GRAPHIC PACKAGING CORPORATION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER: 1-13182

Graphic Packaging Corporation

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		58-2205241 (I.R.S. employer identification no.)

814 Livingston Court
Marietta, Georgia		30067
(Address of principal executive offices)		(Zip Code)

(770) 644-3000
(Registrant’s telephone number, including area code)

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

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

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

Yes o No þ

As of July 31, 2006, there were 198,776,992 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

Information Concerning Forward-Looking Statements

Certain statements of Graphic Packaging Corporation’s expectations, including, but not limited to, statements regarding inflationary pressures, cost savings from its continuous improvement programs and manufacturing rationalization, price increases, capital spending, depreciation and amortization, and interest expense, in this report constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations. These risks and uncertainties include, but are not limited to, inflation of and volatility in raw material and energy costs, the Company’s substantial amount of debt, continuing pressure for lower cost products, the Company’s ability to implement its business strategies, currency translation movements and other risks of conducting business internationally, and the impact of regulatory and litigation matters, including those that impact the Company’s ability to protect and use its intellectual property. Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made and the Company undertakes no obligation to update such statements. Additional information regarding these and other risks is contained in Part II, Item 1A. Risk Factors herein.

GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Millions, Except Share Amounts)
(Unaudited)


	June 30,			December 31,
	2006			2005
ASSETS
Current Assets:
Cash and Equivalents	$	7.3		$	12.7
Receivables, Net		272.5			216.3
Inventories		291.1			298.5
Other Current Assets		30.4			26.1

Total Current Assets		601.3			553.6

Property, Plant and Equipment, Net		1,509.3			1,551.5
Goodwill		642.7			642.6
Intangible Assets, Net		152.6			157.3
Deferred Tax Assets		352.3			350.8
Other Assets		88.0			100.2


Total Assets	$	3,346.2		$	3,356.0


LIABILITIES
Current Liabilities:
Short Term Debt	$	17.5		$	11.0
Accounts Payable and Other Accrued Liabilities		410.4			409.6

Total Current Liabilities		427.9			420.6

Long Term Debt		1,980.5			1,967.3
Deferred Tax Liabilities		472.3			461.5
Other Noncurrent Liabilities		251.3			237.9

Total Liabilities		3,132.0			3,087.3


SHAREHOLDERS’ EQUITY
Preferred Stock, par value $.01 per share; 50,000,000 shares authorized; no shares issued or outstanding		—			—
Common Stock, par value $.01 per share; 500,000,000 shares authorized; 198,776,992 and 198,663,007 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		2.0			2.0
Capital in Excess of Par Value		1,169.9			1,169.6
Unearned Compensation		—			(0.1	)
Accumulated Deficit		(858.1	)		(800.6	)
Minimum Pension Liability Adjustment		(90.0	)		(90.0	)
Accumulated Derivative Instruments (Loss) Gain		(2.2	)		5.2
Cumulative Currency Translation Adjustment		(7.4	)		(17.4	)

Total Shareholders’ Equity		214.2			268.7

Total Liabilities and Shareholders’ Equity	$	3,346.2		$	3,356.0

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

GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
Net Sales	$	625.5		$	623.0		$	1,205.9		$	1,206.0
Cost of Sales		550.8			537.2			1,064.0			1,053.0
Selling, General and Administrative		51.0			53.2			100.6			100.9
Research, Development and Engineering		3.0			3.2			6.0			5.5
Other (Income) Expense, Net		(0.8	)		5.8			(0.5	)		10.7


Income from Operations		21.5			23.6			35.8			35.9
Interest Income		0.2			0.1			0.4			0.2
Interest Expense		(43.2	)		(39.0	)		(84.7	)		(76.2	)

Loss before Income Taxes and Equity in Net Earnings of Affiliates		(21.5	)		(15.3	)		(48.5	)		(40.1	)
Income Tax Expense		(4.9	)		(4.8	)		(9.5	)		(9.7	)
Equity in Net Earnings of Affiliates		0.4			0.5			0.5			0.6


Net Loss	$	(26.0	)	$	(19.6	)	$	(57.5	)	$	(49.2	)


Loss Per Share — Basic	$	(0.13	)	$	(0.10	)	$	(0.29	)	$	(0.25	)
Loss Per Share — Diluted	$	(0.13	)	$	(0.10	)	$	(0.29	)	$	(0.25	)

Weighted Average Number of Shares Outstanding — Basic		198.7			198.6			198.7			198.6
Weighted Average Number of Shares Outstanding — Diluted		198.7			198.6			198.7			198.6

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

GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
(Unaudited)


	Six Months Ended
	June 30,			June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(57.5	)	$	(49.2	)
Noncash Items Included in Net Loss:
Depreciation and Amortization		98.8			106.6
Deferred Income Taxes		10.0			9.1
Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions		11.6			12.2
Amortization of Deferred Debt Issuance Costs		4.4			4.0
Other, Net		1.7			4.8
Changes in Operating Assets & Liabilities		(50.0	)		(58.7	)


Net Cash Provided by Operating Activities		19.0			28.8


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Spending		(31.1	)		(54.8	)
Change in Other Assets		(12.3	)		(9.5	)


Net Cash Used in Investing Activities		(43.4	)		(64.3	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under Revolving Credit Facilities		371.1			263.8
Payments on Revolving Credit Facilities		(351.3	)		(228.5	)
Other, Net		(0.8	)		0.3


Net Cash Provided by Financing Activities		19.0			35.6


Effect of Exchange Rate Changes on Cash		—			(0.3	)


Net Decrease in Cash and Equivalents		(5.4	)		(0.2	)
Cash and Equivalents at Beginning of Period		12.7			7.3


Cash and Equivalents at End of Period	$	7.3		$	7.1

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

GRAPHIC PACKAGING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Graphic Packaging Corporation (“GPC” and, together with its subsidiaries, the “Company”) is a leading provider of paperboard packaging solutions for a wide variety of products to multinational and other consumer products companies. The Company strives to provide its customers with packaging solutions designed to deliver marketing and performance benefits at a competitive cost by capitalizing on its low-cost paperboard mills and converting plants, its proprietary carton designs and packaging machines, and its commitment to customer service.

GPC and GPI Holding, Inc., its wholly-owned subsidiary, conduct no significant business and have no independent assets or operations other than their ownership of Graphic Packaging International, Inc. GPC and GPI Holding, Inc. fully and unconditionally guarantee substantially all of the debt of Graphic Packaging International, Inc. Effective July 31, 2006, GPI Holding, Inc. was merged into GPC.

