**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2004**

 

**COMMISSIONFILE NUMBER: 1-13182**

 

**Graphic Packaging Corporation**

(Exactname of registrant as specified in its charter)

 

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

 

**(770) 644-3000**

Registrant’stelephone number, including area code:

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý  No o

 

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

Yes o No ý

 

As of April30, 2004, there were 198,426,858 shares of the registrant’s Common Stock, parvalue $0.01 per share, outstanding.

 

 

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**PART I.FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

2

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
|                                                                                                                                                                                     |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                               |   |                |    |                    |   |
| Current Assets:                                                                                                                                                                          |   |                |    |                    |   |
| Cash and Equivalents                                                                                                                                                                     |   | $                   | 10.5    |                    | $      | 17.5 |   |
| Receivables, Less Allowance for Doubtful  Accounts of $3.7 and $4.4 at March 31, 2004 and December 31, 2003,  respectively                                                               |   | 233.4               |    | 198.5                   |   |
| Inventories                                                                                                                                                                              |   | 308.5               |    | 306.9                   |   |
| Prepaid Expenses                                                                                                                                                                         |   | 13.3                |    | 15.1                    |   |
|                                                                                                                                                                                     |   |                |    |                    |   |
| Total Current Assets                                                                                                                                                                     |   | 565.7               |    | 538.0                   |   |
| Property, Plant and Equipment, Net of  Accumulated Depreciation of $950.8 and $908.4 at March 31, 2004 and December  31, 2003, respectively                                              |   | 1,700.1             |    | 1,722.9                 |   |
| Goodwill                                                                                                                                                                                 |   | 652.9               |    | 624.3                   |   |
| Intangible Assets, Net of Accumulated  Amortization of $46.4 and $38.0 at March 31, 2004 and December 31, 2003,  respectively                                                            |   | 184.2               |    | 192.3                   |   |
| Other Assets                                                                                                                                                                             |   | 120.2               |    | 122.8                   |   |
|                                                                                                                                                                                     |   |                |    |                    |   |
| Total Assets                                                                                                                                                                             |   | $                   | 3,223.1 |                    | $      | 3,200.3 |   |
|                                                                                                                                                                                     |   |                |    |                    |   |
| **LIABILITIES**                                                                                                                                                                          |   |                |    |                    |   |
| Current Liabilities:                                                                                                                                                                     |   |                |    |                    |   |
| Short-Term Debt                                                                                                                                                                          |   | $                   | 39.8    |                    | $      | 38.4 |   |
| Accounts Payable and Other Accrued  Liabilities                                                                                                                                          |   | 313.8               |    | 346.7                   |   |
| Total Current Liabilities                                                                                                                                                                |   | 353.6               |    | 385.1                   |   |
|                                                                                                                                                                                     |   |                |    |                    |   |
| Long Term Debt, Less Current Portion                                                                                                                                                     |   | 2,178.7             |    | 2,116.2                 |   |
| Other Noncurrent Liabilities                                                                                                                                                             |   | 216.2               |    | 210.0                   |   |
| Total Liabilities                                                                                                                                                                        |   | 2,748.5             |    | 2,711.3                 |   |
|                                                                                                                                                                                     |   |                |    |                    |   |
| **SHAREHOLDERS' EQUITY**                                                                                                                                                                 |   |                |    |                    |   |
| Preferred Stock par value $0.01 per share;  50,000,000 shares authorized; no shares issued or outstanding                                                                                |   | —              |    | —                  |   |
| Common Stock par value $0.01 per share;  500,000,000 shares authorized; 198,416,983 and 198,378,110 shares issued and  outstanding at March 31, 2004 and December 31, 2003, respectively |   | 2.0                 |    | 2.0                     |   |
| Capital in Excess of Par Value                                                                                                                                                           |   | 1,168.7             |    | 1,168.5                 |   |
| Accumulated Deficit                                                                                                                                                                      |   | (610.4              | )       | (598.0                  | )      |
| Minimum Pension Liability Adjustment                                                                                                                                                     |   | (60.2               | )       | (60.2                   | )      |
| Accumulated Derivative Instruments Loss                                                                                                                                                  |   | (13.8               | )       | (12.7                   | )      |
| Cumulative Currency Translation Adjustment                                                                                                                                               |   | (11.7               | )       | (10.6                   | )      |
| Total Shareholders' Equity                                                                                                                                                               |   | 474.6               |    | 489.0                   |   |
| Total Liabilities and Shareholders' Equity                                                                                                                                               |   | $                   | 3,223.1 |                    | $      | 3,200.3 |   |

 

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

 

3

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
|                                                               |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|
|                                                               |   | **March 31,  2004**     |   | **March 31,  2003** |   |
|                                                               |   |                    |   |   |   |
| Net Sales                                                          |   | $                       | 575.9  |   | $ | 298.0 |   |
| Cost of Sales                                                      |   | 486.9                   |   | 239.9 |   |
| Selling, General and Administrative                                |   | 48.2                    |   | 29.9 |   |
| Research, Development and Engineering                              |   | 2.4                     |   | 1.4 |   |
| Other Expense, Net                                                 |   | 11.7                    |   | 1.9 |   |
|                                                               |   |                    |   |   |   |
| Income from Operations                                             |   | 26.7                    |   | 24.9 |   |
| Interest Income                                                    |   | 0.1                     |   | 0.1 |   |
| Interest Expense                                                   |   | (38.0                   | )      | (34.0 | ) |
| Loss before Income Taxes and Equity in Net  Earnings of Affiliates |   | (11.2                   | )      | (9.0 | ) |
| Income Tax Expense                                                 |   | (1.5                    | )      | (1.0 | ) |
| Equity in Net Earnings of Affiliates                               |   | 0.3                     |   | 0.2 |   |
| Net Loss                                                           |   | $                       | (12.4  | ) | $ | (9.8 | ) |
|                                                               |   |                    |   |   |   |
| Loss Per Share - Basic                                             |   | $                       | (0.06  | ) | $ | (0.09 | ) |
| Loss Per Share - Diluted                                           |   | $                       | (0.06  | ) | $ | (0.09 | ) |
|                                                               |   |                    |   |   |   |
| Weighted Average Number of Shares  Outstanding - Basic             |   | 198.4                   |   | 114.9 |   |
| Weighted Average Number of Shares  Outstanding - Diluted           |   | 198.4                   |   | 114.9 |   |

 

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

 

4

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**

**(Amountsin Millions)**

**(Unaudited)**

 
|                                                        |   | **Three  Months Ended** |   |
|-------------------------------------------------------------|--------|-------------------------|--------|
|                                                        |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| Net Loss                                                    |   | $                       | (12.4  | ) | $ | (9.8 | ) |
| Other Comprehensive (Loss) Income:                          |   |                    |   |   |   |
| Derivative Instruments Loss, Net of Tax of  $0              |   | (1.1                    | )      | (0.2 | ) |
| Foreign Currency Translation Adjustments,  Net of Tax of $0 |   | (1.1                    | )      | 1.5 |   |
| Comprehensive Loss                                          |   | $                       | (14.6  | ) | $ | (8.5 | ) |

 

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

 

5

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**GRAPHICPACKAGING CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amountsin Millions)**

**(Unaudited)**

 
|                                                                               |   | **Three  Months Ended** |   |
|------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                               |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                    |   |   |   |
| Net Loss                                                                           |   | $                       | (12.4  | ) | $ | (9.8 | ) |
| Noncash Items Included in Net Loss:                                                |   |                    |   |   |   |
| Depreciation and Amortization                                                      |   | 57.5                    |   | 31.2 |   |
| Deferred Income Taxes                                                              |   | —                  |   | 0.2 |   |
| Pension, Postemployment and Postretirement  Benefits Expense, Net of Contributions |   | 6.5                     |   | 5.0 |   |
| Equity in Net Earnings of Affiliates, Net  of Dividends                            |   | 0.7                     |   | (0.2 | ) |
| Amortization of Deferred Debt Issuance  Costs                                      |   | 2.1                     |   | 1.6 |   |
| Loss on Retirement of Assets                                                       |   | 3.0                     |   | — |   |
| Other, Net                                                                         |   | 0.1                     |   | 0.1 |   |
| Changes in Operating Assets &  Liabilities:                                    |   |                    |   |   |   |
| Receivables                                                                        |   | (35.0                   | )      | (0.1 | ) |
| Inventories                                                                        |   | (3.7                    | )      | (8.3 | ) |
| Prepaid Expenses                                                                   |   | 1.6                     |   | (1.9 | ) |
| Accounts Payable and Other Accrued  Liabilities                                    |   | (42.5                   | )      | (1.5 | ) |
| Other Noncurrent Liabilities                                                       |   | 0.1                     |   | 0.8 |   |
|                                                                               |   |                    |   |   |   |
| Net Cash (Used in) Provided by Operating  Activities                               |   | (22.0                   | )      | 17.1 |   |
|                                                                               |   |                    |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                    |   |   |   |
| Purchases of Property, Plant and Equipment                                         |   | (45.0                   | )      | (19.6 | ) |
| Increase in Other Assets                                                           |   | (3.9                    | )      | (1.1 | ) |
|                                                                               |   |                    |   |   |   |
| Net Cash Used in Investing Activities                                              |   | (48.9                   | )      | (20.7 | ) |
|                                                                               |   |                    |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                    |   |   |   |
| Borrowing under Revolving Credit Facilities                                        |   | 176.8                   |   | 95.0 |   |
| Payments on Revolving Credit Facilities                                            |   | (112.8                  | )      | (94.0 | ) |
| Payments on Debt                                                                   |   | (0.3                    | )      | (0.2 | ) |
| Issuance of Common Stock                                                           |   | 0.2                     |   | — |   |
| Repurchases of Redeemable Common Stock                                             |   | —                  |   | (0.4 | ) |
|                                                                               |   |                    |   |   |   |
| Net Cash Provided by Financing Activities                                          |   | 63.9                    |   | 0.4 |   |
|                                                                               |   |                    |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |   | —                  |   | — |   |
|                                                                               |   |                    |   |   |   |
| Net Decrease in Cash and Equivalents                                               |   | (7.0                    | )      | (3.2 | ) |
| Cash and Equivalents at Beginning of Period                                        |   | 17.5                    |   | 13.8 |   |
|                                                                               |   |                    |   |   |   |
| CASH AND EQUIVALENTS AT END OF PERIOD                                              |   | $                       | 10.5   |   | $ | 10.6 |   |

 

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

 

6

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**GRAPHICPACKAGING CORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE1 - ORGANIZATION AND BASIS OF PRESENTATION**

 

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

 

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

 

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

 

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

 

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

 

###### **NOTE 2 – MERGER**

 

The Merger wasconsummated primarily to create a value added paperboard packaging company.Prior to the consummation of the Merger, Riverwood Holding had two classes ofcommon stock. There were 9.0 million shares of Class A common stock, par value$0.01, authorized with 7.0 million shares outstanding at August 8, 2003. Therewere 3.0 million shares of Class B common stock, par value $0.01, authorizedwith 0.5 million shares outstanding at August 8, 2003. In connection with theMerger, the Company’s Board of Directors approved a 15.21-to-one stock split.At the time, the Class A and Class B common stock were reclassified as oneclass of common stock, par value $0.01. Immediately after the stock split,there were 500.0 million shares of common stock authorized with 114.8 million sharesoutstanding. The aggregate par value of the issued common stock was increasedby $1.1 million as a result of keeping the par value price $0.01. Accordingly,Capital in Excess of Par Value was decreased $1.1 million. In connection withthe Merger, the shareholders of Graphic Packaging International Corporationreceived one share of the Company’s common stock and associated shareholderrights for each share of Graphic Packaging

 

7

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InternationalCorporation common stock and associated shareholder rights they owned prior tothe Merger. Accordingly, Capital in Excess of Par Value increased $419.5million.

