---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





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




| |  | For the quarterly period ended September 30, 2002
| |  | -------------------------------------------------




OR





| ̈ |  | 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: 0-20704





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GRAPHIC PACKAGING INTERNATIONAL CORPORATION


(Exact name of registrant as specified
in its charter)





Colorado

84-1208699(State or other jurisdiction of

(I.R.S. Employer Identification No.)incorporation or organization)





4455 Table Mountain Drive, Golden, Colorado

80403(Address of principal executive offices)

(Zip Code)





(303) 215-4600


(Registrants telephone number, including area code)





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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  x  No  ̈





There were 32,926,055 shares of common stock outstanding as of September 30, 2002.





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---




PART I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONSOLIDATED INCOME STATEMENT


(In thousands, except per share data)





Three months ended September 30,


Nine months ended September 30,2002


2001


2002


2001Net sales

$
270,002


$
270,818


$
797,643


$
842,514Cost of goods sold


240,949



234,363



701,403



723,549Gross profit


29,053



36,455



96,240



118,965Selling, general and administrative expense


16,192



16,061



46,887



46,978Goodwill amortization






5,175







15,487Asset impairment and restructuring charges














3,000Operating income


12,861



15,219



49,353



53,500Gain on sale of assets














3,650Interest expense


(11,310
)


(12,429
)


(35,059
)


(42,084
)Income before income taxes, extraordinary item and cumulative effect of change in accounting
principle


1,551



2,790



14,294



15,066Income tax expense


(604
)


(1,160
)


(5,575
)


(6,026
)Income before extraordinary item and cumulative effect of change in accounting principle


947



1,630



8,719



9,040Extraordinary loss on early extinguishment of debt, net of tax of $6,149










(9,617
)


Income (loss) before cumulative effect of change in accounting principle


947



1,630



(898
)


9,040Cumulative effect of change in goodwill accounting, net of tax of $0










(180,000
)


Net income (loss)


947



1,630



(180,898
)


9,040Preferred stock dividends declared


(2,500
)


(2,500
)


(7,500
)


(7,500
)Net income (loss) attributable to common shareholders

$
(1,553
)

$
(870
)

$
(188,398
)

$
1,540











See Notes to Consolidated Financial Statements.




2




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GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONSOLIDATED INCOME STATEMENT


(In thousands,
except per share data)





Three months ended September 30,


Nine months ended September
30,2002


2001


2002


2001Net income (loss) attributable to common shareholders per basic and diluted share:Before extraordinary item and cumulative effect of change in accounting principle

$
(0.05
)

$
(0.03
)

$
0.04


$
0.05Extraordinary loss










(0.30
)


Cumulative effect of change in accounting principle










(5.52
)


$
(0.05
)

$
(0.03
)

$
(5.78
)

$
0.05Weighted average shares outstandingbasic


32,839



31,882



32,585



31,459Weighted average shares outstandingdiluted


32,839



31,882



33,999



32,444














See Notes to Consolidated Financial Statements.




3




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GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


(In thousands)





Three months ended September 30,


Nine months ended September 30,2002

2001


2002


2001Net income (loss)

$
947

$
1,630


$
(180,898
)

$
9,040Other comprehensive income:Foreign currency translation adjustments


1


46



342



(284
)Cumulative effect of change in accounting for interest rate swaps, net of tax of $2,012













(3,217
)Recognition of hedge results to interest expense during the period, net of tax of $457, $214, $2,276, and $793,
respectively


736


343



3,664



1,269Amortization of cancelled interest rate swap, net of tax of $137 and $320, respectively


220






513



Change in fair value of cash flow hedges during the period, net of tax of $425, $969, $296, and $2,017,
respectively


684


(1,551
)


476



(3,224
)Other comprehensive income (loss)


1,641


(1,162
)


4,995



(5,456
)Comprehensive income (loss)

$
2,588

$
468


$
(175,903
)

$
3,584














See Notes to Consolidated Financial Statements.




