**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30,2005**

 

**COMMISSION FILE NUMBER: 1-13182**

** **

**GraphicPackaging Corporation**

(Exact name ofregistrant 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’s telephonenumber, including area code)

 

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

Yes ý  No o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).

Yes ý  No o

 

As of August 5, 2005, there were 198,658,004shares of the registrant’s Common Stock, par value $0.01 per share,outstanding.

 

 

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**Explanatory Note**

 

On August 9, 2005, Graphic Packaging Corporation (the “Company”)filed Amendment No. 2 on Form 10-K/A to its Annual Report on Form 10-Kfor the year ended December 31, 2004 and Amendment No. 1 on Form10-Q/A to its Quarterly Report on Form 10-Q for the three months endedMarch 31, 2005 with the Securities and Exchange Commission. Theseamendments restate the Company’s previously issued financial statements for thefull years ended December 31, 2004, 2003 and 2002, and the quarterlyperiod ended March 31, 2005 to reflect corrections in accounting fordeferred taxes. The aforementioned restatements are discussed in more detail inNote 11 to the accompanying financial statements beginning on page 16 as wellas in Note 25 to the audited financial statements for the year ended December 31,2004 included in Amendment No. 2 on Form 10-K/A and in Note 10 to thefinancial statements for the three months ended March 31, 2005 included inAmendment No.1 on Form 10-Q/A.

 

**PART I. FINANCIALINFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

2

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                | ** ** | ** **         | ** ** | **As Restated**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| **ASSETS**                                                                                                                                                                                | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current Assets:                                                                                                                                                                           | ** ** | ** **         | ** ** | ** **             | ** ** |
| Cash and  Equivalents                                                                                                                                                                     |       | $                  | 7.1        |                   | $          | 7.3 |   |
| Receivables,  Less Allowance for Doubtful Accounts of $1.5 and $1.8 at June 30, 2005 and  December 31, 2004, respectively                                                                 |       | 252.0              |       | 214.9                  |       |
| Inventories                                                                                                                                                                               |       | 294.8              |       | 301.2                  |       |
| Prepaid Expenses                                                                                                                                                                          |       | 17.0               |       | 14.9                   |       |
| Total Current  Assets                                                                                                                                                                     |       | 570.9              |       | 538.3                  |       |
| Property, Plant  and Equipment, Net of Accumulated Depreciation of $1,158.9 and $1,078.7 at  June 30, 2005 and December 31, 2004, respectively                                            |       | 1,600.4            |       | 1,649.0                |       |
| Goodwill                                                                                                                                                                                  |       | 643.4              |       | 643.4                  |       |
| Intangible  Assets, Net of Accumulated Amortization of $71.2 and $65.1 at June 30, 2005  and December 31, 2004, respectively                                                              |       | 161.6              |       | 166.6                  |       |
| Other Assets                                                                                                                                                                              |       | 110.3              |       | 114.0                  |       |
|                                                                                                                                                                                      |       |               |       |                   |       |
| Total Assets                                                                                                                                                                              |       | $                  | 3,086.6    |                   | $          | 3,111.3 |   |
|                                                                                                                                                                                      |       |               |       |                   |       |
| **LIABILITIES**                                                                                                                                                                           | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current  Liabilities:                                                                                                                                                                     | ** ** | ** **         | ** ** | ** **             | ** ** |
| Short-Term Debt                                                                                                                                                                           |       | $                  | 18.5       |                   | $          | 14.2 |   |
| Accounts Payable  and Other Accrued Liabilities                                                                                                                                           |       | 375.0              |       | 401.8                  |       |
| Total Current  Liabilities                                                                                                                                                                |       | 393.5              |       | 416.0                  |       |
|                                                                                                                                                                                      |       |               |       |                   |       |
| Long Term Debt,  Less Current Portion                                                                                                                                                     |       | 2,040.6            |       | 2,011.0                |       |
| Other Noncurrent  Liabilities                                                                                                                                                             |       | 315.1              |       | 297.4                  |       |
| Total  Liabilities                                                                                                                                                                        |       | 2,749.2            |       | 2,724.4                |       |
|                                                                                                                                                                                      |       |               |       |                   |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                             |       |               |       |                   |       |
| Preferred Stock,  par value $0.01 per share; 50,000,000 shares authorized; no shares issued or  outstanding                                                                               |       | —             |       | —                 |       |
| Common Stock,  par value $0.01 per share; 500,000,000 shares authorized; 198,669,146 and  198,586,108 shares issued and outstanding at June 30, 2005 and December 31,  2004, respectively |       | 2.0                |       | 2.0                    |       |
| Capital in  Excess of Par Value                                                                                                                                                           |       | 1,169.6            |       | 1,169.2                |       |
| Unearned  Compensation                                                                                                                                                                    |       | (0.3               | )          | (0.4                   | )          |
| Accumulated  Deficit                                                                                                                                                                      |       | (758.7             | )          | (709.5                 | )          |
| Minimum Pension  Liability Adjustment                                                                                                                                                     |       | (65.2              | )          | (65.2                  | )          |
| Accumulated  Derivative Instruments Gain (Loss)                                                                                                                                           |       | 3.1                |       | (9.0                   | )          |
| Cumulative  Currency Translation Adjustment                                                                                                                                               |       | (13.1              | )          | (0.2                   | )          |
| Total  Shareholders’ Equity                                                                                                                                                          |       | 337.4              |       | 386.9                  |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                                          |       | $                  | 3,086.6    |                   | $          | 3,111.3 |   |

 

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

 

3

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | ** **             | ** ** | **As Restated**      | ** ** | **As Restated** | ** ** | **As Restated** | ** ** |
| ** **                                                                  | ** ** | **June 30,  2005**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Net Sales                                                                   |       | $                      | 623.0      |                 | $          | 606.3 |   | $ | 1,206.0 |   | $ | 1,182.2 |   |
| Cost of Sales                                                               |       | 537.2                  |       | 508.2                |       | 1,053.0 |   | 995.1 |   |
| Selling, General  and Administrative                                        |       | 53.2                   |       | 49.2                 |       | 100.9 |   | 97.4 |   |
| Research,  Development and Engineering                                      |       | 3.2                    |       | 2.4                  |       | 5.5 |   | 4.8 |   |
| Other Expense,  Net                                                         |       | 5.8                    |       | 9.8                  |       | 10.7 |   | 21.5 |   |
| Income from  Operations                                                     |       | 23.6                   |       | 36.7                 |       | 35.9 |   | 63.4 |   |
| Interest Income                                                             |       | 0.1                    |       | 0.1                  |       | 0.2 |   | 0.2 |   |
| Interest Expense                                                            |       | (39.0                  | )          | (36.1                | )          | (76.2 | ) | (74.1 | ) |
| (Loss) Income  before Income Taxes and Equity in Net Earnings of Affiliates |       | (15.3                  | )          | 0.7                  |       | (40.1 | ) | (10.5 | ) |
| Income Tax  Expense                                                         |       | (4.8                   | )          | (5.7                 | )          | (9.7 | ) | (12.0 | ) |
| Equity in Net  Earnings of Affiliates                                       |       | 0.5                    |       | 0.4                  |       | 0.6 |   | 0.7 |   |
| Net Loss                                                                    |       | $                      | (19.6      | )                    | $          | (4.6 | ) | $ | (49.2 | ) | $ | (21.8 | ) |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Loss Per Share -  Basic                                                     |       | $                      | (0.10      | )                    | $          | (0.02 | ) | $ | (0.25 | ) | $ | (0.11 | ) |
| Loss Per Share -  Diluted                                                   |       | $                      | (0.10      | )                    | $          | (0.02 | ) | $ | (0.25 | ) | $ | (0.11 | ) |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Weighted Average  Number of Shares Outstanding - Basic                      |       | 198.6                  |       | 198.5                |       | 198.6 |   | 198.4 |   |
| Weighted Average  Number of Shares Outstanding - Diluted                    |       | 198.6                  |       | 198.5                |       | 198.6 |   | 198.4 |   |

 

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

 

4

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE(LOSS) INCOME**

**(Amounts in Millions)**

**(Unaudited)**

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | ** **             | ** ** | **As Restated**      | ** ** | **As Restated** | ** ** | **As Restated** | ** ** |
| ** **                                              | ** ** | **June 30,  2005**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Net Loss                                                |       | $                      | (19.6      | )                    | $          | (4.6 | ) | $ | (49.2 | ) | $ | (21.8 | ) |
| Other  Comprehensive (Loss) Income:                     |       |                   |       |                 |       |   |   |   |   |
| Minimum Pension  Liability Adjustment, Net of Tax of $0 |       | —                 |       | 1.1                  |       | — |   | 1.1 |   |
| Derivative  Instruments (Loss) Gain, Net of Tax of $0   |       | (4.3                   | )          | 6.9                  |       | 12.1 |   | 5.8 |   |
| Currency  Translation Adjustments, Net of Tax of $0     |       | (8.2                   | )          | (2.7                 | )          | (12.9 | ) | (3.8 | ) |
| Comprehensive  (Loss) Income                            |       | $                      | (32.1      | )                    | $          | 0.7 |   | $ | (50.0 | ) | $ | (18.7 | ) |

 

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

 