 

The Companydetermined that the relative outstanding share ownership and the designation ofcertain senior management positions require the Company to be the acquiringentity for accounting purposes, resulting in the historical financialstatements of Riverwood Holding becoming the historical financial statements ofGraphic Packaging Corporation. The assets and liabilities of the acquiredbusiness are included in the condensed consolidated balance sheets at March 31,2004 and December 31, 2003. The accompanying condensed consolidated statementof operations for the three months ended March 31, 2004 includes the results ofGraphic. The accompanying condensed consolidated statement of operations forthe three months ended March 31, 2003 represent the results of the Companyonly. The purchase price for the acquisition, including transaction costs, hasbeen allocated to the assets acquired and liabilities assumed based on theestimated fair market values at the date of the Merger. Goodwill is allocatedentirely to the paperboard packaging segment and is not deductible for taxpurposes. The purchase price allocation for the Merger is preliminary andfurther adjustments are likely to be made as valuations for property, plant,equipment, and intangible assets are finalized. The stock-for-stock exchangeresulted in the issuance of approximately 83.4 million shares of common stockto fund the purchase price of $469.7 million. The preliminary purchase priceallocation is as follows:

 
| **(Amounts in Millions)**                                                                     |   |   |    |
|-----------------------------------------------------------------------------------------------|--------|--------|---------|
| Current assets                                                                                |   | $      | 209.6   |   |
| Property, plant & equipment                                                               |   | 472.7  |    |
| Goodwill                                                                                      |   | 384.9  |    |
| Intangible assets                                                                             |   | 162.0  |    |
| Other assets                                                                                  |   | 19.9   |    |
| Total assets aquired                                                                          |   | $      | 1,249.1 |   |
|                                                                                          |   |   |    |
| Accounts payable and accrued expenses                                                         |   | $      | 152.4   |   |
| Total debt                                                                                    |   | 496.6  |    |
| Pension and other post-retirement liabilities, assumed merger related  liabilities, and other |   | 130.4  |    |
| Total liabilities assumed                                                                     |   | $      | 779.4   |   |

 

Seealso Note 9 – RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES.

 

**Selected UnauditedPro Forma Combined Financial Information**

 

The following unaudited pro formacombined financial information is presented to show the estimated effect of theMerger and the Related Financing Transactions (as defined herein) and representthe Company’s pro forma combined financial information for the three monthsended March 31, 2003 as if the Merger and Related Financing Transactions hadoccurred on January 1, 2003. The unaudited pro forma combined financialinformation includes adjustments directly attributable to the Merger and theRelated Financing Transactions that are expected to have a continuing impact onthe Company. The pro forma adjustments are based upon available information andcertain assumptions that management believes are reasonable.

 

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

 

• Theentering into and borrowing under the Senior Secured Credit Agreement, dated asof August 8, 2003, among Graphic Packaging International, Inc. and the severallender parties thereto (the “Senior Secured Credit Agreement”), which providesfor 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 revolving loans(including standby and commercial letters of credit) outstanding at anytime, toGraphic Packaging International, Inc.

 

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

 

8

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• Therepayment of all outstanding amounts under each of RIC’s and Graphic’s priorsenior secured credit facilities and the termination of all commitments underthose facilities.

 

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

 

• Theconsummation of an anticipatory change of control tender offer and consentsolicitation for all of Graphic’s 8 5/8% senior subordinated notes due 2012(the “Prior Graphic Notes”) made in anticipation of the change of control offerrequired by the indenture governing the Prior Graphic Notes. Out of $300.0million in aggregate principal amount of Prior Graphic Notes outstanding,approximately $299.1 million in aggregate principal amount of Prior GraphicNotes were tendered in the anticipatory change of control tender offer. OnSeptember 15, 2003, the Company completed the change of control offer requiredpursuant to the indenture governing the Prior Graphic Notes. As of March 31,2004 and December 31, 2003, $0.8 million in principal amount of the PriorGraphic Notes 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 actualallocation and its effect on results of operations may differ significantlyfrom the pro forma amounts included herein.

 

The pro forma financialinformation is based on the Company’s actual financial results for the periodindicated and the historical results of Graphic from the beginning of theperiod presented through March 31, 2003. The pro forma financial informationhas been prepared in accordance with accounting principles generally acceptedin the United States of America and is provided for comparison and analysispurposes only. The unaudited pro forma combined financial information does notpurport to represent the combined company’s results of operations or financialcondition had the Merger and Related Financing Transactions actually occurredas of such dates or of the results that the combined company would haveachieved after the Merger. The unaudited pro forma combined financialinformation is as follows:

 

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**CombinedCompany**

**UnauditedCondensed Pro Forma Combined Statement of Operations**

**Forthe Three Months Ended March 31, 2003**

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

** **
|                                                                        |   | **Company** |   | **Graphic** |   | **Pro Forma  Adjustments** |        | **Condensed  Pro  Forma Combined** |   |
|-----------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|----------------------------|-------------|------------------------------------|--------|
| Net Sales                                                                   |   | $           | 298.0  |        | $      | 260.9                      |        | $                                  | (15.8  | )**A** | $ | 543.1 |   |
| Cost of Sales                                                               |   | 239.9       |   | 234.2       |   | (15.8                      | )**A**      | 457.7                              |   |
|                                                                        |   |        |   |        |   | (0.6                       | )**B**      |                               |   |
| Selling, General and Administrative,  Research, Development and Engineering |   | 33.2        |   | 17.4        |   | 6.8                        | ** B** | 57.4                               |   |
| Income from Operations                                                      |   | 24.9        |   | 9.3         |   | (6.2                       | )           | 28.0                               |   |
| Interest Expense, Net                                                       |   | (33.9       | )      | (9.4        | )      | 7.2                        | ** C** | (36.1                              | )      |
| (Loss) Income before Income Taxes and  Equity in Net Earnings of Affiliates |   | (9.0        | )      | (0.1        | )      | 1.0                        |        | (8.1                               | )      |
| Income Tax Expense                                                          |   | (1.0        | )      | —      |   | —                     |        | (1.0                               | )      |
| (Loss) Income before Equity in Net Earnings  of Affiliates                  |   | (10.0       | )      | (0.1        | )      | 1.0                        |        | (9.1                               | )      |
| Equity in Net Earnings of Affiliates                                        |   | 0.2         |   | —      |   | —                     |        | 0.2                                |   |
| Net (Loss) Income                                                           |   | (9.8        | )      | (0.1        | )      | 1.0                        |        | (8.9                               | )      |
| Preferred Stock Dividends Declared                                          |   | —      |   | 2.5         |   | (2.5                       | )**D**      | —                             |   |
| Net (Loss) Income Attributable to Common  Stockholders                      |   | $           | (9.8   | )           | $      | (2.6                       | )           | $                                  | 3.5    |   | $ | (8.9 | ) |
|                                                                        |   |        |   |        |   |                       |        |                               |   |
| Loss Per Share - Basic                                                      |   | $           | (0.09  | )           |   |                       |        |                               | $      | (0.04 | ) |
| Loss Per Share - Diluted                                                    |   | $           | (0.09  | )           |   |                       |        |                               | $      | (0.04 | ) |
|                                                                        |   |        |   |        |   |                       |        |                               |   |
| Weighted Average Number of Shares  Outstanding:                             |   |        |   |        |   |                       |        |                               |   |
| Basic                                                                       |   | 114.9       |   |        |   |                       |        | 198.4                              |   |
| Diluted                                                                     |   | 114.9       |   |        |   |                       |        | 198.4                              |   |

 

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Adjustments in the unauditedcondensed pro forma combined financial statements are as follows:

 

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**A**RIC sold coated unbleached kraft paperboard (“CUK”) folding boxboard to Graphicfor use in certain cartons manufactured by Graphic. This pro forma adjustmenteliminates the intercompany sales and cost of sales of $15.8 million for theperiod ended March 31, 2003, related to this activity.

 

**B**Theamortization of the identifiable intangible assets (customer relationships,patents and proprietary technology) is reflected as a pro forma adjustment tothe unaudited condensed pro forma combined statement of operations. The Companyis amortizing the estimated fair value of the identifiable intangibles ofapproximately $162.0 million on a straight-line basis over an average estimateduseful life of eighteen years except for non-compete agreements which have anestimated useful life of approximately one year. Depreciation expense wouldhave decreased by $0.6 million for the three months ended March 31, 2003, as aresult of the Company revising the depreciable asset lives and the fair valueof the property purchased in the Merger. The net effect of this increasedamortization and decreased depreciation of $6.2 million for the three monthsended March 31, 2003 is reflected in the unaudited condensed pro forma combinedstatement of operations as follows:

** **
|                                                                                                       |   | **Three  Months Ended  March 31, 2003** |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
| Cost of Sales                                                                                              |   | $                                       | (0.6   | ) |
| Selling, General and Administrative,  Research, Development and Engineering                                |   | 6.8                                     |   |
| Total Net Additional Amortization and  Depreciation of Intangible Assets and Property, Plant and Equipment |   | $                                       | 6.2    |   |

 

**C**In connection with the Merger, substantially all of RIC’s and Graphic’s thenoutstanding indebtedness was redeemed, repurchased or otherwise repaid andreplaced with borrowings under the Senior Secured Credit Agreement and indebtednessunder the Senior Notes and Senior Subordinated Notes. Excluding hedges andamortization of financing costs, the pro forma interest expense adjustmentsreflect an average variable interest rate of 3.9% 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 reflectthe new equity structure of the Company, including conversion of $100 millionof Graphic’s convertible preferred stock into common stock (accordingly thereis no preferred stock dividends declared).

 

**NOTE 3 — SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

For a summaryof the Company’s significant accounting policies, please refer to the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.

 

Thepreparation of the Condensed Consolidated Financial Statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the Condensed Consolidated Financial Statements andthe reported amounts of revenues and expenses during the reporting period.Actual amounts could differ from those estimates.

 

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

 

The Companyhas reclassified the presentation of certain prior period information toconform to the current presentation format.