4




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GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONSOLIDATED BALANCE SHEET


(In thousands, except share data)





September 30, 2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
10,646


$
6,766Accounts receivable


68,755



59,474Inventories:Finished


52,504



55,057In process


10,691



15,258Raw materials


26,391



22,093Total inventories


89,586



92,408Other assets


27,520



33,156Total current assets


196,507



191,804Properties, net


419,240



443,712Goodwill, net


379,696



559,696Other assets


30,033



34,123Total assets

$
1,025,476


$
1,229,335LIABILITIES AND SHAREHOLDERS EQUITYCurrent maturities of long-term debt

$
3,610


$
37,373Accounts payable


89,633



59,002Other current liabilities


66,638



73,026Total current liabilities


159,881



169,401Long-term debt


475,300



488,386Other long-term liabilities


71,288



73,900Total liabilities


706,469



731,687Shareholders equityPreferred stock, nonvoting, 20,000,000 shares authorized:Series A, $0.01 par value, no shares issued or outstanding Series B, $0.01 par value, 1,000,000 shares issued and
outstanding at stated value of $100 per share


100,000



100,000Common stock, $0.01 par value 100,000,000 shares authorized and 32,926,055 and 32,188,941 issued and outstanding at
September 30, 2002, and December 31, 2001, respectively


329



322Paid-in capital


415,004



417,749Accumulated deficit


(181,460
)


(562
)Accumulated other comprehensive loss


(14,866
)


(19,861
)Total shareholders equity


319,007



497,648Total liabilities and shareholders equity

$
1,025,476


$
1,229,335





See Notes to Consolidated Financial Statements.




5




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GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONSOLIDATED STATEMENT OF CASH FLOWS


(In thousands)





Nine months ended September
30,2002


2001Cash flows from operating activities:Net income (loss)

$
(180,898
)

$
9,040Adjustments to reconcile net income (loss) to net cash provided by operating activities:Goodwill impairment


180,000



Asset impairment charges






1,500Extraordinary loss on early extinguishment of debt


15,766



Gain on sale of assets






(3,650
)Depreciation


45,950



44,564Amortization of goodwill






15,487Amortization of debt issuance costs


2,539



5,920Compensation expense settled in stock


3,377



4,140Change in current assets and current liabilities:Accounts receivable


(9,281
)


(8,245
)Inventory


2,822



9,012Other current assets


5,636



(727
)Accounts payable


30,631



4,588Other current liabilities


(1,735
)


8,073Other


(726
)


3,894Net cash provided by operating activities


94,081



93,596Cash flows from investing activities:Capital expenditures


(21,049
)


(22,135
)Proceeds from sale of assets






8,950Net cash used in investing activities


(21,049
)


(13,185
)Cash flows from financing activities:Repayment of debt


(730,426
)


(225,900
)Proceeds from borrowings


683,577



155,235Payment of debt issuance costs


(16,019
)


Payment of preferred stock dividends


(7,500
)


(9,583
)Issuance of common stock and other


1,216



117Net cash used in financing activities


(69,152
)


(80,131
)Cash and cash equivalents:Net increase in cash and cash equivalents


3,880



280Balance at beginning of period


6,766



4,012Balance at end of period

$
10,646


$
4,292





See Notes to Consolidated Financial Statements.




6




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GRAPHIC PACKAGING INTERNATIONAL CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1.    Nature of Operations and Basis of Presentation





Graphic
Packaging International Corporation (the Company or GPIC) is a manufacturer of packaging products used by consumer product companies as primary packaging for their end-use products.





The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the
disclosures included herein are adequate to make the information presented not misleading. A description of the Companys accounting policies and other financial information is included in the audited financial statements filed with the
Securities and Exchange Commission in the Companys Form 10-K/A for the year ended December 31, 2001.





In the
opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to fairly state the financial position of the Company at September 30, 2002, and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The results of operations for the three months ended September 30, 2002 are not necessarily indicative of the results that may be achieved for the full fiscal year and cannot be used
to indicate financial performance for the entire year.





Certain prior year amounts have been reclassified to
conform with the current year presentation.





Note 2.    Goodwill Accounting





SFAS No. 142, Goodwill and Other Intangible Assets,was issued in 2001 and became effective on January 1, 2002 for the Company.
This statement establishes new accounting and reporting standards that, among other things, eliminate amortization of goodwill and certain intangible assets with indefinite useful lives. The Company does not have any intangible assets with
indefinite useful lives; however, as required by the new standard, the Companys goodwill will be evaluated annually for impairment using a fair-value based approach and, if there is impairment, the carrying amount of goodwill will be written
down to its implied fair value.