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

In the Company’s opinion, the accompanying financial statements contain all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods. The Company’s year end condensed consolidated balance sheet data was derived from audited financial statements. The Company has condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. In addition, the preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

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

NOTE 2 — ACCOUNTING POLICIES

For a summary of the Company’s significant accounting policies, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Recent Accounting Pronouncement

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”), which is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS No. 151 addresses financial accounting and reporting for inventory costs. The adoption of SFAS No. 151 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29” (“SFAS No. 153”), which is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets. The adoption of SFAS No. 153 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and Statement No. 3” (“SFAS No. 154”). Previously, APB Opinion No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS No. 154 which is effective January 1, 2006, requires companies to recognize a change in accounting principle, including a change required in a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. The Company will assess the impact of a change in accounting principle in accordance with SFAS No. 154 when such a change arises.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109” (“FIN No. 48”). FIN No. 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken on an income tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effects, if any, of applying this interpretation will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the effect of FIN No. 48 on its financial position, results of operations and cash flows.

NOTE 3 — STOCK INCENTIVE PLANS

Stock Options

Prior to January 1, 2006, the Company’s stock options were accounted for under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (“SFAS No. 123R”), using the modified-prospective transition method. The adoption of SFAS No. 123R did not have an impact on the Company’s income from continuing operations, income before income taxes, net loss, cash flow from operations, cash flow from financing activities and basic and diluted loss per share.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plan for the three months and six months ended June 30, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ vesting periods.


	Three Months			Six Months
	Ended			Ended
(Amounts in Millions, Except Per Share Amounts)	June 30, 2005			June 30, 2005
Net Loss, As Reported	$	(19.6	)	$	(49.2	)

Add: Stock-Based Employee Compensation Expense Included in Reported Net Loss		—			—
Deduct: Total Stock-Based Employee Compensation Expense Determined Under Fair Value Based Method for All Awards		(0.8	)		(1.6	)


Adjusted Net Loss	$	(20.4	)	$	(50.8	)


Loss Per Basic Share-As Reported	$	(0.10	)	$	(0.25	)
Loss Per Basic Share-As Adjusted	$	(0.10	)	$	(0.26	)

Loss Per Diluted Share-As Reported	$	(0.10	)	$	(0.25	)
Loss Per Diluted Share-As Adjusted	$	(0.10	)	$	(0.26	)

On December 8, 2005, the Compensation and Benefits Committee of the Board of Directors of the Company approved the acceleration of the vesting of all of the unvested stock options granted to employees of the Company so that such options vested immediately. The action affected 1,835,268 stock options, 1,762,768 of which had exercise prices in excess of the then current market price of the Company’s common stock. The action is expected to reduce the Company’s future compensation expense by $3.2 million. The Company recognized no expense related to stock options in the six months ended June 30, 2006.

The Company has eight equity compensation plans. The Company’s only active plan as of June 30, 2006 is the Graphic Packaging Corporation 2004 Stock and Incentive Compensation Plan (“2004 Plan”), pursuant to which the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other types of stock-based awards to employees and directors of the Company. Stock options and other awards granted under all of the Company’s plans generally vest and expire in accordance with terms established at the time of grant (except as noted above with respect to accelerated vesting).

The weighted average fair value of stock options is estimated to be $2.73 per option as of the date of grant for stock options granted in 2004. The weighted average contractual life of the options outstanding at June 30, 2006 was 4.8 years.

During the six months ended June 30, 2006, there were no stock options granted, 7,500 stock options were exercised and 725,718 stock options were cancelled from the different plans. The total number of shares subject to options at June 30, 2006 was 15,211,121 at a weighted average exercise price of $6.92.

Restricted Stock Awards

The Company’s 2004 Plan and the 2003 Riverwood Holding, Inc. Long-Term Incentive Plan provide for restricted stock awards (shares or stock units (“RSUs”)). All restricted stock awards vest and become unrestricted in one to five years from date of grant. Upon vesting, RSUs granted in 2005 and 2006 are payable 50% in cash and 50% in shares of common stock. All other RSUs are payable in shares of common stock.

Data concerning restricted stock awards granted in the first six months of 2006 is as follows:


			Weighted Avg.
	Shares		Value Per Share
	(In thousands)
RSUs — Employees		2,239	$	2.83
Shares — Board of Directors		71	$	3.39

The value of the RSUs is based on the market value of the Company’s common stock on the date of grant. The shares payable in cash are subject to variable accounting and marked to market accordingly. Both components are recorded as a liability. At June 30, 2006, the Company had 5,246,782 RSUs outstanding. The unrecognized expense at June 30, 2006 is approximately $8 million and is expected to be recognized over a weighted average period of 2.3 years.

The value of restricted stock shares is based on the market value of the Company’s common stock on the date of grant and recorded at the date of the award as unearned compensation in a separate component of stockholders’ equity. The shares issued to the board of directors during the second quarter of 2006 vested on the date of grant and therefore were expensed in the quarter.

During the first six months of 2006, the Company also issued 20,942 shares of phantom stock, representing deferred compensation by one of its directors. These shares of phantom stock vest on the date of grant and are payable upon termination of service.

During the six months ended June 30, 2006 and 2005, $2.9 million and $2.5 million was charged to compensation expense, respectively.

NOTE 4— INVENTORIES

The major classes of inventories were as follows:


	June 30,		December 31,
(Amounts in Millions)	2006		2005
Finished goods	$	145.5	$	164.2
Work in progress		27.5		22.7
Raw materials		69.1		67.3
Supplies		49.0		44.3

Total	$	291.1	$	298.5

NOTE 5 — ENVIRONMENTAL AND LEGAL MATTERS

The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the investigation and remediation of contamination resulting from historical site operations and releases of hazardous substances, and the health and safety of employees. Compliance initiatives could result in significant costs, which could negatively impact the Company’s financial position, results of operations or cash flows. Any failure to comply with such laws and regulations or any permits and authorizations required thereunder could subject the Company to fines, corrective action or other sanctions.

In addition, some of the Company’s current and former facilities are the subject of environmental investigations and remediations resulting from historical operations and the release of hazardous substances or other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations may be imposed in the future or for which indemnification claims may be asserted against the Company. Also, potential future closures or sales of facilities may necessitate further investigation and may result in future remediation at those facilities.

During the first quarter of 2006, the Company self-reported certain violations of its Title V permit under the federal Clean Air Act for its West Monroe, Louisiana mill to the Louisiana Department of Environmental Quality (the “LADEQ”). The violations relate to the collection, treatment and reporting of hazardous air pollutants. The Company recorded $0.6 million of expense in the first quarter of 2006 for compliance costs to correct the technical issues causing the Title V permit violations. The Company received a consolidated compliance order and notice of potential penalty dated July 5, 2006 (“The Compliance Order”) from the LADEQ, and is currently in the process of reviewing and analyzing such Compliance Order. As set forth in the Compliance Order, the Company may be required to pay civil penalties for violations that occurred from 2001 through 2005. Although the Company believes that it is reasonably possible that the LADEQ will assess some penalty, at this time the amount of such penalty is not estimable.

