracts outstandingat December 31, 2004, when aggregated and measured in U.S. dollars at December31, 2004 exchange rates, had net notional amounts totaling $12.8 million.Generally, unrealized gains and losses resulting from these contracts arerecognized in operations and approximately offset corresponding unrealizedgains and losses recognized on the hedged accounts receivable. These contractsare presently being and will continue to be marked to market through the incomestatement.

 

*Accumulated Derivative Instruments Gain (Loss)*

 

The following is a reconciliation of changes in the fair value of theinterest rate swap agreements, foreign currency forward contracts and naturalgas swap agreements which have been recorded as Accumulated DerivativeInstruments Gain (Loss) in the accompanying Condensed Consolidated BalanceSheet at March 31, 2005 and at March 31, 2004, and as Derivative Instruments Gain(Loss) in the accompanying Condensed Consolidated Statements of ComprehensiveLoss for the three months ended March 31, 2005 and 2004.

 
| **(Amounts in millions)**            | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1                |       | $        | (9.0       | )        | $          | (12.7 | ) |
| Reclassification  to earnings        |       | 3.1      |       | (1.7     | )          |
| Current period  change in fair value |       | 13.3     |       | 0.6      |       |
| Balance at March  31                 |       | $        | 7.4        |     | $          | (13.8 | ) |

 

The balance recorded in Accumulated Derivative Instruments Gain (Loss)at March 31, 2005 is expected to be reclassified into future earnings,contemporaneously with and offsetting changes in the related hedged exposure.The actual amount that will be reclassified to future earnings over the next 12months may vary from this amount as a result of changes in market conditions.

 

10

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**Note 7 – PENSIONS AND OTHER POSTRETIREMENTBENEFITS**

 

The Company maintains defined benefit pension plans for its U.S.employees. Benefits are based on years of service and average base compensationlevels over a period of years. The Company’s funding policies with respect toits U.S. pension plans are to contribute funds to trusts as necessary to atleast meet the minimum funding requirements of the U.S. Internal Revenue Code.Plan assets are invested in equities and fixed income securities.

 

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

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Service Cost                    |       | $                      | 3.9        |   | $ | 3.2 |   |
| Interest Cost                   |       | 7.5                    |       | 6.8 |   |
| Expected Return  on Plan Assets |       | (7.4                   | )          | (6.9 | ) |
| Amortizations:                  |       |                   |       |   |   |
| Prior Service  Cost             |       | 0.7                    |       | 0.5 |   |
| Actuarial Loss                  |       | 0.8                    |       | 0.9 |   |
| Net Periodic  Pension Cost      |       | $                      | 5.5        |   | $ | 4.5 |   |

 

The Company did not make any contributions to its U.S. pension plans duringthe first three months of 2005 and 2004. The Company expects to makecontributions of $7.6 million in 2005 as required by Internal Revenue CodeSection 412.

 

The Company sponsors postretirement health care plans that providemedical and life insurance coverage to eligible salaried and hourly retiredU.S. employees and their dependents. No postretirement medical benefits areoffered to salaried employees who began employment with the Company afterDecember 31, 1993 or to Graphic employees hired after June 15, 1999.

 

The other postretirement benefits expense consisted of the following:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions)**                  | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Service Cost                               |       | $                      | 0.2        |   | $ | 0.2 |   |
| Interest Cost                              |       | 0.8                    |       | 0.8 |   |
| Amortizations:                             |       |                   |       |   |   |
| Prior Service  Cost                        |       | —                 |       | (0.1 | ) |
| Actuarial Loss                             |       | 0.2                    |       | 0.1 |   |
| Net Periodic  Postretirement Benefits Cost |       | $                      | 1.2        |   | $ | 1.0 |   |

 

In December 2003,President Bush signed into law the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”). The Act expands Medicare primarily byadding a prescription drug benefit for Medicare-eligible individuals beginning in2006. The Act did not have a significant impact on the Company’s financial positionand results of operations.

 

The Company madebenefit payments of $0.8 million and $0.7 million for the first quarter of 2005and 2004, respectively. The Company estimates its postretirement benefitpayments for 2005 to be $3.6 million.

 

11

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**Note 8 – RESTRUCTURING CHARGES**

 

The Company adopted a plan in the first quarter of 2004 to restructureits operations by closing facilities, relocating equipment and severingemployees in an effort to better position the Company to operate in the currentbusiness environment. Components of the restructuring charges for the threemonths ended March 31, 2005 and 2004 are as follows:

 
| ** **                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions)**                                              | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Restructuring  Charges:                                                |       |                   |       |   |   |
| Equipment  Removal Costs                                               |       | $                      | —     |   | $ | 1.3 |   |
| Facility  Restoration and Carrying Costs                               |       | —                 |       | 1.4 |   |
| Severance of  Employees and Other Employee Termination-Related Charges |       | —                 |       | 4.5 |   |
| Total  Restructuring Charges                                           |       | $                      | —     |   | $ | 7.2 |   |

 

The initialpurchase price allocation associated with the Merger of $7.2 million recordedat March 31, 2004 was reduced by $0.9 million in the second quarter of 2004primarily for facility restoration and carrying costs as a building was soldsooner than anticipated. Through March 31, 2005, the Company has made paymentsfor severance and other employee termination-related charges in the amount of $1.2million and for equipment removal and facilities restoration in the amount of$0.7 million, both of which reduced the initial reserve detailed above. TheCompany anticipates the majority of cash payments to be made under therestructuring plan will occur in the second and third quarters of 2005. Therestructuring activities described herein are expected to be completed by theend of 2005 and affect only the paperboard packaging segment. As of March 31,2005, the Company had $4.4 million accrued for restructuring, as follows:

