**UNITEDSTATES**

**SECURITIESAND 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 September 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          |       | (I.R.S. employer    |
| incorporation or  organization)           |       | identification no.) |
|                                      |       |                |
| **814 Livingston Court**                  |       |                |
| **Marietta, Georgia**                     | ** ** | **30067**           |
| (Address of principal  executive offices) |       | (Zip Code)          |

 

**(770) 644-3000**

(Registrant’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.

Yesý  No o

 

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

Yes ý No o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o No ý

 

As of October 31, 2005, there were 198,659,288shares of the registrant’s Common Stock, par value $0.01 per share,outstanding.

 

 

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**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)**

 
| ** **                                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Cash and Equivalents                                                                                                                                                                                    |       | $                      | 9.0        |                  | $          | 7.3 |   |
| Receivables                                                                                                                                                                                             |       | 244.3                  |       | 214.9                 |       |
| Inventories                                                                                                                                                                                             |       | 300.6                  |       | 301.2                 |       |
| Prepaid Expenses                                                                                                                                                                                        |       | 24.6                   |       | 14.9                  |       |
| Total Current  Assets                                                                                                                                                                                   |       | 578.5                  |       | 538.3                 |       |
| Property, Plant and Equipment, Net of Accumulated  Depreciation of $1,203.1 and $1,078.7 at September 30, 2005 and December 31,  2004, respectively                                           |       | 1,575.4                |       | 1,649.0               |       |
| Goodwill                                                                                                                                                                                                |       | 643.2                  |       | 643.4                 |       |
| Intangible Assets, Net of Accumulated Amortization  of $74.1 and $65.1 at September 30, 2005 and December 31, 2004,  respectively                                                             |       | 159.4                  |       | 166.6                 |       |
| Other Assets                                                                                                                                                                                            |       | 108.8                  |       | 114.0                 |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| Total Assets                                                                                                                                                                                            |       | $                      | 3,065.3    |                  | $          | 3,111.3 |   |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  Liabilities:                                                                                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| Short-Term Debt                                                                                                                                                                                         |       | $                      | 17.7       |                  | $          | 14.2 |   |
| Accounts Payable and Other Accrued Liabilities                                                                                                                                                          |       | 365.8                  |       | 401.8                 |       |
| Total Current  Liabilities                                                                                                                                                                              |       | 383.5                  |       | 416.0                 |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| Long Term Debt,  Less Current Portion                                                                                                                                                                   |       | 2,022.4                |       | 2,011.0               |       |
| Other Noncurrent  Liabilities                                                                                                                                                                           |       | 307.9                  |       | 297.4                 |       |
|  Total  Liabilities                                                                                                                                                                                |       | 2,713.8                |       | 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; 198,658,004 and 198,586,108 shares issued and outstanding  at September 30, 2005 and December 31, 2004, respectively |       | 2.0                    |       | 2.0                   |       |
| Capital in  Excess of Par Value                                                                                                                                                                         |       | 1,169.5                |       | 1,169.2               |       |
| Unearned  Compensation                                                                                                                                                                                  |       | (0.1                   | )          | (0.4                  | )          |
| Accumulated  Deficit                                                                                                                                                                                    |       | (758.1                 | )          | (709.5                | )          |
| Minimum Pension  Liability Adjustment                                                                                                                                                                   |       | (65.2                  | )          | (65.2                 | )          |
| Accumulated  Derivative Instruments Gain (Loss)                                                                                                                                                         |       | 16.9                   |       | (9.0                  | )          |
| Cumulative  Currency Translation Adjustment                                                                                                                                                             |       | (13.5                  | )          | (0.2                  | )          |
| Total  Shareholders’ Equity                                                                                                                                                                        |       | 351.5                  |       | 386.9                 |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                                                        |       | $                      | 3,065.3    |                  | $          | 3,111.3 |   |

 

Theaccompanying notes are an integral part of the Condensed Consolidated FinancialStatements.

 

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                  | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Net Sales                                                                   |       | $                      | 605.4      |                   | $          | 617.2 |   | $ | 1,811.4 |   | $ | 1,799.4 |   |
| Cost of Sales                                                               |       | 506.8                  |       | 513.0                  |       | 1,559.8 |   | 1,508.1 |   |
| Selling, General  and Administrative                                        |       | 50.1                   |       | 48.6                   |       | 151.0 |   | 146.0 |   |
| Research,  Development and Engineering                                      |       | 2.3                    |       | 2.1                    |       | 7.8 |   | 6.9 |   |
| Other Expense,  Net                                                         |       | 2.1                    |       | 6.5                    |       | 12.8 |   | 28.0 |   |
| Income from  Operations                                                     |       | 44.1                   |       | 47.0                   |       | 80.0 |   | 110.4 |   |
| Interest Income                                                             |       | 0.1                    |       | 0.1                    |       | 0.4 |   | 0.3 |   |
| Interest Expense                                                            |       | (39.2                  | )          | (38.5                  | )          | (115.5 | ) | (112.6 | ) |
| Income (Loss) before Income Taxes and Equity in Net  Earnings of Affiliates |       | 5.0                    |       | 8.6                    |       | (35.1 | ) | (1.9 | ) |
| Income Tax  Expense                                                         |       | (4.8                   | )          | (8.4                   | )          | (14.5 | ) | (20.4 | ) |
| Equity in Net  Earnings of Affiliates                                       |       | 0.4                    |       | 0.5                    |       | 1.0 |   | 1.2 |   |
| Net Income  (Loss)                                                          |       | $                      | 0.6        |                   | $          | 0.7 |   | $ | (48.6 | ) | $ | (21.1 | ) |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Loss Per Share -  Basic                                                     |       | $                      | 0.00       |                   | $          | 0.00 |   | $ | (0.24 | ) | $ | (0.11 | ) |
| Loss Per Share -  Diluted                                                   |       | $                      | 0.00       |                   | $          | 0.00 |   | $ | (0.24 | ) | $ | (0.11 | ) |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Weighted Average Number of Shares Outstanding -  Basic                      |       | 198.7                  |       | 198.6                  |       | 198.6 |   | 198.5 |   |
| Weighted Average Number of Shares Outstanding -  Diluted                    |       | 202.4                  |       | 203.1                  |       | 198.6 |   | 198.5 |   |

 

Theaccompanying notes are an integral part of the Condensed Consolidated FinancialStatements.

 

4

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)**

**(Amounts in Millions)**

**(Unaudited)**

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income  (Loss)                                      |       | $                      | 0.6        |                   | $          | 0.7 |   | $ | (48.6 | ) | $ | (21.1 | ) |
| Other  Comprehensive Income (Loss):                     |       |                   |       |                   |       |   |   |   |   |
| Minimum Pension Liability Adjustment,  Net of Tax of $0 |       | —                 |       | —                 |       | — |   | 1.1 |   |
| Derivative Instruments Gain, Net of Tax of $0           |       | 13.8                   |       | 5.9                    |       | 25.9 |   | 11.7 |   |
| Currency Translation Adjustments, Net of Tax of $0      |       | (0.4                   | )          | 3.0                    |       | (13.3 | ) | (0.8 | ) |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Comprehensive  Income (Loss)                            |       | $                      | 14.0       |                   | $          | 9.6 |   | $ | (36.0 | ) | $ | (9.1 | ) |

 

Theaccompanying notes are an integral part of the Condensed Consolidated FinancialStatements.