The Company has established reserves for those facilities or issues where liability is probable and the costs are reasonably estimable. Except for the Title V permit issue described above, for which it is too early in the investigation and regulatory process to make a determination, the Company believes that the amounts accrued for all of its loss contingencies, and the reasonably possible loss beyond the amounts accrued, are not material to the Company’s financial position, results of operations or cash flows. Except for the compliance costs described above relating to the West Monroe, Louisiana mill, the Company cannot estimate with certainty other future corrective compliance, investigation or remediation costs, all of which the Company currently considers to be remote. Costs relating to historical usage or indemnification claims that the Company considers to be reasonably possible are not quantifiable at this time. The Company will continue to monitor environmental issues at each of its facilities and will revise its accruals, estimates and disclosures relating to past, present and future operations as additional information is obtained.

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

NOTE 6 — BUSINESS SEGMENT INFORMATION

The Company reports its results in two business segments: paperboard packaging and containerboard/other. These segments are evaluated by the chief operating decision maker based primarily on income from operations. The Company’s reportable segments are based upon strategic business units that offer different products. The paperboard packaging business segment includes the production and sale of paperboard for its beverage multiple packaging and consumer products packaging businesses from its West Monroe, Louisiana, Macon, Georgia, Kalamazoo, Michigan and Norrköping, Sweden mills; carton converting facilities in the United States, Europe, Brazil and Canada; and the design, manufacture and installation of packaging machinery related to the assembly of cartons. The containerboard/other business segment primarily includes the production and sale of linerboard, corrugating medium and kraft paper from paperboard mills in the United States.

Business segment information is as follows:


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
(Amounts in Millions)	2006			2005			2006			2005
NET SALES:
Paperboard Packaging	$	601.5		$	600.3		$	1,161.8		$	1,159.3
Containerboard/Other		24.0			22.7			44.1			46.7

Total	$	625.5		$	623.0		$	1,205.9		$	1,206.0


INCOME (LOSS) FROM OPERATIONS:
Paperboard Packaging	$	34.3		$	43.7		$	62.2		$	72.6
Containerboard/Other		(5.1	)		(4.0	)		(9.8	)		(8.2	)
Corporate		(7.7	)		(16.1	)		(16.6	)		(28.5	)

Total	$	21.5		$	23.6		$	35.8		$	35.9

NOTE 7 – PENSIONS AND OTHER POSTRETIREMENT BENEFITS

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

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


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
(Amounts in Millions)	2006			2005			2006			2005
Service Cost	$	4.0		$	3.5		$	8.0		$	7.4
Interest Cost		8.1			8.1			16.2			15.6
Expected Return on Plan Assets		(8.0	)		(7.8	)		(16.0	)		(15.2	)
Amortizations:
Prior Service Cost		0.5			0.4			1.0			1.1
Actuarial Loss		1.3			0.9			2.6			1.7


Net Periodic Pension Cost	$	5.9		$	5.1		$	11.8		$	10.6

The Company made contributions of $2.9 million and $2.1 million to its U.S. pension plans during the first six months of 2006 and 2005, respectively. The Company expects to make contributions of approximately $29 million for the full year 2006. During 2005, the Company made $17.7 million of contributions to its U.S. pension plans.

OTHER POSTRETIREMENT BENEFITS

The Company sponsors postretirement health care plans that provide medical and life insurance coverage to certain eligible salaried and hourly retired U.S. employees and their dependents. No postretirement medical benefits are offered to salaried employees who began employment with the Company after December 31, 1993 or to Graphic employees hired after June 15, 1999.

The other postretirement benefits expense consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(Amounts in Millions)	2006		2005		2006		2005
Service Cost	$	0.3	$	0.3	$	0.6	$	0.5
Interest Cost		0.6		0.7		1.2		1.5
Amortizations:
Actuarial Loss		—		0.2		—		0.4


Net Periodic Postretirement Benefits Cost	$	0.9	$	1.2	$	1.8	$	2.4

In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006. The Act has not and is not expected to have a significant impact on the Company’s financial position, results of operations or cash flows.

The Company made benefit payments of $2.0 million and $1.3 million during the first six months of 2006 and 2005, respectively. The Company estimates its postretirement benefit payments for the full year 2006 to be approximately $3 million. During 2005, the Company made postretirement benefit payments of $2.6 million.

NOTE 8 — RESTRUCTURING CHARGES

The Company adopted a plan in the first quarter of 2004 to restructure its operations by closing facilities, relocating equipment and severing employees in an effort to better position the Company to operate in the current business environment. The restructuring activities described herein affect only the paperboard packaging segment. The Company did not record any restructuring charges during the six months ended June 30, 2006 and 2005.

The initial amount of $7.2 million for restructuring recorded at March 31, 2004 was reduced by $0.9 million in the second quarter of 2004 primarily for facility restoration and carrying costs, as a building was sold sooner than anticipated, and by $1.0 million in the fourth quarter of 2005 for a change in estimate for certain severance and other employee related termination costs. Through June 30, 2006, the Company has made payments for severance and other employee termination-related charges in the amount of $3.2 million and for equipment removal and facilities restoration in the amount of $1.9 million, both of which reduced the initial reserve detailed above. The remaining reserve is for carrying costs of a building until it is sold. As of June 30, 2006, the Company had $0.2 million accrued for restructuring, as follows:


			Adjustments
	Balance at		(Statement of				Purchase					Balance at
	December 31,		Operations Impact)				Price		Cash			June 30,
(Amounts in Millions)	2005		Expense		Reversal		Allocation		Payments			2006
Equipment Removal Costs	$	—	$	—	$	—	$	—	$	—		$	—
Facility Restoration and Carrying Costs		0.6		—		—		—		(0.4	)		0.2
Severance of Employees and Other Employee Termination-Related Charges		0.6		—		—		—		(0.6	)		—

Total	$	1.2	$	—	$	—	$	—	$	(1.0	)	$	0.2

As of December 31, 2005, the Company had $1.2 million accrued for restructuring, as follows:


			Adjustments
	Balance at		(Statement of					Purchase					Balance at
	January 1,		Operations Impact)					Price		Cash			December 31,
(Amounts in Millions)	2005		Expense		Reversal			Allocation		Payments			2005
Equipment Removal Costs	$	0.8	$	—	$	—		$	—	$	(0.8	)	$	—
Facility Restoration and Carrying Costs		0.6		—		—			—		—		$	0.6
Severance of Employees and Other Employee Termination-Related Charges		3.1		—		(1.0	)		—		(1.5	)	$	0.6

Total	$	4.5	$	—	$	(1.0	)	$	—	$	(2.3	)	$	1.2

NOTE 9 — DEBT

At June 30, 2006 and December 31, 2005, Long Term Debt consisted of the following:


	June 30,		December 31,
(Amounts in Millions)	2006		2005
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 (7.52% at June 30, 2006 and 6.60% at December 31, 2005) payable through 2010		1,109.0		1,109.0
Senior Secured Revolving Facility with interest payable at various dates at floating rates (9.25% at June 30, 2006 and 9.25% at December 31, 2005) payable in 2009		25.0		6.0
Other		2.7		3.5

		1,986.7		1,968.5
Less, current portion		6.2		1.2

Total	$	1,980.5	$	1,967.3

The Senior Notes are rated B- by Standard & Poor’s and B2 by Moody’s Investor Services. The Senior Subordinated Notes are rated B- by Standard & Poor’s and B3 by Moody’s Investor Services. The Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated B+ by Standard & Poor’s and B1 by Moody’s Investor Services. As of June 30, 2006, both Standard & Poor’s and Moody’s Investor Services’ ratings on the Company remain on negative outlook.