5

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts in Millions)**

**(Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **As Restated**      | ** ** | **As Restated** | ** ** |
| ** **                                                                         | ** ** | **June 30,  2005**   | ** ** | **June 30,  2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                 |       |   |   |
| Net Loss                                                                           |       | $                    | (49.2      | ) | $ | (21.8 | ) |
| Noncash Items  Included in Net Loss:                                               |       |                 |       |   |   |
| Depreciation and  Amortization                                                     |       | 106.6                |       | 114.2 |   |
| Deferred Income  Taxes                                                             |       | 9.1                  |       | 8.6 |   |
| Pension,  Postemployment and Postretirement Benefits Expense, Net of Contributions |       | 12.2                 |       | 12.7 |   |
| Equity in Net  Earnings of Affiliates, Net of Dividends                            |       | 0.5                  |       | 0.4 |   |
| Amortization of  Deferred Debt Issuance Costs                                      |       | 4.0                  |       | 4.4 |   |
| Loss on  Retirement of Assets                                                      |       | 2.6                  |       | 4.9 |   |
| Other, Net                                                                         |       | 1.7                  |       | (1.8 | ) |
| Changes in  Operating Assets & Liabilities:                                    |       |                 |       |   |   |
| Receivables                                                                        |       | (42.9                | )          | (27.8 | ) |
| Inventories                                                                        |       | (0.7                 | )          | 1.6 |   |
| Prepaid Expenses                                                                   |       | (0.2                 | )          | 0.6 |   |
| Accounts Payable  and Other Accrued Liabilities                                    |       | (18.0                | )          | (26.0 | ) |
| Other Noncurrent  Liabilities                                                      |       | 3.1                  |       | (1.0 | ) |
|                                                                               |       |                 |       |   |   |
| Net Cash  Provided by Operating Activities                                         |       | 28.8                 |       | 69.0 |   |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                 |       |   |   |
| Purchases of  Property, Plant and Equipment                                        |       | (54.8                | )          | (75.3 | ) |
| Proceeds from  Sale of Assets, Net of Selling Costs                                |       | 1.1                  |       | 9.6 |   |
| Change in Other  Assets                                                            |       | (10.6                | )          | (6.8 | ) |
|                                                                               |       |                 |       |   |   |
| Net Cash Used in  Investing Activities                                             |       | (64.3                | )          | (72.5 | ) |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                 |       |   |   |
| Borrowing under  Revolving Credit Facilities                                       |       | 263.8                |       | 302.1 |   |
| Payments on  Revolving Credit Facilities                                           |       | (228.5               | )          | (301.2 | ) |
| Payments on Debt                                                                   |       | (0.7                 | )          | (9.8 | ) |
| Other                                                                              |       | 1.0                  |       | 0.1 |   |
| Net Cash  Provided by (Used in) Financing Activities                               |       | 35.6                 |       | (8.8 | ) |
| Effect of  Exchange Rate Changes on Cash                                           |       | (0.3                 | )          | 0.1 |   |
| Net Decrease in  Cash and Equivalents                                              |       | (0.2                 | )          | (12.2 | ) |
| Cash and  Equivalents at Beginning of Period                                       |       | 7.3                  |       | 17.5 |   |
| Cash and  Equivalents at End of Period                                             |       | $                    | 7.1        |   | $ | 5.3 |   |

 

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

 

6

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**GRAPHIC PACKAGING CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION**

 

On August 8, 2003,the corporation formerly known as Graphic Packaging International Corporationmerged with and into Riverwood Acquisition Sub LLC, a wholly owned subsidiaryof Riverwood Holding, Inc. (“Riverwood Holding”), with Riverwood AcquisitionSub LLC as the surviving entity (the “Merger”). At the closing of the Merger,one share of common stock of Riverwood Holding was exchanged for each share ofcommon stock of Graphic Packaging International Corporation. RiverwoodAcquisition Sub LLC then merged into Riverwood Holding, which was renamedGraphic Packaging Corporation. After the Merger, (1) RIC Holding, Inc.merged into Graphic Packaging Holdings, Inc., which was renamed GPIHolding, Inc. and (2) the corporation formerly known as GraphicPackaging Corporation merged into Riverwood International Corporation (“RIC”)which was renamed Graphic Packaging International, Inc. (“Graphic PackagingInternational”).

 

References to the “Company”are to Riverwood Holding and its subsidiaries for periods prior to the Mergerand to Graphic Packaging Corporation and its subsidiaries for periods after theMerger. Graphic Packaging International Corporation and its subsidiaries forperiods prior to the Merger are referred to herein as “Graphic.”

 

For accounting purposes,the Merger was accounted for as a purchase by the Company. Under the purchasemethod of accounting, the assets and liabilities of Graphic were recorded, asof the date of the closing of the Merger, at their respective fair values andadded to those of the Company. The difference between the purchase price andthe fair market values of the assets acquired and liabilities assumed ofGraphic was recorded as goodwill. The historical financial statements ofRiverwood Holding became the historical financial statements of GraphicPackaging Corporation.

 

Graphic PackagingCorporation and GPI Holding, Inc., its wholly-owned subsidiary, conduct nosignificant business and have no independent assets or operations other thantheir ownership of Graphic Packaging International. Graphic PackagingCorporation and GPI Holding, Inc. fully and unconditionally guaranteesubstantially all of the debt of Graphic Packaging International.

 

The Company’s Condensed Consolidated FinancialStatements include all subsidiaries in which the Company has the ability toexercise direct or indirect control over operating and financial policies.Intercompany transactions and balances are eliminated in consolidation.

 

In the Company’s opinion, the accompanying financialstatements contain all normal recurring adjustments necessary to present fairlythe financial position, results of operations and cash flows for the interimperiods. The Company has condensed or omitted certain notes and otherinformation from the interim financial statements presented in this QuarterlyReport on Form 10-Q. Therefore, these financial statements should be readin conjunction with the Company’s Annual Report on Form 10-K for the yearended December 31, 2004, as amended. In addition, the preparation of theCondensed Consolidated Financial Statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the Condensed Consolidated Financial Statements and the reportedamounts of revenues and expenses during the reporting period. Actual amountscould differ from those estimates.

 

The Company has reclassified the presentation ofcertain prior period information to conform to the current presentation format.

 

7

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**NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

For a summary of the Company’s significant accountingpolicies, please refer to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004, as amended.

 

As permitted by Statementof Financial Accounting Standards (“SFAS”) No. 123 *“Accountingfor Stock-Based Compensation,”* the Company continues to applyintrinsic value accounting for its stock option plans under AccountingPrinciples Board Opinion No. 25 (“APB 25”), *“Accountingfor Stock Issued to Employees.”* Compensation cost for stock options,if any, is measured as the excess of the market price of the Company’s commonstock at the date of grant over the exercise price to be paid by the grantee toacquire the stock. The Company has adopted disclosure-only provisions of SFAS No. 123and SFAS No. 148, *“Accounting for Stock-BasedCompensation—Transition and Disclosure—an Amendment of FASB Statement No. 123.”*If the Company had elected to recognize compensation expense based upon thefair value at the grant dates for awards under these plans, the Company’s NetLoss would have been as follows:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                    | ** ** | ** **              | ** ** | **As Restated**         | ** ** | **As Restated** | ** ** | **As Restated** | ** ** |
| **(Amounts in Millions, Except  Per Share Amounts)**                                                                                          | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Net Loss, As  Reported                                                                                                                        |       | $                       | (19.6      | )                       | $          | (4.6 | ) | $ | (49.2 | ) | $ | (21.8 | ) |
|                                                                                                                                          |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Add: Stock-Based  Employee Compensation Expense Included in Reported Net Loss, Net of Related  Tax Effects                                    |       | 1.1                     |       | 1.0                     |       | 2.5 |   | 2.4 |   |
|                                                                                                                                          |       |                    |       |                    |       |   |   |   |   |
| Deduct: Total  Stock-Based Employee Compensation Expense Determined Under Fair Value Based  Method for All Awards, Net of Related Tax Effects |       | (0.8                    | )          | (3.2                    | )          | (1.6 | ) | (6.8 | ) |
|                                                                                                                                          |       |                    |       |                    |       |   |   |   |   |
| Adjusted Net  Loss                                                                                                                            |       | $                       | (19.3      | )                       | $          | (6.8 | ) | $ | (48.3 | ) | $ | (26.2 | ) |
|                                                                                                                                          |       |                    |       |                    |       |   |   |   |   |
| Loss Per Basic  Share-As Reported                                                                                                             |       | $                       | (0.10      | )                       | $          | (0.02 | ) | $ | (0.25 | ) | $ | (0.11 | ) |
| Loss Per Basic  Share-As Adjusted                                                                                                             |       | $                       | (0.10      | )                       | $          | (0.03 | ) | $ | (0.24 | ) | $ | (0.13 | ) |
|                                                                                                                                          |       |                    |       |                    |       |   |   |   |   |
| Loss Per Diluted  Share-As Reported                                                                                                           |       | $                       | (0.10      | )                       | $          | (0.02 | ) | $ | (0.25 | ) | $ | (0.11 | ) |
| Loss Per Diluted  Share-As Adjusted                                                                                                           |       | $                       | (0.10      | )                       | $          | (0.03 | ) | $ | (0.24 | ) | $ | (0.13 | ) |

 

**NOTE 3— INVENTORIES**

 

Themajor classes of inventories were as follows:

 
| **(Amounts in Millions)** | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Finished goods            |       | $                       | 156.5      |                        | $          | 166.9 |   |
| Work in progress          |       | 21.5                    |       | 14.9                        |       |
| Raw materials             |       | 71.5                    |       | 76.2                        |       |
| Supplies                  |       | 45.3                    |       | 43.2                        |       |
| Total                     |       | $                       | 294.8      |                        | $          | 301.2 |   |

 

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 in progressand finished goods inventories are valued at the cost of raw material consumedplus direct manufacturing costs (such as labor, utilities and supplies) asincurred and allocated manufacturing overhead.

 

8

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**NOTE 4 — CONTINGENCIES AND LEGAL MATTERS**

 

The Company is subject toa broad range of foreign, federal, state and local environmental, health andsafety laws and regulations, including those governing discharges to air, soiland water, the management, treatment and disposal of hazardous substances, themanagement, treatment and disposal of solid and hazardous wastes, theinvestigation and remediation of contamination resulting from historical siteoperations and releases of hazardous substances, and the health and safety ofemployees. The Company’s potential environmental liabilities and obligationsmay result in significant costs, which could negatively impact its financialcondition and results of operations. In addition, capital expenditures may benecessary for the Company to comply with such laws and regulations, includingthe U.S. Environmental Protection Agency’s (“EPA”) regulations mandatingstringent controls on air and water discharges from pulp and paper mills(referred to herein as the “cluster rules”). Any failure to comply withenvironmental, health and safety laws or any permits and authorizationsrequired thereunder could subject the Company to fines, corrective action orother sanctions. In addition, some of the Company’s current and formerfacilities are the subject of environmental investigations and remediationsresulting from historical operations and the release of hazardous substances orother constituents. Some current and former facilities have a history ofindustrial usage for which investigation and remediation obligations may beimposed in the future or for which indemnification claims may be assertedagainst the Company. The Company cannot predict with certainty futureinvestigation or remediation costs or future costs relating to historical usageor indemnification claims. Also, potential future closures or sales offacilities may necessitate further investigation and may result in futureremediation at those facilities. The Company will continue to review and reviseits estimate of potential, contingent environmental liabilities related topast, present and future operations as additional information related to itsenvironmental liabilities is obtained.