 

5

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**GRAPHIC PACKAGING CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts in Millions)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                   |       |   |   |
| Net Loss                                                                           |       | $                      | (48.6      | ) | $ | (21.1 | ) |
| Noncash Items  Included in Net Loss:                                               |       |                   |       |   |   |
| Depreciation and Amortization                                                      |       | 155.2                  |       | 173.0 |   |
| Deferred Income Taxes                                                              |       | 14.1                   |       | 13.3 |   |
| Pension, Postemployment and Postretirement Benefits  Expense, Net of Contributions |       | 2.6                    |       | 17.9 |   |
| Equity in Net Earnings of Affiliates, Net of  Dividends                            |       | —                 |       | (0.2 | ) |
| Amortization of Deferred Debt Issuance Costs                                       |       | 6.1                    |       | 6.5 |   |
| Loss on Retirement of Assets                                                       |       | 3.3                    |       | 7.3 |   |
| Other, Net                                                                         |       | 0.9                    |       | (2.4 | ) |
| Changes in  Operating Assets & Liabilities:                               |       |                   |       |   |   |
| Receivables                                                                        |       | (31.1                  | )          | (35.3 | ) |
| Inventories                                                                        |       | (6.7                   | )          | 5.2 |   |
| Prepaid Expenses                                                                   |       | 0.9                    |       | 3.4 |   |
| Accounts Payable and Other Accrued Liabilities                                     |       | (27.2                  | )          | (24.0 | ) |
| Other Noncurrent Liabilities                                                       |       | 1.7                    |       | (2.1 | ) |
|                                                                               |       |                   |       |   |   |
| Net Cash  Provided by Operating Activities                                         |       | 71.2                   |       | 141.5 |   |
|                                                                               |       |                   |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                   |       |   |   |
| Purchases of  Property, Plant and Equipment                                        |       | (71.9                  | )          | (103.4 | ) |
| Proceeds from  Sale of Assets, Net of Selling Costs                                |       | 1.1                    |       | 11.8 |   |
| Change in Other  Assets                                                            |       | (15.1                  | )          | (11.4 | ) |
|                                                                               |       |                   |       |   |   |
| Net Cash Used in  Investing Activities                                             |       | (85.9                  | )          | (103.0 | ) |
|                                                                               |       |                   |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                   |       |   |   |
| Borrowing under  Revolving Credit Facilities                                       |       | 396.1                  |       | 452.7 |   |
| Payments on  Revolving Credit Facilities                                           |       | (379.4                 | )          | (473.5 | ) |
| Payments on Debt                                                                   |       | (0.9                   | )          | (9.9 | ) |
| Other                                                                              |       | 0.8                    |       | 0.4 |   |
| Net Cash  Provided by (Used in) Financing Activities                               |       | 16.6                   |       | (30.3 | ) |
| Effect of  Exchange Rate Changes on Cash                                           |       | (0.2                   | )          | 0.2 |   |
| Net Increase in  Cash and Equivalents                                              |       | 1.7                    |       | 8.4 |   |
| Cash and  Equivalents at Beginning of Period                                       |       | 7.3                    |       | 17.5 |   |
| Cash and  Equivalents at End of Period                                             |       | $                      | 9.0        |   | $ | 25.9 |   |

 

Theaccompanying notes are an integral part of the Condensed Consolidated FinancialStatements.

 

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 RiverwoodAcquisition Sub LLC as the surviving entity (the “Merger”). At the closing ofthe Merger, one share of common stock of Riverwood Holding was exchanged foreach share of common stock of Graphic Packaging International Corporation.Riverwood Acquisition Sub LLC then merged into Riverwood Holding, which wasrenamed Graphic Packaging Corporation. After the Merger, (1) RIC Holding, Inc.merged into Graphic Packaging Holdings, Inc., which was renamed GPIHolding, Inc. and (2) the corporation formerly known as 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 common stock. GraphicPackaging Corporation and GPI Holding, Inc. fully and unconditionallyguarantee substantially 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 equity compensation 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 forStock-Based Compensation—Transition and Disclosure—an Amendment of FASBStatement No. 123.”* If the Company had elected to recognizecompensation expense based upon the fair value at the grant dates for awardsunder these plans, the Company’s Net Income (Loss) would have been as follows:

 
| ** **                                                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Amounts in Millions, Except Per Share Amounts)**                                                              | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income  (Loss), As Reported                                                                                  |       | $                      | 0.6        |                   | $          | 0.7 |   | $ | (48.6 | ) | $ | (21.1 | ) |
|                                                                                                             |       |                   |       |                   |       |   |   |   |   |
| Add: Stock-Based Employee Compensation Expense  Included in Reported Net Income (Loss)                           |       | —                 |       | (0.2                   | )          | — |   | (0.5 | ) |
| Deduct: Total Stock-Based Employee Compensation  Expense Determined Under Fair Value Based Method for All Awards |       | (0.8                   | )          | (1.3                   | )          | (2.4 | ) | (8.1 | ) |
|                                                                                                             |       |                   |       |                   |       |   |   |   |   |
| Adjusted Net  Loss                                                                                               |       | $                      | (0.2       | )                      | $          | (0.8 | ) | $ | (51.0 | ) | $ | (29.7 | ) |
|                                                                                                             |       |                   |       |                   |       |   |   |   |   |
| Loss Per Basic  Share-As Reported                                                                                |       | $                      | 0.00       |                   | $          | 0.00 |   | $ | (0.24 | ) | $ | (0.11 | ) |
| Loss Per Basic  Share-As Adjusted                                                                                |       | $                      | 0.00       |                   | $          | 0.00 |   | $ | (0.26 | ) | $ | (0.15 | ) |
|                                                                                                             |       |                   |       |                   |       |   |   |   |   |
| Loss Per Diluted  Share-As Reported                                                                              |       | $                      | 0.00       |                   | $          | 0.00 |   | $ | (0.24 | ) | $ | (0.11 | ) |
| Loss Per Diluted  Share-As Adjusted                                                                              |       | $                      | 0.00       |                   | $          | 0.00 |   | $ | (0.26 | ) | $ | (0.15 | ) |

 

**NOTE 3 – 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 stockcompensation plans under SFAS No. 123, *“Accounting forStock-Based Compensation.”* The Company previously reported that itwill adopt SFAS No. 123R for the quarter ending September 30, 2005.On April 14, 2005, however, the Securities and Exchange Commission (“SEC”)deferred the required adoption date of SFAS No. 123R to the beginning ofthe first quarter of 2006, at which time the Company will adopt SFAS No. 123R.The Company does not believe that such adoption of SFAS No. 123R will havea significant impact on its financial position and results of operations.

 

8

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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 does not believe that 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.

 

**NOTE 4 – INVENTORIES**

 

Themajor classes of inventories were as follows:

 
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions)** | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Finished goods            |       | $                      | 162.1      |                  | $          | 166.9 |   |
| Work in progress          |       | 20.4                   |       | 14.9                  |       |
| Raw materials             |       | 74.1                   |       | 76.2                  |       |
| Supplies                  |       | 44.0                   |       | 43.2                  |       |
| Total                     |       | $                      | 300.6      |                  | $          | 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.

 

9

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**NOTE 5 – 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, including theU.S. Environmental Protection Agency’s (“EPA”) regulations mandating stringentcontrols on air and water discharges from pulp and paper mills (referred toherein as the “cluster rules”). 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,contingent environmental liabilities related to past, present and futureoperations as additional information related to its environmental liabilitiesis 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 6 — 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** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET SALES:                      |       |                   |       |                   |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 585.9      |                   | $          | 590.7 |   | $ | 1,745.2 |   | $ | 1,731.9 |   |
| Containerboard/Other            |       | 19.5                   |       | 26.5                   |       | 66.2 |   | 67.5 |   |
| Total                           |       | $                      | 605.4      |                   | $          | 617.2 |   | $ | 1,811.4 |   | $ | 1,799.4 |   |
|                            |       |                   |       |                   |       |   |   |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                   |       |                   |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 64.7       |                   | $          | 67.0 |   | $ | 137.3 |   | $ | 185.3 |   |
| Containerboard/Other            |       | (3.9                   | )          | (3.7                   | )          | (12.0 | ) | (19.2 | ) |
| Corporate                       |       | (16.7                  | )          | (16.3                  | )          | (45.3 | ) | (55.7 | ) |
| Total                           |       | $                      | 44.1       |                   | $          | 47.0 |   | $ | 80.0 |   | $ | 110.4 |   |

 

10

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**NOTE 7 – 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 to interest,currency and commodity risks. The Company does not trade or use derivativeinstruments with the objective of earning financial gains on interest rates, currencyrates or commodity pricing, nor does it use leveraged instruments orinstruments 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 September 30, 2005, the Company had interest rate swapagreements with a notional amount of $880 million, which expire on variousdates from 2005 to 2008 and under which the Company will pay fixed rates of 2.31%to 4.53% and receive three-month LIBOR.