 
| ** **                                                             | ** ** | ** **       | ** ** | **Adjustments**        | ** ** | ** **   | ** ** | ** **     | ** ** | ** **   | ** ** | ** **           | ** ** |
|------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|--------------|------------|----------------|------------|--------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **Balance at**   | ** ** | **(Statement of**      | ** ** | **Purchase** | ** ** | ** **     | ** ** | ** **   | ** ** | **Balance at**       | ** ** |
| ** **                                                             | ** ** | **December 31,** | ** ** | **Operations Impact)** | ** ** | **Price**    | ** ** | **Cash**       | ** ** | ** **   | ** ** | **March. 31,**       | ** ** |
| **(Amounts in Millions)**                                              | ** ** | **2004**         | ** ** | **Expense**            | ** ** | **Reversal** | ** ** | **Allocation** | ** ** | **Payments** | ** ** | **Reclassification** | ** ** | **2005** | ** ** |
| Equipment  Removal Costs                                               |       | $                | 0.8        |                   | $          | —       |       | $              | —     |         | $          | —               |       | $ | — |   | $ | — |   | $ | 0.8 |   |
| Facility  Restoration and Carrying Costs                               |       | 0.6              |       | —                 |       | —       |       | —         |       | —       |       | —               |       | 0.6 |   |
| Severance of  Employees and Other Employee Termination-Related Charges |       | 3.1              |       | —                 |       | —       |       | —         |       | (0.1         | )          | —               |       | 3.0 |   |
| Total                                                                  |       | $                | 4.5        |                   | $          | —       |       | $              | —     |         | $          | —               |       | $ | (0.1 | ) | $ | — |   | $ | 4.4 |   |

 

12

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As of December 31, 2004, the Company had $4.5 millionaccrued for restructuring, as follows:

 
| ** **                                                             | ** ** | ** **     | ** ** | **Adjustments**        | ** ** | ** **   | ** ** | ** **     | ** ** | ** **   | ** ** | ** **           | ** ** |
|------------------------------------------------------------------------|------------|----------------|------------|------------------------|------------|--------------|------------|----------------|------------|--------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **Balance at** | ** ** | **(Statement of**      | ** ** | **Purchase** | ** ** | ** **     | ** ** | ** **   | ** ** | **Balance at**       | ** ** |
| ** **                                                             | ** ** | **January 1,** | ** ** | **Operations Impact)** | ** ** | **Price**    | ** ** | **Cash**       | ** ** | ** **   | ** ** | **Dec. 31,**         | ** ** |
| **(Amounts in Millions)**                                              | ** ** | **2004**       | ** ** | **Expense**            | ** ** | **Reversal** | ** ** | **Allocation** | ** ** | **Payments** | ** ** | **Reclassification** | ** ** | **2004** | ** ** |
| Equipment  Removal Costs                                               |       | $              | —     |                   | $          | —       |       | $              | —     |         | $          | 1.4                  |       | $ | (0.6 | ) | $ | — |   | $ | 0.8 |   |
| Facility  Restoration and Carrying Costs                               |       | —         |       | —                 |       | —       |       | 0.7            |       | (0.1         | )          | —               |       | 0.6 |   |
| Severance of  Employees and Other Employee Termination-Related Charges |       | —         |       | —                 |       | —       |       | 4.2            |       | (1.1         | )          | —               |       | 3.1 |   |
| Total                                                                  |       | $              | —     |                   | $          | —       |       | $              | —     |         | $          | 6.3                  |       | $ | (1.8 | ) | $ | — |   | $ | 4.5 |   |

 

**NOTE 9 – RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In November 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 151, *“Inventory Costs, anAmendment of ARB No. 43, Chapter 4*” (“SFAS No. 151”), which iseffective for inventory costs incurred during fiscal years beginning after June15, 2005. SFAS No. 151 addresses financial accounting and reporting forinventory costs. The Company does not believe the adoption of SFAS No. 151 willhave a significant impact on its financial position and results of operations.

 

In December 2004, the FASB issued SFAS No. 153, *“Exchangesof Nonmonetary Assets, an Amendment of APB Opinion No. 29”* (“SFASNo. 153”), which is effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005. SFAS No. 153 addresses themeasurement of exchanges of nonmonetary assets. The Company does not believethat the adoption of SFAS No. 153 will have a significant impact on itsfinancial position and results of operations.

 

In December 2004,the FASB issued SFAS No. 123 (Revised 2004), “*Share-BasedPayment’*’ (“SFAS No. 123R”) which is effective for new awards andawards modified or settled occurring in fiscal years beginning after December15, 2004. SFAS No. 123R amends and clarifies the accounting for stock compensationplans under SFAS No. 123, *“Accounting forStock-Based Compensation.”* The Company previously reported that it willadopt SFAS No. 123R for the quarter ending September 30, 2005, however, onApril 14, 2005, the Securities and Exchange Commission deferred the requiredadoption date of SFAS No. 123R for the Company to the beginning of the firstquarter of 2006. The Company does not believe that the adoption of SFAS No.123R will have a significant impact on its financial position and results ofoperations.

 

FinancialAccounting Standards Board Interpretation No. 47, *“Accounting for Conditional Asset Retirement Obligations”* (“FINNo. 47”), was issued in March 2005 and is effective no later than the end offiscal years ending after December 15, 2005. FIN No. 47 clarifies the termconditional asset retirement obligation as used in FASB Statement No. 143, *“Accounting for Asset Retirement Obligations.”*The Company has not determined if the adoption of FIN No. 47 will have asignificant impact on its financial position and results of operations.

 

**NOTE 10 - RESTATEMENT**

 

Previously issuedfinancial statements for the three months ended March 31, 2005 andfinancial statements for the years ended December 31, 2004, 2003 and 2002 havebeen restated to reflect adjustments to deferred taxes.  Historically, the Company accounted for itsdeferred tax liability related to goodwill as a reversing taxable temporarydifference. Following the adoption of Financial Accounting Standard No. 142,Goodwill and Other Intangible Assets, on January 1, 2002, the deferred taxliability related to the Company’s goodwill must be considered as a liabilityrelated to an asset with an indefinite life. Therefore, the deferred tax liability does not amortize and is notavailable as a source of taxable income to support the realization of deferredtax assets created by other deductible temporary timing differences. Withoutthe deferred tax liability related to the Company’s goodwill, the Company doesnot believe it is more likely than not it will realize its deferred tax assetsand therefore, the Company was required to record an additional tax expense toincrease its deferred tax asset valuation allowance. The restatementadjustments are non-cash and had no effect on operating cash flows nor on theCompany’s compliance with its debt covenants.