 

11

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As permitted by Statement of Financial Accounting Standards (“SFAS”)No. 123 “Accounting for Stock-Based Compensation,” the Company continues toapply intrinsic value accounting for its stock option plans under AccountingPrinciples Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”Compensation cost for stock options, if any, is measured as the excess of themarket price of the Company’s common stock at the date of grant over theexercise price to be paid by the grantee to acquire the stock. The Company hasadopted disclosure-only provisions of SFAS No. 123 and SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendmentof FASB Statement No. 123.” If the Company had elected to recognizecompensation expense based upon the fair value at the grant dates for awardsunder these plans, the Company’s Net Loss would have been as follows:

 
|                                                                                                                                                         |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                         |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| Net Loss, As Reported                                                                                                                                        |   | $                       | (12.4  | ) | $ | (9.8 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                                    |   | 0.2                     |   | 0.2 |   |
| (Deduct) Add: Total stock-based employee  compensation (expense) income determined under fair value based method for  all awards, net of related tax effects |   | (2.4                    | )      | 0.4 |   |
| Adjusted Net Loss                                                                                                                                            |   | $                       | (14.6  | ) | $ | (9.2 | ) |
|                                                                                                                                                         |   |                    |   |   |   |
| Loss Per Basic Share-As Reported                                                                                                                             |   | $                       | (0.06  | ) | $ | (0.09 | ) |
| Loss Per Basic Share-As Adjusted                                                                                                                             |   | $                       | (0.07  | ) | $ | (0.08 | ) |
|                                                                                                                                                         |   |                    |   |   |   |
| Loss Per Diluted Share-As Reported                                                                                                                           |   | $                       | (0.06  | ) | $ | (0.09 | ) |
| Loss Per Diluted Share-As Adjusted                                                                                                                           |   | $                       | (0.07  | ) | $ | (0.08 | ) |

 

The Company recognized stock-based employee compensation expense in theamount of $1.4 and $0.3 million for the three months ended March 31, 2004 and2003, respectively.

 

The following table displays the intangibleassets that continue to be subject to amortization and aggregate amortizationexpense as well as intangible assets not subject to amortization as of March31, 2004 and December 31, 2003:

 

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|                             |   | **As of  March 31, 2004**  |   |
|----------------------------------|--------|----------------------------|--------|
| **(In  millions of dollars)**    |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
| Amortized Intangible Assets:     |   |                       |   |   |   |   |   |
| Customer Relationships           |   | $                          | 109.9  |   | $ | 3.3 |   | $ | 106.6 |   |
| Non-Compete Agreements           |   | 23.3                       |   | 12.8 |   | 10.5 |   |
| Patents, Trademarks and Licenses |   | 97.4                       |   | 30.3 |   | 67.1 |   |
|                             |   | $                          | 230.6  |   | $ | 46.4 |   | $ | 184.2 |   |
|                             |   |                       |   |   |   |   |   |
| Unamortized Intangible Assets:   |   |                       |   |   |   |   |   |
| Goodwill                         |   | $                          | 652.9  |   | — |   | $ | 652.9 |   |

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

 

The Companyrecorded amortization expense of $8.3 million and $0.9 million for the threemonths ended March 31, 2004 and 2003, respectively, relating to intangibleassets subject to amortization. The Company expects amortization expense to beapproximately $26 million for 2004 and approximately $12 million for each ofthe following four fiscal years.

 

**NOTE 4— INVENTORIES**

 

Themajor classes of inventories were as follows:

 
| **(In  millions of dollars)** |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|
| Finished goods                |   | $                   | 177.1  |                    | $      | 172.8 |   |
| Work-in progress              |   | 19.7                |   | 22.6                    |   |
| Raw materials                 |   | 69.1                |   | 66.0                    |   |
| Supplies                      |   | 42.6                |   | 45.5                    |   |
|                          |   | $                   | 308.5  |                    | $      | 306.9 |   |

 

Raw materials and consumables usedin the production process such as wood chips and chemicals are valued atpurchase cost on a first-in, first-out (“FIFO”) basis upon receipt. Work inprocess and finished goods inventories are valued at the cost of raw materialconsumed plus direct manufacturing costs (such as labor, utilities andsupplies) as incurred and a proportion of manufacturing overhead.

 

**NOTE 5 — CONTINGENCIES ANDCOMMITMENTS**

 

The Company is subject to a broad range of foreign, federal, state andlocal environmental, health and safety laws and regulations, including thosegoverning discharges to air, soil and water, the management, treatment anddisposal of hazardous substances, the investigation and remediation ofcontamination resulting from releases of hazardous substances, and the healthand safety of employees. The Company’s environmental liabilities andobligations may result in significant costs, which could negatively impact itsfinancial condition and results of operations. Capital expenditures may benecessary for the Company to comply with such laws and regulations, includingthe U.S. Environmental Protection Agency’s

 

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regulations mandating stringent controls on air and water dischargesfrom pulp and paper mills (referred to herein as the “cluster rules”). Anyfailure to comply with environmental, health and safety laws or any permits andauthorizations required thereunder could subject the Company to fines orsanctions. In addition, some of the Company’s current and former facilities,and facilities at which it disposed of hazardous substances, are the subject ofenvironmental investigations and remediations resulting from releases ofhazardous substances or other constituents. Some current and former facilitieshave a history of industrial usage for which investigation and remediation obligationscould be imposed in the future or for which indemnification claims could beasserted against 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, the Company’s plants have received or submitted anapplication to the appropriate permitting authority for a Title V permit. TheCompany from time to time upgrades and replaces equipment in order to complywith air quality standards.

 

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 of theCompany’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. Management believes that these actions are not material to theCompany’s consolidated financial position. The Company is involved ininvestigation and remediation projects for certain properties that it currentlyor formerly owned or operated. The Company has also received demands arisingout of alleged contamination of various properties currently or formerlyoperated by it, and at certain waste disposal sites. The Company’s costs inmany instances cannot be reliably estimated until the remediation process issubstantially underway or the liability has been addressed.

 

The Company could incur significant costs in connection withinvestigation and remediation activities and other environmental matters. Somecurrent and former facilities have a history of industrial usage for whichinvestigation and remediation obligations could be imposed in the future or forwhich indemnification claims could be asserted against the Company.

 

The presence of soil and groundwater contamination has beeninvestigated at portions of the Company’s Portland, Oregon plant. The site islisted on Oregon’s inventory of contaminated sites. The Company periodicallymonitors groundwater conditions at the site. While the Company does notcurrently have any remediation obligations at the site, such obligations couldarise in the future.

 

The Kalamazoo, Michigan mill and carton plant have long histories ofindustrial usage. Portions of the property on which the mill is located havebeen found to contain some contamination. Remediation obligations could arisein the future at these facilities.

 

The Company is a party to a number of lawsuits arising in the ordinaryconduct of its business, the most significant of which are listed below.Although the timing and outcome of these lawsuits cannot be predicted, theCompany does not believe that disposition of these lawsuits will have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows.

 

On April 2, 2003, two separate lawsuits were filed in the DistrictCourt of Jefferson County, Colorado, against Graphic, Graphic’s directors andthe Company relating to the Merger between Graphic and the Company pursuant tothe merger agreement. The complaints were filed by Robert F. Smith and HaroldLightweis, on behalf of themselves and all others similarly situated. Each ofthe two complaints alleges breach of fiduciary duties by Graphic’s directors toGraphic’s public shareholders in connection with the Merger and that theCompany aided and abetted the alleged breach. The complaints also allege thatthe Coors family stockholders negotiated the merger consideration in their owninterest and not in the interest of the public stockholders. The complaintssought an injunction against consummation of the Merger,

 

14

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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 has objected to the request for fees and expenses. OnJuly 3, 2003, a third lawsuit was filed in the 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., sought certain equitable relief, including an injunctionagainst the consummation of the Merger, rescission of the Merger if it isconsummated, rescission of the sale of the convertible preferred stock whichhad been issued on August 15, 2000 to the Grover C. Coors Trust (the “Trust”),and an injunction against the conversion of the convertible preferred stock inconnection with the Merger and costs. Graphic filed motions asking to dismissthe lawsuit or to bifurcate the claim to enjoin the Merger from the claim torescind issuance or enjoin the conversion of the preferred stock and to eitherstay the claim relating to the preferred stock or consolidate that claim withthe lawsuit filed by Chinyun Kim disclosed below. By order dated October 7,2003, the court dismissed Graphic from the Bederka lawsuit, leaving Graphic’sdirectors and the Company as defendants. The court also refused to consolidatethe Bederka lawsuit with the Chinyun Kim lawsuit (discussed below), but stayedall discovery in the Bederka lawsuit relating to the sale of the preferredstock. The court has allowed the parties to proceed, however, with disclosuresand discovery relating to the Merger. The Company believes that these threelawsuits are without merit.

 

On February 19, 2002, Chinyun Kim filed a putative class action claimin the District Court of Jefferson County, Colorado, against Graphic andcertain of its shareholders and directors alleging breach of fiduciary duty inconnection with the issuance on August 15, 2000 of the convertible preferredstock to the Trust. Plaintiff sought damages in the amount of over $43 millionor, alternatively, to require transfer to the class of some or all of theTrust’s Graphic common stock into which the convertible preferred stock wasconverted. The court dismissed plaintiff’s claims against Graphic for breach offiduciary duty while allowing the plaintiff to proceed against the nameddirectors and shareholders, including certain other Coors family trusts. TheCompany provided a defense to this action pursuant to its indemnificationobligations. The case was tried in January 2004 and the court ruled in favor ofthe defendants on all counts. Plaintiff has filed a notice of appeal.

 

On April 14, 2000, Lemelson Medical, Education & ResearchFoundation (“Lemelson”) sued Graphic and 75 other defendants in the UnitedStates District Court for the District of Arizona for unspecified damages foralleged infringement of certain patents relating to ‘‘machine vision’’ and‘‘automatic identification.’’ This is one of a series of cases brought against430 defendants and has been stayed pending a final determination of a lawsuitfor noninfringement brought by equipment manufacturers which utilize thetechnology. In a decision issued January 23, 2004 by the District Court forNevada in Symbol Technology et al v. Lemelson, 14 of Lemelson’s patentsrelating to bar code reading and machine vision were held invalid or notinfringed. Lemelson is expected to appeal the ruling. A decision on the appealcan be expected in 12 to 24 months. The Company believes, based upon the adviceof counsel, that the Lemelson patents are invalid and therefore the litigationagainst the Company will not have a material adverse effect on its financialposition, results of operations or cash flows.

 

**NOTE 6 — BUSINESS SEGMENTINFORMATION**

 

The Company reports its results in twobusiness segments: paperboard packaging and containerboard/other. Thesesegments are evaluated by the chief operating decision maker based primarily onincome from operations. The Company’s reportable segments are based uponstrategic business units that offer different products. The paperboardpackaging business segment includes the production and sale of paperboard forits beverage multiple packaging and consumer products packaging businesses fromits West Monroe, Louisiana, Macon, Georgia, Kalamazoo, Michigan and Norrköping,Sweden mills; carton converting facilities in the United States, Europe andBrazil; and the design, manufacture and installation of packaging machineryrelated to the assembly of cartons. The containerboard/other business segmentprimarily includes the production and sale of linerboard, corrugating mediumand kraft paper from paperboard mills in the United States.

 

15

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Business segment information is as follows:

** **
|                           |   | **Three  Months Ended** |   |
|--------------------------------|--------|-------------------------|--------|
| **(In millions of dollars)**   |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| NET SALES:                     |   |                    |   |   |   |
| Paperboard Packaging           |   | $                       | 557.3  |   | $ | 275.9 |   |
| Containerboard/Other           |   | 18.6                    |   | 22.1 |   |
|                           |   | $                       | 575.9  |   | $ | 298.0 |   |
|                           |   |                    |   |   |   |
| INCOME (LOSS) FROM OPERATIONS: |   |                    |   |   |   |
| Paperboard Packaging           |   | $                       | 52.9   |   | $ | 38.9 |   |
| Containerboard/Other           |   | (8.5                    | )      | (6.7 | ) |
| Corporate                      |   | (17.7                   | )      | (7.3 | ) |
|                           |   | $                       | 26.7   |   | $ | 24.9 |   |

 

**NOTE 7 – FINANCIAL INSTRUMENTS,DERIVATIVES AND HEDGING ACTIVITIES**

 

The Company is exposed tofluctuations in interest rates on its variable debt, fluctuations in foreigncurrency transaction cash flows and variability in cash flows attributable tocertain commodity purchases. The Company actively monitors these fluctuationsand periodically uses derivatives and other financial instruments to hedgeexposures to interest, commodity and currency risks. The Company’s use ofderivative instruments may result in short-term gains or losses and mayincrease volatility in its earnings. In addition, these instruments involve, tovarying degrees, elements of market and credit risk in excess of the amountsrecognized in the Condensed Consolidated Balance Sheets. The Company does nottrade or use derivative instruments with the objective of earning financialgains on interest or currency rates, nor does it use leveraged instruments orinstruments where there are no underlying exposures identified.

 

*Interest Rate Risk*

 

The Company uses interest rateswaps to manage interest rate risks on future income caused by interest ratechanges on its variable rate Term Loan facility. The differential to be paid orreceived under these agreements is recognized as an adjustment to interestexpense related to the debt. At March 31, 2004 the Company had interest rateswap agreements with a notional amount of $845 million, which expire on variousdates from 2004 to 2007 under which the Company will pay fixed rates of 1.89%to 3.27% and receive three-month LIBOR.

 

During the three months endedMarch 31, 2004, there was approximately $0.3 million determined to be theineffective portion related to changes in the fair value of the interest rateswap agreements. Additionally, there were no amounts excluded from the measureof effectiveness.

 

*Commodity Risk*

 

To manage risks associated withfuture variability in cash flows and price risk attributable to certain commoditypurchases, the Company entered into fixed price natural gas contracts designedto effectively hedge prices for a portion of its natural gas requirements atits U.S. mills through October 2004. These contracts are not accounted for asderivative instruments under SFAS No. 133*, Accounting for Derivative Instruments and HedgingActivities, as amended by SFAS No. 137, Accounting for Derivative Instrumentsand Hedging Activities—Deferral of the Effective Date of FASB Statement No.133, and SFAS No. 138, Accounting for Certain Derivative Instruments andCertain Hedging Activities* (‘‘SFAS No. 133’’), as they qualify forthe normal purchase exemption.

 

*Foreign Currency Risk*

 

The Company enters into optionand forward exchange contracts to manage risks associated with futurevariability in cash flows resulting from anticipated foreign currencytransactions adversely affected by changes

 

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in exchange rates. Gains/losses, if any, related to these contracts arerecognized in income when the anticipated transaction affects income. Thepremium on an option contract is reflected in Other Expense, Net in the periodin which the contract expires. At March 31, 2004 and December 31, 2003, nooption contracts existed.

 

At March 31, 2004 and December 31, 2003, multiple forward exchangecontracts existed that expire on various dates through the year 2004. Whenmeasured in U.S. dollars at March 31, 2004 exchange rates, the notional amountof the purchased forward exchange contracts totaled approximately $106.0million. When measured in U.S. dollars at December 31, 2003 exchange rates, thenotional amount of the purchased forward exchange contracts totaledapproximately $141.7 million.

 

No amounts were reclassified to earnings during the three months endedMarch 31, 2004 in connection with forecasted transactions that were no longerconsidered probable of occurring and there was no material ineffective portionrelated to changes in the fair value of foreign currency forward contracts.Additionally, there were no amounts excluded from the measure of effectiveness.

 

*Derivativesnot Designated as Hedges*

 

The Company enters into forward exchange contracts to effectively hedgesubstantially all accounts receivable and certain accounts payable resultingfrom transactions denominated in foreign currencies in order to manage risksassociated with foreign currency transactions adversely affected by changes inexchange rates. At March 31, 2004 and December 31, 2003, the Company hadvarious foreign currency forward exchange contracts, with maturities ranging upto six months. When aggregated and measured in U.S. dollars at period-endexchange rates, the net notional amount of these forward currency exchangecontracts totaled approximately $22.5 million and $29.3 million at March 31,2004 and December 31, 2003, respectively. Generally, unrealized gains andlosses resulting from these contracts are recognized in operations andapproximately offset corresponding unrealized gains and losses recognized onthe hedged accounts receivable or payable. These contracts are presently beingand will continue to be marked to market through the income statement.

 

*AccumulatedDerivative Instruments Loss*

 

The balance of $13.8 million recorded in Accumulated DerivativeInstruments Loss at March 31, 2004 is expected to be reclassified into futureearnings, contemporaneously with and offsetting changes in the related hedgedexposure. The actual amount that will be reclassified to future earnings overthe 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 at March 31,2004 and December 31, 2003 and as Derivative Instruments Loss in theaccompanying Condensed Consolidated Statement of Comprehensive Loss for thethree months ended March 31, 2004.

 
| **(In millions of dollars)**           |   |   |   |
|----------------------------------------|--------|--------|--------|
|                                   |   |   |   |
| Balance at  December 31, 2002          |   | $      | (6.1   | ) |
| Reclassification  to earnings          |   | (5.0   | )      |
| Current period decrease  in fair value |   | (1.6   | )      |
| Balance at  December 31, 2003          |   | $      | (12.7  | ) |
| Reclassification  to earnings          |   | (1.7   | )      |
| Current period  increase in fair value |   | 0.6    |   |
| Balance at March  31, 2004             |   | $      | (13.8  | ) |

 

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**NOTE 8 – PENSIONS AND OTHERPOSTRETIREMENT BENEFITS**

 

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

 

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

 
|                            |   | **Three  Months Ended** |   |
|---------------------------------|--------|-------------------------|--------|
| **(In millions of dollars)**    |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| Service Cost                    |   | $                       | 3.2    |   | $ | 1.4 |   |
| Interest Cost                   |   | 6.8                     |   | 4.2 |   |
| Expected Return  on Plan Assets |   | (6.9                    | )      | (4.2 | ) |
| Amortizations:                  |   |                    |   |   |   |
| Prior Service  Cost             |   | 0.5                     |   | 0.1 |   |
| Actuarial Loss                  |   | 0.9                     |   | 0.4 |   |
|                            |   |                    |   |   |   |
| Net Periodic  Pension Cost      |   | $                       | 4.5    |   | $ | 1.9 |   |

 

The Company disclosed in its financial statements for the year endedDecember 31, 2003, that due to certain minimum regulatory requirements, theCompany may be required to make contributions to its pension plans. Thecontributions were contingent upon final pension funding proposals separatelyapproved by both houses of the U.S. Congress. The legislative actions have nowbeen passed and as such the Company estimates that the contributions requiredwill be approximately $0.8 million to be paid in the fourth quarter of 2004.The Company has not made any contributions to its pension plans during thethree months ended March 31, 2004.

 

The Company sponsors postretirement health care plans that providemedical and life insurance coverage to eligible salaried and hourly retiredU.S. employees and their dependents. No postretirement medical benefits areoffered to salaried employees who began employment after December 31, 1993.

 

The other postretirement benefits expense consisted of the following:

 
|                                       |   | **Three  Months Ended** |   |
|--------------------------------------------|--------|-------------------------|--------|
| **(In millions of dollars)**               |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| Service Cost                               |   | $                       | 0.2    |   | $ | 0.1 |   |
| Interest Cost                              |   | 0.8                     |   | 0.5 |   |
| Amortizations:                             |   |                    |   |   |   |
| Prior Service  Cost                        |   | (0.1                    | )      | (0.1 | ) |
| Actuarial Loss                             |   | 0.1                     |   | 0.1 |   |
|                                       |   |                    |   |   |   |
| Net Periodic  Postretirement Benefits Cost |   | $                       | 1.0    |   | $ | 0.6 |   |

 

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**NOTE 9 – RESTRUCTURING CHARGES ANDIMPAIRMENT LOSSES**

 

The Company adopted a plan in the firstquarter of 2004 to restructure its operations by closing facilities,relocating equipment andsevering employees in an effort to better position the Company to operate inthe current business environment. Components of the restructuring charges forthe three months ended March 31, 2004 are as follows:

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

 

Through March 31, 2004, the Company has madepayments for severance and other employee termination-related charges in theamount of $0.1 million which reduced the initial reserve detailed above. Noother payments or adjustments have been made to the restructuring reserve atMarch 31, 2004.  The restructuringactivities described herein are expected to be completed by the end of 2005 andaffect only the paperboard packaging segment. As of March 31, 2004, theCompany had approximately $7.1 million accrued for restructuring, as follows:

 
|                                                                   |   |                             |        | **Adjustments  (Statement of  Operations Impact)** |         |   |                            |   |                 |                            |   |   |   |
|------------------------------------------------------------------------|--------|----------------------------------|-------------|----------------------------------------------------|--------------|--------|---------------------------------|--------|----------------------|---------------------------------|--------|--------|--------|
|                                                                   |   | **Balance at  January 1,  2004** |        |                                               |         |   | **Purchase  Price  Allocation** |   |                 | **Balance at  March 31,  2004** |
|                                                                   |   |                             |        | **Cash  Payments**                                 |         |   |                            |
| **(In millions of dollars)**                                           |   |                             | **Expense** |                                               | **Reversal** |   |                            |   | **Reclassification** |
| Equipment  Removal Costs                                               |   | $                                | —      |                                               | $            | — |                            | $      | —               |                            | $      | — |   | $ | 1.3 |   | $ | — |   | $ | 1.3 |   |
| Facility  Restoration and Carrying Costs                               |   | —                           |        | —                                             |         | — |                            | — |                 | 1.4                             |   | — |   | 1.4 |   |
| Severance of  Employees and Other Employee Termination-Related Charges |   | —                           |        | —                                             |         | — |                            | (0.1   | )                    | 4.5                             |   | — |   | 4.4 |   |
| Total                                                                  |   | $                                | —      |                                               | $            | — |                            | $      | —               |                            | $      | (0.1   | )      | $ | 7.2 |   | $ | — |   | $ | 7.1 |   |

 

**NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

In July 2002, the FASB issued SFAS No. 146, *‘‘Accounting for Costs Associated withExit or Disposal Activities’’* (‘‘SFAS No.146’’), which was effectiveDecember 31, 2002. SFAS No. 146 addresses financial

 

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accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (‘‘EITF’’) Issue No. 94-3, *‘‘LiabilityRecognition for Certain Employee Termination Benefits and 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 early applicationencouraged. The Company adopted SFAS No. 146 effective January 1, 2003 and theadoption did not have a significant impact on its financial position andresults of operations.