 

During the nine monthsended September 30, 2005, there was no ineffective portion related tochanges in the fair value of the interest rate swap agreements. Additionally,there were no amounts excluded from the measure of effectiveness.

 

During the nine monthsended September 30, 2004, there was $2.4 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 March 2006. 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).When a contract matures, the resulting gain or loss is reclassified into Costof Sales concurrently with the recognition of the commodity purchased. Theineffective portion of the swap contracts change in fair value, if any, wouldbe recognized immediately in earnings. During the nine months ended September 30,2005, there was $1.1 million of ineffective portion related to changes in fairvalue of natural gas swap contracts. Additionally, there were no amountsexcluded from the measure of effectiveness. At September 30, 2004, therewas no ineffective portion related to changes in fair value of natural gas swapcontracts.

 

*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 September 30,2005 and December 31, 2004, multiple forward exchange contracts existedthat expire on various dates throughout 2005. Those purchased forward exchangecontracts outstanding at September 30, 2005, when measured in U.S. dollarsat September 30, 2005 exchange rates, had notional amounts totaling $164.0million. Those purchased forward exchange contracts outstanding at December 31,2004, when measured in U.S. dollars at December 31, 2004 exchange rates,had notional amounts totaling $154.8 million.

 

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

 

11

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*Derivativesnot Designated as Hedges*

 

The Company enters intoforward exchange contracts to effectively hedge a portion of accountsreceivable resulting from transactions denominated in foreign currencies inorder to manage risks associated with foreign currency transactions adverselyaffected by changes in exchange rates. At September 30, 2005 and December 31,2004, multiple foreign currency forward exchange contracts existed, withmaturities ranging up to three and six months, respectively. Those forwardcurrency exchange contracts outstanding at September 30, 2005, whenaggregated and measured in U.S. dollars at September 30, 2005 exchangerates, had net notional amounts totaling $3.7 million. Those forward currencyexchange contracts outstanding at December 31, 2004, when aggregated andmeasured in U.S. dollars at December 31, 2004 exchange rates, had netnotional amounts 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 a reconciliationof changes in the fair value of the interest rate swap agreements, foreigncurrency forward contracts and natural gas swap agreements which have beenrecorded as Accumulated Derivative Instruments Gain (Loss) in the accompanying CondensedConsolidated Balance Sheet at September 30, 2005 and at September 30,2004, and as Derivative Instruments Gain in the accompanying Condensed ConsolidatedStatements of Comprehensive Income (Loss) for the nine months ended September 30,2005 and 2004.

 
| **(Amounts in millions)**            | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1            |       | $        | (9.0       | )        | $          | (12.7 | ) |
| Reclassification  to earnings        |       | (0.1     | )          | (6.6     | )          |
| Current period  change in fair value |       | 26.0     |       | 18.3     |       |
| Balance at September 30         |       | $        | 16.9       |     | $          | (1.0 | ) |

 

The balance recorded inAccumulated Derivative Instruments Gain (Loss) at September 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.

 

12

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**Note 8 –PENSIONS AND OTHER POSTRETIREMENT BENEFITS**

 

**U.S.PENSION PLANS**

 

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** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                    |       | $                      | 3.5        |                   | $          | 3.7 |   | $ | 10.9 |   | $ | 10.6 |   |
| Interest Cost                   |       | 7.5                    |       | 7.4                    |       | 23.1 |   | 21.7 |   |
| Expected Return  on Plan Assets |       | (7.9                   | )          | (8.2                   | )          | (23.1 | ) | (22.0 | ) |
| Amortizations:                  |       |                   |       |                   |       |   |   |   |   |
| Prior Service Cost              |       | 0.8                    |       | 1.0                    |       | 1.9 |   | 1.9 |   |
| Actuarial Loss                  |       | 0.8                    |       | —                 |       | 2.5 |   | 1.8 |   |
|                            |       |                   |       |                   |       |   |   |   |   |
| Net Periodic  Pension Cost      |       | $                      | 4.7        |                   | $          | 3.9 |   | $ | 15.3 |   | $ | 14.0 |   |

 

The Company made contributionsof $16.9 million and nil to its U.S. pension plans during the first nine monthsof 2005 and 2004, respectively. The Company expects to make total contributionsof $17.4 million for the full year 2005.

 

**INTERNATIONALPENSION PLANS**

 

The Company maintains international defined benefitpension plans that are both noncontributory and contributory and are funded inaccordance with applicable local laws. The pension or termination benefits arebased primarily on years of service and the employees’ compensation.

 

The pension expense relatedto the international plans consisted of the following:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                    |       | $                      | 0.5        |                   | $          | — |   | $ | 0.6 |   | $ | 0.1 |   |
| Interest Cost                   |       | 1.6                    |       | 1.6                    |       | 4.8 |   | 4.7 |   |
| Expected Return  on Plan Assets |       | (1.8                   | )          | (1.5                   | )          | (5.4 | ) | (4.5 | ) |
| Amortizations:                  |       |                   |       |                   |       |   |   |   |   |
| Actuarial Loss                  |       | 0.2                    |       | 0.2                    |       | 0.5 |   | 0.6 |   |
|                            |       |                   |       |                   |       |   |   |   |   |
| Net Periodic  Pension Cost      |       | $                      | 0.5        |                   | $          | 0.3 |   | $ | 0.5 |   | $ | 0.9 |   |

 

The Company madecontributions of $0.9 million and $1.1 million to its international pensionplans during the first nine months of 2005 and 2004, respectively. The Companyexpects to make total contributions of $1.4 million for the full year 2005.

 

13

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**OTHERPOSTRETIREMENT BENEFITS**

 

The Company sponsorspostretirement health care plans that provide medical and life insurancecoverage to certain eligible salaried and hourly retired U.S. employees andtheir dependents. 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** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Amounts in Millions)**                  | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                               |       | $                      | 0.3        |                   | $          | 0.3 |   | $ | 0.8 |   | $ | 0.7 |   |
| Interest Cost                              |       | 0.8                    |       | 1.2                    |       | 2.3 |   | 2.7 |   |
| Amortizations:                             |       |                   |       |                   |       |   |   |   |   |
| Prior Service Cost                         |       | —                 |       | —                 |       | — |   | (0.1 | ) |
| Actuarial Loss                             |       | 0.2                    |       | —                 |       | 0.6 |   | 0.2 |   |
|                                       |       |                   |       |                   |       |   |   |   |   |
| Net Periodic  Postretirement Benefits Cost |       | $                      | 1.3        |                   | $          | 1.5 |   | $ | 3.7 |   | $ | 3.5 |   |

 

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 has not and is notexpected to have a significant impact on the Company’s financial position andresults of operations.

 

The Company made benefit payments of $2.5 million duringthe first nine months of 2005 and 2004. The Company estimates itspostretirement benefit payments for the full year 2005 to be $3.6 million.