Principal and interest payments under the Term Loan Facility and the Revolving Credit Facility, together with principal and interest payments on the Senior Notes and the Senior Subordinated Notes, represent significant liquidity requirements for the Company. Based upon current levels of operations, anticipated cost-savings and expectations as to future growth, the Company believes that cash generated from operations, together with amounts available under its Revolving Credit Facility and other available financing sources, will be adequate to permit the Company to meet its debt service obligations, necessary capital expenditure program requirements, ongoing operating costs and working capital needs, although no assurance can be given in this regard. The Company’s future financial and operating performance, ability to service or refinance its debt and ability to comply with the covenants and restrictions contained in its debt agreements, will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company’s control and will be substantially dependent on the selling prices and demand for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business and profitability strategies.

The Senior Secured Credit Agreement, as amended, which governs the Term Loan Facility and the Revolving Credit Facility, imposes restrictions on the Company’s ability to make capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the Senior Notes and Senior Subordinated Notes (the “Notes”) limit the Company’s ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company’s ability to respond to market conditions, meet its capital spending program, provide for unexpected capital investments or take advantage of business opportunities. The covenants contained in the Senior Secured Credit Agreement, as amended, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividend and other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of indentures under which the Notes are issued, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, make capital expenditures and engage in certain transactions with affiliates.

The financial covenants contained in the Senior Secured Credit Agreement, as amended, among other things, specify the following requirements for each of the following test periods:


			Minimum Credit
	Maximum Consolidated		Agreement EBITDA to
	Debt to Credit Agreement		Consolidated Interest
	EBITDA Leverage Ratio (a)		Expense Ratio (a)
Four Fiscal Quarters Ending
2006 June 30, 2006		6.75 to 1.00		1.75 to 1.00
September 30, 2006		6.75 to 1.00		1.75 to 1.00
December 31, 2006		6.75 to 1.00		1.75 to 1.00

2007 March 31, 2007		6.50 to 1.00		1.75 to 1.00
June 30, 2007		6.50 to 1.00		1.75 to 1.00
September 30, 2007		6.50 to 1.00		1.75 to 1.00
December 31, 2007		6.00 to 1.00		1.85 to 1.00

2008 March 31, 2008		6.00 to 1.00		1.85 to 1.00
June 30, 2008		6.00 to 1.00		1.85 to 1.00
September 30, 2008		6.00 to 1.00		1.85 to 1.00
December 31, 2008		5.50 to 1.00		2.00 to 1.00

2009 March 31, 2009 and thereafter		4.50 to 1.00		2.90 to 1.00

Note:

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

At June 30, 2006, the Company was in compliance with the financial covenants in the Secured Credit Agreement, as amended, and the ratios were as follows:

Consolidated Debt to Credit Agreement EBITDA Leverage Ratio — 6.57 to 1.00
Credit Agreement EBITDA to Consolidated Interest Expense Ratio — 1.95 to 1.00

The Senior Secured Credit Agreement, as amended, requires adjustment to the pricing for the Senior Secured Term Loan Facility by increasing the applicable margin by 0.25% if, and for so long as, the Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated less than B+ by Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies Inc.) or less than B1 by Moody’s Investors Service, Inc.

If the negative impact of inflationary pressures on key inputs continues, or depressed selling prices, lower sales volumes, increased operating costs or other factors have a negative impact on the Company’s ability to increase its profitability, the Company may not be able to maintain its compliance with the financial covenants in its Senior Secured Credit Agreement, as amended. The Company’s ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement, as amended, will depend on its ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and other factors,

many of which are beyond the Company’s control and will be substantially dependent on the selling prices for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business strategies, and meet its profitability objective. If a violation of any of the covenants occurred, the Company would attempt to obtain a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the Senior Subordinated Notes and the Senior Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions. If an event of default occurs, the lenders are entitled to declare all amounts owed to be due and payable immediately. The Senior Secured Credit Agreement, as amended, is collateralized by substantially all of the Company’s domestic assets.

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

INTRODUCTION

This management’s discussion and analysis of financial conditions and results of operations is intended to provide investors with an understanding of the Company’s past performance, its financial condition and its prospects. The following will be discussed and analyzed:

Overview of Business

Overview of 2006 Results

Results of Operations

Financial Condition, Liquidity and Capital Resources

Critical Accounting Policies

New Accounting Standards

Business Outlook

OVERVIEW OF BUSINESS

The Company’s objective is to strengthen its position as a leading provider of paperboard packaging solutions. To achieve this objective, the Company offers customers its paperboard, cartons and packaging machines, either as an integrated solution or separately. The Company is also implementing strategies to expand market share in its current markets and to identify and penetrate new markets; to capitalize on the Company’s customer relationships, business competencies, and mills and converting assets; to develop and market innovative products and applications; and to continue to reduce costs by focusing on operational improvements. The Company’s ability to fully implement its strategies and achieve its objectives may be influenced by a variety of factors, many of which are beyond its control including (i) inflation of raw material and other costs, which the Company cannot always pass through to its customers, and (ii) the effect of overcapacity in the worldwide paperboard packaging industry.

Significant Factors That Impact The Company’s Business

Impact of Inflation. The Company’s cost of sales consists primarily of energy (including natural gas, fuel oil and electricity), pine pulpwood, hardwood, chemicals, recycled fibers, purchased paperboard, paper, aluminum foil, ink, plastic films and resins, depreciation expense and labor. The Company continues to be negatively impacted by inflationary pressures, which increased costs $39.9 million compared to the first six months of 2005 and are primarily related to energy ($26.7 million); chemical based inputs ($8.1 million); freight ($3.3 million); labor and related benefits ($4.1 million); and other ($0.4 million) somewhat offset by favorable changes for fiber, outside board purchases and

corrugated shipping containers ($2.7 million). The Company has entered into contracts designed to manage risks associated with future variability in cash flows caused by changes in the price of natural gas. The Company has hedged approximately 80%, 30% and 5% of its expected natural gas usage for the years 2006, 2007 and 2008, respectively. Depending on price levels, these percentages are expected to increase further during 2006. The Company believes that inflationary pressures will negatively impact its results for 2006. Since negotiated contracts and the market largely determine the pricing for its products, the Company is at times limited in its ability to raise prices and pass through to its customers any inflationary or other cost increases that the Company may incur thereby further exacerbating the inflationary problems.