 

The Company is a party toa number of lawsuits arising in the ordinary conduct of its business. Althoughthe timing and outcome of these lawsuits cannot be predicted with certainty,the Company 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.

 

**NOTE 5 — BUSINESS SEGMENT INFORMATION**

 

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

 

Business segmentinformation is as follows:

** **
| ** **                      | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Amounts in Millions)**       | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| NET SALES:                      |       |                    |       |                    |       |   |   |   |   |
| Paperboard  Packaging           |       | $                       | 600.3      |                    | $          | 583.9 |   | $ | 1,159.3 |   | $ | 1,141.2 |   |
| Containerboard/Other            |       | 22.7                    |       | 22.4                    |       | 46.7 |   | 41.0 |   |
| Total                           |       | $                       | 623.0      |                    | $          | 606.3 |   | $ | 1,206.0 |   | $ | 1,182.2 |   |
|                            |       |                    |       |                    |       |   |   |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                    |       |                    |       |   |   |   |   |
| Paperboard  Packaging           |       | $                       | 43.7       |                    | $          | 65.4 |   | $ | 72.6 |   | $ | 118.3 |   |
| Containerboard/Other            |       | (4.0                    | )          | (7.0                    | )          | (8.2 | ) | (15.5 | ) |
| Corporate                       |       | (16.1                   | )          | (21.7                   | )          | (28.5 | ) | (39.4 | ) |
| Total                           |       | $                       | 23.6       |                    | $          | 36.7 |   | $ | 35.9 |   | $ | 63.4 |   |

 

9

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**NOTE 6 – FINANCIAL INSTRUMENTS, DERIVATIVES ANDHEDGING ACTIVITIES**

 

The Company is exposed tofluctuations in interest rates on its variable debt, fluctuations in foreigncurrency and variability in cash flows attributable to certain commoditypurchases. The Company actively monitors these fluctuations and periodicallyuses derivatives and other financial instruments to hedge exposures tointerest, currency and commodity risks. The Company does not trade or usederivative instruments with the objective of earning financial gains oninterest rates, currency rates or commodity pricing, nor does it use leveragedinstruments or instruments where there are no underlying exposures identified.

 

*InterestRate Risk*

 

The Company uses interestrate swaps to manage interest rate risks caused by interest rate changes on itsvariable rate Term Loan facility. The differential to be paid or received underthese agreements is recognized as an adjustment to interest expense related tothe debt. At June 30, 2005, the Company had interest rate swap agreementswith a notional amount of $880 million, which expire on various dates from 2005to 2008 and under which the Company will pay fixed rates of 2.31% to 4.53% andreceive three-month LIBOR.

 

During the six monthsended June 30, 2005, there was no ineffective portion related to changesin the fair value of the interest rate swap agreements. Additionally, therewere no amounts excluded from the measure of effectiveness.

 

During the six monthsended June 30, 2004, there was $1.9 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.

 

*CommodityRisk*

 

To manage risksassociated with future variability in cash flows and price risk attributable tocertain commodity purchases, the Company entered into natural gas swapcontracts to hedge prices for a significant portion of its natural gasrequirements through December 2005. Such contracts are designated as cashflow hedges and are accounted for by deferring the quarterly change in fairvalue of the outstanding contracts in Accumulated Derivative Instruments Gain (Loss).On the date a contract matures, the resulting gain or loss is reclassified intoCost of Sales concurrently with the recognition of the commodity purchased. Theineffective portion of the swap contracts change in fair value, if any, wouldbe recognized in earnings. During the six months ended June 30, 2005,there was a minimal amount of ineffective portion related to changes in fairvalue of natural gas swap contracts. Additionally, there were no amountsexcluded from the measure of effectiveness. At June 30, 2004, no naturalgas swap contracts existed.

 

*ForeignCurrency Risk*

 

The Company enters intoforward exchange contracts to manage risks associated with future variabilityin cash flows resulting from anticipated foreign currency transactions that maybe adversely affected by changes in exchange rates. Gains/losses, if any,related to these contracts are recognized in income when the anticipatedtransaction affects income.

 

At June 30, 2005 andDecember 31, 2004, multiple forward exchange contracts existed that expireon various dates throughout 2005. Those purchased forward exchange contractsoutstanding at June 30, 2005, when measured in U.S. dollars at June 30,2005 exchange rates, had notional amounts totaling $67.6 million. Thosepurchased forward exchange contracts outstanding at December 31, 2004,when measured in U.S. dollars at December 31, 2004 exchange rates, hadnotional amounts totaling $154.8 million.

 

No amounts werereclassified to earnings during the first six months of 2005 or 2004 inconnection with forecasted transactions that were no longer considered probableof occurring and there was no material ineffective portion related to changesin the fair value of foreign currency forward contracts. Additionally, therewere no amounts excluded from the measure of effectiveness.

 

*Derivativesnot Designated as Hedges*

 

The Company enters intoforward exchange contracts to effectively hedge substantially all accountsreceivable resulting from transactions denominated in foreign currencies inorder to manage risks associated

 

10

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with foreign currencytransactions adversely affected by changes in exchange rates. At June 30,2005 and December 31, 2004, multiple foreign currency forward exchangecontracts existed, with maturities ranging up to six months. Those forwardcurrency exchange contracts outstanding at June 30, 2005, when aggregatedand measured in U.S. dollars at June 30, 2005 exchange rates, had netnotional amounts totaling $2.6 million. Those forward currency exchangecontracts outstanding at December 31, 2004, when aggregated and measuredin U.S. dollars at December 31, 2004 exchange rates, had net notionalamounts totaling $12.8 million. Generally, unrealized gains and lossesresulting from these contracts are recognized in operations and approximatelyoffset corresponding unrealized gains and losses recognized on the hedgedaccounts receivable. These contracts are presently being and will continue tobe marked to market through the income statement.

 

*AccumulatedDerivative Instruments Gain (Loss)*

 

The following is areconciliation of changes in the fair value of the interest rate swapagreements, foreign currency forward contracts and natural gas swap agreements whichhave been recorded as Accumulated Derivative Instruments Gain (Loss) in theaccompanying Condensed Consolidated Balance Sheet at June 30, 2005 and at June 30,2004, and as Derivative Instruments (Loss) Gain in the accompanying Condensed ConsolidatedStatements of Comprehensive (Loss) Income for the six months ended June 30,2005 and 2004.

 
| **(Amounts in millions)**            | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1           |       | $        | (9.0       | )        | $          | (12.7 | ) |
| Reclassification  to earnings        |       | 4.2      |       | (6.2     | )          |
| Current period  change in fair value |       | 7.9      |       | 12.0     |       |
|                                 |       |     |       |     |       |
| Balance at  June 30             |       | $        | 3.1        |     | $          | (6.9 | ) |

 

The balance recorded inAccumulated Derivative Instruments Gain (Loss) at June 30, 2005 isexpected to be reclassified into future earnings, contemporaneously with andoffsetting changes in the related hedged exposure. The actual amount that willbe reclassified to future earnings over the next 12 months may vary from thisamount as a result of changes in market conditions.

 

11

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**Note 7 –PENSIONS AND OTHER POSTRETIREMENT BENEFITS**

 

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

 

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

 
| ** **                      | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Amounts in Millions)**       | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Service Cost                    |       | $                       | 3.5        |                    | $          | 3.7 |   | $ | 7.4 |   | $ | 6.9 |   |
| Interest Cost                   |       | 8.1                     |       | 7.5                     |       | 15.6 |   | 14.3 |   |
| Expected Return  on Plan Assets |       | (7.8                    | )          | (6.9                    | )          | (15.2 | ) | (13.8 | ) |
| Amortizations:                  |       |                    |       |                    |       |   |   |   |   |
| Prior Service  Cost             |       | 0.4                     |       | 0.4                     |       | 1.1 |   | 0.9 |   |
| Actuarial Loss                  |       | 0.9                     |       | 0.9                     |       | 1.7 |   | 1.8 |   |
|                            |       |                    |       |                    |       |   |   |   |   |
| Net Periodic  Pension Cost      |       | $                       | 5.1        |                    | $          | 5.6 |   | $ | 10.6 |   | $ | 10.1 |   |

 

The Company made contributionsof $2.1 million and nil to its U.S. pension plans during the first six monthsof 2005 and 2004, respectively. The Company expects to make contributions of $17.6million in 2005.

 

The Company sponsorspostretirement health care plans that provide medical and life insurancecoverage to eligible salaried and hourly retired U.S. employees and theirdependents. No postretirement medical benefits are offered to salariedemployees who began employment with the Company after December 31, 1993 orto Graphic employees hired after June 15, 1999.

 

The other postretirementbenefits expense consisted of the following:

 
| ** **                                 | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Amounts in Millions)**                  | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Service Cost                               |       | $                       | 0.3        |                    | $          | 0.2 |   | $ | 0.5 |   | $ | 0.4 |   |
| Interest Cost                              |       | 0.7                     |       | 0.7                     |       | 1.5 |   | 1.5 |   |
| Amortizations:                             |       |                    |       |                    |       |   |   |   |   |
| Prior Service  Cost                        |       | —                  |       | —                  |       | — |   | (0.1 | ) |
| Actuarial Loss                             |       | 0.2                     |       | 0.1                     |       | 0.4 |   | 0.2 |   |
|                                       |       |                    |       |                    |       |   |   |   |   |
| Net Periodic  Postretirement Benefits Cost |       | $                       | 1.2        |                    | $          | 1.0 |   | $ | 2.4 |   | $ | 2.0 |   |

 

In December 2003, President Bush signed into lawthe Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”).The Act expands Medicare primarily by adding a prescription drug benefit forMedicare-eligible individuals beginning in 2006. The Act did not have asignificant impact on the Company’s financial position and results ofoperations.

 

The Company made benefit payments of $1.3 million and$1.6 million during the first six months of 2005 and 2004, respectively. TheCompany estimates its postretirement benefit payments for 2005 to be $3.6million.