 

14

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**Note 9 –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 nine months ended September 30, 2005and 2004 are as follows:

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

 

The initial purchaseprice allocation associated with the Merger of $7.2 million for restructuring recordedat March 31, 2004 was reduced by $0.9 million in the second quarter of2004 primarily for facility restoration and carrying costs as a building wassold sooner than anticipated. Through September 30, 2005, the Company hasmade payments for severance and other employee termination-related charges inthe amount of $1.8 million and for equipment removal and facilities restorationin the amount of $1.2 million, both of which reduced the initial reservedetailed above. The Company anticipates the majority of cash payments to bemade under the restructuring plan will occur in the fourth quarter of 2005. Therestructuring activities described herein are expected to be completed by theend of 2005 and affect only the paperboard packaging segment. As of September 30,2005, the Company had $3.3 million accrued for restructuring, as follows:

 
| ** **                                                             | ** ** | ** **            | ** ** | **Adjustments**        | ** ** | ** **   | ** ** | ** **     | ** ** | ** **   | ** ** | ** **              | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|--------------|------------|----------------|------------|--------------|------------|-------------------------|------------|
| ** **                                                             | ** ** | **Balance at**        | ** ** | **(Statement of**      | ** ** | **Purchase** | ** ** | ** **     | ** ** | ** **   | ** ** | **Balance at**          | ** ** |
| ** **                                                             | ** ** | **December 31,** | ** ** | **Operations Impact)** | ** ** | **Price**    | ** ** | **Cash**       | ** ** | ** **   | ** ** | **September  30,** | ** ** |
| **(Amounts in Millions)**                                              | ** ** | **2004**              | ** ** | **Expense**            | ** ** | **Reversal** | ** ** | **Allocation** | ** ** | **Payments** | ** ** | **Reclassification**    | ** ** | **2005** | ** ** |
| Equipment Removal Costs                                                |       | $                     | 0.8        |                   | $          | —       |       | $              | —     |         | $          | —                  |       | $ | (0.5 | ) | $ | — |   | $ | 0.3 |   |
| Facility Restoration and  Carrying Costs                               |       | 0.6                   |       | —                 |       | —       |       | —         |       | —       |       | —                  |       | 0.6 |   |
| Severance of Employees and  Other Employee Termination-Related Charges |       | 3.1                   |       | —                 |       | —       |       | —         |       | (0.7         | )          | —                  |       | 2.4 |   |
| Total                                                                  |       | $                     | 4.5        |                   | $          | —       |       | $              | —     |         | $          | —                  |       | $ | (1.2 | ) | $ | — |   | $ | 3.3 |   |

 

15

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

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

 

**Note 10 – DEBT**

 

At September 30,2005 and December 31, 2004, Long-Term Debt consisted of the following:

 
| ** **                                                                                                                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions)**                                                                                                                                                                | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Senior Notes with interest payable semi-annually at  8.5%, payable in 2011                                                                                                               |       | $                      | 425.0      |                  | $          | 425.0 |   |
| Senior Subordinated Notes with interest payable  semi-annually at 9.5%, payable in 2013                                                                                                  |       | 425.0                  |       | 425.0                 |       |
| Senior Secured Term Loan Facility with interest  payable at various dates at floating rates (6.04% at September 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 (7.97% at September 30, 2005) payable in 2009                                           |       | 17.9                   |       | —                |       |
| Other                                                                                                                                                                                    |       | 3.7                    |       | 3.8                   |       |
|                                                                                                                                                                                     |       | 2,029.6                |       | 2,011.8               |       |
| Less, current portion                                                                                                                                                                    |       | 7.2                    |       | 0.8                   |       |
| Total                                                                                                                                                                                    |       | $                      | 2,022.4    |                  | $          | 2,011.0 |   |

 

Principal and interest payments under the Term LoanFacility and the Revolving Credit Facility, together with principal andinterest payments on the Senior Notes and the Senior Subordinated Notes,represent significant liquidity requirements for the Company. Based uponcurrent levels of operations, anticipated cost-savings and expectations as tofuture growth, the Company believes that cash generated from operations, togetherwith amounts available under its Revolving Credit Facility and other availablefinancing sources, will be adequate to permit the Company to meet its debtservice obligations, necessary 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 overall businessand profitability strategies.

 

The Senior Secured Credit Agreement, which governs theTerm Loan Facility and the Revolving Credit Facility, is collateralized bysubstantially all of the Company’s domestic assets and imposes restrictions onthe Company’s ability to make capital expenditures, and both the Senior SecuredCredit Agreement and the indentures governing the Senior Notes and SeniorSubordinated Notes (the “Notes”) limit the Company’s ability to incuradditional indebtedness. Such restrictions, together with the highly leveragednature of the Company, could limit the Company’s ability to respond to market conditions,meet its capital spending program, provide for unanticipated capitalinvestments or take advantage of business opportunities. The covenantscontained in the Senior Secured Credit Agreement, among other things, restrictthe ability of the Company to dispose of assets, incur additional indebtedness,incur guarantee obligations, prepay other indebtedness, make dividend and otherrestricted payments, create

 

16

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liens, make equity or debt investments, makeacquisitions, modify the terms of indentures under which the Notes are issued,engage in mergers or consolidations, change the business conducted by theCompany and its subsidiaries, make capital expenditures and engage in certaintransactions with affiliates. As of September 30, 2005, the Company was incompliance with the financial covenants in the Senior Secured Credit Agreement.

 

17

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**Note 11 – SUBSEQUENT EVENT**

 

On October 17,2005, Graphic Packaging International, a wholly-owned subsidiary of theCompany, entered into the Second Amendment (the “Second Amendment”) to the $1.6billion Senior Secured Credit Agreement dated August 8, 2003 among GraphicPackaging International and the several lenders from time to time partiesthereto (the “Original Credit Agreement”). As a result, the Companyincurred fees and transaction costs of approximately $4 million.

 

The SecondAmendment relaxed the Consolidated Debt to Credit Agreement EBITDA LeverageRatio covenant and the Credit Agreement EBITDA to Consolidated Interest ExpenseRatio covenant as shown below beginning with the covenant requirements for September 30,2005.

 
| ** **                         | ** ** | **Consolidated Debt to Credit  Agreement EBITDA Leverage  Ratio (A)** | ** ** | **Credit Agreement EBITDA to  Consolidated Interest Expense  Ratio (A)** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Four Fiscal Quarters Ending**    | ** ** | **Previous**                                                          | ** ** | **As Amended**                                                           | ** ** | **Previous** | ** ** | **As Amended** | ** ** |
| 2005                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| September 30, 2005            |       | 6.15 to 1.00                                                          |       | 6.75 to 1.00                                                             |       | 2.25 to 1.00 |   | 1.75 to 1.00 |   |
| December 31, 2005             |       | 5.75 to 1.00                                                          |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
|                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| 2006                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| March 31, 2006                |       | 5.75 to 1.00                                                          |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
| June 30, 2006                 |       | 5.75 to 1.00                                                          |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
| September 30, 2006            |       | 5.75 to 1.00                                                          |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
| December 31, 2006             |       | 5.25 to 1.00                                                          |       | 6.75 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
|                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| 2007                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| March 31, 2007                |       | 5.25 to 1.00                                                          |       | 6.50 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
| June 30, 2007                 |       | 5.25 to 1.00                                                          |       | 6.50 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
| September 30, 2007            |       | 5.25 to 1.00                                                          |       | 6.50 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
| December 31, 2007             |       | 4.75 to 1.00                                                          |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
|                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| 2008                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| March 31, 2008                |       | 4.75 to 1.00                                                          |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
| June 30, 2008                 |       | 4.75 to 1.00                                                          |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
| September 30, 2008            |       | 4.75 to 1.00                                                          |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
| December 31, 2008             |       | 4.50 to 1.00                                                          |       | 5.50 to 1.00                                                             |       | 2.90 to 1.00 |   | 2.00 to 1.00 |   |
|                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| 2009                               |       |                                                                  |       |                                                                     |       |   |   |   |   |
| March 31, 2009 and thereafter |       | 4.50 to 1.00                                                          |       | 4.50 to 1.00                                                             |       | 2.90 to 1.00 |   | 2.90 to 1.00 |   |

 

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Note:

(A)  Credit Agreement EBITDA is calculated inaccordance with the definitions contained in the Company’s Senior SecuredCredit Agreement. Credit Agreement EBITDA is defined as consolidated net incomebefore consolidated interest expense, non-cash expenses and charges, totalincome tax expense, depreciation expense, expense associated with amortizationof intangibles and other assets, non-cash provisions for reserves fordiscontinued operations, extraordinary, unusual or non-recurring gains orlosses or charges or credits, gain or loss associated with sale or write-downof assets not in the ordinary course of business, and any income or lossaccounted for by the equity method of accounting.