Effective January 1, 2002, the Company assigned the carrying value of its
goodwill, totaling $560 million, to one reporting unit. Management has completed the transitional impairment testing of the Companys goodwill and has determined that the Companys goodwill was impaired by $180 million at January 1, 2002.
The fair value of the goodwill was derived using a discounted cash flow method. The transitional impairment loss is reflected as a cumulative effect of change in accounting principle in the accompanying income statement. Future impairments of
goodwill, if any, will be charged to operating income in the period in which impairment arises.





Of the $560
million carrying value of goodwill at December 31, 2001, $418 million is deductible for Federal income tax purposes and $142 million is not deductible. The $180 million goodwill impairment charge consists of approximately $131 million of deductible
goodwill and approximately $49 million of non-deductible goodwill. The $131 million tax deductible portion of the impairment charge resulted in a deferred tax benefit/asset of approximately $50 million. We recorded a 100% valuation allowance against
the approximately $50 million deferred tax asset resulting from recognition of the transitional goodwill impairment loss. Therefore, the cumulative effect of change in accounting principle reflected in the accompanying income statement is net of $0
tax benefit.





Effective January 1, 2002, the Company stopped amortizing its goodwill as required by SFAS No. 142.
The annual reduction in amortization expense is approximately $20.6 million before taxes. Because some of the Companys goodwill amortization is nondeductible for tax purposes, the Companys effective tax rate is lower as a result of
implementing SFAS No. 142. The change in the carrying amount of the Companys goodwill for the nine months ended September 30, 2002 consists entirely of the impairment of $180 million.




7




---

The Company recorded its transitional goodwill impairment charge during the second quarter of 2002, as permitted by SFAS
No. 142. The following table presents the results of operations for the first quarter of 2002 after giving effect to the goodwill impairment charge (in thousands):





As Reported in Form 10-Q


As Adjusted for Goodwill ImpairmentOperating income

$
19,405


$
19,405Net loss attributable to common shareholders

$
(7,171
)

$
(187,171
)Net loss attributable to common shareholders per basic and diluted share

$
(0.22
)

$
(5.79
)





The following table illustrates net income (loss) attributable to
common shareholders and earnings per share, exclusive of goodwill amortization expense in the prior year periods (in thousands):





Three Months Ended September
30,


Nine Months Ended September
30,2002


2001


2002


2001Reported net income (loss) before extraordinary item attributable to common shareholders

$
(1,553
)

($
870
)

$
(178,781
)

$
1,540Extraordinary item










(9,617
)


Reported net income (loss) attributable to common shareholders


(1,553
)


(870
)


(188,398
)


1,540Goodwill amortization, net of tax






3,105







9,292Adjusted net income (loss) attributable to common shareholders

$
(1,553
)

$
2,235


$
(188,398
)

$
10,832Earnings per sharebasic:Reported net income (loss) before extraordinary item attributable to common shareholders

$
(0.05
)

($
0.03
)

$
(5.48
)

$
0.05Extraordinary item










(0.30
)


Reported net income (loss) attributable to common shareholders


(0.05
)


(0.03
)


(5.78
)


0.05Goodwill amortization, net of tax






0.10







0.29Adjusted net income (loss) attributable to common shareholders

$
(0.05
)

$
0.07


$
(5.78
)

$
0.34Earnings per sharediluted:Reported net income (loss) before extraordinary item attributable to common shareholders

$
(0.05
)

($
0.03
)

$
(5.48
)

$
0.05Extraordinary item










(0.30
)


Reported net income (loss) attributable to common shareholders


(0.05
)


(0.03
)


(5.78
)


0.05Effect of additional dilutive securities(1)






0.05







0.06Goodwill amortization, net of tax






0.04







0.12Adjusted net income (loss) attributable to common shareholders

$
(0.05
)

$
0.06


$
(5.78
)

$
0.23


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|(1) |  | Includes the dilutive effect from the conversion of preferred stock into 48.5 million shares of common stock and the elimination of $2.5 million per quarter of
preferred stock dividends, as well as the dilutive effect from the conversion of other common stock equivalents into 1.4 million shares of common stock for those periods where conversion is dilutive.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



8




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Note 3.    New Accounting Pronouncements





In 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the recognition of a
liability and offsetting asset for any legal obligation associated with the retirement of long-lived assets. The asset retirement cost is depreciated over the life of the related asset. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Management does not believe SFAS No. 143 will have a significant effect on the Company.





SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued on April 30, 2002. SFAS No. 145 includes, among other things, the rescission of
SFAS No. 4, which required that gains and losses from early extinguishment of debt be classified as an extraordinary item, net of related income tax effects. Under the new guidance of SFAS No. 145, losses from early extinguishment of debt will be
classified as extraordinary items only when the losses are considered unusual in nature and infrequent in occurrence. SFAS No.145 will be effective for the Company on January 1, 2003, at which time the Company will reclassify its first quarter 2002
loss on early extinguishment of debt as a non-extraordinary item.





SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,was issued on July 30, 2002. SFAS No. 146 will require companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 is effective for the Company on January 1, 2003 and will have no effect on the Companys historical financial results.





Note 4.    Refinancing Transactions





On February 28, 2002, the
Company completed certain refinancing transactions that replaced its then existing debt instruments with longer-term facilities more conducive to the Companys long-range needs. The refinancing consisted of the following concurrent
transactions:





| |  |  | The Companys wholly owned subsidiary, Graphic Packaging Corporation (GPC), issued $300 million aggregate principal amount of 8 5/8% senior subordinated
notes due in 2012 in a Rule 144A transaction. Net proceeds from the sale of the notes totaled approximately $294.1 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | GPC entered into a new $450 million senior secured credit facility. The new facility includes a $175 million seven-year term note and a $275 million five-year
revolving line of credit. Initial borrowings under the revolving line of credit totaled $62.6 million. Initial interest rates for the seven-year term note and the five-year revolving line of credit were 6.5% and 5.75%, respectively. Interest rates
have subsequently dropped to 4.57% and 3.80%, respectively, at September 30, 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The Company used the proceeds from the refinancing transactions to retire GPICs then existing senior credit facilities, to repurchase $50 million of
subordinated notes due to Golden Heritage, LLC, a related party, at par, to pay interest and expenses and for general corporate purposes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Senior Subordinated Notes





The senior subordinated notes
(the Notes) are unsecured senior subordinated obligations of GPC. Interest accrues at 8 5/8%, payable semi-annually on August 15th and February 15th, beginning on August 15, 2002. The Notes will mature on February 15, 2012. The Notes are
unconditionally and jointly and severally guaranteed by GPIC and its domestic subsidiaries. GPC may redeem the Notes, but prior to 2010, must pay a premium to do so. Upon a change in control, the holders of the Notes may require GPC to repurchase
the Notes at a 1% premium.





GPC issued the Notes under an indenture among GPC, as issuer, GPIC, as a guarantor,
the Companys domestic subsidiaries, as the subsidiary guarantors, and Wells Fargo Bank Minnesota, National Association, as trustee. GPC and GPIC entered into a registration rights agreement which provided for them to use commercially
reasonable efforts to consummate an exchange offer under the Securities Act of 1933, within 210 days of closing. The Company consummated the exchange offer in August 2002.




9




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Senior Secured Credit Facility





GPC is the borrower under the new senior secured credit facility (the Credit Facility). A syndicate of financial institutions serves as lenders, with Morgan Stanley Senior
Funding, Inc. and Credit Suisse First Boston as the joint lead arrangers. The Credit Facility consists of a $275 million, five-year revolving credit facility, or the Revolver, and a $175 million, seven-year term loan, or the Term Loan. The Revolver
bears interest at various pricing options, including LIBOR plus a spread tied to GPCs leverage, with a single principal payment due at maturity. There were no outstanding borrowings under the revolver at September 30, 2002. The Term Loan bears
interest at various pricing options, including LIBOR plus 275 basis points, with principal amortization of 1% a year and the balance due at maturity. The interest rate for the Term Loan was 4.57% at September 30, 2002. The Credit Facility must also
be prepaid with a cash flow recapture calculation, and with certain proceeds from asset sales, and debt or equity offerings. The Credit Facility is collateralized by first priority liens on all material assets of the Company and all of its domestic
subsidiaries. The Companys borrowing arrangements limit the ability to pay dividends other than permitted dividends on the preferred stock, and imposes limitations on the incurrence of additional debt, acquisitions, capital expenditures and
the sale of assets.