Substantial Debt Obligations. The Company has approximately $1,998 million of outstanding debt obligations as of June 30, 2006. This debt can have significant consequences for the Company, as it requires a significant portion of cash flow from operations to be used for the payment of principal and interest, exposes the Company to the risk of increased interest rates and restricts the Company’s ability to obtain additional financing. Covenants in the Company’s Senior Secured Credit Agreement, as amended, also prohibit or restrict, among other things, the disposal of assets, the incurrence of additional indebtedness (including guarantees) and payment of dividends, loans or advances and certain other types of transactions. These restrictions could limit the Company’s flexibility to respond to changing market conditions and competitive pressures. The covenants also require compliance with certain financial ratios. The Company’s ability to comply in future periods with the financial covenants will depend on its ongoing financial and operating performance, which in turn will be subject to many other factors, many of which are beyond the Company’s control. See “Financial Condition, Liquidity and Capital Resources—-Liquidity and Capital Resources” and “-Covenant Restrictions” for additional information regarding the Company’s debt obligations.

Commitment to Cost Reduction. In light of increasing margin pressure throughout the paperboard packaging industry, the Company has programs in place that are designed to reduce costs, improve productivity and increase profitability. The Company utilizes a global continuous improvement initiative that uses statistical process control to help design and manage many types of activities, including production and maintenance. This includes a Six Sigma process focused on reducing variable and fixed manufacturing and administrative costs. During the first six months of 2006, the Company achieved approximately $27 million in cost savings through its continuous improvement programs and manufacturing initiatives.

Market Factors. As some products can be packaged in different types of materials, the Company’s sales are affected by competition from other manufacturers’ coated unbleached kraft paperboard, or CUK board, and other substrates — solid bleached sulfate, or SBS, recycled clay coated news, or CCN, and, internationally, white lined chipboard, or WLC, substitute products including shrink film and corrugated containers, as well as by general market conditions. In addition, the Company’s sales historically are driven by consumer buying habits in the markets its customers serve. New product introductions and promotional activity by the Company’s customers and the Company’s introduction of new packaging products also impacted its sales. The Company’s containerboard business is subject to conditions in the cyclical worldwide commodity paperboard markets which have a significant impact on containerboard sales. In addition, the Company’s net sales, income from operations and cash flows from operations are subject to moderate seasonality, with demand usually increasing in the spring and summer due to the seasonality of the worldwide beverage multiple packaging markets.

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

OVERVIEW OF 2006 RESULTS

	•		Net Sales in the second quarter of 2006 increased by $2.5 million, or 0.4%, to $625.5 million from $623.0 million in the second quarter of 2005 due primarily to improved pricing for cartons, rollstock and containerboard, and higher unit volumes in the international beverage markets somewhat offset by lower carton sales in North America, primarily in the food and consumer product markets.

	•		Income from Operations in the second quarter of 2006 decreased by $2.1 million, or 8.9%, to $21.5 million from $23.6 million in the second quarter of 2005 due primarily to inflation of approximately $23 million and approximately $6 million of higher manufacturing costs somewhat offset by worldwide cost reductions of approximately $9 million resulting from the Company’s cost reduction initiatives, improved pricing and lower depreciation expense.

	•		Debt decreased by $38.7 million during the second quarter of 2006 as a result of cash provided by operating activities.

RESULTS OF OPERATIONS

Segment Information

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


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
(Amounts in Millions)	2006			2005			2006			2005
NET SALES:
Paperboard Packaging	$	601.5		$	600.3		$	1,161.8		$	1,159.3
Containerboard/Other		24.0			22.7			44.1			46.7

Total	$	625.5		$	623.0		$	1,205.9		$	1,206.0


INCOME (LOSS) FROM OPERATIONS:
Paperboard Packaging	$	34.3		$	43.7		$	62.2		$	72.6
Containerboard/Other		(5.1	)		(4.0	)		(9.8	)		(8.2	)
Corporate		(7.7	)		(16.1	)		(16.6	)		(28.5	)

Total	$	21.5		$	23.6		$	35.8		$	35.9

SECOND QUARTER 2006 COMPARED WITH SECOND QUARTER 2005

Net Sales

The components of the change in Net Sales are as follows:


	Three Months												Three Months
	Ended		Variances										Ended
(Amounts in Millions)	June 30, 2005		Price		Volume/Mix			Exchange			Total		June 30, 2006
Net Sales	$	623.0		8.0		(4.0	)		(1.5	)		2.5	$	625.5

Paperboard Packaging

The Company’s Net Sales from paperboard packaging in the second quarter of 2006 increased by $1.2 million, or 0.2%, to $601.5 million from $600.3 million in the second quarter of 2005 due primarily to improved pricing in the food and consumer product carton markets and, to a lesser extent, open market rollstock sales, higher volumes in the international beverage markets and improved product mix in the food and consumer product

markets. These increases were somewhat offset by the negative impact of foreign currency exchange rates as well as an approximate 1% decrease in carton sales in North America and lower volumes in the international food and consumer product markets.

Containerboard/Other

The Company’s Net Sales from containerboard/other in the second quarter of 2006 increased by $1.3 million, or 5.7%, to $24.0 million from $22.7 million in the second quarter of 2005 due primarily to improved pricing in the containerboard medium markets.

Income (Loss) from Operations

The components of the change in Income (Loss) from Operations are as follows:


	Three Months																	Three Months
	Ended		Variances															Ended
(Amounts in Millions)	June 30, 2005		Price		Volume/Mix			Inflation			Exchange		Other (a)		Total			June 30, 2006
Income (Loss) from Operations	$	23.6		8.0		(1.1	)		(22.8	)		1.2		12.6		(2.1	)	$	21.5

Note:

(a) Includes the benefits from the Company’s cost reduction initiatives and the impact of lower depreciation expense, somewhat offset by higher manufacturing costs, primarily at the Company’s West Monroe, LA paper mill.