 

In addition to thechanges to the financial covenants described above, the Second Amendmentmodifies the pricing for the Senior Secured Term Loan Facility by increasingthe applicable margin by .25% if, and for so long as, Graphic PackagingInternational’s indebtedness under the Senior Secured Credit Agreement is ratedless than B+ by Standard & Poor’s Ratings Group (a division of TheMcGraw Hill Companies Inc.) or less than B1 by Moody’s Investors Service, Inc.

 

If the negative impact of inflationary pressures onkey inputs continues, or depressed selling prices, lower sales volumes, increasedoperating costs or other factors have a negative impact on the Company’sability to increase its profitability, the Company may not be able to maintainits compliance with the financial covenants in its Senior Secured CreditAgreement, as amended. The Company’s ability to comply in future periods withthe financial covenants in the Senior Secured Credit Agreement will depend onits ongoing financial and operating performance, which in turn will be subjectto economic conditions and to financial, business and other factors, many ofwhich are beyond the Company’s control and will be substantially dependent onthe selling prices for the Company’s products, raw material and energy costs,and the Company’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,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.

 

18

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

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

** **

*Certain statements of Graphic Packaging Corporation’sexpectations, including, but not limited to, statements regarding the timing ofand expenses related to restructuring activities, pension contributions andbenefit payments, cost savings from restructuring activities and merger synergies,capital expenditures, the impact of inflation on energy, chemical and fibercosts, the outcome of litigation and environmental proceedings and thereduction of debt in this report constitute “forward-looking statements” asdefined in the Private Securities Litigation Reform Act of 1995. Suchstatements are based on currently available operating, financial andcompetitive information and are subject to various risks and uncertainties thatcould cause actual results to differ materially from the Company’s historicalexperience and its present expectations. These risks and uncertainties include,but are not limited to, inflation of and volatility in raw materials and energycosts, the Company’s ability to implement its business strategies, the Company’ssubstantial amount of debt, continuing pressure for lower cost products andresulting depressed selling prices, lower sales volumes, rising labor and otheroperating costs, the Company’s ability to pass these increased costs on to itscustomers, unfavorable currency translation movements and other risks ofconducting business internationally, and the impact of regulatory andlitigation matters, including those that impact the Company’s ability toprotect and use its intellectual property. Undue reliance should not be placedon such forward-looking statements, as such statements speak only as of thedate on which they are made and the Company undertakes no obligation to updatesuch statements. Additional information regarding these and other risks iscontained in 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.

 

**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.

 

*Impact ofInflation.* The Company’s cost of sales consists primarily ofenergy (including natural gas, fuel oil and electricity), pine pulpwood,hardwood, chemicals, recycled fibers, purchased paperboard, paper, aluminumfoil, ink, plastic films and resins, depreciation expense and labor. TheCompany continues to be negatively impacted by inflationary pressures whichincreased costs $74.1 million compared to the first nine months of 2004 and areprimarily related to fiber, outside board purchases and corrugated shippingcontainers ($19.5 million); chemical based inputs ($18.9 million); energy($12.6 million); labor and related benefits ($11.8 million); freight ($7.0million); and other ($4.3 million). The Company has entered into contractsdesigned to mitigate the impact of future cost increases for a significantportion of its natural gas requirements, primarily at its U.S. mills, through March 2006.The Company will continue to evaluate its position regarding natural gaspurchase commitments. The Company believes that inflationary pressures willnegatively impact its results for 2005 and2006. Since negotiated contracts and the market largely determine thepricing for its products, the Company is limited in its ability to pass throughto its customers any inflationary or other cost increases that the Company mayincur in the future. Additionally, the Company’s sales contracts often limitits timing and ability to raise prices, further exacerbating the inflationaryproblems.

 

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*Substantial Debt Obligations*. TheCompany has approximately $2,040 million of outstanding debt obligations as of September 30,2005. This debt can have significant consequences for the Company, as itrequires significant portion of cash flow from operations to be used for thepayment of principal and interest, exposes the Company to the risk of increasedinterest rates, restricts the Company’s ability to obtain additional financingand limits the Company’s flexibility to respond to changing market conditionsand competitive pressures. Covenants in the Company’s Senior Secured CreditAgreement 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 of transactions.The covenants also require compliance with certain financial ratios. TheCompany’s ability to comply in future periods with the financial covenants willdepend on its ongoing financial and operating performance, which in turn willbe subject to many other factors, many of which are beyond the Company’scontrol. See “-Liquidity and Capital Resources” and “-Covenant Restrictions”for additional information regarding the Company’s debt obligations.

 

*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 continuousimprovement initiative that uses statistical process control to help design andmanage many types of activities, including production and maintenance. Thisincludes a Six Sigma process focused on reducing variable and fixedmanufacturing and administrative costs. During the first nine months of 2005,the Company achieved approximately $21 million in net cost savings through itscontinuous improvement programs and 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 nine 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 $71 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 $28 million over the 2004 to 2006 period. The Company has spentapproximately $26 million of the projected expenditures through September 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.

 

*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 other manufacturers’coated unbleached kraft paperboard, or CUK board, and other substrates — solidbleached sulfate, or SBS, recycled clay coated news, or CCN, and,internationally, white lined chipboard, or WLC — as well as by general marketconditions. 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.

 

20

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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 nine months of 2005 decreased approximately 26%compared to the first nine 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 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.

 

**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 3 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** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(Amounts in Millions)**       | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET SALES:                      |       |                   |       |                   |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 585.9      |                   | $          | 590.7 |   | $ | 1,745.2 |   | $ | 1,731.9 |   |
| Containerboard/Other            |       | 19.5                   |       | 26.5                   |       | 66.2 |   | 67.5 |   |
| Total                           |       | $                      | 605.4      |                   | $          | 617.2 |   | $ | 1,811.4 |   | $ | 1,799.4 |   |
|                            |       |                   |       |                   |       |   |   |   |   |
| INCOME (LOSS)  FROM OPERATIONS: |       |                   |       |                   |       |   |   |   |   |
| Paperboard  Packaging           |       | $                      | 64.7       |                   | $          | 67.0 |   | $ | 137.3 |   | $ | 185.3 |   |
| Containerboard/Other            |       | (3.9                   | )          | (3.7                   | )          | (12.0 | ) | (19.2 | ) |
| Corporate                       |       | (16.7                  | )          | (16.3                  | )          | (45.3 | ) | (55.7 | ) |
| Total                           |       | $                      | 44.1       |                   | $          | 47.0 |   | $ | 80.0 |   | $ | 110.4 |   |

 

21

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**RESULTS OF OPERATIONS**

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | ** **             | ** ** | **Increase**          | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **             | ** ** | **(Decrease)**        | ** ** | ** ** | ** ** | ** ** | ** ** | **(Decrease)** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **September**          | ** ** | **From**              | ** ** | **September** | ** ** | **September** | ** ** | **From** | ** ** | **September** | ** ** |
| ** **                            | ** ** | **30,**                | ** ** | **Prior**             | ** ** | **30,** | ** ** | **30,** | ** ** | **Prior** | ** ** | **30,** | ** ** |
| **(Amounts in Millions)**             | ** ** | **2005**               | ** ** | **Period**            | ** ** | **2004** | ** ** | **2005** | ** ** | **Period** | ** ** | **2004** | ** ** |
| Net Sales                             |       | $                      | 605.4      |                  | (1.9       | )% | $ | 617.2 |   | $ | 1,811.4 |   | 0.7 | % | $ | 1,799.4 |   |
| Cost of Sales                         |       | 506.8                  |       | (1.2                  | )%         | 513.0 |   | 1,559.8 |   | 3.4 | % | 1,508.1 |   |
| Gross Profit                          |       | 98.6                   |       | (5.4                  | )%         | 104.2 |   | 251.6 |   | (13.6 | )% | 291.3 |   |
| Selling, General and Administrative   |       | 50.1                   |       | 3.1                   | %          | 48.6 |   | 151.0 |   | 3.4 | % | 146.0 |   |
| Research, Development and Engineering |       | 2.3                    |       | 9.5                   | %          | 2.1 |   | 7.8 |   | 13.0 | % | 6.9 |   |
| Other Expense, Net                    |       | 2.1                    |       | (67.7                 | )%         | 6.5 |   | 12.8 |   | (54.3 | )% | 28.0 |   |
| Income from Operations                |       | $                      | 44.1       |                  | (6.2       | )% | $ | 47.0 |   | $ | 80.0 |   | (27.5 | )% | $ | 110.4 |   |

 

**THIRD QUARTER 2005 COMPARED WITH THIRD QUARTER 2004**

 

**Net Sales**

 

The Company’s Net Sales in the third quarter of 2005 decreasedby $11.8 million, or 1.9%, to $605.4 million from $617.2 million in the thirdquarter of 2004 due primarily to a 3.8% decline in beverage carton sales withinNorth America as a result of lower pricing and soft market demand, particularlyfor beer cartons; lower volumes in international food and consumer productmarkets; and lower North American open market rollstock sales andcontainerboard sales, a portion of these reductions is due to utilizing morerollstock internally, and producing coated board in place of containerboardtons. These decreases were somewhat offset by a 6.1% increase in North Americanfood and consumer product carton sales as a result of higher volumes and increasedpricing.