 

In April 2003, the FASB issued SFAS No. 149 *“Amendment of Statement 133 onDerivative Instruments and**Hedging Activities,”* (“SFAS No. 149”).This statement is effective and will be applied to contracts entered into ormodified after June 30, 2003. The Company adopted SFAS No. 149 and the adoptiondid not have a significant impact on its financial position and results ofoperations.

 

In May 2003, the FASB issued SFAS No. 150 *“Accounting for Certain FinancialInstruments with Characteristics**of Liabilities and Equity,”* (“SFAS No.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 effective July 1, 2003and the adoption did not have an impact on its financial position and resultsof operations.

 

In December 2003,the FASB issued SFAS No. 132 (Revised 2003), ‘‘Employers’ Disclosures aboutPensions and Other Postretirement Benefits-an amendment of FASB Statements No.87, 88 and 106’’ (‘‘SFAS No. 132’’). This statement revises the disclosuresrequired for pension plans and other postretirement benefit plans. The Companyadopted this revised statement effective December 31, 2003.

 

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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 the accountingby 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 its financialposition and results of operations.

 

Financial Accounting Standards Board Interpretation (“FIN”) No. 46, *“Consolidationof**Variable Interest Entities”* (“FIN No. 46”), was issued inJanuary 2003. FIN No. 46 defines a variable interest entity as a legal entityin which, among other things, the equity investments at risk are not sufficientto finance the operating and closing activities of the entity withoutadditional subordinated financial support from the entity’s investors. TheCompany is not a partner to any material variable interest entity.

 

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

The Company is a leading provider of paperboard packaging solutions tomultinational consumer products companies. The Company has verticallyintegrated operations enabling it to offer customers paperboard, cartons andpackaging machines, either as an integrated solution or separately.

 

The Company’s objective is to expand its position as a leading providerof paperboard packaging solutions. To achieve this objective, the Company isimplementing strategies to expand market share in its current markets and toidentify and penetrate new markets; to capitalize on the Company’s andGraphic’s complementary customer relationships, business competencies, andmills and converting assets; to develop and market innovative products andapplications; to continue to reduce costs by focusing on operationalimprovements and identified operating synergies from the Merger; and to useanticipated future cash flows to reduce debt.

 

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**The Merger**

 

The Merger wasaccounted for as a purchase by the Company. Under the purchase method ofaccounting, the assets and liabilities of Graphic were recorded, as of the dateof the closing of the Merger, at their respective fair values and added tothose of the Company.

 

The Company isahead of schedule in merger integration and in realizing the initial estimateof approximately $52 million of annual synergies by the third year after theclosing of the Merger, primarily due to savings realized in corporate andsupply chain operations. As of March 31, 2004, the Company has achievedsynergies at an annualized rate of approximately $43 million. In January 2004,the Company announced plans to close its Garden Grove, CA converting plant, andin May 2004 announced plans to close its Bow, NH and Clinton, MS convertingplants. By the end of 2006, the Company estimates realizing an additional $19million in annual synergies, improved cost structures and increasedproductivity as a result of these facilities closures. The Company cannot makeassurances as to the amount or timing of future synergies, if any, that may berealized. Potential difficulties in realizing such projected synergies include,among other things, the integration of personnel, the combination of differentcorporate cultures and the integration of facilities.

 

For additionaldiscussion of the Merger and the impact of the Merger on the Company’sfinancial condition and results of operations, see Note 1, Note 2 and Note 9 inNotes to Condensed Consolidated Financial Statements.

 

**SegmentInformation**

 

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

 
|                            |   | **Three  Months Ended** |   |
|---------------------------------|--------|-------------------------|--------|
| **(In millions of dollars)**    |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| NET SALES:                      |   |                    |   |   |   |
| Paperboard  Packaging           |   | $                       | 557.3  |   | $ | 275.9 |   |
| Containerboard/Other            |   | 18.6                    |   | 22.1 |   |
|                            |   | $                       | 575.9  |   | $ | 298.0 |   |
|                            |   |                    |   |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |   |                    |   |   |   |
| Paperboard  Packaging           |   | $                       | 52.9   |   | $ | 38.9 |   |
| Containerboard/Other            |   | (8.5                    | )      | (6.7 | ) |
| Corporate                       |   | (17.7                   | )      | (7.3 | ) |
|                            |   | $                       | 26.7   |   | $ | 24.9 |   |

 

**SignificantFactors That Impact The Company’s Business**

 

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

 

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

 

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

 

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

 

•        preparedfoods, including snacks, quick serve foods in restaurants and food serviceproducts;

 

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

 

•        tobacco,including flip top boxes and long cartons.

 

The Company historically experienced stable pricing for its integratedbeverage multiple packaging products and moderate cyclical pricing for itsother product offerings. Because some products can be packaged in differenttypes of materials, 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. New product introductionsand promotional activity by Graphic’s customers and Graphic’s introduction ofnew packaging products also impacted its sales. The Company’s containerboardbusiness is subject to conditions in the cyclical worldwide commoditypaperboard markets which have a significant impact on containerboard sales.

 

The Company worksto maintain market share through efficiency, product innovation and strategicsourcing to its customers; however, pricing and other competitive pressures mayoccasionally result in the loss of a customer relationship. In the fourthquarter of 2002, the Company was notified by Coca-Cola Enterprises (“CCE”) thatCCE would not renew its supply contract with the Company. Under this contract,which expired on March 31, 2003, the Company supplied to CCE beverage cartonsmade from its CUK board, packaging machines and related services. The Company’ssupply contracts with its independent Coca-Cola bottling company customers werenot subject to CCE’s non-renewal notification. CCE’s action negatively impactedthe Company’s volumes in 2003 by approximately 16,000 tons. In February 2004,the Company dismissed a lawsuit that was filed against MeadWestvaco Corporationalleging infringement of US Patent 6,578,736 covering the Company’s Fridge Vendor®carton and also announced the Company will resume supplying Fridge Vendor®cartons to CCE in various locations that were being supplied by MeadWestvaco.

 

Packagingmachinery placements during the first quarter of 2004 increased approximately144% compared to the first quarter of 2003 partially due to the timing ofshipments. The Company expects packaging machinery placements for 2004 to beapproximately 60% higher when compared to 2003. The Company has been and willcontinue to be selective in future packaging machinery placements to ensureappropriate returns.

 

*Cost of Sales*. TheCompany’s cost of sales consist primarily of energy, pine pulpwood, hardwood,chemicals, recycled fibers, purchased paperboard, paper, aluminum foil, ink,plastic films and resins, depreciation expense and labor. Energy, includingnatural gas, fuel oil and electricity, represents a significant portion of theCompany’s manufacturing costs. During the first quarter of 2004, the Companyexperienced a significant increase in its energy costs compared to the prioryear period, principally at its mills, equal to approximately $3 million on apro forma basis which represents an approximate 10% increase. The Company hasentered into contracts designed to mitigate the impact of future cost increasesfor a portion of its natural gas requirements, at its U.S. mills throughOctober 2004. The Company will continue to evaluate its position regardingnatural gas purchase commitments. The Company believes that higher energy costswill continue to negatively impact its results for 2004.

 

*Commitmentto Cost Reduction*. In light of increasing margin pressurethroughout the paperboard packaging industry, the Company has programs in placethat are designed to reduce costs. The Company is pursuing a number oflong-term initiatives designed to improve productivity and profitability. TheCompany is continuing to implement a global continuous improvement initiativewhich uses statistical process control to help design and manage many types ofactivities, including production and maintenance. This includes a Six Sigmaprocess focused on reducing variable and fixed manufacturing and administrativecosts. During the first quarter of 2004, the Company achieved approximately $6million in annualized cost savings through its continuous improvementinitiative.

 

TheCompany is implementing an initiative designed to enhance the competitivenessof its beverage multiple packaging converting operations. This initiative isexpected to add new manufacturing technology, add press capacity andconsolidate certain beverage carton converting operations. The Company expectsto make capital investments of approximately $75 million through 2005 and torealize cost savings relative to 2002 from this initiative of approximately $39million annually by 2005. The Company has spent approximately $53 million ofthat amount for such capital investment through March 31, 2004. The Companycannot make assurances as to the amount, if any, or timing of cost savings thatmay be realized.

 

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

 

**CriticalAccounting Policies**

 

Thepreparation of Condensed Consolidated Financial Statements in conformity withgenerally accepted accounting principles in the United States requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. These estimates and assumptions are basedon historical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ from theseestimates under different assumptions or conditions.

 

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

 

• Revenue Recognition — TheCompany receives revenue from the sales of manufactured products, the leasingof packaging machinery, and the servicing of packaging machinery. The Companyrecognizes sales revenue when the following criteria are met: persuasiveevidence of an agreement exists, delivery has occurred or services have beenrendered, the Company’s price to the buyer is fixed and determinable, andcollectibility is reasonably assured. Delivery is not considered to haveoccurred until the customer takes title and assumes the risks and rewards ofownership. The timing of revenue recognition is largely dependent on shippingterms. Revenue is recorded at the time of shipment for terms designated as freeon board, or f.o.b., shipping point. For sales transactions designated f.o.b.destination, revenue is recorded when the product is delivered to thecustomer’s delivery site. The Company recognizes revenues on its annual andmulti-year carton supply contracts as the shipment occurs in accordance withthe shipping terms discussed above.

 

Paymentsfrom packaging machinery use agreements are recognized on a straight-line basisover the term of the agreements. Service revenue on packaging machinery isrecorded at the time of service.

 

Discounts and allowances are comprised of trade allowances, cash discounts,and sales returns. Cash discounts and sales returns are estimated usinghistorical experience. Trade allowances are based on the estimated obligationsand historical experience. Rebates are determined based on the quantitypurchased and are recorded at the time of sale.

 

• Collectibility of AccountsReceivable — The Company estimates losses for uncollectible accounts based onthe aging of accounts receivable and the evaluation of the likelihood ofsuccess in collecting the receivables. Typically, allowances are needed fordisputed accounts, customers that are having financial problems orbankruptcies.

 

• Inventory Costing — TheCompany’s inventories are stated at the lower of cost or market with costdetermined principally by the first-in, first-out (‘‘FIFO’’) basis (see Note 4in Notes to the Condensed Consolidated Financial Statements). Average costbasis is used to determine the cost of supplies inventories. Raw materials andconsumables used in the production process such as wood chips and chemicals arevalued at purchase cost on a FIFO basis upon receipt. Work in progress andfinished goods inventories are valued at the cost of raw material consumed plusdirect manufacturing costs (such as labor, utilities and supplies) as incurredand a proportion of manufacturing overhead. Inventories are stated net of anallowance for slow-moving and obsolete inventory, which is based on estimates.If the condition of the inventories or the state of the Company’s business wereto deteriorate, additional allowances may be required which would reduceincome.

 

• Self-Insurance Reserves — The Company is self-insuredfor certain losses relating to workers’ compensation claims and employeemedical and dental benefits. Provisions for expected losses are recorded basedon the Company’s estimates, on an undiscounted basis, of the aggregateliabilities for known claims and estimated claims incurred but not reported.The Company has purchased stop-loss coverage or insurance with deductibles inorder to limit its exposure to significant claims. The Company also has anextensive safety program in place to minimize its exposure to workers’compensation claims. Self-

 

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insured losses areaccrued based upon estimates of the aggregate uninsured claims incurred usingcertain actuarial assumptions followed in the insurance industry and historicalexperience.

 

• Retirement-Related Benefits —The Company sponsors defined benefit plans, or the plans, for eligibleemployees and retirees. The effect of the plans on the Condensed ConsolidatedFinancial Statements is subject to many assumptions. The Company believes thatthe most critical assumptions are (1) the discount rate, (2) the rate ofincrease in future compensation levels and (3) the expected long-term rate ofreturn on plan assets. The projected unit credit cost method is used forvaluation purposes.

 

• GoodwillValuation — The Company estimates the value of its goodwill using thediscounted cash flow method of valuation on an annual basis. The Company’s cashflows are generated by its operations and are used to fund working capitalneeds, debt service and capital spending. The Company discounts these cashflows using its weighted average cost of capital. Changes in borrowing rates, whichare impacted by market rate fluctuations, would impact discounted cash flowcalculations. Other factors, such as significant operating losses oracquisitions of new operations, would also impact discounted cash flowcalculations.

 

• Recovery ofLong-Lived Assets — The Company reviews long-lived assets (including property,plant and equipment and intangible assets) for impairment whenever events orchanges in business circumstances, such as the closure of a plant, indicatethat the carrying value of an asset may not be fully recoverable byundiscounted cash flows. Measurement of the impairment loss, if any, is basedon 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.

 

• Deferred Tax Asset ValuationAllowance — The Company estimates the realizability of deferred tax assets, byestimating the projected reversal of offsetting deferred tax liability amountsand future taxable income. As discussed above in “Goodwill valuation,”significant operating losses or acquisitions of operations would impactprojected taxable income used to estimate the reversal of deferred taxbalances.

 

• LegalAccruals — The Company estimates the amount of potential exposure it may havewith respect to litigation, claims and assessments, based upon analysesprepared by in-house and outside counsel, and records reserves when managementbelieves it is probable that a loss will occur and the amount of loss isreasonably estimable. While there can be no assurance as to the ultimateoutcome of any current lawsuits, claims or investigations relating to suchuncertainties, the Company does not believe that such uncertainties will have amaterial adverse impact on its results of operations, cash flows or financialcondition. However, future uncertainties may have a material adverse impact onresults of operations, cash flows or financial condition.

 

• Environmental Expendituresand Remediation Liabilities — Environmental expenditures that relate to currentoperations are expensed or capitalized as appropriate. Expenditures that relateto an existing condition caused by past operations, and which do not contributeto current or future revenue generation, are expensed. Liabilities are recordedwhen remedial efforts are probable and the costs can be reasonably estimated.Typically, environmental expenditures relate to the maintenance and upgradingof equipment as well as the installation of new equipment that is necessary inorder to comply with environmental laws.

 

• Business Combinations—The Company, in assessing thefair market value of assets acquired and liabilities assumed in the Merger, hasused certain estimates and assumptions that were based, in part, uponindependent third-party appraisals and valuations.

 

For a discussionof recent accounting pronouncements impacting the Company, see Note 10 in Notesto Condensed Consolidated Financial Statements.

 

**RESULTS OF OPERATIONS**

 

TheMerger was accounted for as a purchase by the Company thus, the results ofoperations for the first quarter of 2003 represent the results of the Companyonly. The Company’s results of operations for the three months ended March 31,2004 include the results of Graphic. Accordingly, amounts for the first quarterof 2004 are not comparable to those for the first quarter 2003. See Note 2 inNotes to Condensed Consolidated Financial Statements.

 

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**FIRST QUARTER 2004 COMPARED WITH FIRST QUARTER 2003**

 
|                                   |   | **Three  Months Ended**   |   |
|----------------------------------------|--------|---------------------------|--------|
| **(Amounts in Millions)**              |   | **March  31,  2004** |   | **Increase  (Decrease)  From  Prior Period** |   | **March 31,  2003** |   |
|                                   |   |                      |   |   |   |   |   |
| Net Sales                              |   | $                         | 575.9  |   | 93.3 | % | $ | 298.0 |   |
| Cost of Sales                          |   | 486.9                     |   | 103.0 |   | 239.9 |   |
| Gross Profit                           |   | 89.0                      |   | 53.2 |   | 58.1 |   |
| Selling, General  and Administrative   |   | 48.2                      |   | 61.2 |   | 29.9 |   |
| Research, Development  and Engineering |   | 2.4                       |   | 71.4 |   | 1.4 |   |
| Other Expense,  Net                    |   | 11.7                      |   | 515.8 |   | 1.9 |   |
| Income from  Operations                |   | $                         | 26.7   |   | 7.2 | % | $ | 24.9 |   |

 

**Net Sales**

 

The Company’s Net Sales in the first quarter of 2004 increased by$277.9 million, or 93.3%, to $575.9 million from $298.0 million in the firstquarter of 2003 due primarily to the addition of Graphic’s paperboard packagingbusiness which increased Net Sales by $279.0 million. Foreign currency exchangerates positively impacted Net Sales by $15.3 million. These increases weresomewhat offset by lower pricing, mix and volume in the Company’s NorthAmerican beverage markets primarily as a result of increased marketcompetitiveness.

 

**Gross Profit**

 

TheCompany’s Gross Profit in the first quarter of 2004 increased by $30.9 million,or 53.2%, to $89.0 million from $58.1 million in the first quarter of 2003. TheCompany’s gross profit margin decreased to 15.5% in the first quarter of 2004from 19.5% in the first quarter of 2003. The decrease in gross profit marginwas due primarily to lower pricing and volumes in North American beveragemarkets as a result of increased market competitiveness, lower margin productmix in North American markets including the addition of Graphic’s paperboardpackaging business, higher energy and fiber costs, and inflation. The decreasein gross profit margin was somewhat offset by higher Net Sales as a result ofthe factors discussed above and worldwide cost reductions resulting from theCompany’s cost reduction initiatives.

 

**Selling, General and Administrative**

 

Selling, General and Administrative expenses increased by $18.3million, or 61.2%, to $48.2. million in the first quarter of 2004 from $29.9million in the first quarter of 2003, due primarily to the addition ofGraphic’s Selling, General and Administrative expenses of $11.5 million,expenses related to the Merger of $1.1 million, higher incentive expenses andinflation. As a percentage of Net Sales, Selling, General and Administrativeexpenses were 8.4% in the first quarter of 2004 and 10.0% in the first quarterof 2003.

** **

**Research, Development and Engineering**

 

Research,Development and Engineering expenses increased by $1.0 million, or 71.4%, to$2.4 million in the first quarter of 2004 from $1.4 million in the firstquarter of 2003, due to the addition of Graphic’s Research, Development andEngineering expenses of $1.0 million.

 

**Other Expense, Net**

 

OtherExpense, Net was $11.7 million in the first quarter of 2004 as compared to $1.9million in the first quarter of 2003. This change was principally due to higheramortization expense of $7.4 million due to the effects of purchase accountingin connection with the Merger and non-cash charges of approximately $3.0million recorded in the first quarter of 2004 associated with the retirement ofcertain equipment, somewhat offset by the charge of approximately $1.9 millionrecorded in the first quarter of 2003 to write off deferred costs associatedwith the withdrawal of the proposed initial public offering of the Company’scommon stock.

 

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**Income from Operations**

 

Primarilyas a result of the factors discussed above, the Company’s Income fromOperations in the first quarter of 2004 increased by $1.8 million, or 7.2%, to$26.7 million from $24.9 million in the first quarter of 2003, while itsoperating margin decreased to 4.6% in the first quarter of 2004 from 8.4% inthe first quarter of 2003.

 

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

 

The weakening of the U.S. dollar currency exchange rates as compared tothe euro and other European currencies, and the Japanese yen had a modestimpact on Net Sales, Gross Profit, Income from Operations, and operatingexpenses during the first quarter of 2004.

 

**INTERESTINCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NET EARNINGS OFAFFILIATES**

 

**InterestIncome**

 

InterestIncome remained constant at $0.1 million in the first quarter of 2004 and 2003.

 

**InterestExpense**

 

Interest Expense increased by $4.0 million to $38.0 million in thefirst quarter of 2004 from $34.0 million in the first quarter of 2003 dueprimarily to higher debt balances following the Merger. The increase wassomewhat offset by lower 3 month LIBOR interest rates on the variable rateportion of the debt portfolio and lower interest rates on the new Senior andSenior Subordinated notes.

 

**IncomeTax Expense**

 

During the first quarter of 2004, the Company recognized an Income TaxExpense of $1.5 million on Loss before Income Taxes and Equity in Net Earningsof Affiliates of $11.2 million. During the first quarter of 2003, the Companyrecognized an Income Tax Expense of $1.0 million on Loss before Income Taxesand Equity in Net Earnings of Affiliates of $9.0 million. Income Tax Expense onincome earned in the U.S. and certain foreign countries in the first quarter of2004 and 2003 was fully offset by a reduction to valuation allowances recordedfor those countries. Income Tax Expense for the first quarter of 2004 and 2003was due primarily to income earned in other foreign countries where no valuationallowance is recorded. Since income earned in those foreign countries washigher for the first quarter of 2004 in comparison to the first quarter of2003, Income Tax Expense was higher for the same period.

 

**Equityin Net Earnings of Affiliates**

 

Equity in Net Earnings of Affiliates increased by $0.1 million to $0.3million in the first quarter of 2004 from $0.2 million in the first quarter of2003 as a result of improved operations of the Company’s non-consolidated jointventure, Rengo Riverwood Packaging, Ltd.

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITALRESOURCES**

 

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

 

**Cash Flows**

 

Cash andEquivalents decreased by approximately $7.0 million in the first quarter of2004. Cash used in operating activities in the first quarter of 2004 totaled$22.0 million, compared to cash provided by operating activities of $17.1million in the first quarter of 2003. This change was principally due tounfavorable changes

 

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in operatingassets and liabilities, primarily receivables and accounts payable and otheraccrued liabilities, as a result of the additional working capital needsfollowing the Merger and timing differences, including those associated withthe Company’s payment of interest. Cash used in investing activities in thefirst quarter of 2004 totaled $48.9 million, compared to $20.7 million in thefirst quarter of 2003. This change was principally due to an increase inpurchases of property, plant and equipment of approximately $25.4 million (see“— Capital Expenditures”). Cash provided by financing activities in the firstquarter of 2004 totaled $63.9 million, compared to $0.4 million in the firstquarter of 2003. This change was principally due to higher net borrowings underthe Company’s revolving credit facilities primarily as a result of the above.Depreciation and amortization during the first quarter of 2004 totaledapproximately $57.5 million and is expected to be approximately $220 million to$230 million in 2004.

 

**Liquidity and Capital Resources**

 

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

 

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

 

• The entering into andborrowing under the Senior Secured Credit Agreement, dated as of August 8,2003, among Graphic Packaging International, Inc. and the several lenderparties thereto (the “Senior Secured Credit Agreement”), which provides foraggregate 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 revolving loans (includingstandby and commercial letters of credit) outstanding at anytime, to GraphicPackaging International, Inc.

 

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

 

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

 

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

 

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

 

As of March 31, 2004, the Company had outstanding $2.2 billion oflong-term debt, consisting primarily of $850 million aggregate principal amountof Senior Notes and Senior Subordinated Notes, $1,266 million of term loansunder the Term Loan Facility, $82 million of revolving credit borrowings underthe Revolving Credit Facility, and other debt issues and facilities.

 

Principaland interest payments under the Term Loan Facility and the Revolving CreditFacility, together with principal and interest payments on the Senior Notes andthe Senior Subordinated Notes, represent significant liquidity requirements forthe Company. The Tranche A term loans mature in 2009 and amortize insemi-annual installments over their term on the following amortizationschedule: $3.75 million on June 30, 2004, $7.5 million on December 31, 2004 andJune 30, 2005, $11.25 million on December 31, 2005 and June 30, 2006, $15.0million on December 31, 2006 and June 30, 2007, and $18.75 million on December31, 2007, June 30, 2008, December 31, 2008 and at maturity. The Tranche B termloans mature in 2010 and

 

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amortizein semi-annual installments of $5.625 million payable on December 31 and June30 of each year through December 31, 2009, with a final payment ofapproximately $1.05 billion at maturity. The Revolving Credit Facility maturesin 2009.

 

The loans under the Senior Secured Credit Agreement bear interest atfluctuating rates based upon the interest rate option elected by the Company.The loans under the Term Loan Facility bore interest as of March 31, 2004 at anaverage rate per annum of 3.9%. The Senior Notes and the Senior SubordinatedNotes bear interest at rates of 8.5% and 9.5%, respectively. The loans underthe Revolving Credit Facility bore interest as of March 31, 2004 at an averagerate per annum of 4.5%.

 

Interest expense in 2004 is expected to be approximately $145 million,including approximately $9 million of non-cash amortization of deferred debtissuance costs. During the first quarter of 2004, cash paid for interest wasapproximately $57 million.

 

AtMarch 31, 2004, the Company and its U.S. and international subsidiaries had thefollowing commitments, amounts outstanding and amounts available underrevolving credit facilities:

 
| **(In  millions of dollars)** |   | **Total  Amount of  Commitments** |   | **Total  Amount  Outstanding** |   | **Total  Amount  Available (A)** |   |
|-------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|----------------------------------|--------|
| Revolving Credit  Facility    |   | $                                 | 325.0  |                           | $      | 81.9                             |   | $ | 230.9 |   |
| International  Facilities     |   | 17.5                              |   | 13.2                           |   | 4.3                              |   |
|                          |   | $                                 | 342.5  |                           | $      | 95.1                             |   | $ | 235.2 |   |

 

----

**Note:**

(A)      In accordance with its debtagreements, the Company’s availability under its Revolving Credit Facility hasbeen reduced by the amount of standby letters of credit issued of approximately$12.2 million as of March 31, 2004. These letters of credit are used assecurity against its self-insurance obligations, workers’ compensationobligations and an outstanding note payable. These letters of credit expire atvarious dates through 2005 unless extended.

 

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 operating performance,ability to service or refinance its debt and ability to comply with thecovenants and restrictions contained in its debt agreements (see “—CovenantRestrictions”), will be subject to future economic conditions and to financial,business and other factors, many of which are beyond the Company’s control andwill be substantially dependent on the selling prices and demand for theCompany’s products, raw material and energy costs, and the Company’s ability tosuccessfully implement its overall business and profitability strategies.

 

TheCompany expects that its working capital and business needs will require it tocontinue to have access to the Revolving Credit Facility or a similar revolvingcredit facility after the maturity date, and that the Company accordingly willhave to extend, renew, replace or otherwise refinance such facility at or priorto such date. No assurance can be given that it will be able to do so. TheCompany has in the past refinanced and in the future may seek to refinance itsdebt prior to the respective maturities of such debt.

 

The Company uses interest rate swaps to manage interest rate risks onfuture income caused by interest rate changes on its Term Loan Facility. Thedifferential to be paid or received under these agreements is recognized as anadjustment to interest expense related to the debt. At March 31, 2004 theCompany had interest rate swap agreements with a notional amount of $845million, which expire on various dates from 2004 to 2007 under which theCompany will pay fixed rates of 1.89% to 3.27% and receive three-month LIBOR.

 

Asof December 31, 2003, the Company had approximately $1,360.5 million of netoperating loss carryforwards (“NOLs”). These NOLs generally may be used by theCompany to offset taxable income earned in subsequent taxable years. However,the Company’s ability to use these NOLs to offset its future taxable income maybe subject to significant limitation as a result of certain shifts in ownershipdue to direct

 

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orindirect 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 future after tax free cash flow.

 

**CovenantRestrictions**

 

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

 

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

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

 

----

Note:

(A) See “—CreditAgreement EBITDA”

 

At March 31, 2004, the Company was in compliance with the financialcovenants in the Senior Secured Credit Agreement. The Company’s ability tocomply in future periods with the financial covenants in the Senior SecuredCredit Agreement will depend on its ongoing financial and operatingperformance, which in turn will be subject to economic conditions and tofinancial, business and other factors, many of which are beyond the Company’scontrol and will be substantially dependent on the selling prices for theCompany’s products, raw material and energy costs, and the Company’s ability tosuccessfully implement its overall business and profitability strategies. If aviolation of any of the covenants occurred, the Company would attempt to get awaiver or an amendment from its lenders, although no assurance can be giventhat the Company would be successful in this regard. The Senior Secured CreditAgreement and the indentures governing the Senior Subordinated Notes and theSenior Notes have covenants as well as certain cross-default orcross-acceleration provisions; failure to comply with these covenants in any agreementcould result in a violation of such agreement which could, in turn, lead toviolations of other agreements pursuant to such cross-default orcross-acceleration provisions.

 

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

 

**Credit Agreement EBITDA**

 

The table below sets forth EBITDA as defined in the Company’s SeniorSecured Credit Agreement, which is referred to in this report as “CreditAgreement EBITDA.” Credit Agreement EBITDA as presented below is afinancial measure that is used in the Senior Secured Credit Agreement. CreditAgreement EBITDA is not a

 

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

 

Borrowings under 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 section.Failure to comply with these financial ratio covenants would result in aviolation of the Senior Secured Credit Agreement and, absent a waiver oramendment from the lenders under such agreement, permit the acceleration of alloutstanding borrowings under the Senior Secured Credit Agreement.

 

The calculation ofCredit Agreement EBITDA for the periods indicated is set forth below. CreditAgreement EBITDA for the three months ended March 31, 2004 is calculated inaccordance with the Senior Secured Credit Agreement. Credit Agreement EBITDAfor the twelve months ended March 31, 2004 and December 31, 2003 is calculatedon a pro forma basis giving effect to the Merger in accordance with the SeniorSecured Credit Agreement. Credit Agreement EBITDA for the three months endedMarch 31, 2003 is also calculated on a pro forma basis giving effect to theMerger as if the Senior Secured Credit Agreement was in effect with respect tosuch period. See Note 2 in Notes to Condensed Consolidated Financial Statementsfor selected unaudited pro forma combined financial information giving effectto the Merger.

 
|                                                         |   | **Three  Months Ended** |   | **Twelve  Months Ended** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
| **(Amounts  in Millions)**                                   |   | **Mar. 31,  2004**      |   | **Mar. 31,  2003**       |   | **Mar. 31,  2004** |   | **Dec. 31,  2003** |   |
|                                                         |   | **Actual**              |   | **Pro Forma**            |   | **Pro Forma** |   | **Pro Forma** |   |
| Unaudited  Combined Loss Attributable to Common Stockholders |   | $                       | (12.4  | )                        | $      | (8.9 | ) | $ | (77.9 | ) | $ | (74.4 | ) |
| Income Tax  Expense                                          |   | 1.5                     |   | 1.0                      |   | 3.1 |   | 2.5 |   |
| Interest  Expense, Net                                       |   | 37.9                    |   | 36.1                     |   | 149.9 |   | 148.1 |   |
| Depreciation and  Amortization                               |   | 57.5                    |   | 52.9                     |   | 219.6 |   | 214.9 |   |
| Equity in Net  Earnings of Affiliates                        |   | (0.3                    | )      | (0.2                     | )      | (1.5 | ) | (1.3 | ) |
| Other Non-Cash  Charges (A)                                  |   | 9.5                     |   | 5.3                      |   | 36.0 |   | 31.8 |   |
| Merger Related  Expenses                                     |   | 0.8                     |   | 2.3                      |   | 11.6 |   | 13.1 |   |
| Dividends from  Equity Investments                           |   | 1.1                     |   | —                   |   | 1.7 |   | 0.7 |   |
| Loss on Early  Extinguishment of Debt                        |   | —                  |   | —                   |   | 46.6 |   | 46.6 |   |
| Credit Agreement  EBITDA (B)                                 |   | $                       | 95.6   |                     | $      | 88.5 |   | $ | 389.1 |   | $ | 382.0 |   |

 

----

**Notes:**

(A) Other non-cash charges include non-cash charges for pension,postretirement and postemployment benefits, and amortization of premiums onhedging contracts deducted in determining net income.

 

(B) Credit Agreement EBITDA is calculated in accordance with thedefinitions contained in the Company’s Senior Secured Credit Agreement. CreditAgreement EBITDA is defined as consolidated net income before consolidatedinterest expense, non-cash expenses and charges, total income tax expense,depreciation expense, expense associated with amortization of intangibles andother assets, non-cash provisions for reserves for discontinued operations,extraordinary, unusual or non-recurring gains or losses or charges or credits,gain or loss associated with sale or write-down of assets not in the ordinarycourse of business, and any income or loss accounted for by the equity methodof accounting.

 

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**Capital Expenditures**

 

The Company’s capital spending for the three months ended March 31,2004 was approximately $45.0 million, up 129.6% from $19.6 million for thethree months ended March 31, 2003. During the first three months of 2004, theCompany had capital spending of approximately $11.9 million for improvingprocess capabilities, approximately $24.9 million for its beverage multiplepackaging converting operations initiative, approximately $7.1 million formanufacturing packaging machinery and approximately $1.1 million for compliancewith cluster rules. Total capital spending for 2004 is expected to beapproximately $150 million and is expected to relate principally to improvingthe Company’s process capabilities (approximately $126 million), the productionof packaging machinery (approximately $18 million) and environmental clusterrules compliance (approximately $6 million). Through 2005, the Companyanticipates that it will spend approximately $22 million at its U.S. mills tocomply with the cluster rules. The Company is accelerating certain capitaldriven cost reduction projects that it anticipates will deliver benefits in2004 and 2005.

 

**Related Party Transactions – Coors BrewingCompany**

 

CoorsBrewing Company, a subsidiary of Adolph Coors Company, accounted forapproximately $22.9 million of the Company’s Net Sales during the three monthsended March 31, 2004. The loss of Coors Brewing Company as a customer in theforeseeable future could have a material effect on the Company’s results ofoperations. The supply agreement, effective April 1, 2003, with Coors BrewingCompany will not expire until December 31, 2006.