Paperboard Packaging

The Company’s Income from Operations from paperboard packaging in the second quarter of 2006 decreased by $9.4 million, or 21.5%, to $34.3 million from $43.7 million in the second quarter of 2005 due primarily to inflationary pressures primarily on energy, chemical-based inputs, freight and labor and related benefits, approximately $6 million of higher manufacturing costs which were primarily the result of an initiative to upgrade the West Monroe, LA mill’s preventative maintenance program along with preparation for the mill’s number one paper machine bi-annual maintenance outage. A $3.5 million inventory write-off was recorded in the quarter. This adjustment related to intercompany transactions that should have been recognized in prior periods. These decreases were somewhat offset by worldwide cost reductions resulting from the Company’s cost reduction initiatives, the improved pricing in the North American food and consumer product carton markets, and improved product mix in the food and consumer product markets.

Containerboard/Other

The Company’s Loss from Operations from containerboard/other was $5.1 million in the second quarter of 2006 compared to a loss of $4.0 million in the second quarter of 2005. This change of $1.1 million was due primarily to inflationary pressures somewhat offset by the improved pricing in the containerboard medium markets.

Corporate

The Company’s Loss from Operations from corporate was $7.7 million in the second quarter of 2006 compared to a loss of $16.1 million in the second quarter of 2005. This $8.4 million improvement was due primarily to lower consulting fees as well as lower expenses associated with Sarbanes-Oxley compliance efforts, a legal settlement and lower merger related expenses primarily related to the conversion to SAP in 2005.

FIRST SIX MONTHS OF 2006 COMPARED WITH FIRST SIX MONTHS OF 2005

Net Sales

The components of the change in Net Sales are as follows:


	Six Months													Six Months
	Ended		Variances											Ended
(Amounts in Millions)	June 30, 2005		Price		Volume/Mix			Exchange			Total			June 30, 2006
Net Sales	$	1,206.0		11.7		(3.8	)		(8.0	)		(0.1	)	$	1,205.9

Paperboard Packaging

The Company’s Net Sales from paperboard packaging in the first six months of 2006 increased by $2.5 million, or 0.2%, to $1,161.8 million from $1,159.3 million in the six months of 2005 due primarily to improved pricing in the food and consumer product carton markets and a 13% increase in international beverage market sales as a result of higher unit volumes. These increases were somewhat offset by the negative impact of foreign currency exchange rates, a 3% decline in beverage carton sales in North America driven by weaker overall demand for beer cartons and lower volumes in the international food and consumer product markets.

Containerboard/Other

The Company’s Net Sales from containerboard/other in the first six months of 2006 decreased by $2.6 million, or 5.6%, to $44.1 million from $46.7 million in the first six months of 2005 due primarily to lower linerboard sales as a result of producing coated board in place of containerboard tons. This additional coated board was utilized in the production of food and consumer product cartons. This decrease was somewhat offset by the improved pricing in the containerboard medium markets.

Income (Loss) from Operations

The components of the change in Income (Loss) from Operations are as follows:


	Six Months																Six Months
	Ended		Variances														Ended
(Amounts in Millions)	June 30, 2005		Price		Volume/Mix		Inflation			Exchange		Other (a)		Total			June 30, 2006
Income (Loss) from Operations	$	35.9		11.7		1.0		(39.9	)		2.7		24.4		(0.1	)	$	35.8

Note:

(a) Includes the benefits from the Company’s cost reduction initiatives and the impact of lower depreciation and amortization expense, somewhat offset by higher manufacturing costs, primarily at the Company’s West Monroe, LA paper mill.

Paperboard Packaging

The Company’s Income from Operations from paperboard packaging in the first six months of 2006 decreased by $10.4 million, or 14.3%, to $62.2 million from $72.6 million in the first six months of 2005 due primarily to inflationary pressures primarily on energy, chemical-based inputs, freight and labor and related benefits, unfavorable manufacturing variances of approximately $9 million primarily related to an unexpected failure in a major turbine generator at the Company’s West Monroe, LA paper mill and approximately $6 million of higher manufacturing costs which were primarily the result of an initiative to upgrade the West Monroe, LA mill’s preventative maintenance program along with preparation for the mill’s number one paper machine bi-annual maintenance outage. The turbine failure caused machine downtime resulting in reduced production of approximately 4,000 tons of rollstock. This event also resulted in additional costs associated with purchases of outside energy and repair of the turbine. A $3.5 million inventory write-off was recorded in the quarter. This adjustment related to intercompany transactions that should have been recognized in prior periods. These decreases were somewhat offset by worldwide cost reductions resulting from the Company’s cost reduction initiatives, the improved pricing in the North American food and consumer product carton markets and improved product mix in the food and consumer product markets.

Containerboard/Other

The Company’s Loss from Operations from containerboard/other was $9.8 million in the first six months of 2006 compared to a loss of $8.2 million in the first six months of 2005. This change of $1.6 million was due primarily to inflationary pressures somewhat offset by the improved pricing in the containerboard medium markets.

Corporate

The Company’s Loss from Operations from corporate was $16.6 million in the first six months of 2006 compared to a loss of $28.5 million in the first six months of 2005. This $11.9 million improvement was due primarily to lower consulting fees as well as lower expenses associated with Sarbanes-Oxley compliance efforts, a legal settlement and lower merger related expenses primarily related to the conversion to SAP in 2005.

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

Interest Income

Interest Income increased by $0.2 million to $0.4 million in the first six months of 2006 from $0.2 million in the first six months of 2005 primarily due to higher interest rates.

Interest Expense

Interest Expense increased by $8.5 million to $84.7 million in the first six months of 2006 from $76.2 million in the first six months of 2005, due to higher interest rates on the unhedged portion of the Company’s floating rate debt. The increase was somewhat offset by lower average debt balances during the first six months of 2006.

Income Tax Expense

During the first six months of 2006, the Company recognized an Income Tax Expense of $9.5 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $48.5 million. During the first six months of 2005, the Company recognized an Income Tax Expense of $9.7 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $40.1 million. Income Tax Expense for the first six months of 2006 and 2005 was primarily due to the noncash expense associated with the amortization of goodwill for tax purposes, losses benefited in certain foreign countries and tax withholding in foreign jurisdictions.

Equity in Net Earnings of Affiliates

Equity in Net Earnings of Affiliates was $0.5 million in the first six months of 2006 and $0.6 million in the first six months of 2005 and is related to the Company’s equity investment in the joint venture Rengo Riverwood Packaging, Ltd.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company broadly defines liquidity as its ability to generate sufficient funds from both internal and external sources to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments.

Cash Flows

Cash and Equivalents decreased by $5.4 million in the first six months of 2006. Cash provided by operating activities in the first six months of 2006 totaled $19.0 million, compared to $28.8 million in 2005. This was principally due to higher net loss as well as lower depreciation and amortization somewhat offset by favorable changes in operating assets and liabilities, primarily in inventory. Depreciation and

amortization during the first six months of 2006 totaled $98.8 million. Cash used in investing activities in the first six months of 2006 totaled $43.4 million, compared to $64.3 million in 2005. This change was principally due to lower purchases of property, plant and equipment of $23.7 million (see “-Capital Investment”). Cash provided by financing activities in the first six months in 2006 totaled $19.0 million, compared to $35.6 million in 2005. This change was principally due to lower net borrowings under the Company’s revolving credit facilities.