 

**GrossProfit**

** **

The Company’s Gross Profit in the third quarter of2005 decreased by $5.6 million, or 5.4%, to $98.6 million from $104.2 millionin the third quarter of 2004. The Company’s gross profit margin decreased to 16.3%in the third quarter of 2005 from 16.9% in the third quarter of 2004. Thedecrease 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 the 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, lower depreciation expense and improved pricing asdiscussed above.

 

**Selling,General and Administrative**

** **

Selling, General andAdministrative expenses increased by $1.5 million, or 3.1%, to $50.1 million inthe third quarter of 2005 from $48.6 million in the third quarter of 2004, dueprimarily to higher consulting fees and labor and related benefit costs somewhatoffset by lower incentive compensation expenses. As a percentage of Net Sales,Selling, General and Administrative expenses were 8.3% in the third quarter of 2005versus 7.9% in the third quarter of 2004.

 

**Research,Development and Engineering**

** **

Research, Developmentand Engineering expenses increased by $0.2 million, or 9.5%, to $2.3 million inthe third quarter of 2005 from $2.1 million in the third quarter of 2004, dueto higher investment related to the Company’s products and packaging machinery.

 

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**OtherExpense, Net**

** **

Other Expense, Net decreasedby $4.4 million, or 67.7%, to $2.1 million in the third quarter of 2005 from $6.5million in the third quarter of 2004. This change was principally due to loweramortization expense of Merger related intangibles of $3.9 million.

 

**Incomefrom Operations**

** **

Primarily as a result ofthe factors discussed above, the Company’s Income from Operations in the thirdquarter of 2005 decreased by $2.9 million, or 6.2%, to $44.1 million from $47.0million in the third quarter of 2004, while its operating margin decreased to 7.3%in the third quarter of 2005 from 7.6% in the third quarter of 2004.

 

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

** **

Fluctuations in U.S.dollar currency exchange rates had a minimal impact on Net Sales, Gross Profit,Income from Operations, and operating expenses during the third quarter of 2005.

 

**FIRST NINEMONTHS 2005 COMPARED WITH FIRST NINE MONTHS 2004**

 

**Net Sales**

 

The Company’s Net Sales in the first nine months of2005 increased by $12.0 million, or 0.7%, to $1,811.4 million from $1,799.4million in the first nine months of 2004 due primarily to a 6.4% 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 $9.2 million. These increases were somewhat offset by lower volumes inNorth American open market rollstock sales and lower volumes in internationalfood and consumer product markets as well as lower pricing in North American beveragecarton markets as a result of increased market competitiveness.

 

**GrossProfit**

** **

The Company’s Gross Profit in the first nine months of2005 decreased by $39.7 million, or 13.6%, to $251.6 million from $291.3 millionin the first nine months of 2004. The Company’s gross profit margin decreasedto 13.9% in the first nine months of 2005 from 16.2% in the first nine monthsof 2004. The decrease in gross profit margin was due primarily to inflationarypressures primarily on chemical based inputs, fiber, outside board purchasesand corrugated shipping containers, energy, labor and related benefits andfreight; and the lower pricing in North American beverage carton markets as aresult of increased market competitiveness. The decrease in gross profit marginwas somewhat offset by worldwide cost reductions resulting from the Company’scost reduction initiatives and improved pricing as discussed above.

 

**Selling,General and Administrative**

** **

Selling, General andAdministrative expenses increased by $5.0 million, or 3.4%, to $151.0 millionin the first nine months of 2005 from $146.0 million in the first nine monthsof 2004, due primarily to higher consulting fees including those associatedwith Sarbanes-Oxley compliance efforts and labor and related benefit costs, somewhatoffset by lower incentive compensation and depreciation expense. As apercentage of Net Sales, Selling, General and Administrative expenses were 8.3%in the first nine months of 2005 versus 8.1% in the first nine months of 2004.

 

**Research,Development and Engineering**

** **

Research, Developmentand Engineering expenses increased by $0.9 million, or 13.0%, to $7.8 millionin the first nine months of 2005 from $6.9 million in the first nine months of2004, due to higher investment related to the Company’s products and packagingmachinery.

 

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**OtherExpense, Net**

** **

Other Expense, Netdecreased by $15.2 million, or 54.3%, to $12.8 million in the first nine monthsof 2005 from $28.0 million in the first nine months of 2004. This change wasprincipally due to lower amortization expense of Merger related intangibles of$14.8 million.

 

**Income from Operations**

 

Primarily as a result ofthe factors discussed above, the Company’s Income from Operations in the first ninemonths of 2005 decreased by $30.4 million, or 27.5%, to $80.0 million from $110.4million in the first nine months of 2004, while its operating margin decreasedto 4.4% in the first nine months of 2005 from 6.1% in the first nine months of2004.

 

**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 favorable impact of $9.2million on Net Sales, while there was a modest impact on Gross Profit, Incomefrom Operations, and operating expenses during the first nine months of 2005.

 

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

 

**InterestIncome**

 

Interest Income was $0.4million in the first nine months of 2005 and $0.3 million in the first ninemonths of 2004.

 

**InterestExpense**

 

Interest Expense increasedby $2.9 million to $115.5 million in the first nine months of 2005 from $112.6million in the first nine months of 2004, due to the Company’s unhedged floatingrate debt being tied to increasing market interest rates. The increase wassomewhat offset by lower average debt balances in 2005 and a 25 basis pointsreduction in interest charged during the first nine months of 2005 on the TermLoan Facility as a result of the October 1, 2004 amendment to the Company’sSenior Secured Credit Agreement.

 

**IncomeTax Expense**

 

During the first nine months of 2005, the Companyrecognized an Income Tax Expense of $14.5 million on Loss before Income Taxesand Equity in Net Earnings of Affiliates of $35.1 million. During the first ninemonths of 2004, the Company recognized an Income Tax Expense of $20.4 millionon Loss before Income Taxes and Equity in Net Earnings of Affiliates of $1.9million. Income Tax Expense for the first nine months of 2005 and 2004 wasprimarily due to the amortization of goodwill for tax purposes, income earnedin certain foreign countries, and tax withholding in foreign jurisdictions.

 

**Equity inNet Earnings of Affiliates**

 

Equity in Net Earnings ofAffiliates was $1.0 million in the first nine months of 2005 and $1.2 millionin the first nine months of 2004 and related to the Company’s equity investmentin the 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.

 

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**CashFlows**

** **

Cash and Equivalents increased by $1.7 million in thefirst nine months of 2005. Cash provided by operating activities in the first ninemonths of 2005 totaled $71.2 million, compared to $141.5 million in the first ninemonths of 2004. This was principally due to lower operating income as well as $17.8million of cash contributions made to fund the Company’s pension plans and unfavorablechanges in operating assets and liabilities, primarily inventories. Cash usedin investing activities in the first nine months of 2005 totaled $85.9 million,compared to $103.0 million in 2004. This change was principally due to lowerpurchases of property, plant and equipment of $31.5 million (see “-CapitalExpenditures”) somewhat offset by lower proceeds from the sale of assets. Cash providedby financing activities in 2005 totaled $16.6 million, compared to cash used infinancing activities of $30.3 million in 2004. This change was principally dueto higher net borrowings under the Company’s revolving credit facilities aswell as lower debt payments. Depreciation and amortization during the first ninemonths of 2005 totaled $155.2 million and is expected to be between approximately$200 million and $210 million for the full year 2005.

 

**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 September 30,2005 and December 31, 2004, Long-Term Debt consisted of the following:

 
| ** **                                                                                                                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in Millions)**                                                                                                                                                                | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Senior Notes with interest payable semi-annually at  8.5%, payable in 2011                                                                                                               |       | $                      | 425.0      |                  | $          | 425.0 |   |
| Senior Subordinated Notes with interest payable  semi-annually at 9.5%, payable in 2013                                                                                                  |       | 425.0                  |       | 425.0                 |       |
| Senior Secured Term Loan Facility with interest  payable at various dates at floating rates (6.04% at September 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 (7.97% at September 30, 2005) payable in 2009                                           |       | 17.9                   |       | —                |       |
| Other                                                                                                                                                                                    |       | 3.7                    |       | 3.8                   |       |
|                                                                                                                                                                                     |       | 2,029.6                |       | 2,011.8               |       |
| Less, current  portion                                                                                                                                                                   |       | 7.2                    |       | 0.8                   |       |
| Total                                                                                                                                                                                    |       | $                      | 2,022.4    |                  | $          | 2,011.0 |   |

 

Total debt increasedduring the first nine months of 2005 from 2004 fiscal year end. This increaseis a result of seasonal factors and the negative impact of inflationarypressures. The Senior Notes are rated B- by Standard & Poor’s and B2by Moody’s Investor Services. During the first nine months of 2005, cash paidfor interest was approximately $128 million.

 

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

 
| ** **                 | ** ** | **Total Amount of** | ** ** | **Total Amount** | ** ** | **Total Amount**  | ** ** |
|----------------------------|------------|---------------------|------------|------------------|------------|-------------------|------------|
| **(Amounts in Millions)**  | ** ** | **Commitments**     | ** ** | **Outstanding**  | ** ** | **Available (A)** | ** ** |
| Revolving Credit  Facility |       | $                   | 325.0      |             | $          | 17.9              |       | $ | 293.2 |   |
| International  Facilities  |       | 21.2                |       | 9.9              |       | 11.3              |       |
| Total                      |       | $                   | 346.2      |             | $          | 27.8              |       | $ | 304.5 |   |

 

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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 September 30, 2005. These letters ofcredit are 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.

 

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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, necessary capital expenditure programrequirements, ongoing operating costs and working capital needs, although noassurance can be given in this regard. The Company’s future financial andoperating performance, ability to service or refinance its debt and ability tocomply with the covenants and restrictions contained in its debt agreements(see “-Covenant Restrictions”), will be subject to future economic conditionsand to financial, business and other factors, many of which are beyond the Company’scontrol and will be substantially dependent on the selling prices and demandfor the Company’s products, raw material and energy costs, and the Company’sability to successfully implement its overall business and profitabilitystrategies.

 

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 September 30, 2005, the Company had interest rate swapagreements with a notional amount of $880 million, which expire on variousdates from 2005 to 2008 under which the Company will pay fixed rates of 2.31%to 4.53% and receive three-month LIBOR.

 

Effective as of September 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, is collateralized by substantially all of the Company’s domestic assetsand imposes restrictions on the Company’s ability to make capital expenditures,and both the Senior Secured Credit Agreement and the indentures governing theSenior Notes and Senior Subordinated Notes (the “Notes”) limit the Company’sability to incur additional indebtedness. Such restrictions, together with thehighly leveraged nature of the Company, could limit the Company’s ability torespond to market conditions, meet its capital spending program, provide forunanticipated capital investments or take advantage of business opportunities.The covenants contained in the Senior Secured Credit Agreement, among otherthings, restrict the ability of the Company to dispose of assets, incur additionalindebtedness, incur guarantee obligations, prepay other indebtedness, makedividend and other restricted payments, create liens, make equity or debtinvestments, make acquisitions, modify the terms of indentures under which theNotes are issued, engage in mergers or consolidations, change the businessconducted by the Company and its subsidiaries, make capital expenditures andengage in certain transactions with affiliates. As of September 30, 2005, theCompany was in compliance with the financial covenants in the Senior SecuredCredit Agreement.

 

On October 17,2005, Graphic Packaging International, a wholly-owned subsidiary of theCompany, entered into the Second Amendment (the “Second Amendment”) to the $1.6billion Senior Secured Credit Agreement dated August 8, 2003 among GraphicPackaging International and the several lenders from time to time partiesthereto (the “Original Credit Agreement”). As a result, the Companyincurred fees and transaction costs of approximately $4 million.

 

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The SecondAmendment relaxed the Consolidated Debt to Credit Agreement EBITDA LeverageRatio covenant and the Credit Agreement EBITDA to Consolidated Interest ExpenseRatio covenant as shown below beginning with the covenant requirements for September 30,2005.

 
| ** **                         | ** ** | **Consolidated Debt to Credit   Agreement EBITDA Leverage  Ratio (A)** | ** ** | **Credit Agreement EBITDA to  Consolidated Interest Expense  Ratio (A)** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Four Fiscal Quarters Ending**    | ** ** | **Previous**                                                           | ** ** | **As Amended**                                                           | ** ** | **Previous** | ** ** | **As Amended** | ** ** |
| 2005                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| September 30, 2005            |       | 6.15 to 1.00                                                           |       | 6.75 to 1.00                                                             |       | 2.25 to 1.00 |   | 1.75 to 1.00 |   |
| December 31, 2005             |       | 5.75 to 1.00                                                           |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
|                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| 2006                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| March 31, 2006                |       | 5.75 to 1.00                                                           |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
| June 30, 2006                 |       | 5.75 to 1.00                                                           |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
| September 30, 2006            |       | 5.75 to 1.00                                                           |       | 6.75 to 1.00                                                             |       | 2.35 to 1.00 |   | 1.75 to 1.00 |   |
| December 31, 2006             |       | 5.25 to 1.00                                                           |       | 6.75 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
|                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| 2007                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| March 31, 2007                |       | 5.25 to 1.00                                                           |       | 6.50 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
| June 30, 2007                 |       | 5.25 to 1.00                                                           |       | 6.50 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
| September 30, 2007            |       | 5.25 to 1.00                                                           |       | 6.50 to 1.00                                                             |       | 2.50 to 1.00 |   | 1.75 to 1.00 |   |
| December 31, 2007             |       | 4.75 to 1.00                                                           |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
|                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| 2008                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| March 31, 2008                |       | 4.75 to 1.00                                                           |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
| June 30, 2008                 |       | 4.75 to 1.00                                                           |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
| September 30, 2008            |       | 4.75 to 1.00                                                           |       | 6.00 to 1.00                                                             |       | 2.75 to 1.00 |   | 1.85 to 1.00 |   |
| December 31, 2008             |       | 4.50 to 1.00                                                           |       | 5.50 to 1.00                                                             |       | 2.90 to 1.00 |   | 2.00 to 1.00 |   |
|                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| 2009                               |       |                                                                   |       |                                                                     |       |   |   |   |   |
| March 31, 2009 and thereafter |       | 4.50 to 1.00                                                           |       | 4.50 to 1.00                                                             |       | 2.90 to 1.00 |   | 2.90 to 1.00 |   |

 

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Note:

 

(A) See “Credit Agreement EBITDA” below.

 

In addition to thechanges to the financial covenants described above, the Second Amendmentmodifies the pricing for the Senior Secured Term Loan Facility by increasingthe applicable margin by .25% if, and for so long as, Graphic PackagingInternational’s indebtedness under the Senior Secured Credit Agreement is ratedless than B+ by Standard & Poor’s Ratings Group (a division of TheMcGraw Hill Companies Inc.) or less than B1 by Moody’s Investors Service, Inc.

 

If the negative impact of inflationary pressures onkey inputs continues, or depressed selling prices, lower sales volumes,increased operating costs or other factors have a negative impact on theCompany’s ability to increase its profitability, the Company may not be able tomaintain its compliance with the financial covenants in its Senior SecuredCredit Agreement, as amended. The Company’s ability to comply in future periodswith the financial covenants in the Senior Secured Credit Agreement will dependon its ongoing financial and operating performance, which in turn will besubject to economic conditions and to financial, business and other factors,many of which are beyond the Company’s control and will be substantiallydependent on the selling prices for the Company’s products, raw material andenergy costs, and the Company’s ability to successfully implement its overallbusiness and profitability strategies. If a violation of any of the covenantsoccurred, the Company would attempt to obtain a waiver or an amendment from itslenders, although no assurance can be given that the Company would besuccessful in this regard. The Senior Secured Credit Agreement and theindentures governing the Senior Subordinated Notes and the Senior Notes havecovenants as well as certain cross-default or cross-acceleration provisions; failureto comply with these covenants in any agreement could result in a violation ofsuch agreement which could, in turn, lead to violations of other agreementspursuant to such cross-default or cross-acceleration provisions. If an event ofdefault occurs, the lenders are entitled to declare all amounts owed to be dueand payable immediately.

 

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**Credit Agreement EBITDA**

** **

The table below sets forthEBITDA, as defined in the Senior Secured Credit Agreement, which is referred toin this report as “Credit Agreement EBITDA.” Credit Agreement EBITDA aspresented below is a financial measure that is used in the Senior SecuredCredit Agreement. Credit Agreement EBITDA is not a defined term underaccounting principles generally accepted in the United States and should not beconsidered as an alternative to income from operations or net income as ameasure of operating results or cash flows as a measure of liquidity. CreditAgreement EBITDA differs from the term “EBITDA” (earnings before interestexpense, income tax expense, and depreciation and amortization) as it iscommonly used. In addition to adjusting net income to exclude interest expense,income tax expense and depreciation and amortization, Credit Agreement EBITDAalso adjusts net income by excluding certain other items and expenses, asspecified below. The Company’s definition of Credit Agreement EBITDA may differfrom that of other similarly titled measures at other companies. The SeniorSecured Credit Agreement requires the Company to comply with a specifiedconsolidated debt to Credit Agreement EBITDA leverage ratio and a specifiedCredit Agreement EBITDA to consolidated interest expense ratio for specified periods,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 Credit Agreement EBITDA for theperiods indicated is set forth below and is calculated in accordance with theSenior Secured Credit Agreement.

 
| ** **                           | ** ** | **Nine Months Ended**        | ** ** | **Twelve Months Ended**      | ** ** |
|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **(Amounts in Millions)**            | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Net Loss                             |       | $                            | (48.6      | )                            | $          | (21.1 | ) | $ | (88.4 | ) | $ | (60.9 | ) |
| Income Tax Expense                   |       | 14.5                         |       | 20.4                         |       | 23.0 |   | 28.9 |   |
| Interest Expense, Net                |       | 115.1                        |       | 112.3                        |       | 151.8 |   | 149.0 |   |
| Depreciation and Amortization        |       | 155.2                        |       | 173.0                        |       | 211.1 |   | 228.9 |   |
| Equity in Net Earnings of Affiliates |       | (1.0                         | )          | (1.2                         | )          | (1.2 | ) | (1.4 | ) |
| Credit Agreement  Adjustments (A)    |       | 18.0                         |       | 32.9                         |       | 35.7 |   | 50.6 |   |
| Credit Agreement EBITDA (B)          |       | $                            | 253.2      |                         | $          | 316.3 |   | $ | 332.0 |   | $ | 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.

 

(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.

 

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**CapitalExpenditures**

** **

The Company’s capitalspending in the first nine months of 2005 was $71.9 million, compared to $103.4million in the first nine months of 2004. During the first nine months of 2005,the Company had capital spending of $32.5 million for improving processcapabilities, $15.3 million for the expansion of its Fort Smith, AR andLumberton, NC converting plants, $13.0 million for manufacturing packagingmachinery, $7.0 million for compliance with cluster rules and $4.1 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.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

For a discussion of certain market risks related tothe Company, see Part II, Item 7A, “Quantitative and QualitativeDisclosure about Market Risk”, in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004, as amended. There have been nosignificant developments with respect to derivatives or exposure to market riskduring the first nine months of 2005; see Note 7 in Notes to CondensedConsolidated Financial Statements and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations “-Financial Condition, Liquidityand Capital Resources.”

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

*Disclosure Controls and Procedures*

 

The Company’s management has carried out anevaluation, with the participation of its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the Company’s disclosure controlsand procedures pursuant to Rule 13a-15 of the Securities Exchange Act of1934, as amended. Based upon such evaluation, management has concluded that theCompany’s disclosure controls and procedures were not effective as of September 30,2005, solely because of a material weakness in internal control over financialreporting with respect to accounting for deferred taxes as described below.

 

As described in Amendment No. 1 to the Company’sQuarterly Report on Form 10-Q for the period ended September 30,2004, Amendment No. 2 to the Company’s Annual Report on Form 10-K forthe year ended December 31, 2004 and Amendment No. 1 to the Company’sQuarterly Report on Form 10-Q for the period ended March 31, 2005,each filed on August 9, 2005, the Company has restated its consolidatedfinancial statements for the periods ended March 31, 2005 and September30, 2004 and for the years ended December 31, 2004, 2003, and 2002 tocorrect errors relating to accounting for income taxes and related

 

29

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deferred tax liabilities. Based on managements’sreview, it has been determined that the errors were inadvertent andunintentional.

 

A material weakness is a control deficiency, or combinationof control deficiencies, that results in a more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected. As of December 31, 2004, the Company did notmaintain effective controls over the determination of the provision for incometaxes and related deferred income tax accounts. Specifically, the Company didnot maintain effective controls as to the completeness and accuracy of theincome tax provision and the related deferred income tax accounts with respectto differences between the income tax basis and the financial reporting basisof its assets and liabilities. This deficiency resulted in the restatement ofthe annual consolidated financial statements for 2004, 2003 and 2002, therestatement of the third quarter 2004, the first quarter 2005 as well as auditadjustments to the second quarter 2005 consolidated financial statements.Additionally, this control deficiency could result in a misstatement of theincome tax provision or related deferred income tax accounts resulting in amaterial misstatement to the annual or interim consolidated financialstatements that would not be prevented or detected. Accordingly, management hasdetermined that this control deficiency constitutes a material weakness.Because this material weakness has not yet been completely remediated, theCompany concluded that it did not maintain effective internal control overfinancial reporting as of September 30, 2005, based on criteria in*Internal Control-Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

*Changes in Internal Control over FinancialReporting*

 

The Company has made progress in designing andimplementing improvements in its internal control over financial reporting toaddress the material weakness in accounting for income taxes. Theseimprovements include, among other things, hiring a tax director, educating andtraining Company individuals involved in accounting and reporting for income taxes,and enhancing the documentation regarding conclusions reached in theimplementation of generally accepted accounting principles. Other than theseimprovements, there was no changes in the Company’s internal control overfinancial reporting that occurred during the fiscal quarter ended September 30,2005 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

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

 

Duringthe third quarter of 2005, there were no matters submitted to a vote ofsecurity holders.

 

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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              |   | November 3,  2005 |
|                              |   |                                |   |                   |
| /s/ DANIEL J. BLOUNT              |   | Senior Vice  President and          |   |                   |
| Daniel J. Blount                  |   | Chief Financial  Officer (Principal |   | November 3,  2005 |
|                              |   | Financial  Officer)                 |   |                   |
|                              |   |                                |   |                   |
|   /s/  DEBORAH R. FRANK |   | Vice President  and Controller      |   |                   |
| Deborah R. Frank                  |   | (Principal  Accounting Officer)     |   | November 3,  2005 |
|                                   |        |                                     |        |                        |  |

 

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