The Companys borrowings consist of the following (in thousands):





September 30, 2002

December 31, 2001Seven-year term facility due 2009, variable interest currently at 4.57%

$
173,688

$
Five-year revolving credit facility due 2007, variable interest currently at 3.80%





8-5/8% senior subordinated notes due 2012


300,000


Five-year term facility, variable interest at 4.18%, refinanced in 2002





247,035Revolving credit facility, variable interest at 4.18%, refinanced in 2002





222,75010% subordinated notes, refinanced in 2002





50,000Other notes payable


5,222


5,974Total


478,910


525,759Less current maturities


3,610


37,373Long-term maturities

$
475,300

$
488,386





In connection with the refinancing transactions, the Company
incurred a non-cash charge in 2002 to write off its remaining unamortized debt issuance costs associated with the refinanced debt of $15.8 million, pretax, which has been reflected as an extraordinary loss in the accompanying income statement.





Note 5.    Restructuring Charges





The Company recorded restructuring charges totaling $2.4 million in the fourth quarter of 2001 in connection with the announced closure of the Newnan, Georgia plant. The
restructuring charges relate to severance packages for 105 plant personnel that were communicated to employees in December 2001. The Company shut down the plant's operations during the third quarter of 2002 and plans to sell the plant's building and
land which has a combined net book value of $1.8 million. The Company substantially completed the Newnan restructuring plan during the third quarter of 2002. Restructuring payments made during the first nine months of 2002 under this program totaled
$0.9 million.




10




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The following table summarizes accruals related to all of the Companys
restructuring activities during the first nine months of 2002 (in millions):





2000 Saratoga Springs Closure


2000/2001 Reduction in Force


2001 Newnan Plant Closure


TotalsBalance, December 31, 2001

$
0.1


$
0.2


$
2.4


$
2.7Cash paid


(0.1
)


(0.2
)






(0.3
)Balance, March 31, 2002


0.0



0.0



2.4



2.4Cash paid










(0.2
)


(0.2
)Balance, June 30, 2002


0.0



0.0



2.2



2.2Cash paid










(0.7
)


(0.7
)Balance, September 30, 2002

$
0.0


$
0.0


$
1.5


$
1.5





Note 6.    Asset Sales





The Company has closed several noncore or underperforming facilities over the past two years. The Company sold its Saratoga Springs, New
York building and land in June 2001 and its Perrysburg, Ohio building and land in July 2001 for cash proceeds of $3.4 million and $1.9 million, respectively. No gain or loss was recognized on the sales.





In the first quarter of 2001, a pre-tax gain of $3.6 million was recognized upon receipt of additional consideration for assets of the
Companys former developmental businesses.





Note 7.    Segment Information





The Companys reportable segments are based on its method of internal reporting, which is based on product category. The Company has
one reportable segmentPackaging. In addition, the Companys holdings and operations outside the United States are nominal. Therefore, no additional segment information is provided herein.





Note 8.    Kalamazoo Labor Dispute





The labor agreement between GPC and the Paper, Allied-Industrial, Chemical and Energy Workers International (PACE) and PACE Local 6-1010, which represents approximately 400 workers at the Kalamazoo,
Michigan paperboard mill and folding carton plant, expired on July 27, 2002, following a four-day extension. On July 22, 2002, the membership of the local voted against ratification of the Companys offer and voted to strike pending the
approval of the international leadership of PACE. As a result of the unions failure to ratify the contract or act on the strike vote by the end of the extension, the Company staffed the operations of the two facilities with salaried and
non-union employees of GPC to ensure the uninterrupted supply of product to its customers. The Company locked out the union employees pending resolution of the contract issues. It is not possible at this time to estimate how long the lockout at
these plants will last. Net incremental costs to the Company due to this labor dispute were approximately $4.5 million before tax through September 30, 2002. These costs include labor, the incremental cost of outside paperboard purchases, additional
security, travel and lodging for temporary workers, and other related expenses. By mid-September, both facilities were running at normal or higher production rates and efficiencies compared to levels prior to the labor dispute and, as a result,
management believes the labor




11




---




dispute will not have a material impact on the Companys future results of operations, financial
position, or cash flows.





Note 9.    Legal Proceedings





On February 19, 2002, Chinyun Kim filed a putative class action claim in District Court, Jefferson County, Colorado against the Company and certain of its shareholders
and directors alleging breach of fiduciary duty in connection with the issuance on August 15, 2000, of the Companys Series B Preferred Stock to the Grover C. Coors Trust. The Court dismissed Plaintiffs claim against the Company for
breach of fiduciary duty while allowing the Plaintiff to proceed against the named directors and shareholders, including certain Coors Family Trusts. The Company believes that the transaction was in the best interests of the Company and its
shareholders and that it acted appropriately. It intends to continue to provide a vigorous defense to this action.