Liquidity and Capital Resources

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

At June 30, 2006 and December 31, 2005, Long Term Debt consisted of the following:


	June 30,		December 31,
(Amounts in Millions)	2006		2005
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 (7.52% at June 30, 2006 and 6.60% at December 31, 2005) payable through 2010		1,109.0		1,109.0
Senior Secured Revolving Facility with interest payable at various dates at floating rates (9.25% at June 30, 2006 and 9.25% at December 31, 2005) payable in 2009		25.0		6.0
Other		2.7		3.5

		1,986.7		1,968.5
Less, current portion		6.2		1.2

Total	$	1,980.5	$	1,967.3

At June 30, 2006, the Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities:


	Total Amount of		Total Amount		Total Amount
(Amounts in Millions)	Commitments		Outstanding		Available (A)
Revolving Credit Facility	$	325.0	$	25.0	$	288.1
International Facilities		22.3		9.2		13.1

Total	$	347.3	$	34.2	$	301.2

Note:

(A)

In accordance with its debt agreements, the Company’s availability under its Revolving Credit Facility has been reduced by the amount of standby letters of credit issued of $11.9 million as of June 30, 2006. These letters of credit are used as security against its self-insurance obligations and workers’ compensation obligations. These letters of credit expire at various dates through 2007 unless extended.

that cash generated from operations, together with amounts available under its Revolving Credit Facility and other available financing sources, will be adequate to permit the Company to meet its debt service obligations, necessary capital expenditure program requirements, ongoing operating costs and working capital needs, although no assurance can be given in this regard. The Company’s future financial and operating performance, ability to service or refinance its debt and ability to comply with the covenants and restrictions contained in its debt agreements (see “-Covenant Restrictions”), will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company’s control and will be substantially dependent on the selling prices and demand for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business and profitability strategies.

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

Effective as of June 30, 2006, the Company had approximately $1.2 billion of net operating loss carryforwards (“NOLs”). These NOLs generally may be used by the Company to offset taxable income earned in subsequent taxable years. However, the Company’s ability to use these NOLs to offset its future taxable income may be subject to significant limitation as a result of certain shifts in ownership due to direct or indirect transfers of the Company’s common stock by one or more 5 percent stockholders, or issuances or redemptions of the Company’s common stock, which, when taken together with previous changes in ownership of the Company’s common stock, constitute an ownership change under the Internal Revenue Code. Imposition of any such limitation on the use of NOLs could have an adverse effect on the Company’s future after tax free cash flow.

Covenant Restrictions

The financial covenants contained in the Senior Secured Credit Agreement, as amended, among other things, specify the following requirements for each of the following test periods:


			Minimum Credit
	Maximum Consolidated		Agreement EBITDA to
	Debt to Credit Agreement		Consolidated Interest
	EBITDA Leverage Ratio		Expense Ratio
Four Fiscal Quarters Ending
2006 June 30, 2006		6.75 to 1.00		1.75 to 1.00
September 30, 2006		6.75 to 1.00		1.75 to 1.00
December 31, 2006		6.75 to 1.00		1.75 to 1.00

2007 March 31, 2007		6.50 to 1.00		1.75 to 1.00
June 30, 2007		6.50 to 1.00		1.75 to 1.00
September 30, 2007		6.50 to 1.00		1.75 to 1.00
December 31, 2007		6.00 to 1.00		1.85 to 1.00

2008 March 31, 2008		6.00 to 1.00		1.85 to 1.00
June 30, 2008		6.00 to 1.00		1.85 to 1.00
September 30, 2008		6.00 to 1.00		1.85 to 1.00
December 31, 2008		5.50 to 1.00		2.00 to 1.00

2009 March 31, 2009 and thereafter		4.50 to 1.00		2.90 to 1.00

At June 30, 2006, the Company was in compliance with the financial covenants in the Secured Credit Agreement, as amended, and the ratios were as follows:

Consolidated Debt to Credit Agreement EBITDA Leverage Ratio — 6.57 to 1.00
Credit Agreement EBITDA to Consolidated Interest Expense Ratio — 1.95 to 1.00

Credit Agreement EBITDA as used herein is a financial measure that is used in the Senior Secured Credit Agreement. Credit Agreement EBITDA is not a defined term under accounting principles generally accepted in the United States and should not be considered as an alternative to income from operations or net income as a measure of operating results or cash flows as a measure of liquidity. Credit Agreement EBITDA differs from the term “EBITDA” (earnings before interest expense, income tax expense, and depreciation and amortization) as it is commonly used. In addition to adjusting net income to exclude interest expense, income tax expense, and depreciation and amortization, Credit Agreement EBITDA also adjusts net income by excluding certain other items and expenses, as specified below. The Company’s definition of Credit Agreement EBITDA may differ from that of other similarly titled measures at other companies.

The Company’s management believes that presentation of Credit Agreement EBITDA provides useful information to investors because borrowings under the Senior Secured Credit Agreement are a key source of the Company’s liquidity, and the Company’s ability to borrow under the Senior Secured Credit Agreement is dependent on, among other things, its compliance with the financial ratio covenants. Failure to comply with these financial ratio covenants would result in a violation of the Senior Secured Credit Agreement and, absent a waiver or amendment from the lenders under such agreement, permit the acceleration of all outstanding borrowings under the Senior Secured Credit Agreement.

The calculations of the components of the Company’s financial covenant ratios are listed below:


	Twelve Months Ended
(Amounts in Millions)	June 30, 2006
Net Loss	$	(99.4	)
Income Tax Expense		23.1
Interest Expense, Net		164.2
Depreciation and Amortization		197.5
Equity in Net Earnings of Affiliates		(1.1	)
Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions		8.9
Merger Related Expenses		7.9
Write-Down of Assets		0.4
Dividends from Equity Investments		2.4

Credit Agreement EBITDA (a)	$	303.9


	Twelve Months Ended
(Amounts in Millions)	June 30, 2006
Interest Expense, Net	$	164.2
Amortization of Deferred Debt Issuance Costs		(8.6	)
Credit Agreement Interest Expense Adjustments (b)		0.1

Consolidated Interest Expense (c)	$	155.7



	As of
(Amounts in Millions)	June 30, 2006
Short Term Debt	$	17.5
Long Term Debt		1,980.5

Total Debt	$	1,998.0

Notes:

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

(b) Credit agreement interest expense adjustments include the discount from the financing of receivables.

(c) Consolidated Interest Expense is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement. Consolidated Interest Expense is defined as consolidated interest expense minus consolidated interest income plus any discount from the financing of receivables.

