**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**QUARTERLYREPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period endedSeptember 30, 2003**

** **

**Commission file number 1-13182**

 

| **Graphic Packaging Corporation**                       |
|---------------------------------------------------------|
| (Exact name of registrant as specified in  its charter) |
|                                                    |
| **Delaware**                                            |   | **58-2205241** |
| (State of incorporation)                                |   | (I.R.S. Employer  Identification No.) |

 

**814 Livingston CourtMarietta, Georgia 30067**

(Address of principal executive offices)(Zip Code)

 

**(770) 644-3000**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) has filed all reportsto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required 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 an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes o     No  ý

 

At November 5, 2003, there were 198,364,517 shares of theregistrant’s common stock outstanding.

 

 

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# **PARTI. FINANCIAL INFORMATION**

# ** **

**ITEM 1.FINANCIAL STATEMENTS**

 

2

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
|                                                                                                                                                      |   | **Sept. 30,  2003** |       | **Dec. 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|--------------------|------------|
| **ASSETS**                                                                                                                                                |   |                | ** ** |               | ** ** |
| Current Assets:                                                                                                                                           |   |                |       |               |       |
| Cash and Equivalents                                                                                                                                      |   | $                   | 14.7       |               | $          | 13.8 |   |
| Receivables, Less Allowance for Doubtful  Accounts of $4.1 and $2.0 at Sept. 30, 2003 and Dec. 31, 2002, respectively                                     |   | 216.6               |       | 137.3              |       |
| Inventories                                                                                                                                               |   | 294.9               |       | 174.4              |       |
| Prepaid Expenses                                                                                                                                          |   | 29.9                |       | 8.6                |       |
| Total Current Assets                                                                                                                                      |   | 556.1               |       | 334.1              |       |
| Property, Plant and Equipment, Net of  Accumulated Depreciation of $863.5 and $777.0 at Sept. 30, 2003 and Dec. 31,  2002, respectively                   |   | 1,709.6             |       | 1,232.9            |       |
| Goodwill                                                                                                                                                  |   | 624.4               |       | 268.3              |       |
| Intangible Assets, Net of Accumulated  Amortization of $30.0 and $24.0 at Sept. 30, 2003 and Dec. 31, 2002,  respectively                                 |   | 200.2               |       | 42.8               |       |
| Other Assets                                                                                                                                              |   | 110.0               |       | 79.6               |       |
| Total Assets                                                                                                                                              |   | $                   | 3,200.3    |               | $          | 1,957.7 |   |
|                                                                                                                                                      |   |                |       |               |       |
| **LIABILITIES**                                                                                                                                           |   |                |       |               |       |
| Current Liabilities:                                                                                                                                      |   |                |       |               |       |
| Short-Term Debt                                                                                                                                           |   | $                   | 40.8       |               | $          | 98.7 |   |
| Accounts Payable and Other Accrued Liabilities                                                                                                            |   | 308.0               |       | 180.6              |       |
| Total Current Liabilities                                                                                                                                 |   | 348.8               |       | 279.3              |       |
| Long-Term Debt, Less Current Portion                                                                                                                      |   | 2,141.0             |       | 1,429.7            |       |
| Other Noncurrent Liabilities                                                                                                                              |   | 226.9               |       | 116.1              |       |
| Total Liabilities                                                                                                                                         |   | 2,716.7             |       | 1,825.1            |       |
| Contingencies and Commitments (Note 5)                                                                                                                    |   |                |       |               |       |
| Class A Redeemable Common Stock $120/share  redemption value; 57,930 shares issued and outstanding at Dec. 31, 2002                                       |   | —              |       | 7.0                |       |
|                                                                                                                                                      |   |                |       |               |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                             |   |                |       |               |       |
| Preferred Stock par value $.01 per Share;  50,000,000 shares authorized; no shares issued or outstanding                                                  |   | —              |       | —             |       |
| Common Stock par value $.01 per Share;                                                                                                                    |   |                |       |               |       |
| Common Stock, 500,000,000 shares  authorized; 198,364,517 shares issued and outstanding at Sept. 30, 2003                                                 |   | 2.0                 |       | —             |       |
| Class A Common Stock, 9,000,000 shares  authorized; 7,057,930 shares designated, 7,000,000 non-redeemable shares  issued and outstanding at Dec. 31, 2002 |   | —              |       | 0.1                |       |
| Class B Common Stock, 3,000,000 shares  authorized; 500,000 shares of non-redeemable Common Stock issued and  outstanding at Dec. 31, 2002                |   | —              |       | —             |       |
| Capital in Excess of Par Value                                                                                                                            |   | 1,168.4             |       | 748.7              |       |
| Accumulated Deficit                                                                                                                                       |   | (584.0              | )          | (515.1             | )          |
| Accumulated Derivative Instruments Loss                                                                                                                   |   | (11.7               | )          | (6.1               | )          |
| Minimum Pension Liability Adjustment                                                                                                                      |   | (71.3               | )          | (71.3              | )          |
| Cumulative Currency Translation Adjustment                                                                                                                |   | (19.8               | )          | (30.7              | )          |
| Total Shareholders’ Equity                                                                                                                           |   | 483.6               |       | 125.6              |       |
| Total Liabilities and Shareholders’ Equity                                                                                                           |   | $                   | 3,200.3    |               | $          | 1,957.7 |   |

 

See Notes to CondensedConsolidated Financial Statements.

 

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**GRAPHICPACKAGING CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in Millions, Except Per Share Amounts)(unaudited)**

 
|                                                                        |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                        |   | **Sept. 30,  2003**    |   | **Sept. 30,  2002**   |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
|                                                                        |   |                   |   |                  |   |   |   |   |   |
| Net Sales                                                                   |   | $                      | 478.1  |                  | $      | 326.1 |   | $ | 1,114.7 |   | $ | 951.7 |   |
| Cost of Sales                                                               |   | 396.7                  |   | 253.8                 |   | 912.9 |   | 747.5 |   |
| Selling, General and Administrative                                         |   | 44.7                   |   | 30.9                  |   | 105.4 |   | 90.1 |   |
| Research, Development and Engineering                                       |   | 2.1                    |   | 1.3                   |   | 5.4 |   | 3.7 |   |
| Other Expense (Income), Net                                                 |   | 1.5                    |   | (1.0                  | )      | 3.7 |   | (1.8 | ) |
| Income from Operations                                                      |   | 33.1                   |   | 41.1                  |   | 87.3 |   | 112.2 |   |
| Loss on Early Extinguishment of Debt                                        |   | (45.3                  | )      | -                     |   | (45.3 | ) | (11.5 | ) |
| Interest Income                                                             |   | 0.1                    |   | 0.1                   |   | 0.3 |   | 1.2 |   |
| Interest Expense                                                            |   | (39.7                  | )      | (35.1                 | )      | (107.5 | ) | (112.5 | ) |
| (Loss) Income before Income Taxes and Equity in  Net Earnings of Affiliates |   | (51.8                  | )      | 6.1                   |   | (65.2 | ) | (10.6 | ) |
| Income Tax Expense                                                          |   | 1.4                    |   | 1.7                   |   | 4.8 |   | 2.8 |   |
| Equity in Net Earnings of Affiliates                                        |   | 0.4                    |   | 0.3                   |   | 1.1 |   | 0.7 |   |
| Net (Loss) Income                                                           |   | $                      | (52.8  | )                     | $      | 4.7 |   | $ | (68.9 | ) | $ | (12.7 | ) |
|                                                                        |   |                   |   |                  |   |   |   |   |   |
| (Loss) Income Per Share - Basic                                             |   | $                      | (0.32  | )                     | $      | 0.04 |   | $ | (0.52 | ) | $ | (0.11 | ) |
| (Loss) Income Per Share - Diluted                                           |   | $                      | (0.32  | )                     | $      | 0.04 |   | $ | (0.52 | ) | $ | (0.11 | ) |
|                                                                        |   |                   |   |                  |   |   |   |   |   |
| Weighted Average Number of Shares Outstanding -  Basic                      |   | 163.8                  |   | 115.0                 |   | 131.4 |   | 115.1 |   |
| Weighted Average Number of Shares Outstanding -  Diluted                    |   | 163.8                  |   | 119.6                 |   | 131.4 |   | 115.1 |   |

 

See Notes to Condensed Consolidated FinancialStatements.

 

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**GRAPHICPACKAGING CORPORATION**

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

**(Amountsin Millions)**

**(unaudited)**

 
|                                                        |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|-------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                        |   | **Sept.  30,  2003**    |   | **Sept.  30,  2002**   |   | **Sept.  30,  2003** |   | **Sept.  30,  2002** |   |
| Net (Loss)  Income                                          |   | $                       | (52.8  | )                      | $      | 4.7 |   | $ | (68.9 | ) | $ | (12.7 | ) |
| Other Comprehensive  (Loss) Income:                         |   |                    |   |                   |   |   |   |   |   |
| Derivative  Instruments (Loss) Gain, Net of Tax of $0       |   | (6.1                    | )      | 0.6                    |   | (5.6 | ) | 1.1 |   |
| Foreign  Currency Translation Adjustments, Net of Tax of $0 |   | 3.3                     |   | (1.6                   | )      | 10.9 |   | 7.9 |   |
| Comprehensive  (Loss) Income                                |   | $                       | (55.6  | )                      | $      | 3.7 |   | $ | (63.6 | ) | $ | (3.7 | ) |

 

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amountsin Millions)**

**(unaudited)**

 
|                                                                               |   | **Nine Months Ended** |   |
|------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                               |   | **Sept. 30, 2003**    |   | **Sept. 30, 2002** |   |
| **Cash Flows from Operating  Activities:**                                         |   |                  |   |   |   |
| Net (Loss)                                                                         |   | $                     | (68.9  | ) | $ | (12.7 | ) |
| Noncash Items Included in Net (Loss):                                              |   |                  |   |   |   |
| Depreciation and Amortization                                                      |   | 104.9                 |   | 97.6 |   |
| Loss on Early Extinguishment of Debt                                               |   | 16.7                  |   | 3.0 |   |
| Current and Deferred Income Taxes                                                  |   | 0.2                   |   | — |   |
| Pension, Postemployment and Postretirement  Benefits Expense, Net of Contributions |   | 13.4                  |   | 6.2 |   |
| Equity in Net Earnings of Affiliates, Net of  Dividends                            |   | (0.5                  | )      | (0.1 | ) |
| Amortization of Deferred Debt Issuance Costs                                       |   | 5.5                   |   | 5.1 |   |
| Other                                                                              |   | 11.6                  |   | (1.4 | ) |
| Changes in Operating Assets & Liabilities:                                     |   |                  |   |   |   |
| Receivables                                                                        |   | 3.6                   |   | (14.9 | ) |
| Inventories                                                                        |   | (4.8                  | )      | (6.2 | ) |
| Prepaid Expenses                                                                   |   | (1.4                  | )      | (4.9 | ) |
| Accounts Payable and Other Accrued Liabilities                                     |   | (20.3                 | )      | (9.8 | ) |
| Other Noncurrent Liabilities                                                       |   | 1.7                   |   | (2.4 | ) |
| Net Cash Provided by Operating Activities                                          |   | 61.7                  |   | 59.5 |   |
|                                                                               |   |                  |   |   |   |
| **Cash Flows from Investing  Activities:**                                         |   |                  |   |   |   |
| Purchases of Property, Plant and Equipment                                         |   | (75.9                 | )      | (34.9 | ) |
| Acquisition Fees                                                                   |   | (91.8                 | )      | — |   |
| Cash Acquired in Merger                                                            |   | 6.1                   |   | — |   |
| Decrease (increase) in Other Assets                                                |   | 3.0                   |   | (8.3 | ) |
| Net Cash Used in Investing Activities                                              |   | (158.6                | )      | (43.2 | ) |
|                                                                               |   |                  |   |   |   |
| **Cash Flows from Financing  Activities:**                                         |   |                  |   |   |   |
| Borrowings under Revolving Credit Facilities                                       |   | 343.0                 |   | 217.1 |   |
| Payments on Revolving Credit Facilities                                            |   | (305.3                | )      | (215.2 | ) |
| Proceeds from Issuance of Debt                                                     |   | 2,125.0               |   | 250.0 |   |
| Increase in Debt Issuance Costs                                                    |   | (55.2                 | )      | (3.7 | ) |
| Premium paid on Early Extinguishment of Debt                                       |   | (28.6                 | )      | (8.5 | ) |
| Payments on Debt                                                                   |   | (1,980.4              | )      | (252.4 | ) |
| Issuance of Common Stock                                                           |   | 0.2                   |   | — |   |
| Repurchases of Redeemable Common Stock                                             |   | (1.0                  | )      | (0.4 | ) |
| Net Cash Provided by (Used in) Financing  Activities                               |   | 97.7                  |   | (13.1 | ) |
| Effect of Exchange Rate Changes on Cash                                            |   | 0.1                   |   | 1.0 |   |
| Net Increase in Cash and Equivalents                                               |   | 0.9                   |   | 4.2 |   |
| Cash and Equivalents at Beginning of Period                                        |   | 13.8                  |   | 7.4 |   |
| Cash and Equivalents at End of Period                                              |   | $                     | 14.7   |   | $ | 11.6 |   |

 

See Notes to Condensed Consolidated FinancialStatements.

 

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**GRAPHICPACKAGING CORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**NOTE 1 - ORGANIZATIONAND BASIS OF PRESENTATION**

 

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

 

References to the ‘‘Company’’ are to Riverwood Holding and itssubsidiaries for periods prior to the Merger and to Graphic PackagingCorporation and its subsidiaries for periods after the Merger. 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 U.S. GAAP. Under the purchase method of accounting, theassets and liabilities of Graphic were recorded, as of the date of the closingof the Merger, at their respective fair values and added to those of theCompany. The difference between the purchase price and the fair market valuesof the assets acquired and liabilities assumed of Graphic was recorded asgoodwill. The historical financial statements of Riverwood Holding became thehistorical financial statements of Graphic Packaging Corporation. Theaccompanying consolidated statement of operations includes approximately twomonths of Graphic and nine months of the Company. Note 2 provides summaryunaudited pro forma information and information pertaining to the Merger.

 

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

 

The Condensed Consolidated Financial Statements of the Company includedherein have been prepared by the Company without an audit, pursuant to therules and regulations of the Securities and Exchange Commission (the “SEC”).Certain information and footnote disclosures normally included in the financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. In the opinion of management, all adjustments, consistingof normal recurring adjustments necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiods presented have been made. The Condensed Consolidated Balance Sheet asof December 31, 2002 was derived from audited financial statements.

 

**NOTE 2 – MERGER**

 

Prior to consummation of the Merger, Riverwood Holding had two classesof common stock. There were 9.0 million shares of Class A common stock, parvalue $0.01, authorized with 7.0 million and 7.1 million shares outstanding atAugust 8, 2003 and December 31, 2002, respectively. There were 3.0million shares of Class B common stock, par value $0.01, authorized with 0.5million shares outstanding at August 8, 2003 and December 31, 2002,respectively. In connection with the Merger, the Company’s Board of Directorsapproved a 15.21-to-one stock split. At the time, the Class A and Class Bcommon 

 

7

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stock was combined into one class of common stock, par value $0.01.Immediately after the stock split, there were 500.0 million shares of commonstock authorized with 114.8 million shares outstanding. The aggregate par valueof the issued common stock was increased by reducing Capital in Excess of ParValue by $1.1 million. In connection with the Merger, the shareholders ofGraphic Packaging International Corporation received one share of the Company’scommon stock and associated shareholder rights for each share of GraphicPackaging International Corporation common stock and associated shareholderrights they owned prior to the Merger. Accordingly, Capital in Excess of ParValue in the accompanying Condensed Consolidated Balance Sheets atSeptember 30, 2003 and December 31, 2002 increased $419.7 million.