Note
10.    Related Party Transaction





The Company entered into a warehouse sublease on
September 1, 2002 with Rocky Mountain Bottle Company, a partnership partially owned by Coors Brewing Company, a related party. Monthly rent under the sublease is $8,250 and will continue through July 2006.





Note 11.    Supplemental Information





GPC issued $300 million of senior subordinated notes on February 28, 2002. The senior subordinated notes are jointly and severally as well as fully and unconditionally guaranteed by GPIC and its other
domestic subsidiaries. The Companys foreign subsidiaries and a real estate development partnership do not guarantee the senior subordinated notes.





The accompanying supplemental financial information presents condensed consolidating financial statements of (a) Graphic Packaging Corporation (the Issuer); (b) Graphic Packaging International
Corporation (the Parent) and a guarantor; (c) the guarantor subsidiaries; (d) the nonguarantor subsidiaries; and (e) the Company on a consolidated basis.





GPC and GPIC were co-borrowers under the Companys senior bank debt and subordinated debt agreements in effect prior to the refinancing transactions on February 28, 2002. Interest expense under
these borrowing agreements was recorded by GPC. In addition, GPC incurred $2.5 million of interest expense in the three months ended September 30, 2002, and $7.5 million of interest expense in the nine months ended September 30, 2002, pursuant to a
$100 million intercompany loan from GPIC. In the three-month and nine-month periods ended September 30, 2001, GPC incurred $2.2 million and $6.6 million, respectively, of interest pursuant to the same intercompany note that totaled $92.7 million in
2001.





The following condensed consolidating financial statements are presented using the equity method. Under
this method, investments in subsidiaries are recorded at cost and adjusted for the parent companys share of the subsidiaries cumulative results of operations, capital contributions, distributions and other equity changes. The elimination
entries relate primarily to investments in subsidiaries, intercompany loans and other intercompany transactions.




12




---




GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING INCOME STATEMENT


Three
Months Ended September 30, 2002


(in thousands)





Issuer


Parent


Guarantor Subsidiaries


Nonguarantor Subsidiaries


Eliminations


Consolidated TotalNet sales

$
268,616


$



$



$
1,386


$



$
270,002Cost of goods sold


239,754











1,195







240,949Gross profit


28,862











191







29,053Selling, general and administrative expense


16,187











5







16,192Equity in losses (earnings) of subsidiaries subsidiaries


(89
)


593



11







(515
)


Operating income (loss)


12,764



(593
)


(11
)


186



515



12,861Interest (expense) income


(13,792
)


2,500







(18
)






(11,310
)Income (loss) before taxes


(1,028
)


1,907



(11
)


168



515



1,551Income tax (expense) benefit


401



(744
)


3



(64
)


(200
)


(604
)Net income (loss)


(627
)


1,163



(8
)


104



315



947Preferred stock dividends declared






(2,500
)














(2,500
)Net income (loss) attributable to common shareholders

$
(627
)

$
(1,337
)

$
(8
)

$
104


$
315


$
(1,553
)




13




---




GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING INCOME STATEMENT


Three
Months Ended September 30, 2001


(in thousands)





Issuer


Parent


Guarantor Subsidiaries


Nonguarantor Subsidiaries

Eliminations


Consolidated TotalNet sales

$
270,150


$



$



$
668

$



$
270,818Cost of goods sold


233,700











663






234,363Gross profit


36,450











5






36,455Selling, general and administrative expense


16,039







22










16,061Goodwill amortization


5,175


















5,175Equity in (earnings) of subsidiaries


(5
)


(382
)


(17
)





404



Operating income (loss)


15,241



382



(5
)


5


(404
)


15,219Interest (expense) income


(14,610
)


2,155



22



4






(12,429
)Income before taxes


631



2,537



17



9


(404
)


2,790Income tax expense


(262
)


(1,048
)


(14
)


3


161



(1,160
)Net income


369



1,489



3



12


(243
)


1,630Preferred stock dividends declared






(2,500
)













(2,500
)Net income (loss) attributable to common shareholders

$
369


($
1,011
)

$
3


$
12

$
(243
)

$
(870
)