The Senior Secured Credit Agreement, as amended, requires adjustment to the pricing for the Senior Secured Term Loan Facility by increasing the applicable margin by 0.25% if, and for so long as, the Company’s indebtedness under the Senior Secured Credit Agreement is rated less than B+ by Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies Inc.) or less than B1 by Moody’s Investors Service, Inc.

If the negative impact of inflationary pressures on key inputs continues, or depressed selling prices, lower sales volumes, increased operating costs or other factors have a negative impact on the

Company’s ability to increase its profitability, the Company may not be able to maintain its compliance with the financial covenants in its Senior Secured Credit Agreement, as amended. The Company’s ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement will depend on its ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and other factors, many of which are beyond the Company’s control and will be substantially dependent on the selling prices for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business strategies, and meet its profitability objective. If a violation of any of the covenants occurred, the Company would attempt to obtain a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the Senior Subordinated Notes and the Senior Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions. If an event of default occurs, the lenders are entitled to declare all amounts owed to be due and payable immediately. The Senior Secured Credit Agreement is collateralized by substantially all of the Company’s domestic assets.

Capital Investment

The Company’s capital investment in the first six months of 2006 was $31.1 million, compared to $54.8 million in the first six months of 2005. This $23.7 million decrease was due primarily to the higher capital investment in 2005 related to the Company’s manufacturing rationalization initiatives and compliance with environmental laws and regulations. During the first six months of 2006, the Company had capital spending of $22.4 million for improving process capabilities, $8.5 million for manufacturing packaging machinery and $0.2 million for compliance with environmental laws and regulations.

Environmental Matters

During the first quarter of 2006, the Company self-reported certain violations of its Title V permit under the federal Clean Air Act for its West Monroe, Louisiana mill to the LADEQ. The violations relate to the collection, treatment and reporting of hazardous air pollutants. The Company recorded $0.6 million of expense in the first quarter of 2006 for compliance costs to correct the technical issues causing the Title V permit violations. The Company received a consolidated Compliance Order and notice of potential penalty dated July 5, 2006 from the LADEQ, and is currently in the process of reviewing and analyzing such Compliance Order. As set forth in the Compliance Order, the Company may be required to pay civil penalties for violations that occurred from 2001 through 2005. Although the Company believes that it is reasonably possible that the LADEQ will assess some penalty, at this time the amount of such penalty is not estimable.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used by management in the preparation of the Company’s consolidated financial statements are those that are important both to the presentation of the Company’s financial condition and results of operations and require significant judgments by management with regard to estimates used.

The Company’s most critical accounting policies which require significant judgment or involve complex estimations are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

NEW ACCOUNTING STANDARDS

For a discussion of recent accounting pronouncements impacting the Company, see Note 2 in Notes to Condensed Consolidated Financial Statements.

BUSINESS OUTLOOK

The Company expects inflationary pressures for production inputs to continue to impact results in 2006. Specifically, the higher cost of natural gas is expected to negatively influence results.

To help offset inflation in 2006, the Company expects to achieve $50 million in year over year operating cost savings from its continuous improvement programs and manufacturing rationalization. In addition, the Company expects to benefit from improved pricing in 2006 as a result of the contractual price escalators relating to its carton business that pass through the raw material cost increases that occurred in late 2004 and the first half of 2005 as well as the recently announced price increases for coated board rollstock and containerboard.

Total capital investment for 2006 is expected to be between approximately $70 million and $80 million and is expected to relate principally to improving the Company’s process capabilities (approximately $55 million), manufacturing of packaging machinery (approximately $14 million) and environmental laws and regulations (approximately $6 million).

Depreciation and amortization is expected to be between approximately $195 million and $205 million for the full year 2006.

Interest expense in 2006 is expected to be between approximately $165 million and $175 million, including approximately $9 million of non-cash amortization of deferred debt issuance costs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For a discussion of certain market risks related to the Company, see Part II, Item 7A, “Quantitative and Qualitative Disclosure about Market Risk”, in the Company’s Annual Report on Form 10-K for

the year ended December 31, 2005. There have been no significant developments with respect to derivatives or exposure to market risk during the first six months of 2006; for a discussion of the Company’s Financial Instruments, Derivatives and Hedging Activities, see Note 15 in Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and Management’s Discussion and Analysis of Financial Condition and Results of Operations “-Financial Condition, Liquidity and Capital Resources.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management has carried out an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon such evaluation, management has concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2006.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2006 that has materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.”

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2005.

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

At the Company’s Annual Meeting of Stockholders held on May 16, 2006, the stockholders elected the following nominees to the Board of Directors to serve a three-year term. The votes cast were as follows:


Director	For		Withheld
G. Andrea Botta		174,613,021		622,243
William R. Fields		174,689,627		545,637
Harold R. Logan		174,485,697		749,567

The terms of Jeffrey H. Coors, Kevin J. Conway, Robert W. Tieken, John D. Beckett, Stephen M. Humphrey and John R. Miller continued after the Annual Meeting of Stockholders. No matters other than the election of directors were submitted to the stockholders of the Company at the Annual Meeting.

ITEM 6. EXHIBITS

Exhibit Index


Exhibit Number		Description

3.1		Amended and Restated Bylaws of Graphic Packaging Corporation. Filed on July 24, 2006 as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.1		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Jeffrey H. Coors. Filed on July 24, 2006 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.2		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Stephen M. Humphrey. Filed on July 24, 2006 as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.3		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and David W. Scheible. Filed on July 24, 2006 as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.4		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Daniel J. Blount. Filed on July 24, 2006 as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.5		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Stephen A. Hellrung. Filed on July 24, 2006 as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.6		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Wayne E. Juby. Filed on July 24, 2006 as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.7		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Michael R. Schmal. Filed on July 24, 2006 as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.8		Employment Agreement dated as of July 20, 2006 by and between Graphic Packaging International, Inc., Graphic Packaging Corporation and Robert M. Simko. Filed on July 24, 2006 as Exhibit 10.8 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

10.9		Amendment No. 3 to Stockholders Agreement dated as of July 20, 2006 by and among Graphic Packaging Corporation, the Family Stockholders named therein, Clayton, Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.9 to the Registrant’s Current Report on Form 8-K (Date of Earliest Event Reported: July 20, 2006) and incorporated herein by reference.

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.


GRAPHIC PACKAGING CORPORATION
(Registrant)

/s/ STEPHEN A. HELLRUNG	Senior Vice President, General
Stephen A. Hellrung	Counsel and Secretary	August 2, 2006

/s/ DANIEL J. BLOUNT	Senior Vice President and
Daniel J. Blount	Chief Financial Officer (Principal Financial Officer)	August 2, 2006

/s/ DEBORAH R. FRANK	Vice President and Controller
Deborah R. Frank	(Principal Accounting Officer)	August 2, 2006

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PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO