SecProbe.io

CORRESP
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filename1.htm

December
22, 2005

VIA FEDERAL EXPRESS

Mr. Karl Hiller

Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, DC  20549-7010

  Re:

  Graphic Packaging
  Corporation

  Form 10-K/A2 for the
  Fiscal Year Ended December 31, 2004 filed August 9, 2005

  Form 10-Q for the Quarter
  Ended September 30, 2005 filed November 3, 2005

  File No. 001-13182

Dear Mr. Hiller:

                Graphic
Packaging Corporation (the “Company”) is hereby responding to the comments
contained in your letter dated December 8, 2005 relating to Amendment No. 2 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2004 (the “10-K”) and the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005 (the “10-Q”).
The comments of the Staff are set forth in bold and italicized text
below and the Company’s responses are set forth in plain text immediately
beneath each comment.

Form 10-K/A2 for the Fiscal Year
Ended December 31, 2004

Management’s Discussion and Analysis
of Financial Condition and Results of Operations, page 5

The Merger, page 5

1.                                      Although
you disclose that you achieved an annualized synergy rate of $72 million during
2004, it is unclear how you have calculated this measure.  Please expand your disclosure to explain your
approach in measuring the synergy rate, to the extent necessary to convey the
relevance of this measure and whether the financial benefit you suggest has
been achieved is temporary or structural in nature.  The impact of the synergy rate on the
indicative value of your reported historical results should be clear.

A.           The Company has used the
term “synergy rate” as it is commonly defined to mean a rate of change effected
by a combined entity that is greater than either separate entity could have
individually achieved.  Accordingly, the
Company includes only those amounts expected to be permanent improvements such
as (i) lower raw material costs due to the vertical integration of the Company’s
paperboard

production into its converting
operations, as well as the leveraging of the post-merger Company’s purchasing
power, (ii) lower operating expenses as a result of headcount reductions, and
(iii) increased sales volumes as a result of complimentary product offerings in
the calculation of its annualized synergy rate.  Because we do not believe this term as
presented is misleading, we respectfully propose to include the description
provided below in any future filings that discuss the annualized synergy rate.

“The Company includes only
those amounts expected to be permanent improvements such as (i) lower raw
material costs due to the vertical integration of the Company’s paperboard
production into its converting operations, as well as the leveraging of the
post-merger Company’s purchasing power, (ii) lower operating expenses as a
result of headcount reductions, and (iii) increased sales volumes as a result
of complimentary product offerings in the calculation of its annualized synergy
rate.”

Credit Agreement EBITDA, page 18

2.                                      We
note that you disclose that your ability to borrow under the Senior Secured
Credit Agreement is dependent on, among other things, your compliance with the
financial ratio covenants, e.g., Consolidated Debt to Credit Agreement EBITDA
Leverage Ratio and Credit Agreement EBITDA to Consolidated Interest Expense
Ratio, and that your ability to comply with such covenants is relevant to an
understanding of liquidity.  However, you
then disclose a measure of Credit Agreement EBITDA, reconciled to Combined Loss
Attributable to Common Stockholders (using actual results for 2004; pro forms
results for 2003 and 2002), without presenting the ratios you reference as the
basis for disclosure.

Given your emphasis on the ratios, the implication that compliance has
on your ability to borrow under the credit agreement, and the extent to which
you have not complied with the provisions of Item 10(e) of Regulation S-K, it
would seem most appropriate to disclose the actual ratios achieved, rather than
aggregate measures of Credit Agreement EBITDA (since these are not the
covenants).  Please revise your
disclosure accordingly.  Explain how you
calculate the financial ratios, and disclose any instance of non-compliance
with your financial ratio covenants.  Any
retention of pro forma ratios should be accompanied by disclosure
substantiating their relevance and reliability.

                                                                        A.    We agree that our disclosure regarding the
Company’s compliance with the financial covenants in the Senior Secured Credit
Agreement can be improved by focusing on the actual covenants, instead of the
components of such covenants, such as Credit Agreement EBITDA.  However, given that the covenant requirements
were amended on October 17, 2005, we believe it could be confusing to investors
to refile the

2

Company’s 2004 10-K using
information based on the previous covenant requirements.  In addition, we believe the information is of
limited usefulness to investors as we are in the process of preparing the
Company’s Annual Report on Form 10-K for fiscal 2005, which will contain much
more current information.  We expect to
file the Company’s Annual Report on Form 10-K for fiscal 2005 with the
Securities and Exchange Commission in early March 2006.  Accordingly, we respectfully request that we
be permitted to prospectively enhance our disclosures by including the
following (as updated for the appropriate filing period) in future filings:

Covenant Restrictions

                The
Senior Secured Credit Agreement, 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 unanticipated capital investments or take
advantage of business opportunities. The covenants contained in the Senior
Secured Credit Agreement, among other things, restrict the ability of the
Company to dispose of assets, incur additional indebtedness, incur guarantee
obligations, prepay 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 in the Senior Secured Credit Agreement specify, among other
things, the following requirements for each four quarter period ending during
the following test periods:

  Test Period

  Consolidated Debt to

  Credit Agreement EBITDA

  Leverage Ratio(A)

  Credit Agreement

  EBITDA to Consolidated

  Interest Expense Ratio(A)

  December 31, 2004—December
  30, 2005

  6.15
  to 1.00

  2.25
  to 1.00

  December 31, 2005—December
  30, 2006

  5.75
  to 1.00

  2.35
  to 1.00

  December 31, 2006—December
  30, 2007

  5.25
  to 1.00

  2.50
  to 1.00

  December 31, 2007—December
  30, 2008

  4.75
  to 1.00

  2.75
  to 1.00

  December 31, 2008—June 30,
  2010

  4.50
  to 1.00

  2.90
  to 1.00

At December 31, 2004, 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 - 5.13

  Credit
  Agreement EBITDA to Consolidated Interest Expense Ratio - 2.81

3

                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:

  As Restated

  Year Ended

  December 31, 2004

  (Amounts in Millions)

  Net Loss

  $

  (60.9

  )

  Income Tax Expense

  28.9

  Interest Expense, Net

  149.0

  Depreciation and
  Amortization

  228.9

  Equity in Net Earnings of
  Affiliates

  (1.4

  )

  Credit Agreement EBITDA
  Adjustments (A)

  50.6

  Credit Agreement EBITDA (B)

  $

  395.1

  Year
  Ended

  December
  31, 2004

  (Amounts
  in Millions)

  Interest Expense

  $

  149.6

  Amortization of Deferred
  Debt Issuance Costs

  (8.7

  )

  Interest Income

  (0.6

  )

  Credit Agreement Interest
  Expense Adjustments (C)

  0.1

  Consolidated Interest Expense
  (D)

  $

  140.4

4

  As of

  December
  31, 2004

  (Amounts
  in Millions)

  Short Term Debt

  $

  14.2

  Long Term Debt, Less
  Current Portion

  2,011.0

  Total Debt

  $

  2,025.2

Notes:

(A)
Credit agreement EBITDA adjustments include non-cash charges for pension,
postretirement and postemployment benefits, amortization of premiums on hedging
contracts, write-down of assets, merger related expenses deducted in
determining net income and dividends from equity investments.

(B)
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.

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

(D)
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 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 and
profitability strategies. If a violation of any of the covenants occurred, the
Company would attempt to obtain a waiver or an amendment from its lenders,
although no assurance can be given that the Company would be successful in 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.  The Senior Secured Credit
Agreement is collateralized by substantially all of the Company’s domestic
assets.

5

Unaudited Condensed Pro Forma
Combined Statement of Operations, page 31

3.                                      In
preparing the pro forma information required under paragraph 54 of SFAS 141, we
believe you should adhere to the limitations on adjustments set forth in
paragraph 55 of that guidance.  You may
also refer to the guidance of Article 11 of Regulations S-X, in determining
whether your adjustments are appropriate.

A.           The Company believes it has
complied with the provisions of Statement of Financial Accounting Standard No.
141, Business Combinations (“SFAS
No. 141”), as the Company allocated the cost of an acquired entity to the
assets acquired and liabilities assumed based on their estimated fair values at
date of acquisition.  In order to provide
even greater clarity, however, we respectfully request that we be permitted to
enhance our disclosures by including the following in future filings to address
the concerns set forth in Comments 3(a), (b) and (c):

                At
minimum, please address the following pro form adjustments:

a.  Footnote
A, page 33:  You disclose that your cost
of sales includes an adjustment of approximately $7 million for the year ended
December 31, 2003 to eliminate the effect of the increase in fair value of
inventory which was recorded as an addition to cost of sales as a non-recurring
item in 2003.  Clarify why the original
charge was non-recurring and why you eliminated it as a pro forma adjustment.

A. “RIC sold coated unbleached kraft paperboard (“CUK”)
folding boxboard to Graphic for use in certain cartons manufactured by Graphic.
This pro forma adjustment eliminates the intercompany sales and cost of sales
of $38.0 million and $52.8 million for the period ended August 8, 2003, and the
year ended December 31, 2002, respectively, related to this activity. Cost of
Sales also includes an adjustment of approximately $7.0 million for the year
ended December 31, 2003 to eliminate the effect of the increase in fair value
of inventory in 2003. This one-time step-up to fair value was a result of the
requirement under purchase accounting to eliminate manufacturing profits from
the sale of the acquired inventory.”

b.  Footnote
B, page 33:  You disclose that your
depreciation expense would have decreased by $1.3 million and $2.2 million for
the years ended December 2003 and 2002, respectively, as a result of your
revision of the depreciable asset lives.
Explain why you revised the asset lives.

A. “The amortization of the identifiable intangible assets (customer
contracts, patents and proprietary technology) is reflected as a pro forma
adjustment to th