 

A summary of the significant effects of this restatement is as follows:

 
| ** **                    | ** ** | **March 31, 2005**      | ** ** |
|-------------------------------|------------|------------------------------|------------|
| **(Amounts in Millions)**     | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| ** **                    | ** ** | ** **                   | ** ** |
| Income Tax  Expense           |       | —                       |       | $ | (4.9 | ) |
| Net Loss                      |       | $                            | (24.7      | ) | $ | (29.6 | ) |
| Loss Per Share                |       | $                            | (0.12      | ) | $ | (0.15 | ) |
|                          |       |                         |       |   |   |
| As of  March 31, 2005:   |       |                         |       |   |   |
| Other Noncurrent  Liabilities |       | $                            | 234.1      |   | $ | 308.7 |   |
| Accumulated  Deficit          |       | $                            | (664.5     | ) | $ | (739.1 | ) |

 
| ** **                    | ** ** | **December 31, 2004**        | ** ** |
|-------------------------------|------------|------------------------------|------------|
| **(Amounts in Millions)**     | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| As of December  31, 2004:     |       |                         |       |   |   |
| Other Noncurrent  Liabilities |       | $                            | 227.7      |   | $ | 297.4 |   |
| Accumulated  Deficit          |       | $                            | (639.8     | ) | $ | (709.5 | ) |

 
| ** **                | ** ** | **March 31, 2004**      | ** ** |
|---------------------------|------------|------------------------------|------------|
| **(Amounts in Millions)** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| Income Tax  Expense       |       | $                            | (1.5       | ) | $ | (6.3 | ) |
| Net Loss                  |       | $                            | (12.4      | ) | $ | (17.2 | ) |
| Loss Per Share            |       | $                            | (0.06      | ) | $ | (0.09 | ) |

 

The impact of the non-cash adjustments increased income tax expense andnet loss by $19.1 million, $12.8 million and $37.8 million for the full years2004, 2003, and 2002, respectively.

 

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

 

***InformationConcerning Forward-Looking Statements***

** **

*Certain statements of Graphic Packaging Corporation’sexpectations, including, but not limited to, statements regarding theavailability of raw materials, the impact of inflation of energy, chemical andfiber costs, the outcome of litigation and environmental proceedings, thereduction of debt, capital expenditures and certain contractual obligations inthis report constitute “forward-looking statements” as defined in the PrivateSecurities Litigation Reform Act of 1995. Such statements are based oncurrently available operating, financial and competitive information and aresubject to various risks and uncertainties that could cause actual results todiffer materially from the Company’s historical experience and its presentexpectations. These risks and uncertainties include, but are not limited to,the Company’s ability to implement its business strategies, the Company’ssubstantial amount of debt, continuing pressure for lower cost products,inflation of and volatility in raw materials and energy costs, rising laborcosts, the Company’s ability to pass these increased costs on to its customers,unfavorable currency translation movements and other risks of conductingbusiness internationally, and the impact of regulatory and litigation matters,including those that impact the Company’s ability to protect and use itsintellectual property. Undue reliance should not be placed on suchforward-looking statements, as such statements speak only as of the date onwhich they are made and the Company undertakes no obligation to update suchstatements. Additional information regarding these and other risks is containedin the Company’s other periodic filings with the SEC.*

 

**OVERVIEW**

 

The Company’s objective is to strengthen its position as a leadingprovider of paperboard packaging solutions. To achieve this objective, theCompany is implementing strategies to expand market share in its currentmarkets and to identify and penetrate new markets; to capitalize on the Company’scustomer relationships, business competencies, and mills and converting assets;to develop and market innovative products and applications; and to continue toreduce costs by focusing on operational improvements. The Company’s ability tofully implement its strategies and achieve its objectives, however, is affectedby several significant factors beyond the Company’s control, including (i)inflation of raw material and other costs, which the Company cannot always passthrough to its customers, and (ii) the effect of the overcapacity in theworldwide paperboard packaging industry. The Company anticipates using its freecash flows to reduce debt.

 

**The Restatement**

 

This Amendment No. 1to the Company’s Quarterly Report on Form 10-Q restates thecondensed consolidated financial statements for the three months ended March 31,2005. The restatement reflects corrections related to deferred taxes. Historically,the Company accounted for its deferred tax liability related to goodwill as areversing taxable temporary difference. Following the adoption of FinancialAccounting Standard No. 142, Goodwill and Other Intangible Assets, on January 1,2002, the deferred tax liability related to the Company’s goodwill must beconsidered as a liability related to an asset with an indefinite life.Therefore, the deferred tax liability does not amortize and is not available asa source of taxable income to support the realization of deferred tax assetscreated by other deductible temporary timing differences. Without the deferredtax liability related to the Company's goodwill, the Company does not believeit is more likely than not it will realize its deferred tax assets andtherefore, the Company was required to record an additional tax expense toincrease its deferred tax assets valuation allowance. The impact of theadjustments increased income tax expense and net loss by $4.9 million for thethree months ended March 31, 2005.  Therestatement adjustments are non-cash and had no effect on operating cash flowsnor on the Company’s compliance with its debt covenants including the Company'sCredit Agreement EBITDA.

 

**Significant Factors That Impact The Company’s Business**

 

TheCompany’s net sales, income from operations, cash flows from operations andfinancial condition are influenced by a variety of factors.

 

*Sales.* The Company historically experiencedstable pricing for its integrated beverage multiple packaging products andmoderately cyclical pricing for its other product offerings. Because someproducts can be packaged in different types of materials, the Company’s salesare affected by competition from other manufacturers’ coated unbleached kraftpaperboard, or CUK board, and other substrates — solid bleached sulfate, orSBS, recycled clay coated news, or CCN, and, internationally, white linedchipboard, or WLC — as well as by general market conditions. In addition, theCompany’s sales historically are driven by consumer buying habits in themarkets its customers serve. New product introductions and promotional activityby the Company’s customers and the Company’s introduction of new packagingproducts also impacted its sales. The Company’s containerboard business issubject to conditions in the cyclical worldwide commodity paperboard marketswhich have a significant impact on containerboard sales. In addition, theCompany’s net sales, income from operations and cash flows from operations aresubject to moderate seasonality, with demand usually increasing in the springand summer due to the seasonality of the worldwide beverage multiple packagingmarkets.

 

The Company worksto maintain market share through efficiency, product innovation and strategicsourcing to its customers; however, pricing and other competitive pressures mayoccasionally result in the loss of a customer relationship.

 

Packagingmachinery placements during the first three months of 2005 decreased approximately27% compared to the first three months of 2004 due primarily to timingdifferences and to the additional placements in 2004 as a result of the successof the new Fridge Vendor® Package. These machines were placed to package 

 

14

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cansand bottles for beer, soft drink, water and juice applications. The Companyexpects packaging machinery placements for 2005 to be lower when compared to2004 but higher when compared to 2003.

 

*Impact of Inflation**and Operating Costs.* The Company’s cost of sales consistsprimarily of energy (including natural gas, fuel oil and electricity), pinepulpwood, hardwood, chemicals, recycled fibers, purchased paperboard, paper,aluminum foil, ink, plastic films and resins, depreciation expense and labor.The Company continues to be negatively impacted by inflationary pressures whichincreased costs $20.6 million compared to the prior year quarter and primarilyrelated to fiber, outside board purchases and corrugated shipping containers($7.1 million); labor and related benefits ($4.7 million); chemical basedinputs ($3.3 million); freight ($2.2 million); energy ($1.9 million); and other($1.4 million). The Company has entered into contracts designed to mitigate theimpact of future cost increases for a significant portion of its natural gasrequirements, primarily at its U.S. mills, through December 2005. The Companywill continue to evaluate its position regarding natural gas purchasecommitments. The Company believes that inflationary pressures will negativelyimpact its results for 2005. Sincenegotiated contracts and the market largely determine the pricing for itsproducts, the Company is limited in its ability to pass through to itscustomers any inflationary or other cost increases that the Company may incurin the future. Additionally, the Company’s sales contracts often limit itstiming and ability to raise prices, further exacerbating the inflationaryproblems.

 

During December2004, unexpected sub-freezing temperatures in the Southeast resulted in themalfunction of control instrumentation for high pressure boilers at both theCompany’s West Monroe, Louisiana and Macon, Georgia mills. This malfunctionresulted in unplanned down-time on paper machines and turbine generators aswell as costs due to boiler damage. The downtime resulted in lost production and,between the two mills, the total cost from this incident was $3.0 million ofcapital expenditures, along with a negative $2.3 million income statementimpact due to the lost production, repair and startup. These costs wererealized in the first quarter of 2005.

 

*Commitment to Cost Reduction*. Inlight 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 three months of 2005, the Company achieved approximately $8.9 million incost savings through its continuous improvement initiative.

 

TheCompany is finalizing its initiative designed to enhance the competitiveness ofits beverage multiple packaging converting operations and has begun torecognize improved converting performance when comparing against the firstthree months of 2004. This initiative has added new manufacturing technologyand press capacity, and also includes the consolidation of certain beveragecarton converting operations. The Company has made expenditures ofapproximately $68 million and expects to realize cost savings relative to 2002from this initiative of approximately $39 million annually by the end of 2005.

 

As part of theCompany’s manufacturing rationalization initiatives, the Company announced inJanuary 2004 its plans to close its Garden Grove, CA converting plant, and inMay 2004 announced plans to close its Bow, NH and Clinton, MS convertingplants. In addition, the Company announced it is expanding certain of itsexisting sites, including Fort Smith, AR and Lumberton, NC, and as a resultexpects to make expenditures of approximately $26 million over the 2004 to 2005period. The Company has spent approximately $19 million of the projected expendituresthrough March 31, 2005. By the end of 2006, the Company estimates that it willrealize an additional $19 million in annual synergies, improved cost structuresand increased productivity as a result of these manufacturing rationalizationinitiatives.

 

TheCompany continues to evaluate its current operations and assets with a view torationalizing its operations and improving profitability. The Company iscontinuing to focus on reducing working capital and increasing liquidity.

 

15

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**Critical Accounting Policies**

 

Thepreparation of condensed consolidated financial statements in conformity withU.S. GAAP requires the Company to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. These estimatesand assumptions are based on historical experience and various other factorsthat are believed to be reasonable under the circumstances. Actual resultscould differ from these estimates under different assumptions or conditions.

 

The Company’s mostcritical accounting policies which require significant judgment or involvecomplex estimations that are important to the portrayal of the Company’sfinancial conditions and operating results are described in the Company’sAnnual Report on Form 10-K/A for the year ended December 31, 2004, as amended.

 

For a discussion of recent accounting pronouncements impacting theCompany, see Note 9 in Notes to Condensed Consolidated Financial Statements.

 

**Segment Information**

 

The Company reports its results in two business segments: paperboardpackaging and containerboard/other. Business segment information is as follows:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| NET SALES:                      |       |                   |       |   |   |
| Paperboard  Packaging           |       | $                      | 559.0      |   | $ | 557.3 |   |
| Containerboard/Other            |       | 24.0                   |       | 18.6 |   |
| Total                           |       | $                      | 583.0      |   | $ | 575.9 |   |
|                            |       |                   |       |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                   |       |   |   |
| Paperboard  Packaging           |       | $                      | 28.9       |   | $ | 52.9 |   |
| Containerboard/Other            |       | (4.2                   | )          | (8.5 | ) |
| Corporate                       |       | (12.4                  | )          | (17.7 | ) |
| Total                           |       | $                      | 12.3       |   | $ | 26.7 |   |

 

**RESULTS OF OPERATIONS, ASRESTATED**

 

**FIRST QUARTER 2005 COMPARED WITH FIRST QUARTER2004**

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | ** **             | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **             | ** ** | **(Decrease)** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **             | ** ** | **From** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **March 31,**          | ** ** | **Prior** | ** ** | **March 31,** | ** ** |
| **(Amounts in Millions)**              | ** ** | **2005**               | ** ** | **Period** | ** ** | **2004** | ** ** |
| Net Sales                              |       | $                      | 583.0      |   | 1.2 | % | $ | 575.9 |   |
| Cost of Sales                          |       | 515.8                  |       | 5.9 | % | 486.9 |   |
| Gross Profit                           |       | 67.2                   |       | (24.5 | )% | 89.0 |   |
| Selling, General  and Administrative   |       | 47.7                   |       | (1.0 | )% | 48.2 |   |
| Research,  Development and Engineering |       | 2.3                    |       | (4.2 | )% | 2.4 |   |
| Other Expense,  Net                    |       | 4.9                    |       | (58.1 | )% | 11.7 |   |
| Income from  Operations                |       | $                      | 12.3       |   | (53.9 | )% | $ | 26.7 |   |

 

16

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**Net Sales**

 

The Company’s Net Sales in the first quarter of 2005 increased by $7.1million, or 1.2%, to $583.0 million from $575.9 million in the first quarter of2004 due primarily to a 1.9% increase in North American carton sales as aresult of higher volumes in both the beverage and the food and consumer productmarkets, improved pricing in the containerboard medium and linerboard markets,and the positive impact of foreign currency exchange rates of $4.3 million.These increases were somewhat offset by lower volumes in the internationalmarkets and in North American open market rollstock sales as well as lower pricingin the North American carton markets.

 

**Gross Profit**

** **

TheCompany’s Gross Profit in the first quarter of 2005 decreased by $21.8 million,or 24.5%, to $67.2 million from $89.0 million in the first quarter of 2004. TheCompany’s gross profit margin decreased to 11.5% in the first quarter of 2005from 15.5% in the first quarter of 2004. The decrease in gross profit marginwas due primarily to inflationary pressures primarily on fiber, outside boardpurchases and corrugated shipping containers, labor and related benefits,chemical based inputs, freight, and energy; the negative $2.3 million incomestatement impact due to the lost production, repair and startup at both theCompany’s West Monroe, Louisiana and Macon, Georgia mills as a result ofunexpected sub-freezing temperatures during December 2004; and lower pricing inthe North American carton markets as a result of increased marketcompetitiveness. The decrease in gross profit margin was somewhat offset byworldwide cost reductions resulting from the Company’s cost reductioninitiatives and improved pricing in the containerboard medium and linerboardmarkets.

 

**Selling, General and Administrative**

** **

Selling, General and Administrative expenses decreased by $0.5 million,or 1.0%, to $47.7 million in the first quarter of 2005 from $48.2 million inthe first quarter of 2004, due primarily to lower incentive compensation expenses,somewhat offset by inflation and higher expenses associated with Sarbanes-Oxleycompliance efforts. As a percentage of Net Sales, Selling, General andAdministrative expenses were 8.2% in the first quarter of 2005 versus 8.4% inthe first quarter of 2004.

 

**Research, Development and Engineering**

** **

Research,Development and Engineering expenses decreased slightly by $0.1 million, or4.2%, to $2.3 million in the first quarter of 2005 from $2.4 million in thefirst quarter of 2004.

 

**Other Expense, Net**

** **

OtherExpense, Net decreased by $6.8 million, or 58.1%, to $4.9 million in the firstquarter of 2005 from $11.7 million in the first quarter of 2004. This changewas principally due to lower amortization expense of Merger related intangiblesof $5.2 million and non-cash charges of $3.0 million recorded in the firstquarter of 2004 associated with the retirement of certain equipment.

 

**Income from Operations**

** **

Primarilyas a result of the factors discussed above, the Company’s Income fromOperations in the first quarter of 2005 decreased by $14.4 million, or 53.9%,to $12.3 million from $26.7 million in the first quarter of 2004, while itsoperating margin decreased to 2.1% in the first quarter of 2005 from 4.6% inthe first quarter of 2004.

 

**Fluctuations in U.S. Currency Exchange Rates**

** **

The weakening of the U.S. dollar currency exchange rates as compared tocertain currencies including the euro, other European currencies and theJapanese yen had a $4.3 million impact on Net Sales, while there was a modestimpact on Gross Profit, Income from Operations, and operating expenses duringthe first quarter of 2005.

 

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**INTEREST INCOME, INTEREST EXPENSE, INCOME TAXEXPENSE, AND EQUITY IN NET EARNINGS OF AFFILIATES**

 

**Interest Income**

 

InterestIncome remained constant at $0.1 million in the first three months of 2005 and2004.

 

**Interest Expense**

 

Interest Expense decreased by $0.8 million to $37.2 million in thefirst three months of 2005 from $38.0 million in the first three months of 2004,due to lower average debt balances in 2005 and, to a lesser extent, was alsoaffected by a 25 basis points reduction in interest charged during the firstthree months of 2005 on the Term Loan Facility as a result of the October 1,2004 amendment to the Company’s Senior Secured Credit Agreement. The decreasewas somewhat offset due to the Company’s unhedged floating rate debt being tiedto increasing market interest rates.

 

**Income Tax Expense**

 

During the first three months of 2005, the Company recognized an IncomeTax Expense of $4.9 million on Loss before Income Taxes and Equity in NetEarnings of Affiliates of $24.8 million. During the first three months of 2004,the Company recognized an Income Tax Expense of $6.3 million on Loss beforeIncome Taxes and Equity in Net Earnings of Affiliates of $11.2 million. IncomeTax Expense for the first three months of 2005 and 2004 was primarily due tothe amortization of goodwill for tax purposes, income earned in certain foreigncountries, and tax withholding in foreign jurisdictions.

 

**Equity in Net Earnings of Affiliates**

 

Equity in Net Earnings of Affiliates was $0.1 million in the first threemonths of 2005 and $0.3 million in the first three months of 2004 and related tothe Company’s equity investment in the joint venture Rengo Riverwood Packaging,Ltd.

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITALRESOURCES**

** **

The Company broadly defines liquidity as its ability to generatesufficient funds from both internal and external sources to meet itsobligations and commitments. In addition, liquidity includes the ability toobtain appropriate debt and equity financing and to convert into cash thoseassets that are no longer required to meet existing strategic and financialobjectives. Therefore, liquidity cannot be considered separately from capitalresources that consist of current or potentially available funds for use inachieving long-range business objectives and meeting debt service commitments.

 

**Cash Flows**

** **

Cash andEquivalents increased by $1.0 million in the first three months of 2005. Cash usedin operating activities in the first three months of 2005 totaled $35.6million, compared to $22.0 million in the first three months of 2004. This wasprincipally due to lower operating income somewhat offset by favorable changesin operating assets and liabilities primarily as a result of timingdifferences. Cash used in investing activities in the first three months of2005 totaled $37.7 million, compared to $48.9 million in 2004. This change wasprincipally due to lower purchases of property, plant and equipment of $11.7 million(see “-Capital Expenditures”). Cash provided by financing activities in 2005totaled $74.5 million, compared to $63.9 million in 2004. This change wasprincipally due to higher net borrowings under the Company’s revolving creditfacilities. Depreciation and amortization during the first three months of 2005totaled $52.4 million and is expected to be between approximately $200 million and$210 million in 2005.

 

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**Liquidity and Capital Resources**

** **

The Company’s liquidity needs arise primarily from debt service on itssubstantial indebtedness and from the funding of its capital expenditures,ongoing operating costs and working capital.

 

At March 31, 2005 and December 31, 2004, Long-Term Debt consisted ofthe following:

 
| ** **                                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| **(Amounts in Millions)**                                                                                                                                                  | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| Senior Notes  with interest payable semi-annually at 8.5%, payable in 2011                                                                                                 |       | $             | 425.0      |             | $          | 425.0 |   |
| Senior  Subordinated Notes with interest payable semi-annually at 9.5%, payable in  2013                                                                                   |       | 425.0         |       | 425.0            |       |
| Senior Secured  Term Loan Facility with interest payable at various dates at floating rates (5.15%  at March 31, 2005 and 4.52% at December 31, 2004) payable through 2010 |       | 1,158.0       |       | 1,158.0          |       |
| Senior Secured  Revolving Facility with interest payable at various dates at floating rates  (5.87% at March 31, 2005) payable in 2009                                     |       | 74.1          |       | —           |       |
| Other                                                                                                                                                                      |       | 4.6           |       | 3.8              |       |
|                                                                                                                                                                       |       | 2,086.7       |       | 2,011.8          |       |
| Less, current  portion                                                                                                                                                     |       | 1.5           |       | 0.8              |       |
| Total                                                                                                                                                                      |       | $             | 2,085.2    |             | $          | 2,011.0 |   |

 

As in the first quarter of 2004, total debt increased during the firstquarter of 2005. This expected increase is a result of seasonal factors as theCompany ramps up working capital in preparation for the summer season. Inaddition to seasonality in operating income and working capital, the Companymade its semi-annual fixed rate interest payments on its Senior Notes andSenior Subordinated Notes totaling $38.3 million in the first quarter. TheCompany expects that the majority of its full year debt reduction will comeduring the second and fourth quarters.  TheSenior Notes are rated B- by Standard & Poor’s and B2 by Moody’s InvestorServices. During the first three months of 2005, cash paid for interest wasapproximately $54 million.

 

AtMarch 31, 2005, the Company and its U.S. and international subsidiaries had thefollowing commitments, amounts outstanding and amounts available underrevolving credit facilities:

 
| ** **                 | ** ** | **Total Amount of** | ** ** | **Total Amount** | ** ** | **Total Amount**  | ** ** |
|----------------------------|------------|---------------------|------------|------------------|------------|-------------------|------------|
| **(Amounts in Millions)**  | ** ** | **Commitments**     | ** ** | **Outstanding**  | ** ** | **Available (A)** | ** ** |
| Revolving Credit  Facility |       | $                   | 325.0      |             | $          | 74.1              |       | $ | 238.5 |   |
| International  Facilities  |       | 21.5                |       | 11.7             |       | 9.8               |       |
| Total                      |       | $                   | 346.5      |             | $          | 85.8              |       | $ | 248.3 |   |

 

----

**Note:**

(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 $12.4 millionas of March 31, 2005. These letters of credit are used as security against itsself-insurance obligations, workers’ compensation obligations and anoutstanding note payable. These letters of credit expire at various datesthrough 2006 unless extended.

 

Principaland interest payments under the Term Loan Facility and the Revolving CreditFacility, together with principal and interest payments on the Senior Notes andthe Senior Subordinated Notes, represent significant liquidity requirements forthe Company. Based upon current levels of operations, anticipated cost-savingsand expectations as to future growth, the Company believes that cash generatedfrom operations, together with amounts available under its Revolving CreditFacility and other available financing sources, will be adequate to permit theCompany to meet its debt service obligations, capital expenditure programrequirements, ongoing operating costs and working capital needs, although noassurance can be given in this regard. The Company’s future financial and operatingperformance, ability to service or refinance its debt and ability to complywith the covenants and restrictions contained in its debt agreements (see “-CovenantRestrictions”), will be subject to future economic conditions and to financial,business and other factors, many of which are beyond the Company’s control andwill be substantially dependent on the selling prices and demand for theCompany’s products, raw material and energy costs, and the Company’s ability tosuccessfully implement its overall business and profitability strategies.

 

TheCompany expects that its working capital and business needs will require it tocontinue to have access to the Revolving Credit Facility or a similar revolvingcredit facility after the maturity date in 2009, and that the Companyaccordingly will have to extend, renew, replace or otherwise refinance suchfacility at or prior to 

 

19

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suchdate. No assurance can be given that it will be able to do so. The Company hasin the past refinanced and in the future may seek to refinance its debt priorto the respective maturities of such debt.

 

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 March31, 2005, the Company had interest rate swap agreements with a notional amountof $990 million, which expire on various dates from 2005 to 2008 under whichthe Company will pay fixed rates of 1.89% to 4.53% and receive three-monthLIBOR.

 

Effectiveas of March 31, 2005, the Company had approximately $1.3 billion of netoperating loss carryforwards (“NOLs”). These NOLs generally may be used by theCompany to offset taxable income earned in subsequent taxable years. However,the Company’s ability to use these NOLs to offset its future taxable income maybe subject to significant limitation as a result of certain shifts in ownershipdue to direct or indirect transfers of the Company’s common stock by one ormore 5 percent stockholders, or issuances or redemptions of the Company’scommon stock, which, when taken together with previous changes in ownership ofthe Company’s common stock, constitute an ownership change under the InternalRevenue Code. Imposition of any such limitation on the use of NOLs could havean adverse effect on the Company’s future after tax free cash flow.

 

**Covenant Restrictions**

 

The Senior Secured Credit Agreement, which governs the Term LoanFacility and the Revolving Credit Facility, imposes restrictions on the Company’sability to make capital expenditures and both the Senior Secured CreditAgreement and the indentures governing the Senior Notes and Senior SubordinatedNotes (the “Notes”) limit the Company’s ability to incur additionalindebtedness. Such restrictions, together with the highly leveraged nature ofthe Company, could limit the Company’s ability to respond to market conditions,meet its capital spending program, provide for unanticipated capitalinvestments or take advantage of business opportunities. The covenantscontained in the Senior Secured Credit Agreement, among other things, restrictthe ability of the Company to dispose of assets, incur additional indebtedness,incur guarantee obligations, prepay other indebtedness, make dividend and otherrestricted payments, create liens, make equity or debt investments, makeacquisitions, modify terms of indentures under which the Notes are issued,engage in mergers or consolidations, change the business conducted by theCompany and its subsidiaries, make capital expenditures and engage in certaintransactions with affiliates.

 

The financial covenants in the Senior Secured Credit Agreement specify,among other things, the following requirements for each four quarter periodending during the following test periods:

 
| ** **                             | ** ** | **Consolidated Debt to**    | ** ** | **Credit Agreement**          | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Credit Agreement EBITDA** | ** ** | **EBITDA to Consolidated**    | ** ** |
| **Test Period**                        | ** ** | **Leverage Ratio(A)**       | ** ** | **Interest Expense Ratio(A)** | ** ** |
| 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:

(A)      See“Credit Agreement EBITDA” below.

 

At March 31, 2005, the Company was in compliance with the financialcovenants in the Senior Secured Credit Agreement, as amended. The Company’sability to comply in future periods with the financial covenants in the SeniorSecured Credit Agreement will depend on its ongoing financial and operatingperformance, which in turn will be subject to economic conditions and tofinancial, business and other factors, many of which are beyond the Company’scontrol and will be substantially dependent on the selling prices for theCompany’s products, raw material and energy costs, and the Company’s ability tosuccessfully implement its overall business and profitability strategies. If aviolation of any of the covenants occurred, the Company would attempt to obtaina waiver or an amendment from its lenders, although no assurance can be giventhat the Company would be successful in this regard. The Senior Secured CreditAgreement and the 

 

20

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indentures governing the Senior Subordinated Notes and the Senior Noteshave covenants as well as certain cross-default or cross-accelerationprovisions; failure to comply with these covenants in any agreement couldresult in a violation of such agreement which could, in turn, lead toviolations of other agreements pursuant to such cross-default or cross-accelerationprovisions.

 

The Senior Secured Credit Agreement is collateralized by substantiallyall of the Company’s domestic assets.

 

**Credit Agreement EBITDA**

** **

The table below sets forth EBITDA, as defined in the Senior SecuredCredit Agreement, which is referred to in this report as “Credit AgreementEBITDA.” Credit Agreement EBITDA as presented below is a financialmeasure that is used in the Senior Secured Credit Agreement. Credit AgreementEBITDA is not a defined term under accounting principles generally accepted inthe United States and should not be considered as an alternative to income fromoperations or net income as a measure of operating results or cash flows as ameasure of liquidity. Credit Agreement EBITDA differs from the term “EBITDA”(earnings before interest expense, income tax expense, and depreciation andamortization) as it is commonly used. In addition to adjusting net income toexclude interest expense, income tax expense and depreciation and amortization,Credit Agreement EBITDA also adjusts net income by excluding certain otheritems and expenses, as specified below. The Company’s definition of CreditAgreement EBITDA may differ from that of other similarly titled measures atother companies. The Senior Secured Credit Agreement requires the Company tocomply with a specified consolidated debt to Credit Agreement EBITDA leverageratio and a specified Credit Agreement EBITDA to consolidated interest expenseratio for specified periods, as described in the preceding section, “CovenantRestrictions.”

 

The Company’smanagement believes that presentation of Credit Agreement EBITDA provides usefulinformation to investors because borrowings under the Senior Secured CreditAgreement are a key source of the Company’s liquidity, and the Company’sability to borrow under the Senior Secured Credit Agreement is dependent on,among other things, its compliance with the financial ratio covenants referredto in the preceding section. Failure to comply with these financial ratiocovenants would result in a violation of the Senior Secured Credit Agreementand, absent a waiver or amendment from the lenders under such agreement, permitthe acceleration of all outstanding borrowings under the Senior Secured CreditAgreement.

 

The calculation ofCredit Agreement EBITDA for the periods indicated is set forth below and iscalculated in accordance with the Senior Secured Credit Agreement.

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **As Restated**        | ** ** | **As Restated**         | ** ** | **As Restated** | ** ** | **As Restated** | ** ** |
| **(Amounts  in Millions)**            | ** ** | **Mar. 31, 2005**      | ** ** | **Mar. 31, 2004**       | ** ** | **Mar. 31, 2005** | ** ** | **Dec. 31, 2004** | ** ** |
| Net Loss                              |       | $                      | (29.6      | )                       | $          | (17.2 | ) | $ | (73.3 | ) | $ | (60.9 | ) |
| Income Tax  Expense                   |       | 4.9                    |       | 6.3                     |       | 27.5 |   | 28.9 |   |
| Interest  Expense, Net                |       | 37.1                   |       | 37.9                    |       | 148.2 |   | 149.0 |   |
| Depreciation and  Amortization        |       | 52.4                   |       | 57.5                    |       | 223.8 |   | 228.9 |   |
| Equity in Net  Earnings of Affiliates |       | (0.1                   | )          | (0.3                    | )          | (1.2 | ) | (1.4 | ) |
| Credit Agreement  Adjustments (A)     |       | 10.4                   |       | 11.4                    |       | 49.6 |   | 50.6 |   |
| Credit Agreement  EBITDA (B)          |       | $                      | 75.1       |                    | $          | 95.6 |   | $ | 374.6 |   | $ | 395.1 |   |

 

----

**Notes:**

(A)  Credit agreement adjustments include non-cash chargesfor pension, postretirement and postemployment benefits, amortization ofpremiums on hedging contracts, write-down of assets, and merger relatedexpenses deducted in determining net income and dividends from equity investments.

 

(B)  Credit Agreement EBITDA is calculated in accordance withthe definitions contained in the Company’s Senior Secured Credit Agreement.Credit Agreement EBITDA is defined as consolidated net income beforeconsolidated interest expense, non-cash expenses and charges, total income taxexpense, depreciation expense, expense associated with amortization ofintangibles and other assets, non-cash provisions for reserves for discontinuedoperations, extraordinary, unusual or non-recurring gains or losses or chargesor 

 

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credits, gain or loss associated with sale or write-down of assets notin the ordinary course of business, and any income or loss accounted for by theequity method of accounting.

 

**Capital Expenditures**

** **

The Company’s capital spending in the first three months of 2005 was $33.3million, compared to $45.0 million in the first three months of 2004. During thefirst three months of 2005, the Company had capital spending of $14.1 millionfor improving process capabilities, $1.9 million for its beverage multiplepackaging converting operations initiative, $5.4 million for manufacturingpackaging machinery, $9.5 million for the expansion of its Fort Smith, AR andLumberton, NC converting plants and $2.4 million for compliance with clusterrules.

 

**Environmental Matters**

 

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. EPA’s regulations mandatingstringent controls on air and water discharges from pulp and paper mills. Anyfailure to comply with environmental, health and safety laws or any permits andauthorizations required thereunder could subject the Company to fines,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.

 

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

 

For a discussionof certain market risks related to the Company, see Part II, Item 7A, “Quantitativeand Qualitative Disclosure about Market Risk”, in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2004, as amended. There have beenno significant developments with respect to derivatives or exposure to marketrisk during the first three months of 2005; see Note 6 in Notes to CondensedConsolidated Financial Statements and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations “-Liquidity and Capital Resources”.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*Disclosure Controls and Procedures*

 

The Company’s management has carried out an evaluation, with theparticipation of its Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the Company’s disclosure controls and procedures pursuantto Rule 13a-15 of the Securities Exchange Act of 1934, as amended.  Based upon such evaluation, management hasconcluded that the Company’s disclosure controls and procedures were noteffective as of March 31, 2005, solely because of a material weakness ininternal control over financial reporting with respect to accounting fordeferred taxes as described below.

 

As described in Note 10 to the consolidated financial statements forthe period ended March 31, 2005 included herein, the Company has restated suchconsolidated financial statements to correct errors relating to accounting forincome taxes and related deferred tax liabilities.  Based on management’s review, it has beendetermined that these errors were inadvertent and unintentional.

 

*Changes in Internal Control overFinancial Reporting*

* *

A material weakness is a control deficiency, or combination of controldeficiencies, that results in a more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected. As of December 31, 2004, the Company did not maintaineffective controls over the determination of the provision for income taxes andrelated deferred income tax accounts. Specifically, the Company did notmaintain effective controls as to the completeness and accuracy of the incometax provision and the related deferred income tax accounts with respect todifferences between the income tax basis and the financial reporting basis ofits assets and liabilities.  This deficiency resulted in the restatementof the interim and annual consolidated financial statements for 2004, 2003 and2002, the restatement of the first quarter of 2005 as well as audit adjustmentsto the second quarter 2005 consolidated financial statements. Additionally,this control deficiency could result in a misstatement of the income taxprovision or related deferred income tax accounts resulting in a materialmisstatement to the annual or interim consolidated financial statements thatwould not be prevented or detected.  Accordingly, management hasdetermined that this control deficiency constitutes a material weakness. Because this material weakness has not yet been remediated, the Companyconcluded that it did not maintain effective internal control over financialreporting as of March 31, 2005, based on criteria in *Internal Control-Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

The Company is in the process of designing and implementingimprovements in its internal control over financial reporting to address thematerial weakness in accounting for income taxes. These improvements include,among other things, hiring a tax director, educating and training Companyindividuals involved in accounting and reporting for income taxes, andenhancing the documentation regarding conclusions reached in the implementationof generally accepted accounting principles.

 

There was no change in the Company’s internal control over financialreporting that occurred during the fiscal quarter ended March 31, 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

The Company is aparty to a number of lawsuits arising in the ordinary conduct of its business.Although the timing and outcome of these lawsuits cannot be predicted withcertainty, the Company does not believe that disposition of these lawsuits willhave a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

 

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

 

During the first quarterof 2005, there were no matters submitted to a vote of security holders.

 

**ITEM 6.  EXHIBITS**

 

a)      Exhibit Index

 
| **Exhibit Number** | ** ** | **Description**                                                                              |
|--------------------|------------|----------------------------------------------------------------------------------------------|
|               |       |                                                                                         |
| 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. |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| GRAPHIC PACKAGING CORPORATION |   |                               |           |
|-------------------------------|--------|------------------------------------|----------------|
| (Registrant)                  |   |                               |           |
|                          |   |                               |           |
| /s/ STEPHEN A. HELLRUNG       |   | Senior Vice President, General     |           |
| Stephen A. Hellrung           |   | Counsel and Secretary              | August 9, 2005 |
|                          |   |                               |           |
| /s/ JOHN T. BALDWIN           |   | Senior Vice President and          |           |
| John T. Baldwin               |   | Chief Financial Officer (Principal | August 9, 2005 |
|                          |   | Financial and Accounting Officer)  |           |

 

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