14




---




GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING INCOME STATEMENT


Nine
Months Ended September 30, 2002


(in thousands)





Issuer


Parent


Guarantor Subsidiaries


Nonguarantor Subsidiaries


Eliminations


Consolidated TotalNet sales

$
793,167


$



$



$
4,476


$



$
797,643Cost of goods sold


697,652











3,751







701,403Gross profit


95,515











725







96,240Selling, general and administrative expense


46,838











49







46,887Equity in (earnings) of subsidiaries


(358
)


(4,102
)


(449
)






4,909



Operating income


49,035



4,102



449



676



(4,909
)


49,353Interest (expense) income


(42,537
)


7,500







(22
)






(35,059
)Income before taxes, extraordinary item and cumulative effect of change in accounting principle


6,498



11,602



449



654



(4,909
)


14,294Income tax expense


(2,535
)


(4,525
)


(366
)


(64
)


1,915



(5,575
)Income before extraordinary item and cumulative effect of change in accounting principle


3,963



7,077



83



590



(2,994
)


8,719Extraordinary loss on early extinguishment of debt, net of tax


(9,617
)


















(9,617
)Income (loss) before cumulative effect of change in accounting principle


(5,654
)


7,077



83



590



(2,994
)


(898
)Cumulative effect of change in goodwill accounting, net of tax


(180,000
)


















(180,000
)Net income (loss)


(185,654
)


7,077



83



590



(2,994
)


(180,898
)Preferred stock dividends declared






(7,500
)














(7,500
)Net income (loss) attributable to common shareholders

$
(185,654
)

$
(423
)

$
83


$
590


$
(2,994
)

$
(188,398
)




15




---

GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING INCOME STATEMENT


Nine Months Ended September 30, 2001


(in thousands)





Issuer


Parent


Guarantor Subsidiaries


Nonguarantor Subsidiaries


Eliminations


Consolidated TotalNet sales

$
839,928


$



$



$
2,586


$



$
842,514Cost of goods sold


721,037











2,512







723,549Gross profit


118,891











74







118,965Selling, general and administrative expense


46,886







47



45







46,978Goodwill amortization


15,487



















15,487Asset impairment and restructuring charges


3,000



















3,000Equity in (earnings) of subsidiaries


(2,463
)


(5,178
)


(141
)






7,782



Operating income


55,981



5,178



94



29



(7,782
)


53,500Gain on sale of assets










3,650











3,650Interest (expense) income


(49,008
)


6,464



300



160







(42,084
)Income before taxes


6,973



11,642



4,044



189



(7,782
)


15,066Income tax expense


(2,765
)


(4,673
)


(1,666
)


(19
)


3,097



(6,026
)Net income


4,208



6,969



2,378



170



(4,685
)


9,040Preferred stock dividends declared






(7,500
)














(7,500
)Net income (loss) attributable to common shareholders

$
4,208


$
(531
)

$
2,378


$
170


$
(4,685
)

$
1,540




16




---

GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING BALANCE SHEET


At September 30, 2002


(in thousands)





Issuer


Parent

Guarantor Subsidiaries


Nonguarantor Subsidiaries


Eliminations


Consolidated TotalASSETSCurrent assetsCash and cash equivalents

$
6,940


$


$



$
3,706


$



$
10,646Accounts receivable


65,394



2,437






924







68,755Inventories


89,194










392







89,586Other assets


27,484






1



24,008



(23,973
)


27,520Total current assets


189,012



2,437


1



29,030



(23,973
)


196,507Properties, net


410,414










8,826







419,240Goodwill, net


379,696


















379,696Other assets


30,375



560,667


7,356



18,055



(586,420
)


30,033Total assets

$
1,009,497


$
563,104

$
7,357


$
55,911


$
(610,393
)

$
1,025,476LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesCurrent maturities of long-term debt

$
2,252


$


$



$
1,358


$



$
3,610Accounts payable


88,957



166






510







89,633Other current liabilities


63,145



23,851


2,532



1,083



(23,973
)


66,638Total current liabilities


154,354



24,017


2,532



2,951



(23,973
)


159,881Long-term debt


473,291










235,291



(233,282
)


475,300Other long-term liabilities


165,588



1,809










(96,109
)


71,288Total liabilities


793,233



25,826


2,532



238,242



(353,364
)


706,469Shareholders equity:Preferred stock






100,000














100,000Common stock






329


1,829



1,540



(3,369
)