 

12

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**Note 8 –RESTRUCTURING CHARGES**

 

The Company adopted aplan in the first quarter of 2004 to restructure its operations by closingfacilities, relocating equipment and severing employees in an effort to betterposition the Company to operate in the current business environment. Componentsof the restructuring charges for the six months ended June 30, 2005 and2004 are as follows:

 

 
| ** **                                                             | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Amounts in Millions)**                                              | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Restructuring  Charges:                                                |       |                    |       |                    |       |   |   |   |   |
| Equipment  Removal Costs                                               |       | $                       | —     |                    | $          | 0.1 |   | $ | — |   | $ | 1.4 |   |
| Facility  Restoration and Carrying Costs                               |       | —                  |       | (0.7                    | )          | — |   | 0.7 |   |
| Severance of  Employees and Other Employee Termination-Related Charges |       | —                  |       | (0.3                    | )          | — |   | 4.2 |   |
|                                                                   |       |                    |       |                    |       |   |   |   |   |
| Total  Restructuring Charges                                           |       | $                       | —     |                    | $          | (0.9 | ) | $ | — |   | $ | 6.3 |   |

 

The initial purchaseprice allocation associated with the Merger of $7.2 million recorded at March 31,2004 was reduced by $0.9 million in the second quarter of 2004 primarily forfacility restoration and carrying costs as a building was sold sooner thananticipated. Through June 30, 2005, the Company has made payments forseverance and other employee termination-related charges in the amount of $1.3million and for equipment removal and facilities restoration in the amount of $1.0million, both of which reduced the initial reserve detailed above. The Companyanticipates the majority of cash payments to be made under the restructuringplan will occur in the third quarter of 2005. The restructuring activitiesdescribed herein are expected to be completed by the end of 2005 and affectonly the paperboard packaging segment. As of June 30, 2005, the Companyhad $4.0 million accrued for restructuring, as follows:

 
| ** **                                                             | ** ** | **Balance  at  December 31,  2004** | ** **  | **Adjustments  (Statement of  Operations Impact)** | ** **   | **Purchase  Price  Allocation** | ** ** | **Cash  Payments** | ** **           | ** ** | ** ** | **Balance  at  June 30,  2005** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------|-------------|----------------------------------------------------|--------------|---------------------------------|------------|--------------------|----------------------|------------|------------|--------------------------------------|------------|
| ** **                                                             | ** ** | ** **                               | ** **  | ** **                                         | ** **   | ** **                      | ** ** |
| ** **                                                             | ** ** | ** **                               | ** **  | ** **                                         | ** **   | ** **                      | ** ** |
| **(Amounts  in Millions)**                                             | ** ** | ** **                               | **Expense** | ** **                                         | **Reversal** | ** **                      | ** ** | ** **         | **Reclassification** | ** ** |
| Equipment  Removal Costs                                               |       | $                                        | 0.8         |                                               | $            | —                          |       | $                  | —               |       | $          | —                               |       | $ | (0.3 | ) | $ | — |   | $ | 0.5 |   |
| Facility  Restoration and Carrying Costs                               |       | 0.6                                      |        | —                                             |         | —                          |       | —             |                 | —     |       | —                               |       | 0.6 |   |
| Severance of  Employees and Other Employee Termination-Related Charges |       | 3.1                                      |        | —                                             |         | —                          |       | —             |                 | (0.2       | )          | —                               |       | 2.9 |   |
| Total                                                                  |       | $                                        | 4.5         |                                               | $            | —                          |       | $                  | —               |       | $          | —                               |       | $ | (0.5 | ) | $ | — |   | $ | 4.0 |   |

 

13

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

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

 

**NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, *“Inventory Costs, an Amendment of ARB No. 43, Chapter 4*”(“SFAS No. 151”), which is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. SFAS No. 151 addressesfinancial accounting and reporting for inventory costs. The Company does notbelieve the adoption of SFAS No. 151 will have a significant impact on itsfinancial position and results of operations.

 

In December 2004,the FASB issued SFAS No. 153, *“Exchanges of NonmonetaryAssets, an Amendment of APB Opinion No. 29”* (“SFAS No. 153”),which is effective for nonmonetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005. SFAS No. 153 addresses the measurementof exchanges of nonmonetary assets. The Company does not believe that theadoption of SFAS No. 153 will have a significant impact on its financialposition and results of operations.

 

In December 2004,the FASB issued SFAS No. 123 (Revised 2004), “*Share-BasedPayment’*’ (“SFAS No. 123R”) which is effective for new awardsand awards modified or settled occurring in fiscal years beginning after December 15,2004. SFAS No. 123R amends and clarifies the accounting for stock compensationplans under SFAS No. 123, *“Accounting forStock-Based Compensation.”* The Company previously reported that it willadopt SFAS No. 123R for the quarter ending September 30, 2005. On April 14,2005, however, the Securities and Exchange Commission (“SEC”) deferred therequired adoption date of SFAS No. 123R to the beginning of the firstquarter of 2006, at which time the Company will adopt SFAS No. 123R. TheCompany does not believe that such adoption of SFAS No. 123R will have asignificant impact on its financial position and results of operations.

 

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

 

InMay 2005, the FASB issued SFAS No. 154 *“AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20 andStatement No. 3”* (“SFAS No. 154”). Previously, APB OpinionNo. 20 *“Accounting Changes”* and SFAS No. 3*“Reporting Accounting Changes in Interim FinancialStatements”* required the inclusion of the cumulative effect ofchanges in accounting principle in net income of the period of the change. SFASNo. 154 requires companies to recognize a change in accounting principle,including a change required in a new accounting pronouncement when thepronouncement does not include specific transition provisions, retrospectivelyto prior periods’ financial statements. The Company will assess the impact of achange in accounting principle in accordance with SFAS No. 154 when such achange arises after the effective date of January 1, 2006.

 

14

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**NOTE 10 - DEBT**

 

At June 30, 2005 andDecember 31, 2004, Long-Term Debt consisted of the following:

 
| **(Amounts in Millions)**                                                                                                                                                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior Notes  with interest payable semi-annually at 8.5%, payable in 2011                                                                                                           |       | $                       | 425.0      |                        | $          | 425.0 |   |
| Senior  Subordinated Notes with interest payable semi-annually at 9.5%, payable in  2013                                                                                             |       | 425.0                   |       | 425.0                       |       |
| Senior Secured  Term Loan Facility with interest payable at various dates at floating rates  (5.51% at June 30, 2005 and 4.52% at December 31, 2004) payable  through 2010 |       | 1,158.0                 |       | 1,158.0                     |       |
| Senior Secured  Revolving Facility with interest payable at various dates at floating rates  (6.53% at June 30, 2005) payable in 2009                                           |       | 35.8                    |       | —                      |       |
| Other                                                                                                                                                                                |       | 4.0                     |       | 3.8                         |       |
|                                                                                                                                                                                 |       | 2,047.8                 |       | 2,011.8                     |       |
| Less, current  portion                                                                                                                                                               |       | 7.2                     |       | 0.8                         |       |
| Total                                                                                                                                                                                |       | $                       | 2,040.6    |                        | $          | 2,011.0 |   |

 

Principal and interestpayments under the Term Loan Facility and the Revolving Credit Facility,together with principal and interest payments on the Senior Notes and theSenior Subordinated Notes, represent significant liquidity requirements for theCompany. Based upon current levels of operations, anticipated cost-savings andexpectations as to future growth, the Company believes that cash generated fromoperations, together with amounts available under its Revolving Credit Facilityand other available financing sources, will be adequate to permit the Companyto meet its debt service obligations, capital expenditure program requirements,ongoing operating costs and working capital needs, although no assurance can begiven in 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, will be subject tofuture economic conditions and to financial, business and other factors, manyof which are beyond the Company’s control and will be substantially dependenton the selling prices and demand for the Company’s products, raw material andenergy costs, and the Company’s ability to successfully implement its overallbusiness and profitability strategies.

 

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

 

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

 
| **Test Period**                                  | ** ** | **Consolidated Debt to  Credit Agreement EBITDA  Leverage Ratio(A)** | ** ** | **Credit Agreement  EBITDA to Consolidated  Interest Expense Ratio(A)** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| 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)  CreditAgreement EBITDA is calculated in accordance with the definitions contained inthe Company’s Senior Secured Credit Agreement. Credit Agreement EBITDA isdefined as consolidated net income before consolidated interest expense,non-cash expenses and charges, total income tax expense, depreciation expense,expense associated with amortization of intangibles and other assets, non-cashprovisions for reserves for discontinued operations, extraordinary, unusual ornon-recurring gains or losses or charges or credits, gain or loss associatedwith sale or write-down of assets not in the ordinary course of business, andany income or loss accounted for by the equity method of accounting.

 

At June 30, 2005, the Company was in compliancewith the financial covenants in the Senior Secured Credit Agreement, asamended. If the negative impact of inflationary pressures on key inputscontinues or other factors have a negative impact on the Company’s ability toincrease its profitability, the Company may not be able to maintain itscompliance with certain financial covenants in its Senior Secured CreditAgreement. The Company’s ability to comply in future periods with the financialcovenants in the Senior Secured Credit Agreement will depend on its ongoingfinancial and operating performance, which in turn will be subject to economicconditions and to financial, business and other factors, many of which arebeyond the Company’s control and will be substantially dependent on the sellingprices for the Company’s products, raw material and energy costs, and theCompany’s ability to successfully implement its overall business andprofitability strategies. If a violation of any of the covenants occurred, theCompany would attempt to obtain a waiver or an amendment from its lenders, althoughno assurance can be given that the Company would be successful in this regard.The Senior Secured Credit Agreement and the indentures governing the SeniorSubordinated Notes and the Senior Notes have covenants as well as certaincross-default or cross-acceleration provisions; failure to comply with thesecovenants in any agreement could result in a violation of such agreement whichcould, in turn, lead to violations of other agreements pursuant to suchcross-default or cross-acceleration provisions. If an event of default occurs,the lenders are entitled to declare all amounts owed to be due and payableimmediately.

 

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

 

 

15

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**NOTE 11 - RESTATEMENT**

 

Previously issued financial statements for the three months ended March31, 2005 and financial statements for the years ended December 31, 2004, 2003and 2002 have been restated to reflect adjustments to deferred taxes.Historically, the Company accounted for its deferred tax liability related togoodwill as a reversing taxable temporary difference. Following the adoption ofFinancial Accounting Standard No. 142, Goodwill and Other Intangible Assets, onJanuary 1, 2002, the deferred tax liability related to the Company’s goodwillmust be considered as a liability related to an asset with an indefinite life.  Therefore, the deferred tax liability does notamortize and is not available as a source of taxable income to support therealization of deferred tax assets created by other deductible temporary timingdifferences.  Without the deferred taxliability related to the Company’s goodwill, the Company does not believe it ismore likely than not it will realize its deferred tax assets and therefore, theCompany was required to record an additional tax expense to increase itsdeferred tax asset valuation allowance.  The restatement adjustments are non-cash andhad no effect on operating cash flows nor on the Company’s compliance with itsdebt covenants. 