 

The Company determined that the relative outstanding share ownershipand the designation of certain senior management positions require the Companyto be the acquiring entity for accounting purposes, resulting in the historicalfinancial statements of Riverwood Holding becoming the historical financialstatements of Graphic Packaging Corporation. The assets and liabilities of theacquired business are included in the consolidated balance sheet atSeptember 30, 2003. Results of Graphic have been included in the consolidatedstatement of operations since August 8, 2003, the date of the Merger. Thepurchase price for the acquisition, including transaction costs, has beenallocated to the assets acquired and liabilities assumed based on the estimatedfair market values at the date of the Merger. The purchase price allocation forthe Merger is preliminary and further adjustments are likely to be made ascertain issues are resolved. The stock-for-stock exchange resulted in theissuance of approximately 83.4 million shares of common stock to fund thepurchase price of $468.2 million. The preliminary purchase price allocation isas follows:

 
| **(Amount in Millions)**              |   |   |    |
|---------------------------------------|--------|--------|---------|
|                                  |   |   |    |
| Current assets                        |   | $      | 222.7   |   |
| Property, plant & equipment       |   | 493.4  |    |
| Goodwill                              |   | 356.1  |    |
| Intangible assets                     |   | 162.0  |    |
| Other assets                          |   | 19.7   |    |
| Total assets acquired                 |   | $      | 1,253.9 |   |
|                                  |   |   |    |
| Accounts payable and accrued expenses |   | $      | 140.2   |   |
| Total debt                            |   | 496.6  |    |
| Other                                 |   | 148.9  |    |
| Total liabilities assumed             |   | $      | 785.7   |   |

 

**Selected UnauditedPro Forma Combined Financial Information**

 

The following unaudited pro forma combined financial information ispresented to show the estimated effect of the Merger and the Related FinancingTransactions (as defined herein) and represent the Company’s pro forma combinedfinancial information for the three months and nine months endedSeptember 30, 2003 and 2002 as if the Merger and Related FinancingTransactions had occurred on January 1, 2003 and January 1, 2002,respectively. The unaudited pro forma combined financial information includesadjustments directly attributable to the Merger and the Related FinancingTransactions that are expected to have a continuing impact on the Company. Thepro forma adjustments are based upon available information and certainassumptions that management believes are reasonable.

 

The following financing transactions (the“Related Financing Transactions”) were entered into in connection with theMerger:

 

• The entering into and borrowing under theSenior Secured Credit Agreement, dated as of August 8, 2003, among GraphicPackaging International and the several lender parties thereto (the “SeniorSecured Credit Agreement”), which providefor aggregate maximum borrowings of $1.6 billion under (i) a term loan facility(the “Term Loan Facility”) providing for term loans in an aggregate principalamount of $1.275 billion in two tranches, consisting of Tranche A term loansand Tranche B term loans, and (ii) a revolving credit facility (the “RevolvingCredit Facility”) providing for up to $325 million in 

 

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revolving loans (including standby andcommercial letters of credit) outstanding at anytime, to Graphic PackagingInternational.

 

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

 

• The repayment of all outstanding amounts undereach of RIC’s and GPC’s prior senior secured credit facilities and thetermination of all commitments under those facilities.

 

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

 

• The consummation of an anticipatory change ofcontrol tender offer and consent solicitation for all of GPC’s 8 5/8% seniorsubordinated notes due 2012 (the “Prior GPC Notes”) made in anticipation of thechange of control offer required by the indenture governing the Prior GPCNotes. Out of $300.0 million in aggregate principal amount of Prior GPC Notesoutstanding, approximately $299.1 million in aggregate principal amount ofPrior GPC Notes were tendered in the anticipatory change of control tenderoffer. On September 15, 2003, the Company completed the change of controloffer required pursuant to the indenture governing the Prior GPC Notes. As ofSeptember 30, 2003, $0.8 million in principal amount of the Prior GPCNotes were outstanding.

 

The pro forma financial information was prepared using the purchasemethod of accounting, with the Company treated as the acquirer for accountingpurposes. Under purchase accounting, the total cost of the Merger is allocatedto the tangible and intangible assets acquired and liabilities assumed basedupon their respective fair values at the effective date of the Merger. Apreliminary allocation of the cost of the Merger has been made based uponcurrently available information and management’s estimates. The actual allocationand its effect on results of operations may differ significantly from the proforma amounts included herein.

 

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

 

**CombinedCompanyUnaudited Condensed Pro Forma Combined Statement of OperationsFor the Three Months Ended September 30, 2003(in millions, except per share data)**

** **
|                                                                                                                      |   | **Company** |   | **Graphic** |   | **Pro Forma  Adjustments** |   |   |   | **Condensed  Pro Forma Combined** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|----------------------------|--------|--------|--------|-----------------------------------|--------|
| Net sales                                                                                                                 |   | $           | 478.1  |        | $      | 114.9                      |   | $      | (7.6   | )                                 | A      |   | $ | 585.4 |   |
| Cost of goods sold                                                                                                        |   | 396.7       |   | 103.1       |   |                       | (14.7  | )      | A      |                              | 484.9  |   |
|                                                                                                                      |   |        |   |        |   | (0.2                       | )      | B      |   |                              |   |
| Selling, general and administrative and research and development  expense                                                 |   | 48.3        |   | 8.7         |   | 4.2                        |   | B      |   | 61.2                              |   |
| Operating income                                                                                                          |   | 33.1        |   | 3.1         |   | 3.1                        |   |   |   | 39.3                              |   |
| Interest expense, net                                                                                                     |   | (39.6       | )      | (3.9        | )      | 4.0                        |   | C      |   | (39.5                             | )      |
| Loss on early extinguishment of debt                                                                                      |   | (45.3       | )      | (1.3        | )      | —                     |   |   |   | (46.6                             | )      |
| Income (loss) before income taxes, equity earnings of affiliates and  cumulative effect of change in accounting principle |   | (51.8       | )      | (2.1        | )      | 7.1                        |   |   |   | (46.8                             | )      |
| Income tax (expense) benefit                                                                                              |   | (1.4        | )      | 0.2         |   | —                     |   |   |   | (1.2                              | )      |
| Income (loss) before equity earnings of affiliates and cumulative  effect of change in accounting principle               |   | (53.2       | )      | (1.9        | )      | 7.1                        |   |   |   | (48.0                             | )      |
| Equity in net earnings of affiliates                                                                                      |   | 0.4         |   | —      |   | —                     |   |   |   | 0.4                               |   |
| (Loss) income before cumulative effect of change in accounting  principle                                                 |   | (52.8       | )      | (1.9        | )      | 7.1                        |   |   |   | (47.6                             | )      |
| Preferred stock dividends declared                                                                                        |   | —      |   | 1.1         |   | (1.1                       | )      | D      |   | —                            |   |
| Income (loss) attributable to common stockholders before cumulative  effect of change in accounting principle             |   | (52.8       | )      | (3.0        | )      | 8.2                        |   |   |   | (47.6                             | )      |
| (Loss) per basic share before cumulative effect of change in  accounting principle                                        |   | $           | (0.32  | )           |   |                       |   |   |   |                              | $      | (0.24 | ) |
| (Loss) per diluted share before cumulative effect of change in  accounting principle                                      |   | $           | (0.32  | )           |   |                       |   |   |   |                              | $      | (0.24 | ) |
| Weighted average shares outstanding:                                                                                      |   |        |   |        |   |                       |   |   |   |                              |   |
| Basic                                                                                                                     |   | 163.8       |   |        |   |                       |   |   |   | 198.3                             |   |
| Diluted                                                                                                                   |   | 163.8       |   |        |   |                       |   |   |   | 198.3                             |   |
|                                                                                                                           |        |             |        |             |        |                            |        |        |        |                                   |        |  |  |  |  |

 

*Seeaccompanying Notes to Unaudited Condensed Pro Forma Combined FinancialStatements.*

 

9

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**CombinedCompanyUnaudited Condensed Pro Forma Combined Statement of OperationsFor the Three Months Ended September 30, 2002(in millions, except per share data)**

 
|                                                                                                                      |   | **Company** |   | **Graphic** |   | **ProForma  Adjustments** |   |   |   | **Condensed  Pro Forma  Combined** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|---------------------------|--------|--------|--------|------------------------------------|--------|
| Net sales                                                                                                                 |   | $           | 326.1  |        | $      | 270.0                     |   | $      | (13.7  | )                                  | A      |   | $ | 582.4 |   |
| Cost of goods sold                                                                                                        |   | 253.8       |   | 240.9       |   |                      | (13.7  | )      | A      |                               | 480.4  |   |
|                                                                                                                      |   |        |   |        |   | (0.6                      | )      | B      |   |                               |   |
| Selling, general and administrative and research and development  expense                                                 |   | 31.2        |   | 16.2        |   | 7.0                       |   | B      |   | 54.4                               |   |
| Operating income                                                                                                          |   | 41.1        |   | 12.9        |   | (6.4                      | )      |   |   | 47.6                               |   |
| Interest expense, net                                                                                                     |   | (35.0       | )      | (11.2       | )      | 8.0                       |   | C      |   | (38.2                              | )      |
| Loss on early extinguishment of debt                                                                                      |   | —      |   | —      |   | —                    |   |   |   | —                             |   |
| Income (loss) before income taxes, equity earnings of affiliates and  cumulative effect of change in accounting principle |   | 6.1         |   | 1.7         |   | 1.6                       |   |   |   | 9.4                                |   |
| Income tax (expense) benefit                                                                                              |   | (1.7        | )      | (0.6        | )      | —                    |   |   |   | (2.3                               | )      |
| Income (loss) before equity earnings of affiliates and cumulative  effect of change in accounting principle               |   | 4.4         |   | 1.1         |   | 1.6                       |   |   |   | 7.1                                |   |
| Equity in net earnings of affiliates                                                                                      |   | 0.3         |   | —      |   | —                    |   |   |   | 0.3                                |   |
| (Loss) income before cumulative effect of change in accounting  principle                                                 |   | 4.7         |   | 1.1         |   | 1.6                       |   |   |   | 7.4                                |   |
| Preferred stock dividends declared                                                                                        |   | —      |   | 2.5         |   | (2.5                      | )      | D      |   | —                             |   |
| Income (loss) attributable to common stockholders before cumulative  effect of change in accounting principle             |   | 4.7         |   | (1.4        | )      | 4.1                       |   |   |   | 7.4                                |   |
| (Loss) per basic share before cumulative effect of change in  accounting principle                                        |   | $           | 0.04   |        |   |                      |   |   |   |                               | $      | 0.04 |   |
| (Loss) per diluted share before cumulative effect of change in  accounting principle                                      |   | $           | 0.04   |        |   |                      |   |   |   |                               | $      | 0.04 |   |
| Weighted average shares outstanding:                                                                                      |   |        |   |        |   |                      |   |   |   |                               |   |
| Basic                                                                                                                     |   | 115.0       |   |        |   |                      |   |   |   | 198.5                              |   |
| Diluted                                                                                                                   |   | 119.6       |   |        |   |                      |   |   |   | 203.1                              |   |
|                                                                                                                           |        |             |        |             |        |                           |        |        |        |                                    |        |  |  |  |  |

 

*Seeaccompanying Notes to Unaudited Condensed Pro Forma Combined FinancialStatements.*

 

10

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**CombinedCompanyUnaudited Condensed Pro Forma Combined Statement of OperationsFor the Nine Months Ended September 30, 2003(in millions, except per share data)**

 
|                                                                                                                      |   | **Company** |    | **Graphic** |   | **Pro  Forma  Adjustments** |   |   |   | **Condensed  Pro Forma  Combined** |    |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------|---------|-------------|--------|-----------------------------|--------|--------|--------|------------------------------------|---------|
| Net sales                                                                                                                 |   | $           | 1,114.7 |        | $      | 650.8                       |   | $      | (38.0  | )                                  | A       |   | $ | 1,727.5 |   |
| Cost of goods sold                                                                                                        |   | 912.9       |    | 581.7       |   |                        | (45.0  | )      | A      |                               | 1,448.3 |   |
|                                                                                                                      |   |        |    |        |   | (1.3                        | )      | B      |   |                               |    |
| Selling, general and administrative and research and development  expense                                                 |   | 114.5       |    | 44.0        |   | 18.0                        |   | B      |   | 176.5                              |    |
| Operating income                                                                                                          |   | 87.3        |    | 25.1        |   | (9.7                        | )      |   |   | 102.7                              |    |
| Interest expense, net                                                                                                     |   | (107.2      | )       | (23.0       | )      | 18.4                        |   | C      |   | (111.8                             | )       |
| Loss on early extinguishment of debt                                                                                      |   | (45.3       | )       | (1.3        | )      | —                      |   |   |   | (46.6                              | )       |
| Income (loss) before income taxes, equity earnings of affiliates and  cumulative effect of change in accounting principle |   | (65.2       | )       | 0.8         |   | 8.7                         |   |   |   | (55.7                              | )       |
| Income tax (expense) benefit                                                                                              |   | (4.8        | )       | (1.0        | )      | —                      |   |   |   | (5.8                               | )       |
| Income (loss) before equity earnings of affiliates and cumulative  effect of change in accounting principle               |   | (70.0       | )       | (0.2        | )      | 8.7                         |   |   |   | (61.5                              | )       |
| Equity in net earnings of affiliates                                                                                      |   | 1.1         |    | —      |   | —                      |   |   |   | 1.1                                |    |
| (Loss) income before cumulative effect of change in accounting  principle                                                 |   | (68.9       | )       | (0.2        | )      | 8.7                         |   |   |   | (60.4                              | )       |
| Preferred stock dividends declared                                                                                        |   | —      |    | 6.1         |   | (6.1                        | )      | D      |   | —                             |    |
| Income (loss) attributable to common stockholders before cumulative  effect of change in accounting principle             |   | (68.9       | )       | (6.3        | )      | 14.8                        |   |   |   | (60.4                              | )       |
| (Loss) per basic share before cumulative effect of change in  accounting principle                                        |   | $           | (0.52   | )           |   |                        |   |   |   |                               | $       | (0.30 | ) |
| (Loss) per diluted share before cumulative effect of change in  accounting principle                                      |   | $           | (0.52   | )           |   |                        |   |   |   |                               | $       | (0.30 | ) |
| Weighted average shares outstanding:                                                                                      |   |        |    |        |   |                        |   |   |   |                               |    |
| Basic                                                                                                                     |   | 131.4       |    |        |   |                        |   |   |   | 198.3                              |    |
| Diluted                                                                                                                   |   | 131.4       |    |        |   |                        |   |   |   | 198.3                              |    |
|                                                                                                                           |        |             |         |             |        |                             |        |        |        |                                    |         |  |  |  |  |

 

*Seeaccompanying Notes to Unaudited Condensed Pro Forma Combined Financial Statements.*

 

11

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**CombinedCompanyUnaudited Condensed Pro Forma Combined Statement of OperationsFor the Nine Months Ended September 30, 2002(in millions, except per share data)**

 
|                                                                                                                      |   | **Company** |   | **Graphic** |   | **Pro Forma  Adjustments** |   |   |   | **Condensed  Pro Forma Combined** |    |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|----------------------------|--------|--------|--------|-----------------------------------|---------|
| Net sales                                                                                                                 |   | $           | 951.7  |        | $      | 797.6                      |   | $      | (41.0  | )                                 | A       |   | $ | 1,708.3 |   |
| Cost of goods sold                                                                                                        |   | 747.5       |   | 701.4       |   |                       | (41.0  | )      | A      |                              | 1,406.3 |   |
|                                                                                                                      |   |        |   |        |   | (1.6                       | )      | B      |   |                              |    |
| Selling, general and administrative and research and development  expense                                                 |   | 92.0        |   | 46.9        |   | 21.1                       |   | B      |   | 160.0                             |    |
| Operating income                                                                                                          |   | 112.2       |   | 49.3        |   | (19.5                      | )      |   |   | 142.0                             |    |
| Interest expense, net                                                                                                     |   | (111.3      | )      | (35.1       | )      | 22.8                       |   | C      |   | (123.6                            | )       |
| Loss on early extinguishment of debt                                                                                      |   | (11.5       | )      | (15.8       | )      | —                     |   |   |   | (27.3                             | )       |
| Income (loss) before income taxes, equity earnings of affiliates and  cumulative effect of change in accounting principle |   | (10.6       | )      | (1.6        | )      | 3.3                        |   |   |   | (8.9                              | )       |
| Income tax (expense) benefit                                                                                              |   | (2.8        | )      | 0.6         |   | —                     |   |   |   | (2.2                              | )       |
| Income (loss) before equity earnings of affiliates and cumulative  effect of change in accounting principle               |   | (13.4       | )      | (1.0        | )      | 3.3                        |   |   |   | (11.1                             | )       |
| Equity in net earnings of affiliates                                                                                      |   | 0.7         |   | —      |   | —                     |   |   |   | 0.7                               |    |
| (Loss) income before cumulative effect of change in accounting  principle                                                 |   | (12.7       | )      | (1.0        | )      | 3.3                        |   |   |   | (10.4                             | )       |
| Preferred stock dividends declared                                                                                        |   | —      |   | 7.5         |   | (7.5                       | )      | D      |   | —                            |    |
| Income (loss) attributable to common stockholders before cumulative  effect of change in accounting principle             |   | (12.7       | )      | (8.5        | )      | 10.8                       |   |   |   | (10.4                             | )       |
| (Loss) per basic share before cumulative effect of change in  accounting principle                                        |   | $           | (0.11  | )           |   |                       |   |   |   |                              | $       | (0.05 | ) |
| (Loss) per diluted share before cumulative effect of change in  accounting principle                                      |   | $           | (0.11  | )           |   |                       |   |   |   |                              | $       | (0.05 | ) |
| Weighted average shares outstanding:                                                                                      |   |        |   |        |   |                       |   |   |   |                              |    |
| Basic                                                                                                                     |   | 115.1       |   |        |   |                       |   |   |   | 198.3                             |    |
| Diluted                                                                                                                   |   | 115.1       |   |        |   |                       |   |   |   | 198.3                             |    |
|                                                                                                                           |        |             |        |             |        |                            |        |        |        |                                   |         |  |  |  |  |

 

*Seeaccompanying Notes to Unaudited Condensed Pro Forma Combined FinancialStatements.*

 

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Adjustments inthe unaudited condensed pro forma combined financial statements are as follows:

 

**A       **RICsells CUK folding boxboard to Graphic for use in certain cartons manufacturedby Graphic.  This pro forma adjustmenteliminates the intercompany sales and cost of goods sold ($7.6 million and$13.7 million for the three months ended September 30, 2003, and 2002, respectively,and $38.0 million and $41.0 million for the nine months ended September 30,2003 and 2002, respectively, related to this activity.  Cost of goods sold also includes anadjustment of $7.1 million for the three months and nine months ended September30, 2003.  The Pro Forma adjustmenteliminates the effect of the increase in fair value of inventory which wasrecorded as an addition to cost of goods sold as a non-recurring item in thethird quarter of 2003.

 

**B**        The amortization of the identifiableintangible assets (customer contracts, patents and proprietary technology) isreflected as a pro forma adjustment to the unaudited condensed pro formacombined statement of operations. The Company expects to amortize the estimatedfair value of the identifiable intangibles of approximately $162.0 millionon a straight-line basis over an estimated useful life of eighteen years exceptfor non-compete agreements which have an estimated useful life of approximatelyone year.  The Company expects thatdepreciation expense would have decreased by $0.2 million and $0.6 million forthe three months ended September 30, 2003 and 2002 respectively, and by $1.3million and $1.6 million for the nine months ended September 30, 2003 and 2002,respectively, as a result of the Company revising their depreciable asset livesand the fair value of the property purchased in the Merger.  The net effect of this increasedamortization and decreased depreciation of $4.0 million and $6.4 millionfor the three months ended September 30, 2003 and 2002, respectively, and$16.7 million and $19.5 million for the nine months ended September 30, 2003and 2002, respectively, is reflected on the unaudited condensed proforma combined statements of operations as follows:

 
|                                                                                |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                                |   | **Sept. 30,  2003**    |   | **Sept. 30,  2002**   |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
|                                                                                |   |                   |   |                  |   |   |   |   |   |
| Cost of  goods sold                                                                 |   | $                      | (0.2   | )                     | $      | (0.6 | ) | $ | (1.3 | ) | $ | (1.6 | ) |
| Selling, general and administrative and  research and development expense           |   | 4.2                    |   | 7.0                   |   | 18.0 |   | 21.1 |   |
| Total additional amortization and  depreciation of intangible assets and properties |   | $                      | 4.0    |                  | $      | 6.4 |   | $ | 16.7 |   | $ | 19.5 |   |

 

**C**        In connection with the Merger,substantially all of RIC's and Graphic's then outstanding indebtedness wasredeemed, repurchased or otherwise repaid and replaced with borrowings underthe Senior Secured Credit Agreement and indebtedness under the Senior Notes andSenior Subordinated Notes.  The pro forma interest expense adjustmentsreflect an average variable interest rate of 4.09% for the combined company’snew bank debt and a blended fixed rate of 9.0% on the combined company’s SeniorNotes and Senior Subordinated Notes.

 

**D**        To reflect the new equity structure ofthe Company, including conversion of $100 million of Graphic’s convertiblepreferred stock into common stock (accordingly there is no preferred stockdividend declared).

 

**NOTE 3 - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

For a summary of the Company’s significant accounting policies, pleaserefer to the Company’s annual report on Form 10-K/A for the year endedDecember 31, 2002.

 

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

 

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

 

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

 

As permitted by Statement of FinancialAccounting 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 (‘‘APB25’’), *‘‘Accountingfor Stock Issued to Employees’’*. Compensation cost for stockoptions, if any, is measured as the excess of the market price of the Company’scommon stock at the date of grant over the exercise price to be paid by thegrantee to acquire the stock. The Company has adopted disclosure-only provisionsof SFAS No. 123 and SFAS No. 148, *‘‘Accounting for Stock-Based Compensation—Transitionand Disclosure—an Amendment of FASB Statement No. 123’’*.  If theCompany had elected to recognize compensation expense based upon the fair valueat the grant dates for awards under these plans, the Company’s Net (Loss)Income would have been as follows:

 

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|                                                                                                                                                      |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
| **(In milions of dollars)**                                                                                                                               |   | **Sept. 30,  2003**    |   | **Sept. 30,  2002**   |   | **Sept. 30,  2003** |   | **Sept. 30,  2002** |   |
| Net (Loss) Income, As Reported                                                                                                                            |   | $                      | (52.8  | )                     | $      | 4.7 |   | $ | (68.9 | ) | $ | (12.7 | ) |
| Deduct: Total additional stock-based  employee compensation cost, net of tax, that would have been included in Net  (Loss) Income under fair value method |   | (0.5                   | )      | (0.1                  | )      | 0.6 |   | (0.2 | ) |
| Adjusted Net (Loss) Income                                                                                                                                |   | $                      | (53.3  | )                     | $      | 4.6 |   | $ | (68.3 | ) | $ | (12.9 | ) |
|                                                                                                                                                      |   |                   |   |                  |   |   |   |   |   |
| (Loss) Income Per Basic Share - As  Reported                                                                                                              |   | (0.32                  | )      | 0.04                  |   | (0.52 | ) | (0.11 | ) |
| (Loss) Income Per Basic Share - As  Adjusted                                                                                                              |   | (0.33                  | )      | 0.04                  |   | (0.52 | ) | (0.11 | ) |
|                                                                                                                                                      |   |                   |   |                  |   |   |   |   |   |
| (Loss) Income Per Diluted Share - As  Reported                                                                                                            |   | (0.32                  | )      | 0.04                  |   | (0.52 | ) | (0.11 | ) |
| (Loss) Income Per Diluted Share - As  Adjusted                                                                                                            |   | (0.33                  | )      | 0.04                  |   | (0.52 | ) | (0.11 | ) |

 

The Company recognized compensation expenseon stock options for which the exercise price was less than the fair value atthe date of grant in the amount of $0.4 million and $0.6 million for the threemonths ended September 30, 2003 and 2002, and $1.0 million and $1.7million for the nine months ended September 30, 2003 and 2002, respectively.

 

**NOTE 4 - INVENTORIES**

 

The major classes of inventories were as follows:

 
| **(In millions of dollars)** |   | **September 30, 2003** |   | **December 31, 2002** |   |
|------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                         |   |                        |   |                       |   |
| Finished goods               |   | $                           | 142.1  |                       | $      | 78.5 |   |
| Work-in-process              |   | 26.2                        |   | 15.2                       |   |
| Raw materials                |   | 80.8                        |   | 42.8                       |   |
| Supplies                     |   | 45.8                        |   | 37.9                       |   |
| Total                        |   | $                           | 294.9  |                       | $      | 174.4 |   |

 

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

 

**NOTE 5 -CONTINGENCIES AND COMMITMENTS**

 

The Company is subject to a broadrange of foreign, federal, state and local environmental, health and safetylaws and regulations, including those governing discharges to air, soil andwater, the management, treatment and disposal of hazardous substances, theinvestigation and remediation of contamination resulting from releases ofhazardous substances, and the health and safety of employees. The Company’senvironmental liabilities and obligations may result in significant costs,which could negatively impact its financial condition and results ofoperations. Capital expenditures may be necessary for the combined company tocomply with such laws and regulations, including the U.S. EnvironmentalProtection Agency’s regulations mandating stringent controls on air and waterdischarges from pulp and paper mills, 

 

14

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or the cluster rules. The Company expects tospend approximately $22 million over the next two years to comply with thecluster rules. These costs have not been accrued, but rather are a part of theCompany’s capital expenditure plan. Most of these costs are anticipated to beincurred in the first two quarters of 2005. Any failure to comply withenvironmental, health and safety laws or any permits and authorizations requiredthereunder could subject the Company to fines or sanctions. In addition, someof the Company’s current and former facilities, and facilities at which itdisposed of hazardous substances, are the subject of environmentalinvestigations and remediations resulting from releases of hazardous substancesor other constituents. Some current and former facilities have a history ofindustrial usage for which investigation and remediation obligations could beimposed in the future or for which indemnification claims could be assertedagainst the Company. The Company cannot predict with certainty futureinvestigation or remediation costs or future costs relating to indemnificationclaims. Also, potential future closures of facilities may necessitate furtherinvestigation and remediation at those facilities.

 

The federal Clean Air Act imposes stringent limits on air emissions,establishes a federal permit program (Title V) and provides for enforcementsanctions.  Where necessary, theCompany’s plants have received or submitted an application to the appropriatepermitting authority for a Title V permit. The Company upgrades and replaces equipment in order to comply with air qualitystandards.

 

The federal Clean Water Act establishes a system of minimum nationaleffluent standards for each industry, water quality standards for the nation’swaterways and a permit program that provides discharge limitations and providesfor enforcement sanctions. It also regulates releases and spills of oil andhazardous materials and wastewater and stormwater discharges.  Many ofthe Company’s operations discharge to publicly owned treatment works and aresubject to pretreatment requirements and limitations.

 

The federal Comprehensive Environmental Response, Compensation andLiability Act (‘‘CERCLA’’) establishes liability for waste generators, currentand former site owners and operators and others in connection with releases ofhazardous substances. In several instances, the Company has been identified asa Potentially Responsible Party (‘‘PRP’’) under CERCLA and similar state lawswith respect to remediation of sites at which hazardous substances have beenreleased. These actions are not material. The Company is involved in investigation and remediation projects for certainproperties that it currently or formerly owned or operated. The Company hasalso received demands arising out of alleged contamination of variousproperties currently or formerly operated by it, and at certain waste disposalsites. The Company’s costs in many instances cannot be reliably estimated untilthe remediation process is substantially underway or liability has beenaddressed.

 

The Company could incur significant costs inconnection with investigation and remediation activities and otherenvironmental matters. Some current and former facilities have a history ofindustrial usage for which investigation and remediation obligations could beimposed in the future or for which indemnification claims could be assertedagainst the Company.

 

The presence of soil and groundwatercontamination has been investigated at portions of the Company’s Portland,Oregon plant. The site is listed on Oregon’s inventory of contaminated sites.The Company periodically monitors groundwater conditions at the site. While theCompany does not currently have any remediation obligations at the site, suchobligations could arise in the future.

 

The Kalamazoo, Michigan mill and carton planthave long histories of industrial usage. Portions of the property on which themill is located have been found to contain some contamination. Remediationobligations could arise in the future at these facilities.

 

The Company is a party to a number of lawsuits arisingout of the ordinary conduct of its business, the most significant of which arelisted below. Although the timing and outcome of these lawsuits cannot bepredicted, 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.

 

OnApril 2, 2003, two separate lawsuits were filed in the District Court,Jefferson County, Colorado, against Graphic, Graphic’s directors and theCompany relating to the Merger between Graphic and the 

 

15

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Companypursuant to the merger agreement. The complaints were filed by Robert F. Smithand Harold Lightweis, on behalf of themselves and all others similarlysituated. Each of the two complaints alleges breach of fiduciary duties byGraphic’s directors to Graphic’s public shareholders in connection with theMerger and that the Company aided and abetted the alleged breach. Thecomplaints also allege that the Coors family stockholders negotiated the mergerconsideration in their own interest and not in the interest of the publicstockholders. The complaints seek an injunction against consummation of theMerger, rescission of the Merger if it is consummated, unspecified damages,costs and other relief permitted by law and equity. These two lawsuits havebeen consolidated. Messrs. Smith and Lightweis filed a motion asking to dismisstheir claims as moot and for an award of attorney’s fees of $300,000 plusexpenses. The Company intends to object to the request for fees and expenses.On July 3, 2003, a third lawsuit was filed in District Court of JeffersonCounty in Colorado, on behalf of a purported class of Graphic’s stockholdersagainst Graphic, Graphic’s directors and the Company, alleging that Graphic’sdirectors breached their fiduciary duties to the stockholders of Graphic inconnection with the negotiation of the Merger and that Graphic and the Companyaided and abetted the alleged breach. The complaint alleges that the defendantsnegotiated the terms of the Merger in their own interest and in the interest ofcertain other insiders (including the Coors family stockholders), to thedetriment of the public stockholders. The complaint, which is encaptioned JamesA. Bederka, On behalf of Himself and All Other Similarly Situated v. RiverwoodHolding, et al., seeks certain equitable relief, including an injunctionagainst the consummation of the Merger, rescission of the Merger if it isconsummated, rescission of the sale of August 15, 2000 of the convertiblepreferred stock which had been issued on August 15, 2000 to the Grover C.Coors Trust (the “Trust”), and injunction against the conversion of theconvertible preferred stock in connection with the Merger and costs. Graphicfiled motions asking to dismiss the lawsuit or to bifurcate the claim to enjointhe Merger from the claim to rescind issuance or enjoin the conversion of thepreferred stock and to either stay the claim relating to the preferred stock orconsolidate that claim with the lawsuit filed by Chinyun Kim disclosed below.By order dated October 7, 2003, the court dismissed Graphic from theBederka lawsuit, leaving Graphic’s directors and the Company as defendants. Thecourt also refused to consolidate the Bederka lawsuit with the Chinyun Kimlawsuit (discussed below), but stayed all discovery in the Bederka lawsuitrelating to the sale of the preferred stock. The court has allowed the partiesto proceed, however, with disclosures and discovery relating to the Merger. TheCompany believes that these three lawsuits are without merit.

 

On February 19, 2002, Chinyun Kim fileda putative class action claim in District Court Jefferson County, Coloradoagainst Graphic and certain of its shareholders and directors alleging breachof fiduciary duty in connection with the issuance on August 15, 2000 ofthe convertible preferred stock to the Trust. Plaintiff is seeking damages inthe amount of over $43 million or, alternatively, to require transfer to theclass of some or all of the Trust’s Graphic common stock into which theconvertible preferred stock was converted. The court dismissed plaintiff’sclaims against Graphic for breach of fiduciary duty while allowing theplaintiff to proceed against the named directors and shareholders, includingcertain other Coors family trusts. The Company is continuing to provide a defenseto this action pursuant to its indemnification obligations. Currently,discovery is being conducted. By order dated June 12, 2003, the courtcertified a class comprised of all owners of Graphic common stock as ofAugust 2, 2000, excluding the defendants and members of the Coors familyand their affiliates and excluding any additional shares purchased by classmembers after August 2, 2000. Trial is scheduled to commence onJanuary 13, 2004. The Company believes that the transaction was in thebest interest of Graphic and its shareholders and that the case is withoutmerit.

 

In connection with the resale of its aluminumbusiness in 1999, Graphic guaranteed accounts receivable owed by the formerowner of the business. After the resale, the former owner refused to pay theamounts owed, equal to $2.4 million. Pursuant to the terms of the resaleagreement, Graphic paid this amount and sued the former owner in the UnitedStates District Court for the District of Colorado on April 18, 2000. Theformer owner counterclaimed for an additional $11.0 million for certain spareparts, and Graphic amended its claim to seek an additional $16.0 million inoverpayment for raw materials to run the business prior to resale. This claimincreased from $14.3 million to $16.0 million after making an adjustment forcertain offsets to which Graphic was entitled. The parties have filed motionsfor summary judgment. The Company does not believe that this litigation willhave a material adverse effect on its consolidated financial position, resultsof operations or cash flows.

 

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On April 14, 2000, Lemelson Medical,Education & Research Foundation sued Graphic and 75 other defendants in theUnited States District Court for the District of Arizona for unspecifieddamages for alleged infringement of certain patents relating to ‘‘machinevision’’ and ‘‘automatic identification.’’ This is one of a series of casesbrought against 430 defendants and has been stayed pending a determination of alawsuit for noninfringement brought by equipment manufacturers which utilizethe technology. The Company believes, based upon the advice of counsel, thatthe Lemelson patents are invalid and therefore the litigation against theCompany will not have a material adverse effect on its financial position,results of operations or cash flows.

 

**NOTE 6 – BUSINESSSEGMENT INFORMATION**

 

The Company reports its results in two business segments: paperboardpackaging and containerboard/other. These segments are evaluated by the chiefoperating decision maker based primarily on income from operations. TheCompany’s reportable segments are strategic business units that offer differentproducts. The paperboard packaging business segment includes the production andsale of paperboard for its beverage multiple packaging and consumer productspackaging businesses from its West Monroe, Louisiana, Macon, Georgia,Kalamazoo, Michigan and Norrkoping, Sweden mills; carton converting facilitiesin the United States, Europe and Brazil; and the design, manufacture andinstallation of packaging machinery related to the assembly of cartons. Thecontainerboard/other business segment primarily includes the production andsale of linerboard, corrugating medium and kraft paper from paperboard mills inthe United States.

 

Business segment information is as follows:

 

 
|                          |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|-------------------------------|--------|-------------------------|--------|------------------------|--------|
| **(In  millions of dollars)** |   | **Sept.  30,  2003**    |   | **Sept.  30,  2002**   |   | **Sept.  30,  2003** |   | **Sept.  30,  2002** |   |
| NET  SALES:                   |   |                    |   |                   |   |   |   |   |   |
| Paperboard  Packaging         |   | $                       | 459.0  |                   | $      | 304.5 |   | $ | 1,054.1 |   | $ | 892.2 |   |
| Containerboard/Other          |   | 19.1                    |   | 21.6                   |   | 60.6 |   | 59.5 |   |
|                          |   | $                       | 478.1  |                   | $      | 326.1 |   | $ | 1,114.7 |   | $ | 951.7 |   |
|                          |   |                    |   |                   |   |   |   |   |   |
| INCOME  FROM OPERATIONS:      |   |                    |   |                   |   |   |   |   |   |
| Paperboard  Packaging         |   | $                       | 48.5   |                   | $      | 51.9 |   | $ | 130.5 |   | $ | 147.0 |   |
| Containerboard/Other          |   | (5.9                    | )      | (4.8                   | )      | (19.0 | ) | (18.0 | ) |
| Corporate                     |   | (9.5                    | )      | (6.0                   | )      | (24.2 | ) | (16.8 | ) |
|                          |   | $                       | 33.1   |                   | $      | 41.1 |   | $ | 87.3 |   | $ | 112.2 |   |

 

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**NOTE 7 – DERIVATIVEINSTRUMENTS AND HEDGING ACTIVITIES**

 

The Company is exposed to fluctuations in interest rates on itsvariable rate debt and fluctuations in foreign currency transaction cash flows.The Company actively monitors these fluctuations and uses derivativeinstruments from time to time to manage its exposure. In accordance with itsrisk management strategy, the Company uses derivative instruments only for thepurpose of managing risk associated with fluctuations in the cash flow of theunderlying exposures identified by management. The Company does not trade or usederivative instruments with the objective of earning financial gains oninterest or currency rates, nor does it use leveraged instruments orinstruments where there are no underlying exposures identified. The Company’suse of derivative instruments may result in short-term gains or losses and mayincrease volatility in its earnings.

 

The following is a summary of the Company’s derivative instruments asof September 30, 2003 and the accounting policies it employs:

 

# ***Hedges ofAnticipated Cash Flows***

# ** **

The Company uses interestrate swap agreements to fix a portion of its variable rate Term Loan Facilityto a fixed rate in order to reduce the impact of interest rate changes onfuture income. The differential to be paid or received under these agreementsis recognized as an adjustment to interest expense related to the debt. AtSeptember 30, 2003, the Company had interest rate swap agreements with anotional amount of $990 million, which expire on various dates through theyears 2003 through 2007 under which the Company will pay fixed rates of 1.89%to 3.52% and receive three-month LIBOR.

 

During the third quarter of 2003, the Company de-designated itsinterest rate swap agreements due to the early payment of the underlying debtas a result of the Merger. As a result, the Company recognized a mark-to-marketloss of approximately $3.6 million in the accompanying Condensed ConsolidatedStatement of Operations in Interest Expense for the nine months endedSeptember 30, 2003. The Company subsequently re-designated these interestrate swap agreements to hedge its new debt issuance.

 

During the nine months ended September 30, 2003, the Companyentered into forward exchange contracts to hedge certain anticipated foreigncurrency transactions. The purpose of the forward exchange contracts is toprotect the Company from the risk that the eventual functional currency cashflows resulting from anticipated foreign currency transactions will beadversely affected by changes in exchange rates. At September 30, 2003,various forward exchange contracts existed, which expire on various datesthrough the year 2004. When measured in U.S. dollars at quarter-end exchangerates, the notional amount of the purchased forward exchange contracts totaledapproximately $128.8 million. Gains and losses, if any, related to thesecontracts are recognized in income when the anticipated transaction affectsincome. No amounts were reclassified to earnings during 2003 in connection withforecasted transactions that were no longer considered probable of occurring.

 

The balance of $11.7 million recorded in Accumulated DerivativeInstruments Loss at September 30, 2003 is expected to be reclassified intofuture earnings, contemporaneously with and offsetting changes in the relatedhedged exposure. The actual amount that will be reclassified to future earningsover the next twelve months may vary from this amount as a result of changes inmarket conditions.

 

The following is a reconciliation of current period changes in the fairvalue of the interest rate swap agreements and foreign currency forward andoption contracts which have been recorded as Accumulated Derivative InstrumentsLoss in the accompanying Condensed Consolidated Balance Sheets atSeptember 30, 2003 and December 31, 2002 and as Derivative Instruments(Loss) Gain in the accompanying Condensed Consolidated Statement of Operationsand Comprehensive (Loss) Income for the nine months ended September 30,2003.

 

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| **(In millions of dollars)**          |   |   |   |
|---------------------------------------|--------|--------|--------|
|                                  |   |   |   |
| Balance at December 31, 2001     |   | $      | (4.6   | ) |
| Reclassification to earnings          |   | 6.0    |   |
| Current period decrease in fair value |   | (7.5   | )      |
| Balance at December 31, 2002     |   | (6.1   | )      |
| Reclassification to earnings          |   | 0.6    |   |
| Current period increase in fair value |   | (6.2   | )      |
| Balance at September 30, 2003    |   | $      | (11.7  | ) |

 

During the nine months ended September 30, 2003, there was nomaterial ineffective portion related to changes in the fair value of theinterest rate swap agreements and no material ineffective portion related tochange in the fair value of foreign currency forward and option contracts.Additionally, there were no amounts excluded from the measure of effectiveness.

 

*Derivatives not Designated as Hedges*

 

The Company has foreign currency forward contracts used to hedge theexposure associated with foreign currency denominated receivables. Thesecontracts are presently being and will continue to be marked-to-market throughthe income statement.

 

The Company enters intofixed price natural gas contracts designed to effectively hedge prices for asubstantial portion of its natural gas requirements at its U.S. mills. Thepurpose of the fixed price natural gas contracts is to eliminate or reduceprice risk with a focus on making cash flows more predictable. The Company hasentered into contracts to hedge a portion of its natural gas requirements forits U.S. mills through 2004. These contracts are not accounted for asderivative instruments under SFAS No. 133, as they qualify for the normalpurchase exemption.

 

**NOTE 8 – NEWACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the FASB issued SFAS No. 143, *‘‘Accounting for Asset RetirementObligations’’*(‘‘SFAS No. 143’’), which is effective January 1,2003. SFAS No. 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. The Company adopted SFAS No. 143 effectiveJanuary 1, 2003 and the adoption did not have a significant impact on itsfinancial position and results of operations.

 

In April 2002, the FASB issued SFAS No. 145, *‘‘Rescission of FASB Statements No. 4,44, and 64,**Amendment of FASB Statement No. 13, and TechnicalCorrections as of April 2002’’* (‘‘SFAS No. 145’’). Thisstatement rescinds SFAS No. 4, *‘‘Reporting Gains and Losses from Extinguishment ofDebt’’* (‘‘SFAS No. 4’’) and an amendment of the Statement, SFAS No.64, *‘‘Extinguishmentsof Debt Made to Satisfy**Sinking-Fund Requirements.’’* ThisStatement also rescinds SFAS No. 44, *‘‘Accounting for Intangible**Assets ofMotor Carriers.’’* This statement amends SFAS No. 13, *‘‘Accountingfor Leases’’*, to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions. The Company adopted SFAS No. 145 effectiveJanuary 1, 2003 and the adoption resulted in a reclassification ofexpenses from Extraordinary Loss on Early Extinguishment of Debt to Loss onEarly Extinguishment of Debt included in (Loss) before Income Taxes and Equityin Net Earnings of Affiliates of approximately $11.5 million, $8.7 million and$2.1 million for the years ended December 31, 2002, 2001 and 2000,respectively, associated with the rescission of SFAS No. 4.

 

In July 2002, the FASB issued SFAS No. 146, *‘‘Accounting for Costs Associated withExit or Disposal Activities’’* (‘‘SFAS No. 146’’), which waseffective December 31, 2002. SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (‘‘EITF’’) Issue No. 94-3, *‘‘LiabilityRecognition for Certain Employee Termination Benefits and*

 

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*Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).’’*This Statement requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred, and concludesthat an entity’s commitment to an exit plan does not by itself create a presentobligation that meets the definition of a liability. This Statement alsoestablishes that fair value is the objective of initial measurement of theliability. The provisions of this Statement are effective for exit or disposalactivities that are initiated after December 31, 2002, with earlyapplication encouraged. The Company adopted SFAS No. 146 effectiveJanuary 1, 2003 and the adoption did not have a significant impact on itsfinancial position and results of operations.

 

In December 2002, the FASB issued SFAS No. 148, *‘‘Accountingfor Stock-Based Compensation— Transition and Disclosure, Amendment of SFAS No.123’’* (‘‘SFAS No. 148’’). This Statement provides additionaltransition guidance for those entities that elect to voluntarily adopt theprovisions of SFAS No. 123, *‘‘Accounting for Stock-Based Compensation.’’*Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-endfinancial statements within the Company’s Significant Accounting Policies footnote.The Company has elected not to adopt the recognition provisions of SFAS No.123, as amended by SFAS No. 148 (See Note 2).

 

In April 2003, the FASB issued SFAS No. *149 “Amendment of Statement 133 onDerivative Instruments and Hedging Activities,*” (“SFAS No. 149”).This statement will be applied prospectively and is effective for contractsentered into or modified after June 30, 2003. The statement is applicableto existing contracts and new contracts entered into after June 30, 2003.The Company adopted SFAS No. 149 and the adoption did not have a significantimpact on its financial position and results of operations.

 

In May 2003, the FASB issued SFAS No. 150 “*Accounting for Certain FinancialInstruments with Characteristics of Liabilities and Equity,*” (“SFASNo. 150”). This statement establishes standards for classification of certainfinancial instruments that have characteristics of both liabilities and equityin the statement of financial position. This Statement is effective for allcontracts created or modified after the date the Statement was issued andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003. The Company adopted SFAS No. 150 effectiveJuly 1, 2003 and the adoption did not have an impact on its financialposition and results of operations.

 

The Emerging Issues Task Force (“EITF”) issued EITF No. 00-21, *“RevenueArrangements with Multiple Deliverables”*(“EITF No. 00-21”), whichis effective for revenue arrangements entered into in fiscal periods beginningafter June 15, 2003. EITF No. 00-21 addresses certain aspects of theaccounting by a vendor for arrangements under which it will perform multiplerevenue-generating activities. The Company adopted EITF No. 00-21 effectiveJuly 1, 2003 and the adoption did not have a significant impact on itsfinancial position and results of operations.

 

FinancialAccounting Standards Board Interpretation (“FIN”) No. 46, *“Consolidation of Variable InterestEntities”* (“FIN No. 46”), was issued in January 2003. FIN No.46 defines a variable interest entity as a legal entity in which, among otherthings, the equity investments at risk are not sufficient to finance theoperating and closing activities of the entity without additional subordinatedfinancial support from the entity’s investors. The Company is not a partner toany material variable interest entity.

 

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

 

**Overview**

 

The Company isa leading provider of paperboard packaging solutions to multinational consumerproducts companies. The Company has vertically integrated operations enablingit to offer customers paperboard, cartons and packaging machines, either as anintegrated solution or separately.

 

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

 

**TheMerger**

 

The Merger wasaccounted for as a purchase by the Company under U.S. GAAP. Under the purchasemethod of accounting, the assets and liabilities of Graphic were recorded, asof the date of the closing of the Merger, at their respective fair values andadded to those of the Company.

 

Based on theCompany’s expectations of its future performance, the Company estimates that itwill achieve approximately $52 million of synergies by the third year after theclosing of the Merger. The Company is on schedule in merger integrationand realizing synergies primarily in corporate and supply chain operations. TheCompany cannot make assurances as to the amount or timing of synergies, if any,that may be realized. Potential difficulties in realizing such synergiesinclude, among other things, the integration of personnel, the combination ofdifferent corporate cultures and the integration of facilities.

 

For additional discussion of the Merger and the impactof the Merger on the Company’s financial condition and results of operations,see Note 1 and Note 2 to 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** |   | **Nine  Months Ended** |   |
|-------------------------------|--------|-------------------------|--------|------------------------|--------|
| **(In  millions of dollars)** |   | **Sept.  30,  2003**    |   | **Sept.  30,  2002**   |   | **Sept.  30,  2003** |   | **Sept.  30,  2002** |   |
| NET  SALES:                   |   |                    |   |                   |   |   |   |   |   |
| Paperboard  Packaging         |   | $                       | 459.0  |                   | $      | 304.5 |   | $ | 1,054.1 |   | $ | 892.2 |   |
| Containerboard/Other          |   | 19.1                    |   | 21.6                   |   | 60.6 |   | 59.5 |   |
|                          |   | $                       | 478.1  |                   | $      | 326.1 |   | $ | 1,114.7 |   | $ | 951.7 |   |
|                          |   |                    |   |                   |   |   |   |   |   |
| INCOME  FROM OPERATIONS:      |   |                    |   |                   |   |   |   |   |   |
| Paperboard  Packaging         |   | $                       | 48.5   |                   | $      | 51.9 |   | $ | 130.5 |   | $ | 147.0 |   |
| Containerboard/Other          |   | (5.9                    | )      | (4.8                   | )      | (19.0 | ) | (18.0 | ) |
| Corporate                     |   | (9.5                    | )      | (6.0                   | )      | (24.2 | ) | (16.8 | ) |
|                          |   | $                       | 33.1   |                   | $      | 41.1 |   | $ | 87.3 |   | $ | 112.2 |   |

 

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**Significant Factors That Impact Our Business**

 

The Company’snet sales, income from operations, cash flows from operations and financialcondition are influenced by a variety of factors, many of which are beyond itscontrol.

 

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

 

•                  beverage,including beer and soft drinks;

 

•                  food, includingcereal, desserts, snacks, food service products, frozen and microwave foods,and pet foods;

 

•                  householdproducts, including dishwasher and laundry detergent, sporting goods,healthcare, tissues and papers; and

 

•                  tobacco,including flip top boxes and cartons.

 

The Companyhistorically experienced stable pricing for its integrated beverage multiplepackaging products, and moderate cyclical pricing for its other productofferings. Because some products can be packaged in different types ofmaterials, the Company’s sales are affected by competition from othermanufacturers’ coated unbleached kraft paperboard, or CUK board, and othersubstrates — solid bleached sulfate, or SBS, recycled clay coated news, or CCN,and, internationally, white lined chipboard, or WLC — as well as by generalmarket conditions. Graphic’s sales historically were driven primarily byconsumer buying habits in the markets its customers serve. Recent economicconditions in the United States have had a significant impact on consumerbuying even in traditionally non-cyclical industries. New product introductionsand promotional activity by Graphic’s customers and Graphic’s introduction ofnew packaging products also impacted its sales.  The Company’s containerboard business is subject to conditions inthe cyclical worldwide commodity paperboard markets which have a substantialimpact on containerboard sales.

 

The Companyworks to maintain market share through efficiency, product innovation andstrategic sourcing to its customers; however, pricing and other competitivepressures may occasionally result in the loss of a customer relationship. Inthe fourth quarter of 2002, the Company was notified by Coca-Cola Enterprises(“CCE”) that CCE would not renew its supply contract with the Company. Underthis contract, which expired on March 31, 2003, the Company supplied toCCE beverage cartons made from its CUK board, packaging machines and relatedservices. The Company’s supply contracts with its independent Coca-Colabottling company customers are not subject to CCE’s non-renewal notification.CCE’s action did not impact the Company’s 2002 results of operations. Theimpact on the Company’s 2003 results of operations will depend, in part, on theextent to which the Company supplies beverage cartons to CCE during a phase-outperiod that began on April 1, 2003, which the Company continues to discusswith CCE. The Company continues to explore opportunities to replace the volumesthat it will lose as a result of CCE’s decision by seeking to increase sales toexisting and new customers and to develop new applications for its CUK board.The Company continues to evaluate the impact of these developments and therecent increase in beverage market competitiveness on its future pricing forits beverage packaging products. The Company can provide no assurances that itwill be able to replace all or any portion of the volumes it had expected tosupply to CCE in 2003 and future periods or that it will be able to maintaincurrent pricing levels on its beverage packaging products. If the Companycannot replace such volumes, the Company estimates that its volumes will benegatively impacted by approximately 17,000 tons in 2003 and 36,000 tons in2004 and thereafter. In 2002, the CCE business represented approximately 5% ofthe Company’s consolidated net sales.

 

Packagingmachinery placements during the first nine months of 2003 decreasedapproximately 35% when compared to the first nine months of 2002, primarily dueto the timing of shipments. The Company

 

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expectspackaging machinery placements for 2003 to be comparable to 2002. The Companyhas been and will continue to be selective in future packaging machineryplacements to ensure appropriate returns.

 

*Cost of Goods Sold.*TheCompany’s cost of goods sold consists primarily of energy, pine pulpwood,hardwood, recycled fibers, purchased paperboard, paper, aluminum foil, ink,plastic films and resins and labor, all of which are variable cost components.Energy, including natural gas, fuel oil and electricity, represents asignificant portion of the Company’s manufacturing costs. During the first ninemonths of 2003, the Company experienced a significant increase in its energycosts compared to the first nine months of 2002, principally at its mills,equal to approximately $7 million. The Company has entered into fixed pricenatural gas contracts designed to mitigate the impact of future cost increasesfor natural gas requirements, at the Macon and West Monroe mills through andincluding January 2004. The Company also periodically purchases energycontracts for natural gas and/or fuel oil at the Kalamazoo mill, and theCompany will continue to evaluate its hedge positions.

 

*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.The Company is pursuing a number of long-term initiatives designed to improveproductivity and profitability.

 

The Company iscontinuing to implement a global Total Quality Systems, or TQS, initiativewhich uses statistical process control to help design and manage all types ofactivities, including production and maintenance. This includes a Six Sigmaprocess to reduce variable manufacturing costs.

 

The Company isimplementing an initiative designed to enhance the competitiveness of itsbeverage multiple packaging converting operations. This initiative is expectedto add new manufacturing technology, add press capacity and consolidate certainbeverage carton converting operations. The Company expects to make a capitalinvestment of approximately $75 million through 2005 and to realize costsavings relative to 2002 from this initiative of approximately $39 million by2005. The Company cannot make assurances as to the amount or timing of costsavings that may be realized.

 

The Companycontinues 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.

 

**CriticalAccounting Policies**

 

The preparation of 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 believes the following accounting policies are the most criticalsince these policies require significant judgment or involve complexestimations that are important to the portrayal of the Company’s financialconditions and operating results:

 

• RevenueRecognition — The Company receivesrevenue from the sales of manufactured products, the leasing of packagingmachinery, and the servicing of packaging machinery. The Company recognizessales revenue when the following criteria are met: persuasive evidence of anagreement exists, delivery has occurred or services have been rendered, theCompany’s price to the buyer is fixed and determinable, and collectibility isreasonably assured. Delivery is not considered to have occurred until thecustomer takes title and assumes the risks and rewards of ownership. The timingof revenue recognition is largely dependent on shipping terms. Revenue isrecorded at the time of shipment for terms designated as free on board, orf.o.b., shipping point. For sales transactions designated f.o.b. destination,revenue is recorded when the product is delivered to the customer’s deliverysite. The Company recognizes revenues 

 

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on its annual and multi-year carton supply contracts as the shipmentoccurs in accordance with the shipping terms discussed above.

 

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

 

Discounts and allowances are comprised of trade allowances, cashdiscounts, and sales returns. Cash discounts and sales returns are estimatedusing historical experience. Trade allowances are based on the estimatedobligations and historical experience. Rebates are determined based on thequantity purchased and are recorded at the time of sale.

 

•  Collectibility of accounts receivable — TheCompany estimates losses for uncollectible accounts based on the aging ofaccounts receivable and the evaluation of the likelihood of success incollecting the receivables. Typically, allowances are needed for disputedaccounts, customers that are having financial problems or bankruptcies.

 

• InventoryCosting — The Company’s inventoriesare stated at the lower of cost or market with cost determined principally by thefirst-in, first-out (‘‘FIFO’’) basis (see Note 4 in Notes to the CondensedConsolidated Financial Statements). Average cost basis is used to determine thecost of supplies inventories. Raw materials and consumables used in theproduction process such as wood chips and chemicals are valued at purchase coston a FIFO basis upon receipt. Work in progress and finished goods inventoriesare valued at the cost of raw material consumed plus direct manufacturing costs(such as labor, utilities and supplies) as incurred and a proportion ofmanufacturing overhead.  Inventories arestated net of an allowance for slow-moving and obsolete inventory, which isbased on estimates. If the condition of the inventories or the state of theCompany’s business would deteriorate, additional allowances may be requiredwhich would reduce income.

 

• Self-insurance reserves — The Company is self-insured for certain lossesrelating to workers’ compensation claims and employee medical and dentalbenefits. The Company has purchased stop-loss coverage or insurance withdeductibles in order to limit its exposure to significant claims. The Companyalso has an extensive safety program in place to minimize its exposure toworkers’ compensation claims. Self-insured losses are accrued based uponestimates of the aggregate uninsured claims incurred using certain actuarialassumptions followed in the insurance industry and historical experience.

 

• Retirement-related benefits — The Companysponsors defined benefit plans, or the plans, for eligible employees andretirees. The effect of the plans on the consolidated financial statements issubject to many assumptions. The Company believes that the most criticalassumptions are (1) the discount rate, (2) the rate of increase in futurecompensation levels and (3) the expected long-term rate of return on planassets. The projected unit credit cost method is used for valuation purposes.

 

• Goodwill valuation — The Company estimates thevalue of its goodwill using the discounted cash flow method of valuation on anannual basis. The Company’s cash flows are generated by its operations and areused to fund working capital needs, debt service and capital spending. TheCompany discounts these cash flows using its weighted average cost of capital.Changes in borrowing rates, which are impacted by market rate fluctuations,would impact discounted cash flow calculations. Other factors, such assignificant operating losses or acquisitions of new operations, would alsoimpact discounted cash flow calculations.

 

• Recoveryof Long-Lived Assets — The Companyreviews long-lived assets for impairment whenever events or changes in businesscircumstances, such as the closure of a plant, indicate that the carrying valueof an asset may not be fully recoverable by undiscounted cash flows. Measurement of the impairment loss, if any, isbased on the fair value of the asset, which is generally determined by thediscounting of future estimated cash flows, or in the case of real estate,determining market value. The Company evaluates the recovery of its long-livedassets by analyzing operating results and considering significant events orchanges in the business environment that may have triggered impairment.

 

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•  Deferred tax asset valuation allowance — TheCompany estimates the realizability of deferred tax assets, by estimating theprojected reversal of offsetting deferred tax liability amounts and futuretaxable income. As discussed above in ‘‘Goodwill Valuation,’’ significant operatinglosses or acquisitions of operations would impact projected taxable income usedto estimate the reversal of deferred tax balances.

 

• Legal accruals — The Company estimates the amount of potential exposureit may have with respect to litigation, claims and assessments, based uponanalyses prepared by in-house and outside counsel, and records reserves whenmanagement believes it is probable that a loss has occurred and the amount ofloss is reasonably estimable. While there can be no assurance as to theultimate outcome of any current lawsuits, claims or investigations relating tosuch uncertainties, the Company does not believe that such uncertainties willhave a material adverse impact on its results of operations, cash flows orfinancial condition. However, future uncertainties may have a material adverseimpact on results of operations, cash flows or financial condition.

 

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

 

**RESULTSOF OPERATIONS**

 

The Merger was accounted for as a purchase by the Company under U.S.GAAP. Thus, the Company’s results of operations for the three and nine monthsended September 30, 2003 include the results of Graphic fromAugust 8, 2003, the date of the Merger, through September 30, 2003.The results of operations for the three and nine months endedSeptember 30, 2002 represent the results of the Company only. Accordingly,amounts for the three and nine months ended September 30, 2003 are not comparableto those for the three and nine months ended September 30, 2002,respectively.

 

The Company has previously restated its results of operations for thefirst three quarters of 2002, to report its investment in Rengo RiverwoodPackaging Ltd. (“Rengo”) using the equity method and to report its change inits method of determining the cost of inventories from the last-in, first-outmethod to the FIFO method.

 

**THIRDQUARTER 2003 COMPARED WITH THIRD QUARTER 2002**

 

**NetSales**

 

The Company’s Net Sales in the third quarter of 2003 increased by$152.0 million, or 46.6%, to $478.1 million from $326.1 million in the thirdquarter of 2002 due primarily to the addition of Graphic’s paperboard packagingbusiness which increased Net Sales by $155.8 million. Foreign currency exchangerates positively impacted Net Sales by $7.7 million.  Higher volumes in international beverage markets also contributedto the increase in Net Sales. These increases were somewhat offset by lowervolumes and pricing in the Company’s North American markets primarily as aresult of increased market competitiveness.

 

**GrossProfit**

 

The Company’s Gross Profit forthe third quarter of 2003 increased by $9.1 million, or 12.6%, to $81.4 millionfrom $72.3 million in the third quarter of 2002. The Company’s gross profitmargin decreased to 17.0% in the third quarter of 2003 from 22.2% in the thirdquarter of 2002. The decrease in gross profit margin was due primarily to lowervolumes and pricing in North American markets as a result of increased marketcompetitiveness, lower margin product mix in North American 

25

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markets including the additionof Graphic’s paperboard packaging business, higher energy and fiber costs,higher non-cash pension costs, and the approximate $7.1 million increase inCost of Sales relating to the increase in Graphic’s inventory to fair value asa result of purchase accounting revaluation. These decreases were somewhatoffset by higher Net Sales as a result of the factors discussed above and worldwidecost reductions as a result of savings gained from the Company’s cost reductioninitiatives.

 

**Selling, General and Administrative**

 

Selling, General and Administrative expenses increased by $13.8million, or 44.7%, to $44.7 million in the third quarter of 2003 from $30.9million in the third quarter of 2002, due primarily to the addition ofGraphic’s Selling, General and Administrative expenses of $9.1 million andexpenses related to the Merger of $6.7 million. As a percentage of Net Sales,Selling, General and Administrative expenses decreased to 9.3% in the thirdquarter of 2003 from 9.5% in the third quarter of 2002.

 

**Research,Development and Engineering**

 

Research, Development andEngineering expenses increased by $0.8 million, or 61.5%, to $2.1 million inthe third quarter of 2003 from $1.3 million in the third quarter of 2002, dueprimarily to the addition of Graphic’s Research, Development and Engineeringexpenses of $0.5 million and higher research and development investing relatingto the Company’s products.

 

**Other Expense (Income), Net**

 

Other Expense (Income), Net, was $1.5 million in the third quarter of2003 as compared to $(1.0) million in the third quarter of 2002. This changewas principally due to higher amortization expense of $3.1 million due to theeffects of purchase accounting in connection with the Merger recorded in thethird quarter of 2003.

 

**Incomefrom Operations**

 

Primarily as a result of the factors discussed above, the Company’sIncome from Operations in the third quarter of 2003 decreased by $8.0 million,or 19.5%, to $33.1 million from $41.1 million in the third quarter of 2002,while its operating margin decreased to 6.9% in the third quarter of 2003 from12.6% in the third quarter of 2002.

 

**Fluctuationsin U.S. Currency Exchange Rates**

 

The weakening of the U.S. dollar currency exchange rates as compared tothe Euro and other European currencies had a modest impact on Net Sales, GrossProfit, Income from Operations, and operating expenses during the third quarterof 2003.

 

**FIRSTNINE MONTHS 2003 COMPARED WITH FIRST NINE MONTHS 2002**

 

**Net Sales**

 

The Company’s Net Sales in the first nine months of 2003 increased by$163.0 million, or 17.1%, to $1,114.7 million from $951.7 million in the firstnine months of 2002 due primarily to the addition of Graphic’s paperboardpackaging business which increased Net Sales by $155.8 million. Foreigncurrency exchange rates positively impacted Net Sales by $27.7 million.  Higher volumes in international beveragemarkets also contributed to the increase in Net Sales.  These increases were somewhat offset bylower volumes and pricing in the Company’s North American markets and lowervolumes in international consumer products markets, both primarily as a resultof increased market competitiveness.

 

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**GrossProfit**

 

As a result of the factorsdiscussed below, the Company’s Gross Profit in the first nine months of 2003decreased by $2.4 million, or 1.2%, to $201.8 million from $204.2 million inthe first nine months of 2002. The Company’s gross profit margin decreased to18.1% in the first nine months of 2003 from 21.5% in the first nine months of2002. The decrease in gross profit margin was due primarily to lower volumesand pricing in North American markets as a result of increased marketcompetitiveness, lower margin product mix in North American markets includingthe addition of Graphic’s paperboard packaging business, higher energy andfiber costs, higher non-cash pension costs, and the approximate $7.1 millionincrease in Cost of Sales relating to the increase in Graphic’s inventory tofair value as a result of purchase accounting revaluation. These decreases weresomewhat offset by higher Net Sales as a result of the factors discussed aboveand worldwide cost reductions as a result of savings gained from the Company’scost reduction initiatives.

 

**Selling,General and Administrative**

 

Selling, General and Administrative expenses increased by $15.3million, or 17.0%, to $105.4 million in the first nine months of 2003 from$90.1 million in the first nine months of 2002, due primarily to the additionof Graphic’s Selling, General and Administrative expenses of $9.1 million andexpenses related to the Merger of $6.7 million. As a percentage of Net Sales,Selling, General and Administrative expenses was 9.5% in the first nine monthsof 2003 and 2002.

 

**Research,Development and Engineering**

 

Research, Development andEngineering expenses increased by $1.7 million, or 45.9%, to $5.4 million inthe first nine months of 2003 from $3.7 million in the first nine months of2002, due primarily to higher research and development investing related to theCompany’s products and packaging machinery, and the addition of Graphic’sResearch, Development and Engineering expenses of $0.5 million.

 

**Other Expense (Income), Net**

 

Other Expense (Income), Net, was $3.7 million in the first nine monthsof 2003 as compared to $(1.8) million in the first nine months of 2002.  This change was principally due to anon-cash pension adjustment recorded in the first nine months of 2002, and theapproximate $1.9 million charge to write off deferred costs associated with thewithdrawal of the proposed initial public offering of the Company’s commonstock and higher amortization expense of $3.1 million due to the effects ofpurchase accounting in connection with the Merger recorded in the first ninemonths of 2003.

 

**Income from Operations**

 

Primarily as a result of the factors discussed above, the Company’sIncome from Operations in the first nine months of 2003 decreased by $24.9million, or 22.2%, to $87.3 million from $112.2 million in the first ninemonths of 2002, while its operating margin decreased to 7.8% in the first ninemonths of 2003 from 11.8% in the first nine months of 2002.

 

**Fluctuationsin U.S. Currency Exchange Rates**

 

The weakening of the U.S. dollar currency exchange rates as compared tothe Euro and other European currencies had a modest impact on Net Sales, GrossProfit, Income from Operations, and operating expenses during the first ninemonths of 2003.

 

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**LOSS ON EARLYEXTINGUISHMENT OF DEBT, INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE,AND EQUITY IN NET EARNINGS OF AFFILIATES**

 

**Loss on EarlyExtinguishment of Debt**

 

In connection with the Merger, the Company entered into the RelatedFinancing Transactions.  In the thirdquarter of 2003, the Company recorded a non-cash charge to earnings ofapproximately $16.7 million, related to the write-off of remaining debt issuancecosts on its prior senior secured credit facilities and the Prior RIC Notes andthe Company’s charge of approximately $28.6 million, related to the callpremium paid upon redemption of the Prior RIC Notes.

 

**Interest Income**

 

Interest Income decreased by $0.9 million to $0.3 million in the firstnine months of 2003 from $1.2 million in the first nine months of 2002 dueprimarily to lower average interest rates and interest received in the firstnine months of 2002 on monies held in escrow.

 

**Interest Expense**

 

Interest Expense decreased by $5.0 million to $107.5 million in thefirst nine months of 2003 from $112.5 million in the first nine months of 2002due primarily to lower average interest rates as a result of market interestrates and the second quarter 2002 refinancing somewhat offset by interest paidon increased indebtedness following the Merger.

 

**IncomeTax Expense**

 

During the first nine months of2003, the Company recognized an income tax expense of $4.8 million on (Loss)before Income Taxes of $(65.2) million. During the first nine months of 2002, the Company recognized an incometax expense of $2.8 million on (Loss) before Income Taxes of $(10.6)million.  Income Tax Expense on incomeearned in the United States and certain foreign countries for the first ninemonths of both 2003 and 2002 was fully offset by a reduction to valuationallowances recorded for those countries. Income Tax Expense for the first nine months of 2003 and 2002 primarilyrepresents Income Tax Expense on income earned in other foreign countries whereno valuation allowance is recorded. Since income earned in those foreign countries was higher for the firstnine months of 2003 in comparison to the first nine months of 2002, Income TaxExpense was higher for the same period.

 

**Equity in Net Earnings of Affiliates**

 

Equity in Net Earnings of Affiliates increased by $0.4 million to $1.1million in the first nine months of 2003 from $0.7 million in the first ninemonths of 2002 as a result of improved operations of the Company’s non-consolidatedjoint venture, Rengo.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

The Company broadly definesliquidity as its ability to generate sufficient funds from both internal andexternal sources to meet its obligations and commitments.  In addition, liquidity includes the abilityto obtain appropriate debt and equity financing and to convert into cash thoseassets that are no longer required to meet existing strategic and financialobjectives.  Therefore, liquidity cannotbe considered separately from capital resources that consist of current orpotentially available funds for use in achieving long-range business objectivesand meeting debt service commitments.

 

**Cash Flows**

 

Cash and Equivalents increased by approximately $0.9 million in the firstnine months of 2003.  Cash provided byoperating activities in the first nine months of 2003 totaled $61.7 million,compared to $59.5

 

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million in the first nine months of 2002.  Cash used in investing activities in the first nine months of2003 totaled $158.6 million, compared to $43.2 million in the first nine monthsof 2002.  This change was principallydue to approximately $91.8 million in expenses and fees related to the Mergerand a 117.5% increase in purchases of property, plant and equipment.  Cash provided by financing activities in thefirst nine months of 2003 totaled $97.7 million, compared to a use of cash of$13.1 million in the first nine months of 2002.  This change was principally due to higher net borrowings underthe Company’s revolving credit facilities as well as the net effect inconnection with the Related Financing Transactions.  Depreciation and amortization during the first nine months of2003 totaled approximately $104.9 million and is expected to be approximately$155 million to $160 million in 2003.

 

**Liquidityand 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.

 

In connection with the Merger, substantially all of the Company’s andGraphics’s then outstanding indebtedness was redeemed, repurchased or otherwiserepaid and replaced with borrowings under the Senior Secured Credit Agreementand indebtedness under the Senior Notes and the Senior Subordinated Notes.  For a description of the Related FinancingTransactions, see Note 2 to Notes to Condensed Consolidated Financial Statements.

 

As of September 30, 2003, the Company had outstanding $2.2 billionof long-term debt, consisting primarily of $850 million aggregate principalamount of Senior Notes and Senior Subordinated Notes, $1.275 billion of termloans under the Term Loan Facility, $32 million of revolving credit borrowingsunder the Revolving Credit Facility, and other debt issues and facilities.

 

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Principal and interest payments under the TermLoan Facility and the Revolving Credit Facility, together with principal andinterest payments on the Senior Notes and the Senior Subordinated Notes,represent significant liquidity requirements for the Company.  The Tranche A term loans mature in 2009 andamortize in semi-annual installments over their term on the following amortizationschedule: $3.75 million on December 31, 2003 and June 30, 2004, $7.5million on December 31, 2004 and June 30, 2005, $11.25 million onDecember 31, 2005 and June 30, 2006, $15.0 million onDecember 31, 2006 and June 30, 2007, and $18.75 million onDecember 31, 2007, June 30, 2008, December 31, 2008 and atmaturity.  The Tranche B term loansmature in 2010 and amortize in semi-annual installments of $5.625 millionpayable on December 31 and June 30 of each year commencing onDecember 31, 2003 through December 31, 2009, with a final bulletpayment of approximately $1.05 billion at maturity. The Revolving CreditFacility matures in 2009.

 

The loans under the Senior Secured CreditAgreement bear interest at fluctuating rates based upon the interest rateoption elected by the Company. The loans under the Term Loan Facility boreinterest as of September 30, 2003 at an average rate per annum of 3.9%.The Senior Notes and the Senior Subordinated Notes bear interest at rates of8.5% and 9.5%, respectively. The loans under the Revolving Credit Facility boreinterest as of September 30, 2003 at an average rate per annum of 4.4%.

 

Interest expense in 2003 is expected to be approximately $145 millionto $150 million, including approximately $7 million of non-cash amortization ofdeferred debt issuance costs. During the first nine months of 2003, cash paidfor interest was approximately $139 million.

 

At September 30, 2003, theCompany and its U.S. and international subsidiaries had the following amountsof commitments, amounts outstanding and amounts available under revolvingcredit facilities:

 
| **(In millions of dollars)** |   | **Total  Amount of  Commitments** |   | **Total  Amount  Outstanding** |   | **Total  Amount  Available (A)** |   |
|------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|----------------------------------|--------|
|                         |   |                              |   |                           |   |                             |   |
| Revolving  Credit Facility   |   | $                                 | 325.0  |                           | $      | 31.5                             |   | $ | 281.3 |   |
| International  Facilities    |   | 19.9                              |   | 13.2                           |   | 6.7                              |   |
|                         |   | $                                 | 344.9  |                           | $      | 44.7                             |   | $ | 288.0 |   |

 

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Note:

(A) In accordance with its debt agreements, theCompany’s availability under its Revolving Credit Facility has been reduced bythe amount of standby letter of credits issued of approximately $12.2 million.

 

The Company also had $11.6 million of letters of credit outstanding asof September 30, 2003. These letters of credit are used as securityagainst its self-insurance obligations and an outstanding note payable. Theseletters of credit expire at various dates through 2003 and 2004 unlessextended.

 

The Company is required by itsinsurance company to have a standby letter of credit to secure payment ofWorkers’ Compensation claims. The letter of credit, with a value of $0.4million, expired on February 20, 2003 and was subsequently extended. Theletter of credit will automatically be extended without amendment forsuccessive one year periods from the current expiration date and any futureexpiration date unless at least 45 days prior to the expiration date theCompany is notified that the financial institution elects not to renew.

 

In addition, the Ohio Bureau of Workers’ Compensation requires theCompany to have a standby letter of credit for non-performance according to theconditions and obligations as provided under Workers’ Compensation law. It is afurther condition of the letter of credit to cover all injuries or occupationaldisease claims incurred in any period prior to and/or during the present termshould the Company not perform. The letter of credit, with a value of $0.2million, was renewed on September 20, 2002 and is automatically extendedwithout amendment for successive one year periods from the current expirationdate and any future expiration date unless at least 60 days prior to theexpiration date the Company is notified that the financial institution electsnot to renew.

 

Basedupon current levels of operations, anticipated cost-savings and expectations asto future growth, the Company believes that cash generated from operations,together with amounts available under its Revolving Credit Facility and otheravailable financing sources, will be adequate to permit the Company to meet itsdebt service obligations, capital expenditure program requirements, ongoingoperating costs and working capital needs, although no assurance can be givenin 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‘‘—Covenant Restrictions’’), will be subject to future economic conditions andto financial, business and other factors, many of which are beyond theCompany’s control and will be substantially dependent on the selling prices anddemand for the Company’s products, raw material and energy costs, and theCompany’s ability to successfully implement its overall business andprofitability strategies.

 

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

 

The Company uses interest rate swap agreements to fix a portion of itsvariable rate term loans to a fixed rate in order to reduce the impact ofinterest rate changes on future income. The difference to be paid or receivedunder these agreements is recognized as an adjustment to interest expense relatedto that debt. At September 30, 2003, the Company had interest rate swapagreements with a notional amount of $990 million, under which the Company willpay fixed rates of 1.89% to 3.52% and receive three-month LIBOR.

 

As of December 31, 2002,the Company had approximately $1.2 billion of net operating loss carryforwards(“NOLs”). These NOLs generally may be used by the Company to offset taxableincome earned in subsequent taxable years. However, the Company’s ability touse these NOLs to offset its future taxable income may be subject tosignificant limitation as a result of certain shifts in ownership due to director indirect transfers of the Company’s common stock by one or more 5-percentstockholders, or issuances or redemptions of the Company’s common stock, which,when taken together with previous changes in ownership of the Company’s commonstock, constitute an ownership change under the Internal Revenue Code.Imposition of any such limitation on the use of NOLs could have an adverseeffect on the Company’s anticipated future cash flows.

 

 

**CovenantRestrictions**

 

The Senior Secured CreditAgreement, which governs the Term Loan Facility and the Revolving CreditFacility, imposes restrictions on the Company’s ability to make capitalexpenditures and both the Senior Secured Credit Agreement and the indenturesgoverning the 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 dividends andother restricted 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 periodended during the following test periods:

 

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

 

At September 30, 2003, theCompany was in compliance with the financial covenants in the Senior SecuredCredit Agreement. The Company’s ability to comply in future periods with thefinancial covenants in the Senior Secured Credit Agreement will depend on itsongoing financial and operating performance, which in turn will be subject toeconomic conditions and to financial, business and other factors, many of whichare beyond the Company’s control and will be substantially dependent on theselling prices for the Company’s products, raw material and energy costs, andthe Company’s ability to successfully implement its overall business andprofitability strategies. If a violation of any of the covenants occurred, theCompany would attempt to get a waiver or an amendment from its lenders,although no assurance can be given that the Company would be successful in thisregard. The Senior Secured Credit Agreement and the indentures governing theSenior Subordinated Notes and the Senior Notes have covenants as well as certaincross-default or cross-acceleration provisions; failure to comply with thesecovenants in any agreement could result in a violation of such agreement whichcould, in turn, lead to violations of other agreements pursuant to suchcross-default or cross-acceleration provisions.

 

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

 

**Credit AgreementEBITDA**

 

The table below sets forth EBITDA as defined in the Company’s SeniorSecured Credit Agreement, which is referred to in this report as “CreditAgreement EBITDA”. 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 andamortization, Credit Agreement EBITDA also adjusts net income by excludingcertain other items and expenses, as specified below. The Senior Secured CreditAgreement requires the Company to comply with a specified debt to CreditAgreement EBITDA leverage ratio and a specified Credit Agreement EBITDA toconsolidated interest expense ratio for specified periods, as described in thepreceding section, “Covenant Restrictions”.

 

Borrowings under the Senior Secured Credit Agreement are a key sourceof the Company’s liquidity. The Company’s ability to borrow under the SeniorSecured Credit Agreement is dependent on, among other things, its compliancewith the financial ratio covenants referred to in the preceding paragraph.Failure to comply with these financial ratio covenants would result in a violationof the Senior Secured Credit Agreement and, absent a waiver or amendment fromthe lenders under such agreement, permit the acceleration of all outstandingborrowings under the Senior Secured Credit Agreement.

 

The calculation of Credit Agreement EBITDA for the periods indicated isset forth below. Credit Agreement EBITDA for the nine months and the twelvemonths ended September 30, 2003 is calculated on a pro forma basis givingeffect to the Merger in accordance with the Senior Secured Credit Agreement.Credit 

 

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Agreement EBITDA for the nine months ended September 30, 2002 andtwelve months ended December 31, 2002 is also calculated on a pro forma basisgiving effect to the Merger as if the Senior Secured Credit Agreement was ineffect with respect to such periods.

 
|                                                                                                                                         |   | **Nine  Months Ended** |   | **Twelve  Months Ended** |   | **Twelve  Months Ended** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|--------------------------|--------|--------------------------|--------|
| **(Amounts  in Millions)**                                                                                                                   |   | **Sept. 30,  2003**    |   | **Sept. 30,  2002**      |   | **Sept. 30,  2003**      |   | **Dec. 31,  2002** |   |
|                                                                                                                                         |   |                   |   |                     |   |                     |   |   |   |
| Unaudited Pro Forma Combined  Income/(Loss) attributable to common stockholders before cummulative effect  of change in accounting principle |   | $                      | (60.4  | )                        | $      | (10.4                    | )      | $ | (52.5 | ) | $ | (2.4 | ) |
| Income Tax Expense                                                                                                                           |   | 5.8                    |   | 2.2                      |   | (0.3                     | )      | (3.8 | ) |
| Interest Expense, Net                                                                                                                        |   | 111.8                  |   | 123.6                    |   | 145.5                    |   | 157.2 |   |
| Depreciation and Amortization                                                                                                                |   | 159.4                  |   | 163.0                    |   | 217.3                    |   | 220.9 |   |
| Equity in Net Earnings of  Affiliates                                                                                                        |   | (1.1                   | )      | (0.7                     | )      | (1.5                     | )      | (1.0 | ) |
| Other Non-Cash Charges (A)                                                                                                                   |   | 17.1                   |   | 4.5                      |   | 23.6                     |   | 10.8 |   |
| Merger Related Expenses                                                                                                                      |   | 11.2                   |   | —                   |   | 11.2                     |   | — |   |
| Dividends from Equity  Investments                                                                                                           |   | 0.7                    |   | 0.6                      |   | 0.7                      |   | 0.6 |   |
| Loss on Early Extinguishment  of Debt                                                                                                        |   | 46.6                   |   | 27.3                     |   | 46.6                     |   | 27.3 |   |
| Credit Agreement EBITDA (B)                                                                                                                  |   | $                      | 291.1  |                     | $      | 310.1                    |   | $ | 390.6 |   | $ | 409.6 |   |

 

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**Notes:**

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

 

(B) Credit Agreement EBITDA iscalculated in accordance with the definitions contained in the Company’s SeniorSecured Credit Agreement. Credit Agreement EBITDA is defined as consolidatednet income before consolidated interest expense, non-cash expenses and charges,total income tax expense, depreciation expense, expense associated withamortization of intangibles and other assets, non-cash provisions for reservesfor discontinued operations, extraordinary, unusual or non-recurring gains orlosses or charges or credits, gain or loss associated with sale or write-downof assets not in the ordinary course of business, and any income or loss accountedfor by the equity method of accounting.

 

**Capital Expenditures**

 

The Company’s capital spendingfor the first nine months of 2003 was approximately $75.9 million, up 117.5%from $34.9 million in the first nine months of 2002. During the first nine monthsof 2003, the Company had capital spending of approximately $64.9 million forimproving process capabilities including approximately $17.0 million for itsbeverage multiple packaging converting operations initiative and approximately$3.8 million due to the addition of Graphic’s capital spending, approximately$8.9 million for manufacturing packaging machinery and approximately $2.1million for compliance with cluster rules. Total capital spending for 2003 isexpected to be between $120 million and $130 million and is expected to relateprincipally to improving the Company’s process capabilities (approximately $104million to $114 million), the production of packaging machinery (approximately$13 million) and environmental cluster rules compliance (approximately $3million). The Company is accelerating certain capital driven cost reductionprojects that it anticipates will deliver benefits in 2004 and 2005. Over thenext two years, the Company anticipates that it will spend approximately $22million at its U.S. mills to comply with the cluster rules.

 

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**RelatedParty Transactions – Coors Brewing Company**

 

Coors Brewing Company, asubsidiary of Adolph Coors Company, accounted for approximately $15 million ofthe Company’s Net Sales for the three months ended September 30, 2003.  The Company continues to sell packagingproducts to Coors Brewing Company.  Theloss of Coors Brewing Company as a customer in the foreseeable future couldhave a material effect on the Company’s results of operations.  The supply agreement, effective April 1,2003, with Coors Brewing Company will not expire until December 31, 2006.  Total sales under the supply agreement in2002 were approximately $111 million, accounting for approximately 10% ofGraphic's 2002 Net Sales.

 

**Seasonality**

 

The Company’s net sales, incomefrom operations and cash flows from operations are subject to moderateseasonality with demand usually increasing in the spring and summer due to theseasonality of the worldwide beverage multiple packaging markets.

 

**Environmentaland Legal Matters**

 

For a discussion ofenvironmental and legal matters, see Note 5 to Notes to Condensed ConsolidatedFinancial Statements.

 

**InformationConcerning Forward-Looking Statements**

 

Certain of the statementscontained in this report (other than the financial statements and otherstatements of historical fact) are forward-looking statements, including,without limitation, (i) the statements in “—Merger” regarding the Company’sexpectations that it will achieve approximately $52 million of synergies by thethird year after the closing of the Merger; (ii) the statements in“—Significant Factors That Impact Our Business” concerning (a) the Company’sexpectations regarding the impact of CCE’s non-renewal notification, (b) theCompany’s expectations regarding packaging machinery placements and (c) theimprovements which the Company’s long-term initiatives, including, withoutlimitation, its TQS and beverage carton converting operations initiatives, aredesigned to achieve; (iii) the statements in “—Financial Condition, Liquidityand Capital Resources” concerning (a) the Company’s expectation thatdepreciation and amortization for 2003 will be approximately $155 million to$160 million, (b) the Company’s expectation that 2003 interest expense will beapproximately $145 million to $150 million, including approximately $7 millionof non-cash amortization of deferred debt issuance costs, (c) the Company’sbelief that cash generated from operations, together with amounts availableunder available financing sources, will be adequate to permit the Company tomeet its debt service obligations, capital expenditure program requirements,ongoing operating costs and working capital needs, (d) the Company’s expectationthat capital expenditures will range from $120 million to $130 million in 2003,and (e) the Company’s expectations with respect to capital spending that may berequired to comply with the cluster rules and that, based on current knowledge,environmental costs are not expected to have a material impact on the resultsof operations, cash flows or financial condition of the Company (see Note 5 toNotes to Condensed Consolidated Financial Statements), and (iv) otherstatements as to management’s or the Company’s expectations and beliefspresented in this report.

 

Forward-looking statements are made based upon management’s currentexpectations and beliefs concerning future developments and their potentialeffects upon the Company. There can be no assurance that future developmentswill be in accordance with management’s expectations or that the effect offuture developments on the Company will be those anticipated by management. Thefollowing important factors, and those important factors described elsewhere inthis report, the Company’s Report on Form 10-K/A for the year endedDecember 31, 2002, the Company’s Registration Statement, as amended, onForm S-4 (Registration No. 333-104928) and in other Securities and ExchangeCommission filings of the Company, could affect (and in some cases haveaffected) the Company’s actual results and could cause such results to differmaterially from estimates or expectations reflected in such forward-lookingstatements:

 

•                                          Becauseof the Company’s substantial debt, its ability to obtain additional financingmay be impaired; a substantial portion of its operating cash flow must bededicated to service its debt, thus reducing funds available for otherpurposes; the Company is exposed to risk of increased interest costs because aportion of its borrowings are at variable rates of interest; and the 

 

33

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Company’sflexibility to adjust to changing market conditions and its ability towithstand competitive pressures could be limited.

 

•                                          The Company’s ability to generate thesignificant amount of cash needed to service its debt, and to comply with thecovenants and restrictions contained in its debt instruments, will depend onits financial and operating performance, which, in turn, is subject toprevailing economic and competitive conditions and to the following financialand business factors:  operatingdifficulties, increased operating costs, increased raw materials and energycosts, market cyclicality, product prices, the response of competitors,regulatory developments and delays in implementing strategic projects.

 

•                                          The Company’s ability to implementsuccessfully its business strategies and to realize anticipated synergies fromthe Merger is subject to significant business, economic and competitiveuncertainties and contingencies, many of which are beyond the Company’scontrol.

 

•                                          The Company is dependent on key customersand strategic relationships, and the loss of or reduced sales to key customersor changes in these relationships could result in decreased revenues, impactthe Company’s cash flows and harm its financial position.

 

•                                          The Company faces intense competition and,if it is unable to compete successfully against other manufacturers of paperboard or cartons, it could lose customers and itsrevenues may decline.

 

•                                          The Company’s net sales and profitabilitycould be affected by intense pricing pressures.  If the Company’s facilities are not as cost efficient as those of its competitors, or if itscompetitors otherwise are able to lower prices, the Company may lose customersto its competitors, which may negatively impact its revenues, cash flows andfinancial condition.

 

•                                          The Company’s ability to generate cash flowsis dependent in significant part on the sales volume and selling prices that itrealizes for its products.

 

•                                          If the Company fails to realize theanticipated benefits of the Merger, including anticipated synergies, its netsales and profitability could be affected.

 

•                                          Markets may not be able to absorb the Company’sentire paperboard production, which may negatively impact the Company’sfinancial condition and results of operations.

 

•                                          Any prolonged disruption in production dueto labor difficulties, equipment failures, destruction of or material damage toany of the Company’s three paperboard mills could have a material adverseeffect on the Company’s net sales, margins and cash flows.

 

•                                          Significant increases in the cost of energyor raw materials could have a material adverse effect on the Company’s marginsand income from operations.

 

•                                          The Company may not be able to adequatelyprotect its intellectual property and proprietary rights, which could harm itsfuture success and competitive position.

 

•                                          The Company is subject to environmental,health and safety laws and regulations, and costs to comply with such laws and regulations, or any liability or obligation imposedunder such laws or regulations, could negatively impact its financial conditionand results of operations.

 

•                                          Work stoppages and other labor relationsmatters may make it substantially more difficult or expensive for the Companyto manufacture and distributeits products, which could result in decreased sales or increased costs, eitherof which would negatively impact its financial condition and results ofoperations.

 

34

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•                                          The Company is subject to significant risksassociated with operating in foreign countries.  Foreign currency risks and exchange rate fluctuations couldhinder the results of the Company’s international operations, and the strengthof the U.S. dollar could disadvantage the Company relative to its foreigncompetitors.

 

•                                          The Company may be limited in the future inthe amount of net operating loss carryforwards that it can use to offsetincome, which could have an adverse effect on the Company’s anticipated futurecash flows.

 

•                                          Uninsured losses could result in substantialliabilities to the Company, which could negatively impact its financialcondition.

 

While the Company periodicallyreassesses material trends and uncertainties affecting the Company’s results ofoperations and financial condition in connection with its preparation ofmanagement’s discussion and analysis of results of operations and financialcondition contained in its quarterly and annual reports, the Company does notintend to review or revise any particular forward-looking statement referencedin this report in light of future events.

 

**Recent Accounting Pronouncements**

 

For a discussion of recentaccounting pronouncements impacting the Company, see Note 8 to Notes toCondensed Consolidated Financial Statements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

The Company is exposed tomarket risk from dangers in interest rates. Primarily, as a result of itsshort-term and long-term debt with both fixed and floating interest rates. Thetable below sets forth interest rate sensitivity information related to theCompany’s debt.

 

**Total Debt – Principal Amount ByMaturity – Average Interest Rate**

 
| **(In millions of dollars)**                          |   | **Q4 2003**     |   | **2004**        |   | **2005**        |   | **2006**        |   | **2007**        |   | **Thereafter**  |   | **Total** |   | **Fair****Value** |   |
|-------------------------------------------------------|--------|-----------------|--------|-----------------|--------|-----------------|--------|-----------------|--------|-----------------|--------|-----------------|--------|-----------|--------|-------------------|--------|
| Total  Debt                                           |   |            |   |            |   |            |   |            |   |            |   |            |   |      |   |              |   |
| Fixed  Rate                                           |   | —          |   | —          |   | —          |   | —          |   | 1.0             |   | 850.0           |   | 851.0     |   | 928.6             |   |
| Average  Interest Rate                                |   | N/A             |   | N/A             |   | N/A             |   | N/A             |   | 6.25            | %      | 9.00            | %      |      |   |              |   |
|                                                  |   |            |   |            |   |            |   |            |   |            |   |            |   |      |   |              |   |
| Variable  Rate                                        |   | 19.3            |   | 26.5            |   | 34.5            |   | 41.6            |   | 48.8            |   | 1,137.8         |   | 1,308.5   |   | 1,315.7           |   |
| Average  Interest Rate, spread range is 2.75% - 3.00% |   | LIBOR  + Spread |   | LIBOR  + Spread |   | LIBOR  + Spread |   | LIBOR  + Spread |   | LIBOR  + Spread |   | LIBOR  + Spread |   |      |   |              |   |

 

**Total Interest Rate Swaps –Notional Amount By Expiration – Average Swap Rate**

 
| **(In millions of dollars)**                      |   | **Q4 2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|---------------------------------------------------|--------|-------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------------|--------|
| Interest  rate Swaps (Pay Fixed/Receive Variable) |   |        |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
|                                              |   |        |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
| Notional                                          |   | 80.0        |   | 250.0    |   | 330.0    |   | 220.0    |   | 110.0    |   | —         |   | 990.0     |   | (13.8           | )      |
| Average  Pay Rate                                 |   | 3.520       | %      | 2.521    | %      | 2.173    | %      | 2.849    | %      | 3.270    | %      |           |   |      |   |            |   |
| Average  Receive Rate                             |   | 3-Month     |   | 3-Month  |   | 3-Month  |   | 3-Month  |   | 3-Month  |   |           |   |      |   |            |   |
|                                              |   | LIBOR       |   | LIBOR    |   | LIBOR    |   | LIBOR    |   | LIBOR    |   |           |   |      |   |            |   |

 

For a discussion of certainmarket risks related to the Company, see Part II, Item 7A, “Quantitative andQualitative Disclosure about Market Risk”, in the Company’s Annual Report onForm 10-K/A for the fiscal period ended December 31, 2002. See Note 7 toNotes to Condensed Consolidated Financial Statements.

 

 

35

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**ITEM4.  CONTROLS AND PROCEDURES**

 

The Company’s management has carried out anevaluation, with the participation of its chief executive officer and chieffinancial officer, of the effectiveness of the Company’s disclosure controlsand procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.Based upon management’s evaluation, the Company’s chief executive officer andchief financial officer have concluded that the Company’s disclosure controlsand procedures were effective as of September 30, 2003. There was nochange in the Company’s internal control over financial reporting that occurredduring the Company’s last fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.                  LegalProceedings.**

 

Certain legal proceedings in which the Company is involved arediscussed in Note 5 to Notes to Condensed Consolidated Financial Statements.

 

**ITEM 4.                  Submissionof Matters to a Vote of Security Holders**.

 

On July 31, 2003, a written consent in lieu of a meeting wasexecuted by the stockholders of the Company to approve the Riverwood HoldingStock Incentive Plan and Riverwood Holding Supplemental Long-Term IncentivePlan.

 

On August 1, 2003, a written consent in lieu of a meeting wasexecuted by the stockholders of the Company to approve Amendment No. 1 to theRiverwood Holding Stock Incentive Plan, Riverwood Holding SupplementalLong-Term Incentive Plan and Riverwood Holding 2002 Stock Incentive Plan.

 

On August 7, 2003, a written consent of stockholders in lieu of ameeting was executed by the stockholders of the Company to approve the mergerof Riverwood Acquisition Sub LLC into the Company.

 

36

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**ITEM 6.  Exhibits and Reports on Form 8-K.**

 

(a)          Exhibit Index

 

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1                |   | Agreement and Plan of Merger,  dated as of March 25, 2003, among Registrant, Riverwood Acquisition Sub  LLC and Graphic Packaging International Corporation.  Filed as Exhibit 2.1 to Registrant’s  Current Report on Form 8-K filed on March 27, 2003 (Commission File No.  001-11113), and incorporated herein by reference.                                                                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.2                |   | Amendment No. 1 to Agreement  and Plan of Merger, dated as of July 11, 2003, among Registrant,  Riverwood Acquisition Sub LLC and Graphic Packaging International  Corporation.  Filed as Exhibit 2.2 to  Registrant’s Amendment No. 3 to Registration Statement on Form S-4 filed on  July 17, 2003 (Registration No. 333-104928), and incorporated herein by  reference.                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1                |   | Restated Certificate of  Incorporation of Graphic Packaging Corporation. Filed as Exhibit 3.1 to  Registrant’s Current Report on Form 8-K filed on August 13, 2003  (Commission File No. 001-13182), and incorporated herein by reference.                                                                                                                                                                                                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2                |   | Amended and Restated Bylaws of  Graphic Packaging Corporation. Filed as Exhibit 3.2 to Registrant’s Current  Report on Form 8-K filed on August 13, 2003 (Commission File No.  001-13182), and incorporated herein by reference.                                                                                                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.3                |   | Graphic Packaging Corporation  Certificate of Designation, Preferences and Rights of Series A Junior Participating  Preferred Stock. Filed as Exhibit 3.3 to Registrant’s Current Report on Form  8-K filed on August 13, 2003 (Commission File No. 001-13182), and  incorporated herein by reference.                                                                                                                                                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1                |   | Form of Certificate for the  Common Stock, par value $0.01 per share. Filed as Exhibit 4.1 to Registrant’s  Amendment No. 2 to Registration Statement on Form S-4 filed on June 13,  2003 (Registration No. 333-104928), and incorporated herein by reference.                                                                                                                                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2                |   | Rights Agreement, dated  August 7, 2003, between Registrant and Wells Fargo Bank Minnesota,  N.A.  Filed as Exhibit 4.1 to  Registrant’s Current Report on Form 8-K filed on August 13, 2003  (Commission File No. 001-13182), and incorporated herein by reference.                                                                                                                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3                |   | Credit Agreement, dated as of  August 8, 2003, among Graphic Packaging International, Inc., the several  lenders from time to time parties thereto, JPMorgan Chase Bank, as  administrative agent, Deutsche Bank Securities Inc., as syndication agent,  and Goldman Sachs Credit Partners L.P. and Morgan Stanley Senior Funding,  Inc., as documentation agents. Filed as Exhibit 4.2 to Registrant’s Current  Report on Form 8-K filed on August 13, 2003 (Commission File No.  001-13182), and incorporated herein by reference. |

 

37

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| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.4                |   | Guarantee and Collateral  Agreement, dated as of August 8, 2003, made by Registrant, Riverwood  Acquisition Sub LLC, GPI Holding, Inc., Graphic Packaging International,  Inc., and certain of its subsidiaries in favor of JPMorgan Chase Bank as  administrative agent.  Filed as  Exhibit 4.3 to Registrant’s Current Report on Form 8-K filed on  August 13, 2003 (Commission File No. 001-13182), and incorporated herein  by reference.                                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5                |   | Indenture, dated  August 8, 2003, among Graphic Packaging International, Inc., as issuer,  Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank  Minnesota, National Association, as Trustee, relating to the 8.50% Senior  Notes due 2011 of Graphic Packaging International, Inc.  Filed as Exhibit 4.4 to Registrant’s  Current Report on Form 8-K filed on August 13, 2003 (Commission File No.  001-13182), and incorporated herein by reference.                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6                |   | Indenture, dated  August 8, 2003, among Graphic Packaging International, Inc., as issuer,  Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank  Minnesota, National Association, as Trustee, relating to the 9.50% Senior  Subordinated Notes due 2013 of Graphic Packaging International, Inc.  Filed as Exhibit 4.5 to Registrant’s  Current Report on Form 8-K filed on August 13, 2003 (Commission File No.  001-13182), and incorporated herein by reference.                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.7                |   | Form of 8.50% Senior Notes due  2011 of Graphic Packaging International, Inc. (included in Exhibit 4.5).                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.8                |   | Form of 9.50% Senior  Subordinated Notes due 2013 of Graphic Packaging International, Inc.  (included in Exhibit 4.6).                                                                                                                                                                                                                                                                                                                                                                                                                          |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.9                |   | Exchange and Registration  Rights Agreement, dated as of August 8, 2003, among Graphic Packaging  International, Inc., Registrant, GPI Holding, Inc. and Goldman, Sachs &  Co., for itself and on behalf of the Purchasers (as defined therein),  relating to the 8.50% Senior Notes due 2011 of Graphic Packaging  International, Inc. Filed as Exhibit 4.6 to Registrant’s Current Report on  Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and  incorporated herein by reference.                    |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.10               |   | Exchange and Registration  Rights Agreement, dated as of August 8, 2003, among Graphic Packaging  International, Inc., Registrant, GPI Holding, Inc. and Goldman, Sachs &  Co., for itself and on behalf of the Purchasers (as defined therein),  relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging  International, Inc.  Filed as Exhibit 4.7  to Registrant’s Current Report on Form 8-K filed on August 13, 2003  (Commission File No. 001-13182), and incorporated herein by reference. |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1               |   | Amended and Restated  Registration Rights Agreement, dated as of March 25, 2003, among  Registrant, the Family Stockholders named therein, Clayton Dubilier &  Rice Fund V Limited Partnership, EXOR Group S.A., and the Other Riverwood  Stockholders named therein. Filed as Exhibit 10.1 to Registrant’s  Registration Statement on Form S-4 filed on May 2, 2003 (Registration  No. 333-104928), and incorporated herein by reference.                                                                                   |

 

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| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2               |   | Stockholders Agreement, dated  as of March 25, 2003, by and among Registrant, the Family Stockholders  named therein, Clayton Dubilier & Rice Fund V Limited Partnership and  EXOR Group S.A.  Filed as Exhibit 10.2  to Registrant’s Registration Statement on Form S-4 filed on May 2, 2003  (Registration No. 333-104928), and incorporated herein by reference.                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3               |   | Amendment No. 1 to  Stockholders Agreement, dated as of April 29, 2003, by and among  Registrant, the Family Stockholders named therein, Clayton Dubilier &  Rice Fund V Limited Partnership and EXOR Group S.A.  Filed as Exhibit 10.3 to Registrant’s Registration Statement on  Form S-4 filed on May 2, 2003 (Registration No. 333-104928), and  incorporated herein by reference.                                                               |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4               |   | Amendment No. 2 to  Stockholders Agreement, dated as of June 12, 2003, by and among  Registrant, the Family Stockholders named therein, Clayton Dubilier &  Rice Fund V Limited Partnership and EXOR Group S.A.  Filed as Exhibit 10.4 to Registrant’s Amendment No. 1 to  Registration Statement on Form S-4 filed on June 13, 2003 (Registration  No. 333-104928), and incorporated herein by reference.                                           |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5               |   | Transfer Restrictions and  Observation Rights Agreement, dated as of March 25, 2003, among  Registrant and the Other Riverwood Stockholders named therein.  Filed as Exhibit 10.4 to Registrant’s  Registration Statement on Form S-4 filed on May 2, 2003 (Registration  No. 333-104928), and incorporated herein by reference.                                                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6               |   | Third Amended and Restated  Graphic Packaging International Corporation Executive Employment Agreement,  dated as of March 25, 2003, among Graphic Packaging International  Corporation the Affiliated Companies named therein, and Jeffrey H. Coors.  Filed as Exhibit 10.24 to Registrant’s Registration Statement on Form S-4  filed on May 2, 2003 (Registration No. 333-104928), and incorporated  herein by reference.                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7               |   | Third Amended and Restated  Graphic Packaging International Corporation Executive Employment Agreement,  dated as of March 25, 2003, among Graphic Packaging International  Corporation, the Affiliated Companies named therein, and David W.  Scheible.  Filed as Exhibit 10.25 to  Riverwood Holding Inc.’s Registration Statement on Form S-4 filed on  May 2, 2003 (Registration No. 333-104928), and incorporated herein by  reference.             |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8               |   | First Amended and Restated  Employment Agreement, dated as of August 8, 2003, among Riverwood  International Corporation, Registrant and Daniel J. Blount.                                                                                                                                                                                                                                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9               |   | Third Amended and Restated  Graphic Packaging International Corporation Executive Employment Agreement,  dated as of March 25, 2003, among Graphic Packaging International  Corporation, the Affiliated Companies named therein, and Donald W.  Sturdivant.  Filed as Exhibit 10.31 to  Registrant’s Amendment No. 1 to Registration Statement on Form S-4 filed on  June 13, 2003 (Registration No. 333-104928), and incorporated herein by  reference. |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10              |   | Employment Agreement, dated as  of August 8, 2003, among Riverwood International Corporation, Registrant  and Michael R. Schmal.                                                                                                                                                                                                                                                                                                                                        |

 

39

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| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                                                 |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.11              |   | Amendment No. 1 to Riverwood  Holding, Inc. Stock Incentive Plan, Riverwood Holding, Inc. Supplemental  Long-Term Incentive Plan and Riverwood Holding, Inc. 2002 Stock Incentive  Plan.                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.12              |   | Form of Restricted Unit  Agreement, dated as of August 8, 2003, entered into by and between  Registrant and each of Jeffrey H. Coors, David W. Scheible, and Donald W.  Sturdivant.                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.13              |   | Form of Management Stock  Option Agreement entered into by and between Registrant and each of Wayne E.  Juby, Steven D. Saucier, Michael R. Schmal, Daniel J. Blount, John T. Baldwin  and Stephen A. Hellrung.                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.14              |   | Form of Restricted Unit  Agreement entered into by and between Registrant and each of Wayne E. Juby,  Steven D. Saucier, Michael R. Schmal, Daniel J. Blount, John T. Baldwin  and Stephen A. Hellrung.                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.15              |   | Form of Option Cancellation  Acknowledgement of Wayne E. Juby, Steven D. Saucier and Michael R. Schmal.                                                                                                                                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.16              |   | Form of Amendment to  Employment Agreement, dated as of August 7, 2003, entered into by and  between Riverwood International Corporation, Registrant and each of Wayne E.  Juby and Steven D. Saucier.                                                                                                     |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.17              |   | Management Stock Option  Agreement, dated as of August 8, 2003 entered into by and between  Registrant and Stephen M. Humphrey.                                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.18              |   | Restricted Unit Agreement,  dated as of August 8, 2003, entered into by and between Registrant and  Stephen M. Humphrey.                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.19              |   | Employment Agreement, dated as  of September 8, 2003, among Registrant, Graphic Packaging International,  Inc. and John T Baldwin.                                                                                                                                                                         |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.20              |   | Form of Officers’ Salary  Continuation Agreement, as amended.   Filed as Exhibit 10.10 to Graphic Packaging International  Corporation’s Annual Report on Form 10-K filed on March 20, 1995  (Commission File No. 0-20704), and incorporated herein by reference.                           |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.21              |   | Employment Agreement, dated as  of October 6, 2003, entered into by and between Graphic Employment  Packaging Corporation, Graphic Packaging International, Inc. and Stephen A.  Hellrung.                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.22              |   | Graphic Packaging Equity  Incentive Plan, as amended. Filed as Exhibit 10.9 to Graphic Packaging  International Corporation’s Annual Report on Form 10-K filed on  March 23, 2001 (Commission File No. 001-14060), and incorporated herein  by reference.                                             |
|               |   |                                                                                                                                                                                                                                                                                                            |
| 10.23              |   | Graphic Packaging Equity  Compensation Plan for Non-Employee Directors, as amended and restated. Filed  as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual  Report on Form 10-K filed on March 23, 2001 (Commission File No.  001-14060), and incorporated herein by reference. |

 

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| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                           |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                      |
| 10.24              |   | ACX Technologies, Inc. Phantom  Equity Plan. Filed as Exhibit 10.11 to Graphic Packaging International  Corporation’s Current Report on Form 8-K filed on November 19, 1992  (Commission File No. 0-20704), and incorporated herein by reference.                               |
|               |   |                                                                                                                                                                                                                                                                                      |
| 10.25              |   | Graphic Packaging Excess  Benefit Plan, as restated. Filed as Exhibit 10.12 to Graphic Packaging  International Corporation’s Annual Report on Form 10-K filed on  March 23, 2001 (Commission File No. 001-14060), and incorporated herein  by reference.                       |
|               |   |                                                                                                                                                                                                                                                                                      |
| 10.26              |   | Graphic Packaging Supplemental  Retirement Plan, as restated.  Filed  as Exhibit 10.13 to Graphic Packaging International Corporation’s Annual  Report on Form 10-K filed on March 23, 2001 (Commission File No. 001-14060),  and incorporated herein by reference.        |
|               |   |                                                                                                                                                                                                                                                                                      |
| 10.27              |   | ACX Technologies, Inc.  Deferred Compensation Plan, as amended. Filed as Exhibit 10.15 to Graphic  Packaging International Corporation’s Annual Report on Form 10-K filed on  March 7, 1996 (Commission File No. 0-20704), and incorporated herein by  reference.               |
|               |   |                                                                                                                                                                                                                                                                                      |
| 10.28              |   | First Amendment to the Graphic  Packaging Deferred Compensation Plan. Filed as Exhibit 10.16 to Graphic  Packaging International Corporation’s Annual Report on Form 10-K filed on  March 23, 2001 (Commission File No. 001-14060), and incorporated herein  by reference.      |
|               |   |                                                                                                                                                                                                                                                                                      |
| 10.29              |   | Graphic Packaging Executive  Incentive Plan, as amended and restated. Filed as Exhibit 10.17 to Graphic  Packaging International Corporation’s Quarterly Report on Form 10-Q filed on  October 31, 2002 (Commission File No. 001-14060), and incorporated  herein by reference. |
|               |   |                                                                                                                                                                                                                                                                                      |
| 31.1               |   | Certifications required by  Rule 13a-14(a).                                                                                                                                                                                                                                               |
|               |   |                                                                                                                                                                                                                                                                                      |
| 32.1               |   | Certifications required by  Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                        |

 

(b) Reports on Form 8-K.

 

Reports on Form 8-K filed with the SEC on:

 

August 13, 2003 filing certain exhibits.

 

August 18, 2003 announcing the merger between Riverwood Holdingand the corporation formerly known as Graphic Packaging InternationalCorporation as amended by current report on Form 8-K/A filed on October 22,2003.

 

Reports on Form 8-K furnished to the SEC on:

 

July 22, 2003 reporting its second quarter 2003 results.

 

July 22, 2003 announcing Riverwood International Corporation’sintention to offer $850 million total principal amount of senior notes andsenior subordinated notes.

 

August 8, 2003 announcing the closing of sale of $850 milliontotal principal amount of senior notes and senior subordinated notes.

 

August 27, 2003 announcing the appointment of John T. Baldwin asSenior Vice President and Chief Financial Officer.

 

41

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized as of 14thday of November, 2003.

 

 
|                                    | GRAPHIC PACKAGING CORPORATION |                           |
|-----------------------------------------|-------------------------------|--------------------------------|
|                                    | (Registrant)                  |                           |
|                                    |                          |                           |
|                                    |                          |                           |
| Date:  November 14, 2003 | By:                           |                           |
|                                    |                          |                           |
|                                    |                          | /s/                            | Stephen A. Hellrung |   |
|                                    |                          | Stephen A. Hellrung            |   |
|                                    |                          | Senior Vice President, General |   |
|                                    |                          | Counsel and Secretary          |   |
|                                    |                          |                           |   |
| Date:  November 14, 2003 | By:                           |                           |   |
|                                    |                          |                           |   |
|                                    |                          | /s/                            | John T. Baldwin |   |
|                                    |                          | John T. Baldwin                |   |
|                                    |                          | Senior Vice President and      |   |
|                                    |                          | Chief Financial Officer        |   |

 

42

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