 

**Seasonality**

 

TheCompany’s net sales, income from operations and cash flows from operations aresubject to moderate seasonality, with demand usually increasing in the springand summer due to the seasonality of the worldwide beverage multiple packagingmarkets.

 

**EnvironmentalMatters**

 

The Company is subject to a broad range of foreign, federal, state andlocal environmental, health and safety laws and regulations, including thosegoverning discharges to air, soil and water, the management, treatment anddisposal of hazardous substances, the investigation and remediation of contaminationresulting from releases of hazardous substances, and the health and safety ofemployees. The Company’s environmental liabilities and obligations may resultin significant costs, which could negatively impact its financial condition andresults of operations. Capital expenditures may be necessary for the 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, or the cluster rules. Any failure tocomply with environmental, health and safety laws or any permits andauthorizations required thereunder could subject the Company to fines orsanctions. In addition, some of the Company’s current and former facilities, andfacilities at which it disposed of hazardous substances, are the subject ofenvironmental investigations and remediations resulting from releases ofhazardous substances or other constituents. Some current and former facilitieshave a history of industrial usage for which investigation and remediationobligations could be imposed in the future or for which indemnification claimscould be asserted against the Company. The Company cannot predict withcertainty future investigation or remediation costs or future costs relating toindemnification claims. Also, potential future closures of facilities maynecessitate further investigation 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, the Company’s plants have received or submitted anapplication to the appropriate permitting authority for a Title V permit. TheCompany from time to time upgrades and replaces equipment in order to complywith air quality standards.

 

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 of theCompany’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

 

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as a Potentially Responsible Party (“PRP”) under CERCLA and similarstate laws with respect to remediation of sites at which hazardous substanceshave been released. Management believes that 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 the liability has beenaddressed.

 

The Company could incur significant costs in connection withinvestigation and remediation activities and other environmental matters. Somecurrent and former facilities have a history of industrial usage for whichinvestigation and remediation obligations could be imposed in the future or forwhich indemnification claims could be asserted against the Company.

 

The presence of soil and groundwater contamination has been investigatedat portions of the Company’s Portland, Oregon plant. The site is listed onOregon’s inventory of contaminated sites. The Company periodically monitorsgroundwater conditions at the site. While the Company does not currently haveany remediation obligations at the site, such obligations could arise in thefuture.

 

The Kalamazoo, Michigan mill and carton plant have long histories ofindustrial usage. Portions of the property on which the mill is located havebeen found to contain some contamination. Remediation obligations could arisein the future at these facilities.

 

**Information ConcerningForward-Looking Statements**

 

Certain of the statements contained in this report(other than the financial statements and other statements of historical fact)are forward-looking statements, including, without limitation, (i) thestatements in “—Merger” regarding the Company’s expectations that it willachieve specified synergies; (ii) the statements in “—  Significant Factors That Impact ItsBusiness” concerning (a) the Company’s expectations regarding packagingmachinery placements and (b) the improvements which the Company’s long-terminitiatives, including, without limitation, its global continuous improvementand beverage carton converting operations initiatives, are designed to achieve;(iii) the statements in “—Financial Condition, Liquidity and Capital Resources”concerning (a) the Company’s expectation that depreciation and amortization for2004 will be approximately $220 million to $230 million, (b) the Company’sexpectation that 2004 interest expense will be approximately $145 million,including approximately $9 million of non-cash amortization of deferred debtissuance costs, (c) the Company’s belief that cash generated from operations,together with amounts available under available financing sources, will beadequate to permit the Company to meet its debt service obligations, capitalexpenditure program requirements, ongoing operating costs and working capitalneeds, (d) the Company’s expectation that capital expenditures will beapproximately $150 million in 2004, and (e) the Company’s expectations withrespect to capital spending that may be required to comply with the clusterrules and that, based on current knowledge, environmental costs and legal proceedingsare not expected to have a material impact on the results of operations, cashflows or financial condition of the Company (see Note 5 in Notes to CondensedConsolidated Financial Statements), and (iv) other statements as tomanagement’s or the Company’s expectations and beliefs presented in thisreport.

 

Forward-looking statements are made based uponmanagement’s current expectations and beliefs concerning future developmentsand their potential effects upon the Company. There can be no assurance thatfuture developments will be in accordance with management’s expectations orthat the effect of future developments on the Company will be those anticipatedby management. The following important factors, and those important factorsdescribed elsewhere in this report, 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 Company’sflexibility to adjust to changing market conditions and its ability towithstand competitive pressures could be limited.

 

•                  TheCompany’s ability to generate the significant amount of cash needed to serviceits debt, and to comply with the covenants and restrictions contained in itsdebt instruments, will depend on its financial

 

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and operating performance, which,in turn, is subject to prevailing economic and competitive conditions and tothe following financial and business factors: operating difficulties, increasedoperating costs, increased raw materials and energy costs, market cyclicality,product prices, the response of competitors, regulatory developments and delaysin implementing strategic projects.

 

•                  TheCompany’s ability to implement successfully its business strategies and torealize anticipated synergies from the Merger is subject to significant business,economic and competitive uncertainties and contingencies, many of which arebeyond the Company’s control.

 

•                  TheCompany’s ability to generate cash flows is dependent in significant part onthe sales volume and selling prices that it realizes for its products.

 

•                  TheCompany is dependent on key customers and strategic relationships, and the lossof or reduced sales to key customers or changes in these relationships couldresult in decreased revenues, impact the Company’s cash flows and harm itsfinancial position.

 

•                  TheCompany faces intense competition and, if it is unable to compete successfullyagainst other manufacturers of paperboard or cartons, it could lose customersand its revenues may decline.

 

•                  TheCompany’s net sales and profitability could be affected by intense pricingpressures. If the Company’s facilities are not as cost efficient as those ofits competitors, or if its competitors otherwise are able to lower prices, theCompany may lose customers to its competitors, which may negatively impact itsrevenues, cash flows and financial condition.

 

•                  Ifthe Company fails to realize the anticipated benefits of the Merger, includinganticipated synergies, its net sales and profitability could be affected.

 

•                  Marketsmay not be able to absorb the Company’s entire paperboard production, which maynegatively impact the Company’s financial condition and results of operations.

 

•                  Anyprolonged disruption in production due to labor difficulties, equipmentfailures, destruction of or material damage to any of the Company’s fourpaperboard mills could have a material adverse effect on the Company’s netsales, margins and cash flows.

 

•                  Significantincreases in the cost of energy or raw materials could have a material adverseeffect on the Company’s margins and income from operations.

 

•                  TheCompany may not be able to adequately protect its intellectual property andproprietary rights, which could harm its future success and competitiveposition.

 

•                  TheCompany is subject to environmental, health and safety laws and regulations,and costs to comply with such laws and regulations, or any liability orobligation imposed under such laws or regulations, could negatively impact itsfinancial condition and results of operations.

 

•                  Workstoppages and other labor relations matters may make it substantially moredifficult or expensive for the Company to manufacture and distribute itsproducts, which could result in decreased sales or increased costs, either ofwhich would negatively impact its financial condition and results ofoperations.

 

•                  TheCompany is subject to significant risks associated with operating in foreigncountries. Foreign currency risks and exchange rate fluctuations could hinderthe results of the Company’s international operations, and the strength of theU.S. dollar could disadvantage the Company relative to its foreign competitors.

 

•                  TheCompany may be limited in the future in the amount of NOL carryforwards that itcan use to offset income, which could have an adverse effect on the Company’s futureafter tax free cash flow.

 

•                  Uninsuredlosses could result in substantial liabilities to the Company, which couldnegatively impact its financial condition.

 

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While the Company periodically reassessesmaterial trends and uncertainties affecting the Company’s results of operationsand financial condition in connection with its preparation of management’sdiscussion and analysis of results of operations and financial conditioncontained in its quarterly and annual reports, the Company does not intend toreview or revise any particular forward-looking statement referenced in thisreport in light of future events.

 

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**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**Interest Rates**

 

For a discussion of certain market risks related to the Company,see Part II, Item 7A, “Quantitative and Qualitative Disclosure about MarketRisk”, in the Company’s Annual Report on Form 10-K for the fiscal period endedDecember 31, 2003. There have been no significant developments with respect toderivatives or exposure to market risk during the first three months of 2004;see Note 7 in Notes to Condensed Consolidated Financial Statements andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations “-Liquidity and Capital Resources”.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

The Company’s management has carried out an evaluation, with theparticipation of its chief executive officer and chief financial officer, ofthe effectiveness of the Company’s disclosure controls and procedures pursuantto Rule 13a-15 of the Securities Exchange Act of 1934. Based upon management’sevaluation, the Company’s chief executive officer and chief financial officerhave concluded that the Company’s disclosure controls and procedures wereeffective as of March 31, 2004. There was no change in the Company’s internalcontrol over financial reporting that occurred during the Company’s last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

In February 2004,the Company dismissed a lawsuit filed in the U.S. District Court for theNorthern District of Georgia against MeadWestvaco Corporation alleginginfringement of US Patent 6,578,736 covering the Company’s Fridge Vendor®carton. As part of the settlement between the parties, the Company andMeadWestvaco have entered into a global cross license of their intellectualproperty related to Fridge Vendor style carton, which the Company will supplyto CCE in various locations that were being supplied by MeadWestvaco.Additional information regarding legal proceedings in which the Company isinvolved is provided in Note 5 to Notes to Condensed Consolidated FinancialStatements.

 

**ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

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

 

**ITEM 6.  EXHIBITS ANDREPORTS ON FORM 8-K**

 

a)              Exhibit Index

 
| **Exhibit Number** |   | **Description**                                                                              |
|--------------------|--------|----------------------------------------------------------------------------------------------|
|               |   |                                                                                         |
| 31.1               |   | Certification required by Rule 13a-14(a).                                                    |
|               |   |                                                                                         |
| 31.2               |   | Certification required by Rule 13a-14(a).                                                    |
|               |   |                                                                                         |
| 32.1               |   | Certification required by Section 1350 of Chapter 63  of Title 18 of the United States Code. |
|               |   |                                                                                         |
| 32.2               |   | Certification required by Section 1350 of Chapter 63  of Title 18 of the United States Code. |

 

b. Reports on Form 8-K.

 

Reportson Form 8-K filed with the SEC:

 

None.

 

Reportson Form 8-K furnished to the SEC on:

 

February5, 2004 reporting the Registrant’s fourth quarter 2003 results.

 

February5, 2004 reporting the dismissal of a lawsuit.

 

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**SIGNATURES**

 

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

 
| GRAPHIC PACKAGING CORPORATION |                                                                  |        |
|-------------------------------|-----------------------------------------------------------------------|-------------|
| (Registrant)                  |                                                                  |        |
|                          |                                                                  |        |
| /s/ STEPHEN A. HELLRUNG       | Senior Vice President, General                                        |        |
| Stephen A. Hellrung           | Counsel and Secretary                                                 | May 6, 2004 |
|                          |                                                                  |        |
| /s/ JOHN T. BALDWIN           | Senior Vice President and                                             |        |
| John T. Baldwin               | Chief Financial Officer (Principal  Financial and Accounting Officer) | May 6, 2004 |

 

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