 

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

 
| ** **                     | ** ** | **March 31, 2005**    | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **As**                     | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Previously**             | ** ** | **As** | ** ** |
| **(Amounts in Millions)**      | ** ** | **Reported**               | ** ** | **Restated** | ** ** |
| Three Months  Ended:           | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Income Tax  Expense            |       | —                     |       | $ | (4.9 | ) |
| Net Loss                       |       | $                          | (24.7      | ) | $ | (29.6 | ) |
| Loss Per Share                 |       | $                          | (0.12      | ) | $ | (0.15 | ) |
|                           |       |                       |       |   |   |
| ** **                     | ** ** | **December 31, 2004** | ** ** |
| ** **                     | ** ** | **As**                     | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Previously**             | ** ** | **As** | ** ** |
| **(Amounts in Millions)**      | ** ** | **Reported**               | ** ** | **Restated** | ** ** |
| As of  December 31, 2004: |       |                       |       |   |   |
| Other Noncurrent  Liabilities  |       | $                          | 227.7      |   | $ | 297.4 |   |
| Accumulated  Deficit           |       | $                          | (639.8     | ) | $ | (709.5 | ) |
|                           |       |                       |       |   |   |
| ** **                     | ** ** | **June 30, 2004**     | ** ** |
| ** **                     | ** ** | **As**                     | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Previously**             | ** ** | **As** | ** ** |
| **(Amounts in Millions)**      | ** ** | **Reported**               | ** ** | **Restated** | ** ** |
| Three Months  Ended:           | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Income Tax  Expense            |       | $                          | (0.9       | ) | $ | (5.7 | ) |
| Net Income  (Loss)             |       | $                          | 0.2        |   | $ | (4.6 | ) |
| Loss Per Share                 |       | —                     |       | $ | (0.02 | ) |
|                           |       |                       |       |   |   |
| Six Months  Ended:             | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Income Tax  Expense            |       | $                          | (2.4       | ) | $ | (12.0 | ) |
| Net Loss                       |       | $                          | (12.2      | ) | $ | (21.8 | ) |
| Loss Per Share                 |       | $                          | (0.06      | ) | $ | (0.11 | ) |

 

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

 

16

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

 

***Information Concerning Forward-Looking Statements***

** **

*Certainstatements of Graphic Packaging Corporation’s expectations, including, but notlimited to, statements regarding the timing of and expenses related torestructuring activities, pension contributions and benefit payments, costsavings from restructuring activities and merger synergies, capitalexpenditures, the impact of inflation of energy, chemical and fiber costs, theoutcome of litigation and environmental proceedings and the reduction of debtin this report constitute “forward-looking statements” as defined in thePrivate Securities Litigation Reform Act of 1995. Such statements are based oncurrently available operating, financial and competitive information and aresubject to various risks and uncertainties that could cause actual results todiffer materially from the Company’s historical experience and its presentexpectations. These risks and uncertainties include, but are not limited to,the Company’s ability to implement its business strategies, the Company’ssubstantial amount of debt, continuing pressure for lower cost products,inflation of and volatility in raw materials and energy costs, rising laborcosts, the Company’s ability to pass these increased costs on to its customers,unfavorable currency translation movements and other risks of conductingbusiness internationally, and the impact of regulatory and litigation matters,including those that impact the Company’s ability to protect and use itsintellectual property. Undue reliance should not be placed on suchforward-looking statements, as such statements speak only as of the date onwhich they are made and the Company undertakes no obligation to update suchstatements. Additional information regarding these and other risks is containedin the Company’s other periodic filings with the SEC.*

 

**OVERVIEW**

 

The Company’s objectiveis to strengthen its position as a leading provider of paperboard packagingsolutions. To achieve this objective, the Company is implementing strategies toexpand market share in its current markets and to identify and penetrate newmarkets; to capitalize on the Company’s customer relationships, businesscompetencies, and mills and converting assets; to develop and market innovativeproducts and applications; and to continue to reduce costs by focusing onoperational improvements. The Company’s ability to fully implement itsstrategies and achieve its objectives, however, is affected by severalsignificant factors beyond the Company’s control, including (i) inflationof raw material and other costs, which the Company cannot always pass throughto its customers, and (ii) the effect of the overcapacity in the worldwidepaperboard packaging industry. The Company anticipates using its free cashflows to reduce debt.

 

**TheRestatement**

 

On August 9, 2005, Graphic Packaging Corporation (the “Company”)filed Amendment No. 2 on Form 10-K/A to its Annual Report on Form 10-Kfor the year ended December 31, 2004 and Amendment No. 1 on Form 10-Q/Ato its Quarterly Report on Form 10-Q for the three months ended March 31,2005 with the Securities and Exchange Commission. These amendments restate theCompany’s previously issued financial statements for the full years ended December 31,2004, 2003 and 2002, and the quarterly period ended March 31, 2005 toreflect corrections in accounting for deferred taxes. Historically, the Companyaccounted for its deferred tax liability related to goodwill as a reversingtaxable temporary difference. Following the adoption of Financial AccountingStandard No. 142, Goodwill and Other Intangible Assets, on January 1,2002, the deferred tax liability related to the Company’s goodwill must beconsidered as a liability related to an asset with an indefinite life.  Therefore, the deferred tax liability does notamortize and is not available as a source of taxable income to support therealization of deferred tax assets created by other deductible temporary timingdifferences.  Without the deferred taxliability related to the Company’s goodwill, the Company does not believe it ismore likely than not it will realize its deferred tax assets and therefore, theCompany was required to record an additional tax expense to increase itsdeferred tax asset valuation allowance. The impact of the adjustments increased income tax expense and net lossby $4.9 million for the three months ended March 31, 2005.  The restatement adjustments are non-cash andhad no effect on operating cash flows nor on the Company’s compliance with itsdebt covenants including the Company’s Credit Agreement EBITDA.

 

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

 

The Company’s net sales,income from operations, cash flows from operations and financial condition areinfluenced by a variety of factors.

 

*Sales.* The Companyhistorically experienced stable pricing for its integrated beverage multiplepackaging products and moderately cyclical pricing for its other productofferings. Because some products can be packaged in different types ofmaterials, the Company’s sales are affected by competition from othermanufacturers’ coated unbleached kraft paperboard, or CUK board, and othersubstrates — solid bleached sulfate, or SBS, recycled clay coated news, or CCN,and, internationally, white lined chipboard, or WLC — as well as by generalmarket conditions. In addition, the Company’s sales historically are driven byconsumer buying habits in the markets its customers serve. New productintroductions and promotional activity by the Company’s customers and theCompany’s introduction of new packaging products also impacted its sales. TheCompany’s containerboard business is subject to conditions in the cyclicalworldwide commodity paperboard markets which have a significant impact oncontainerboard sales. In addition, the Company’s net sales, income fromoperations and cash flows from operations are subject to moderate seasonality,with demand usually increasing in the spring and summer due to the seasonalityof the worldwide beverage multiple packaging markets.

 

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

 

Packaging machineryplacements during the first six months of 2005 decreased approximately 27%compared to the first six months of 2004 due primarily to timing differencesand to the additional placements in 2004 as a result of the success of the newFridge Vendor® Package. These machines were placed to

 

 

 

17

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package cans and bottlesfor beer, soft drink, water and juice applications. The Company expectspackaging machinery placements for 2005 to be lower when compared to 2004 but higherwhen compared to 2003.

 

*Impact ofInflation**and Operating Costs.*The Company’s cost of sales consists primarily of energy (including naturalgas, fuel oil and electricity), pine pulpwood, hardwood, chemicals, recycledfibers, purchased paperboard, paper, aluminum foil, ink, plastic films andresins, depreciation expense and labor. The Company continues to be negativelyimpacted by inflationary pressures which increased costs $53.1 million comparedto the first six months of 2004 and are primarily related to fiber, outsideboard purchases and corrugated shipping containers ($14.0 million); chemicalbased inputs ($13.6 million); labor and related benefits ($10.4 million); energy($7.8 million); freight ($4.0 million); and other ($3.3 million). The Companyhas entered into contracts designed to mitigate the impact of future costincreases for a significant portion of its natural gas requirements, primarilyat its U.S. mills, through December 2005. The Company will continue toevaluate its position regarding natural gas purchase commitments. The Companybelieves that inflationary pressures will negatively impact its results for 2005. Since negotiated contracts and themarket largely determine the pricing for its products, the Company is limitedin its ability to pass through to its customers any inflationary or other costincreases that the Company may incur in the future. Additionally, the Company’ssales contracts often limit its timing and ability to raise prices, furtherexacerbating the inflationary problems.

 

During December 2004, unexpected sub-freezingtemperatures in the Southeast resulted in the malfunction of controlinstrumentation for high pressure boilers at both the Company’s West Monroe, Louisianaand Macon, Georgia mills. This malfunction resulted in unplanned down-time onpaper machines and turbine generators as well as costs due to boiler damage.The downtime resulted in lost production and between the two mills, the totalcost from this incident was $3.0 million of capital expenditures, along with anegative $2.3 million income statement impact due to the lost production,repair and startup. These costs were realized in the first quarter of 2005.

 

*Substantial Debt Obligations.*TheCompany has approximately $2,059 million of outstanding debt obligations as ofJune 30, 2005. This debt can have significant consequences for the Company,as it requires significant portion of cash flow from operations to be used forthe payment of principal and interest, exposes the Company to the risk ofincreased interest rates, restricts the Company’s ability to obtain additionalfinancing and limits the Company’s flexibility to respond to changing marketconditions and competitive pressures. Covenants in the Company’s Senior SecuredCredit Agreement also prohibit or restrict, among other things, the disposal ofassets, the incurrence of additional indebtedness (including guarantees) andpayment of dividends, loans or advances and certain other types oftransactions. The covenants also require compliance with certain financialratios that adjust to require improved performance on a yearly basis through December31, 2008. The Company’s ability to comply in future periods with the financialcovenants will depend on its ongoing financial and operating performance, whichin turn will be subject to many other factors, many of which are beyond theCompany’s control. See “-Liquidity and Capital Resources” and “-CovenantRestrictions” for additional information regarding the Company’s debtobligations.

 

*Commitmentto Cost Reduction*. In light of increasing margin pressurethroughout the paperboard packaging industry, the Company has programs in placethat are designed to reduce costs, improve productivity and increaseprofitability. The Company is continuing to implement a global continuous improvementinitiative that uses statistical process control to help design and manage manytypes of activities, including production and maintenance. This includes a SixSigma process focused on reducing variable and fixed manufacturing andadministrative costs. During the first six months of 2005, the Company achievedapproximately $22 million in cost savings through its continuous improvement programsand manufacturing initiatives.

 

The Company is finalizingits initiative designed to enhance the competitiveness of its beverage multiplepackaging converting operations and has begun to recognize improved convertingperformance when comparing against the first six months of 2004. Thisinitiative has added new manufacturing technology and press capacity, and alsoincludes the consolidation of certain beverage carton converting operations.The Company has made expenditures of approximately $70 million and expects torealize cost savings relative to 2002 from this initiative of approximately $39million annually by the end of 2005.

 

As part of the Company’s manufacturing rationalizationinitiatives, the Company announced in January 2004 its plans to close itsGarden Grove, CA converting plant, and in May 2004 announced plans toclose its Bow, NH and Clinton, MS converting plants. In addition, the Companyannounced it is expanding certain of its existing sites, including Fort Smith,AR and Lumberton, NC, and as a result expects to make expenditures ofapproximately $26 million over the 2004 to 2005 period. The Company has spentapproximately $23 million of the projected expenditures through June 30,2005. By the end of 2006, the Company estimates that it will realize anadditional $19 million in annual synergies, improved cost structures andincreased productivity as a result of these manufacturing rationalizationinitiatives.

 

The Company continues toevaluate its current operations and assets with a view to rationalizing itsoperations and improving profitability.

 

18

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**CriticalAccounting Policies**

 

The preparation of condensedconsolidated financial statements in conformity with U.S. GAAP 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’s most critical accounting policies whichrequire significant judgment or involve complex estimations that are importantto the portrayal of the Company’s financial conditions and operating resultsare described in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004, as amended.

 

For a discussion ofrecent accounting pronouncements impacting the Company, see Note 9 in Notes to CondensedConsolidated Financial Statements.

 

**SegmentInformation**

 

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

 
| ** **                      | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Amounts in Millions)**       | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| NET SALES:                      |       |                    |       |                    |       |   |   |   |   |
| Paperboard  Packaging           |       | $                       | 600.3      |                    | $          | 583.9 |   | $ | 1,159.3 |   | $ | 1,141.2 |   |
| Containerboard/Other            |       | 22.7                    |       | 22.4                    |       | 46.7 |   | 41.0 |   |
| Total                           |       | $                       | 623.0      |                    | $          | 606.3 |   | $ | 1,206.0 |   | $ | 1,182.2 |   |
|                            |       |                    |       |                    |       |   |   |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                    |       |                    |       |   |   |   |   |
| Paperboard  Packaging           |       | $                       | 43.7       |                    | $          | 65.4 |   | $ | 72.6 |   | $ | 118.3 |   |
| Containerboard/Other            |       | (4.0                    | )          | (7.0                    | )          | (8.2 | ) | (15.5 | ) |
| Corporate                       |       | (16.1                   | )          | (21.7                   | )          | (28.5 | ) | (39.4 | ) |
| Total                           |       | $                       | 23.6       |                    | $          | 36.7 |   | $ | 35.9 |   | $ | 63.4 |   |

 

**RESULTS OF OPERATIONS, AS RESTATED**

 
| ** **                             | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**                          | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in Millions)**              | ** ** | **June 30,  2005** | ** ** | **Increase  (Decrease)  From  Prior  Period** | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** | **Increase  (Decrease)  From  Prior  Period** | ** ** | **June 30,  2004** | ** ** |
| Net Sales                              |       | $                       | 623.0      |                                          | 2.8        | % | $ | 606.3 |   | $ | 1,206.0 |   | 2.0 | % | $ | 1,182.2 |   |
| Cost of Sales                          |       | 537.2                   |       | 5.7                                           | %          | 508.2 |   | 1,053.0 |   | 5.8 | % | 995.1 |   |
| Gross Profit                           |       | 85.8                    |       | (12.5                                         | )%         | 98.1 |   | 153.0 |   | (18.2 | )% | 187.1 |   |
| Selling, General  and Administrative   |       | 53.2                    |       | 8.1                                           | %          | 49.2 |   | 100.9 |   | 3.6 | % | 97.4 |   |
| Research,  Development and Engineering |       | 3.2                     |       | 33.3                                          | %          | 2.4 |   | 5.5 |   | 14.6 | % | 4.8 |   |
| Other Expense,  Net                    |       | 5.8                     |       | (40.8                                         | )%         | 9.8 |   | 10.7 |   | (50.2 | )% | 21.5 |   |
| Income from  Operations                |       | $                       | 23.6       |                                          | (35.7      | )% | $ | 36.7 |   | $ | 35.9 |   | (43.4 | )% | $ | 63.4 |   |

 

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**SECONDQUARTER 2005 COMPARED WITH SECOND QUARTER 2004**

 

**Net Sales**

 

The Company’s Net Sales in the second quarter of 2005increased by $16.7 million, or 2.8%, to $623.0 million from $606.3 million inthe second quarter of 2004 due primarily to a 12.9% increase in North Americanfood and consumer product carton sales as a result of higher volumes andincreased pricing, increased containerboard pricing and the positive impact offoreign currency exchange rates of $4.5 million. These increases were somewhatoffset by lower volumes in containerboard markets as well as lower pricing inNorth American beverage carton markets as a result of increased marketcompetitiveness.

 

**GrossProfit**

** **

The Company’s Gross Profit in the second quarter of2005 decreased by $12.3 million, or 12.5%, to $85.8 million from $98.1 millionin the second quarter of 2004. The Company’s gross profit margin decreased to13.8% in the second quarter of 2005 from 16.2% in the second quarter of 2004.The decrease in gross profit margin was due primarily to inflationary pressuresprimarily on chemical based inputs, fiber, outside board purchases andcorrugated shipping containers, energy, labor and related benefits and freight;and lower pricing in North American beverage carton markets as a result ofincreased market competitiveness. The decrease in gross profit margin wassomewhat offset by worldwide cost reductions resulting from the Company’s costreduction initiatives and improved pricing as discussed above.

 

**Selling,General and Administrative**

** **

Selling, General andAdministrative expenses increased by $4.0 million, or 8.1%, to $53.2 million inthe second quarter of 2005 from $49.2 million in the second quarter of 2004,due primarily to higher consulting fees and labor and related benefits costs. Asa percentage of Net Sales, Selling, General and Administrative expenses were8.5% in the second quarter of 2005 versus 8.1% in the second quarter of 2004.

 

**Research,Development and Engineering**

** **

Research, Developmentand Engineering expenses increased by $0.8 million, or 33.3%, to $3.2 millionin the second quarter of 2005 from $2.4 million in the second quarter of 2004,due to higher investment related to the Company’s products and packagingmachinery.

 

**OtherExpense, Net**

** **

Other Expense, Netdecreased by $4.0 million, or 40.8%, to $5.8 million in the second quarter of2005 from $9.8 million in the second quarter of 2004. This change wasprincipally due to lower amortization expense of Merger related intangibles of$5.7 million.

 

**Incomefrom Operations**

** **

Primarily as a result ofthe factors discussed above, the Company’s Income from Operations in the secondquarter of 2005 decreased by $13.1 million, or 35.7%, to $23.6 million from$36.7 million in the second quarter of 2004, while its operating margindecreased to 3.8% in the second quarter of 2005 from 6.1% in the second quarterof 2004.

 

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

** **

The weakening of the U.S.dollar currency exchange rates as compared to certain currencies including theeuro, other European currencies and the Japanese yen had a $4.5 million impacton Net Sales, while there was a modest impact on Gross Profit, Income fromOperations, and operating expenses during the second quarter of 2005.

 

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**FIRST SIXMONTHS 2005 COMPARED WITH FIRST SIX MONTHS 2004**

 

**Net Sales**

 

The Company’s Net Sales in the first six months of2005 increased by $23.8 million, or 2.0%, to $1,206.0 million from $1,182.2million in the first six months of 2004 due primarily to a 7.0% increase inNorth American food and consumer product carton sales as a result of highervolumes and increased pricing, improved pricing in the containerboard mediumand linerboard markets, and the positive impact of foreign currency exchangerates of $8.8 million. These increases were somewhat offset by lower volumes inNorth American open market rollstock sales as well as lower pricing in NorthAmerican beverage carton markets as a result of increased marketcompetitiveness.

 

**GrossProfit**

** **

The Company’s Gross Profit in the first six months of2005 decreased by $34.1 million, or 18.2%, to $153.0 million from $187.1million in the first six months of 2004. The Company’s gross profit margindecreased to 12.7% in the first six months of 2005 from 15.8% in the first sixmonths of 2004. The decrease in gross profit margin was due primarily toinflationary pressures primarily on chemical based inputs, fiber, outside boardpurchases and corrugated shipping containers, energy, labor and relatedbenefits and freight; the negative $2.3 million income statement impact due tothe lost production, repair and startup at both the Company’s West Monroe,Louisiana and Macon, Georgia mills as a result of unexpected sub-freezingtemperatures during December 2004; and lower pricing in North Americancarton markets as a result of increased market competitiveness. The decrease ingross profit margin was somewhat offset by worldwide cost reductions resultingfrom the Company’s cost reduction initiatives and improved pricing as discussedabove.

 

**Selling,General and Administrative**

** **

Selling, General andAdministrative expenses increased by $3.5 million, or 3.6%, to $100.9 millionin the first six months of 2005 from $97.4 million in the first six months of2004, due primarily to higher consulting fees including those associated withSarbanes-Oxley compliance efforts and labor and related benefit costs. As apercentage of Net Sales, Selling, General and Administrative expenses were 8.4%in the first six months of 2005 versus 8.2% in the first six months of 2004.

 

**Research,Development and Engineering**

** **

Research, Developmentand Engineering expenses increased by $0.7 million, or 14.6%, to $5.5 millionin the first six months of 2005 from $4.8 million in the first six months of2004, due to higher investment related to the Company’s products and packagingmachinery.

 

**OtherExpense, Net**

** **

Other Expense, Netdecreased by $10.8 million, or 50.2%, to $10.7 million in the first six monthsof 2005 from $21.5 million in the first six months of 2004. This change wasprincipally due to lower amortization expense of Merger related intangibles of$10.9 million.

 

**Income from Operations**

 

Primarily as a result ofthe factors discussed above, the Company’s Income from Operations in the firstsix months of 2005 decreased by $27.5 million, or 43.4%, to $35.9 million from$63.4 million in the first six months of 2004, while its operating margindecreased to 3.0% in the first six months of 2005 from 5.4% in the first sixmonths of 2004.

 

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

** **

The weakening of the U.S.dollar currency exchange rates as compared to certain currencies including theeuro, other European currencies and the Japanese yen had a $8.8 million impacton Net Sales, while there was a modest impact on Gross Profit, Income fromOperations, and operating expenses during the second quarter of 2005.

 

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

 

**InterestIncome**

 

Interest Income remainedconstant at $0.2 million in the first six months of 2005 and 2004.

 

**InterestExpense**

 

Interest Expenseincreased by $2.1 million to $76.2 million in the first six months of 2005 from$74.1 million in the first six months of 2004, due to the Company’s unhedgedfloating rate debt being tied to increasing market interest rates. The increasewas somewhat offset by lower average debt balances in 2005 and a 25 basispoints reduction in interest charged during the first six months of 2005 on theTerm Loan Facility as a result of the October 1, 2004 amendment to theCompany’s Senior Secured Credit Agreement.

 

**IncomeTax Expense**

 

During the first sixmonths of 2005, the Company recognized an Income Tax Expense of $9.7 million onLoss before Income Taxes and Equity in Net Earnings of Affiliates of $40.1million. During the first six months of 2004, the Company recognized an IncomeTax Expense of $12.0 million on Loss before Income Taxes and Equity in NetEarnings of Affiliates of $10.5 million. Income Tax Expense for the first sixmonths of 2005 and 2004 was primarily due to the amortization of goodwill fortax purposes, income earned in certain foreign countries, and tax withholdingin foreign jurisdictions.

 

**Equity inNet Earnings of Affiliates**

 

Equity in Net Earnings ofAffiliates was $0.6 million in the first six months of 2005 and $0.7 million inthe first six months of 2004 and related to the Company’s equity investment inthe joint venture Rengo Riverwood Packaging, Ltd.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

** **

The Company broadlydefines liquidity as its ability to generate sufficient funds from bothinternal and external sources to meet its obligations and commitments. Inaddition, liquidity includes the ability to obtain appropriate debt and equityfinancing and to convert into cash those assets that are no longer required tomeet existing strategic and financial objectives. Therefore, liquidity cannotbe considered separately from capital resources that consist of current orpotentially available funds for use in achieving long-range business objectivesand meeting debt service commitments.

 

**CashFlows**

** **

Cash and Equivalents decreased by $0.2 million in thefirst six months of 2005. Cash provided by operating activities in the firstsix months of 2005 totaled $28.8 million, compared to $69.0 million in thefirst six months of 2004. This was principally due to lower operating income aswell as unfavorable changes in operating assets and liabilities. Cash used ininvesting activities in the first six months of 2005 totaled $64.3 million,compared to $72.5 million in 2004. This change was principally due to lowerpurchases of property, plant and equipment of $20.5 million (see “-CapitalExpenditures”) somewhat offset by lower proceeds from sale of assets. Cashprovided by financing activities in 2005 totaled $35.6 million, compared tocash used in financing activities of $8.8 million in 2004. This change wasprincipally due to higher net borrowings under the Company’s revolving creditfacilities as well as lower debt payments. Depreciation and amortization duringthe first six months of 2005 totaled $106.6 million and is expected to bebetween approximately $200 million and $210 million for the full year 2005.

 

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**Liquidityand Capital Resources**

** **

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

 

At June 30, 2005 andDecember 31, 2004, Long-Term Debt consisted of the following:

 
| **(Amounts in Millions)**                                                                                                                                                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior Notes  with interest payable semi-annually at 8.5%, payable in 2011                                                                                                           |       | $                       | 425.0      |                        | $          | 425.0 |   |
| Senior  Subordinated Notes with interest payable semi-annually at 9.5%, payable in  2013                                                                                             |       | 425.0                   |       | 425.0                       |       |
| Senior Secured  Term Loan Facility with interest payable at various dates at floating rates  (5.51% at June 30, 2005 and 4.52% at December 31, 2004) payable  through 2010 |       | 1,158.0                 |       | 1,158.0                     |       |
| Senior Secured  Revolving Facility with interest payable at various dates at floating rates  (6.53% at June 30, 2005) payable in 2009                                           |       | 35.8                    |       | —                      |       |
| Other                                                                                                                                                                                |       | 4.0                     |       | 3.8                         |       |
|                                                                                                                                                                                 |       | 2,047.8                 |       | 2,011.8                     |       |
| Less, current  portion                                                                                                                                                               |       | 7.2                     |       | 0.8                         |       |
| Total                                                                                                                                                                                |       | $                       | 2,040.6    |                        | $          | 2,011.0 |   |

 

Total debt increasedduring the first six months of 2005. This increase is a result of seasonalfactors as the Company ramps up working capital in preparation for the summerseason. The Company expects that the majority of its remaining full year debtreduction will come during the fourth quarter. The Senior Notes are rated B- byStandard & Poor’s and B2 by Moody’s Investor Services. During thefirst six months of 2005, cash paid for interest was approximately $72 million.

 

At June 30, 2005,the Company and its U.S. and international subsidiaries had the followingcommitments, amounts outstanding and amounts available under revolving creditfacilities:

 
| **(Amounts in Millions)**  | ** ** | **Total Amount of  Commitments** | ** ** | **Total Amount  Outstanding** | ** ** | **Total Amount  Available (A)** | ** ** |
|----------------------------|------------|----------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Revolving Credit  Facility |       | $                                | 325.0      |                          | $          | 35.8                            |       | $ | 275.3 |   |
| International  Facilities  |       | 21.1                             |       | 10.7                          |       | 10.4                            |       |
| Total                      |       | $                                | 346.1      |                          | $          | 46.5                            |       | $ | 285.7 |   |

 

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**Note:**

 

(A)      Inaccordance with its debt agreements, the Company’s availability under itsRevolving Credit Facility has been reduced by the amount of standby letters ofcredit issued of $13.9 million as of June 30, 2005. These letters of creditare used as security against its self-insurance obligations, workers’compensation obligations and an outstanding note payable. These letters ofcredit expire at various dates through 2006 unless extended.

 

Principal and interestpayments under the Term Loan Facility and the Revolving Credit Facility,together with principal and interest payments on the Senior Notes and theSenior Subordinated Notes, represent significant liquidity requirements for theCompany. Based upon current levels of operations, anticipated cost-savings andexpectations as to future growth, the Company believes that cash generated fromoperations, together with amounts available under its Revolving Credit Facilityand other available financing sources, will be adequate to permit the Companyto meet its debt service obligations, capital expenditure program requirements,ongoing operating costs and working capital needs, although no assurance can begiven in 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.

 

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The Company expects thatits working capital and business needs will require it to continue to haveaccess to the Revolving Credit Facility or a similar revolving credit facilityafter the maturity date in 2009, and that the Company accordingly will have toextend, renew, replace or otherwise refinance such facility at or prior to suchdate. No assurance can be given that it will be able to do so. The Company hasin the past refinanced and in the future may seek to refinance its debt priorto the respective maturities of such debt.

 

The Company uses interestrate swaps to manage interest rate risks caused by interest rate changes on itsvariable rate Term Loan Facility. The differential to be paid or received underthese agreements is recognized as an adjustment to interest expense related tothe debt. At June 30, 2005, the Company had interest rate swap agreementswith a notional amount of $880 million, which expire on various dates from 2005to 2008 under which the Company will pay fixed rates of 2.31% to 4.53% andreceive three-month LIBOR.

 

Effective as of June 30,2005, the Company had approximately $1.3 billion of net operating losscarryforwards (“NOLs”). These NOLs generally may be used by the Company tooffset taxable income earned in subsequent taxable years. However, the Company’sability to use these NOLs to offset its future taxable income may be subject tosignificant limitation as a result of certain shifts in ownership due to director indirect transfers of the Company’s common stock by one or more 5 percentstockholders, or issuances or redemptions of the Company’s common stock, which,when taken together with previous changes in ownership of the Company’s commonstock, constitute an ownership change under the Internal Revenue Code.Imposition of any such limitation on the use of NOLs could have an adverseeffect on the Company’s future after tax free cash flow.

 

**CovenantRestrictions**

 

The Senior Secured CreditAgreement, which governs the Term Loan Facility and the Revolving CreditFacility, imposes restrictions on the Company’s ability to make capitalexpenditures and both the Senior Secured Credit Agreement and the indenturesgoverning the Senior Notes and Senior Subordinated Notes (the “Notes”) limitthe Company’s ability to incur additional indebtedness. Such restrictions,together with the highly leveraged nature of the Company, could limit theCompany’s ability to respond to market conditions, meet its capital spendingprogram, provide for unanticipated capital investments or take advantage ofbusiness opportunities. The covenants contained in the Senior Secured CreditAgreement, among other things, restrict the ability of the Company to disposeof assets, incur additional indebtedness, incur guarantee obligations, prepayother indebtedness, make dividend and other restricted payments, create liens,make equity or debt investments, make acquisitions, modify the terms ofindentures under which the Notes are issued, engage in mergers orconsolidations, change the business conducted by the Company and itssubsidiaries, make capital expenditures and engage in certain transactions withaffiliates.

 

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

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

 

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Note:

(A) See “Credit Agreement EBITDA” below.

 

At June 30, 2005, the Company was in compliancewith the financial covenants in the Senior Secured Credit Agreement, as amended.If the negative impact of inflationary pressures on key inputs continues orother factors have a negative impact on the Company’s ability to increase itsprofitability, the Company may not be able to maintain its compliance withcertain financial covenants in its Senior Secured Credit Agreement. The Company’sability to comply in future periods with the financial covenants in the SeniorSecured Credit Agreement will depend on its ongoing financial and operatingperformance, which in turn will be subject to economic conditions and tofinancial, business and other factors, many of which are beyond the

 

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Company’s control and will be substantially dependenton the selling prices for the Company’s products, raw material and energycosts, and the Company’s ability to successfully implement its overall businessand profitability strategies. If a violation of any of the covenants occurred,the Company would attempt to obtain a waiver or an amendment from its lenders,although no assurance can be given that the Company would be successful in thisregard. The Senior Secured Credit Agreement and the indentures governing theSenior Subordinated Notes and the Senior Notes have covenants as well ascertain cross-default or cross-acceleration provisions; failure to comply withthese covenants in any agreement could result in a violation of such agreementwhich could, in turn, lead to violations of other agreements pursuant to suchcross-default or cross-acceleration provisions. If an event of default occurs,the lenders are entitled to declare all amounts owed to be due and payableimmediately.

 

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

 

**Credit Agreement EBITDA**

** **

Thetable below sets forth EBITDA, as defined in the Senior Secured CreditAgreement, which is referred to in this report as “Credit Agreement EBITDA.”Credit Agreement EBITDA as presented below is a financial measure thatis used in the Senior Secured Credit Agreement. Credit Agreement EBITDA is nota defined term under accounting principles generally accepted in the UnitedStates and should not be considered as an alternative to income from operationsor net income as a measure of operating results or cash flows as a measure ofliquidity. Credit Agreement EBITDA differs from the term “EBITDA” (earningsbefore interest expense, income tax expense, and depreciation and amortization)as it is commonly used. In addition to adjusting net income to exclude interestexpense, income tax expense and depreciation and amortization, Credit AgreementEBITDA also adjusts net income by excluding certain other items and expenses,as specified below. The Company’s definition of Credit Agreement EBITDA maydiffer from that of other similarly titled measures at other companies. TheSenior Secured 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.”

 

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

 

The calculation of CreditAgreement EBITDA for the periods indicated is set forth below and is calculatedin accordance with the Senior Secured Credit Agreement.

 
| ** **                            | ** ** | **Six Months Ended**                | ** ** | **Twelve Months Ended**             | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in Millions)**             | ** ** | **As Restated  June 30, 2005** | ** ** | **As Restated  June 30, 2004** | ** ** | **As Restated  June 30, 2005** | ** ** | **As Restated  Dec. 31, 2004** | ** ** |
| Net Loss                              |       | $                                   | (49.2      | )                                   | $          | (21.8 | ) | $ | (88.3 | ) | $ | (60.9 | ) |
| Income Tax  Expense                   |       | 9.7                                 |       | 12.0                                |       | 26.6 |   | 28.9 |   |
| Interest  Expense, Net                |       | 76.0                                |       | 73.9                                |       | 151.1 |   | 149.0 |   |
| Depreciation and  Amortization        |       | 106.6                               |       | 114.2                               |       | 221.3 |   | 228.9 |   |
| Equity in Net  Earnings of Affiliates |       | (0.6                                | )          | (0.7                                | )          | (1.3 | ) | (1.4 | ) |
| Credit Agreement  Adjustments (A)     |       | 24.4                                |       | 22.9                                |       | 52.1 |   | 50.6 |   |
| Credit Agreement  EBITDA (B)          |       | $                                   | 166.9      |                                | $          | 200.5 |   | $ | 361.5 |   | $ | 395.1 |   |

 

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**Notes:**

(A) Credit agreementadjustments include non-cash charges for pension, postretirement andpostemployment benefits, amortization of premiums on hedging contracts,write-down of assets, and merger related expenses deducted in determining netincome and dividends from equity investments.

 

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

 

**CapitalExpenditures**

** **

The Company’s capitalspending in the first six months of 2005 was $54.8 million, compared to $75.3million in the first six months of 2004. During the first six months of 2005,the Company had capital spending of $24.8 million for improving processcapabilities, $12.9 million for the expansion of its Fort Smith, AR andLumberton, NC converting plants, $8.6 million for manufacturing packagingmachinery, $5.2 million for compliance with cluster rules and $3.3 millionfor its beverage multiple packaging converting operations initiative.

 

**EnvironmentalMatters**

 

The Company is subject toa broad range of foreign, federal, state and local environmental, health andsafety laws and regulations, including those governing discharges to air, soiland water, the management, treatment and disposal of hazardous substances, themanagement, treatment and disposal of solid and hazardous wastes, theinvestigation and remediation of contamination resulting from historical siteoperations and releases of hazardous substances, and the health and safety ofemployees. The Company’s potential environmental liabilities and obligationsmay result in significant costs, which could negatively impact its financialcondition and results of operations. In addition, capital expenditures may benecessary for the Company to comply with such laws and regulations, includingthe U.S. EPA’s regulations mandating stringent controls on air and waterdischarges from pulp and paper mills. Any failure to comply with environmental,health and safety laws or any permits and authorizations required thereundercould subject the Company to fines, corrective action or other sanctions. Inaddition, some of the Company’s current and former facilities are the subjectof environmental investigations and remediations resulting from historicaloperations and the release of hazardous substances or other constituents. Somecurrent and former facilities have a history of industrial usage for whichinvestigation and remediation obligations may be imposed in the future or forwhich indemnification claims may be asserted against the Company. The Companycannot predict with certainty future investigation or remediation costs orfuture costs relating to historical usage or indemnification claims. Also,potential future closures or sales of facilities may necessitate furtherinvestigation and may result in future remediation at those facilities. TheCompany will continue to review and revise its estimate of potential contingentenvironmental liabilities related to past, present and future operations asadditional information related to its environmental liabilities is obtained.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

 

For a discussion ofcertain market risks related to the Company, see Part II, Item 7A, “Quantitativeand Qualitative Disclosure about Market Risk”, in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2004, as amended. Therehave been no significant developments with respect to derivatives or exposureto market risk during the first six months of 2005; see Note 6 in Notes toCondensed Consolidated Financial Statements and Management’s Discussion andAnalysis of Financial Condition and Results of Operations “-FinancialCondition, Liquidity and Capital Resources”.

 

**ITEM 4. CONTROLSAND PROCEDURES**

 

*DisclosureControls and Procedures*

 

The Company’s managementhas carried out an evaluation, with the participation of its Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 of theSecurities Exchange Act of 1934, as amended.  Based upon such evaluation,management has concluded that the Company’s disclosure controls and procedureswere not effective as of June 30, 2005, solely because of a materialweakness in internal control over financial reporting with respect to accountingfor deferred taxes as described below.

 

As described in AmendmentNo. 2 to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2004 and Amendment No. 1 to the Company’s Quarterly Report onForm 10-Q for the period ended March 31, 2005, each filed on August 9,2005, the Company has restated its consolidated financial statements for thethree months ended March 31, 2005 and for the years ended December 31,2004, 2003, and 2002 and applicable interim quarters to correct errors relatingto accounting for income taxes and related deferred tax liabilities.  Based on management’s review, it has beendetermined that the errors were inadvertent and unintentional.

 

*Changesin Internal Control over Financial Reporting*

 

A material weakness is acontrol deficiency, or combination of control deficiencies, that results in amore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. As of December 31,2004, the Company did not maintain effective controls over the determination ofthe provision for income taxes and related deferred income tax accounts.Specifically, the Company did not maintain effective controls as to thecompleteness and accuracy of the income tax provision and the related deferredincome tax accounts with respect to differences between the income tax basisand the financial reporting basis of its assets and liabilities.  Thisdeficiency resulted in the restatement of the interim and annual consolidatedfinancial statements for 2004, 2003 and 2002, the restatement of the firstquarter of 2005 as well as audit adjustments to the second quarter 2005consolidated financial statements. Additionally, this control deficiency couldresult in a misstatement of the income tax provision or related deferred incometax accounts resulting in a material misstatement to the annual or interimconsolidated financial statements that would not be prevented or detected.Accordingly, management has determined that this control deficiency constitutesa material weakness.  Because this material weakness has not yet beenremediated, the Company concluded that it did not maintain effective internalcontrol over financial reporting as of June 30, 2005, based on criteria in*Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

The Company is in theprocess of designing and implementing improvements in its internal control overfinancial reporting to address the material weakness in accounting for incometaxes. These improvements include, among other things, hiring a tax director,educating and training Company individuals involved in accounting and reportingfor income taxes, and enhancing the documentation regarding conclusions reachedin the implementation of generally accepted accounting principles.

 

There was no change inthe Company’s internal control over financial reporting that occurred duringthe fiscal quarter ended June 30, 2005 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

The Company is a party toa number of lawsuits arising in the ordinary conduct of its business. Althoughthe timing and outcome of these lawsuits cannot be predicted with certainty,the Company 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.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Atthe Company’s Annual Meeting of Stockholders held on May 17, 2005, thestockholders elected the following nominees to the Board of Directors to servea three-year term. The votes cast were as follows:

 
| **Director**         | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|----------------------|------------|-------------|------------|--------------|------------|
| John D. Beckett      |       | 182,898,484 |       | 2,160,175    |       |
| Stephen M.  Humphrey |       | 183,002,121 |       | 2,056,538    |       |
| John R. Miller       |       | 182,866,063 |       | 2,192,596    |       |

 

Theterms of G. Andrea Botta, Harold R. Logan, Jr., Martin D. Walker, JeffreyH. Coors, Kevin J. Conway, and Robert W. Tieken continued after the AnnualMeeting of Stockholders. Mr. Martin D. Walker retired from the Board on June 30,2005.

 

Thestockholders also approved an amendment of the Riverwood Holding, Inc.Stock Incentive Plan to permit the extension of the terms of options grantedunder such plan in 1996 and 1997, to facilitate a cashless method of exercisingstock options and to change the definition of retirement under the plan.

 
| For:               |   | 168,991,310 |   |
|--------------------|--------|-------------|--------|
| Against:           |   | 9,435,293   |   |
| Abstain:           |   | 1,062,856   |   |
| Broker  Non-Votes: |   | 5,010,200   |   |

 

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**ITEM 6. EXHIBITS**

 

a)  Exhibit Index

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

 

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** **

**SIGNATURES**

 

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

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

 

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