329Paid-in capital


424,996



194,519


242,244



(182,037
)


(264,718
)


415,004Retained earnings (deficit)


(194,647
)


242,430


(239,248
)


(1,053
)


11,058



(181,460
)Accumulated other comprehensive income (loss)


(14,085
)









(781
)






(14,866
)Total shareholders equity


216,264



537,278


4,825



(182,331
)


(257,029
)


319,007Total liabilities and shareholders equity

$
1,009,497


$
563,104

$
7,357


$
55,911


$
(610,393
)

$
1,025,476




17




---




GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING BALANCE SHEET


At
December 31, 2001


(in thousands)





Issuer


Parent

Guarantor Subsidiaries


Nonguarantor Subsidiaries


Eliminations


Consolidated TotalASSETSCurrent assetsCash and cash equivalents

$
1,145


$
976

$



$
4,645


$



$
6,766Accounts receivable


56,560



135,301


93



834



(133,314
)


59,474Inventories


92,154










254







92,408Other assets


33,101










24,024



(23,969
)


33,156Total current assets


182,960



136,277


93



29,757



(157,283
)


191,804Properties, net


434,549










9,163







443,712Goodwill, net


559,696


















559,696Other assets


18,626



471,914


8,147



18,075



(482,639
)


34,123Total assets

$
1,195,831


$
608,191

$
8,240


$
56,995


$
(639,922
)

$
1,229,335LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesCurrent maturities of long-term debt

$
36,156


$


$



$
1,217


$



$
37,373Accounts payable


58,110



534






358







59,002Other current liabilities


59,929



33,286


2,730



1,500



(24,419
)


73,026Total current liabilities


154,195



33,820


2,730



3,075



(24,419
)


169,401Long-term debt


579,006










2,055



(92,675
)


488,386Other long-term liabilities


208,823



1,959






233,357



(370,239
)


73,900Total liabilities


942,024



35,779


2,730



238,487



(487,333
)


731,687Shareholders equity:Preferred stock






100,000














100,000Common stock






322


1,829



1,540



(3,369
)


322Paid-in capital


283,787



234,975


243,012



(180,753
)


(163,272
)


417,749Retained earnings (deficit)


(8,993
)


235,353


(239,331
)


(1,643
)


14,052



(562
)Accumulated other comprehensive income (loss)


(20,987
)


1,762






(636
)






(19,861
)Total shareholders equity


253,807



572,412


5,510



(181,492
)


(152,589
)


497,648Total liabilities and shareholders equity

$
1,195,831


$
608,191

$
8,240


$
56,995


$
(639,922
)

$
1,229,335




18




---




GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


Nine Months Ended September 30, 2002


(in thousands)





Issuer


Parent


Guarantor Subsidiaries

Nonguarantor Subsidiaries


Eliminations

Consolidated TotalNet cash provided by (used in) operating activities

$
89,667


$
5,308


$


$
(894
)

$


$
94,081Cash flows from investing activities:Capital expenditures


(21,049
)
















(21,049
)Net cash used in investing activities


(21,049
)
















(21,049
)Cash flows from financing activities:Repayment of debt


(730,381
)









(45
)





(730,426
)Proceeds from borrowings


683,577

















683,577Payment of debt issuance costs


(16,019
)
















(16,019
)Payment of preferred stock dividends






(7,500
)












(7,500
)Issuance of common stock and other






1,216













1,216Net cash used in financing activities


(62,823
)


(6,284
)





(45
)





(69,152
)Cash and cash equivalents:Net increase (decrease)


5,795



(976
)





(939
)





3,880Balance at beginning of period


1,145



976






4,645






6,766Balance at end of period

$
6,940


$



$


$
3,706


$


$
10,646




19




---

GRAPHIC PACKAGING INTERNATIONAL CORPORATION





CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


Nine Months Ended September 30,
2001


(in thousands)





Issuer


Parent


Guarantor Subsidiaries


Nonguarantor Subsidiaries

Eliminations

Consolidated TotalNet cash provided by (used in) operating activities

$
87,500


$
9,466


$
(3,650
)

$
280

$


$
93,596Cash flows from investing activities:Capital expenditures


(22,135
)
















(22,135
)Proceeds from sale of assets


5,300







3,650









8,950Net cash provided by (used in) investing activities


(16,835
)






3,650









(13,185
)Cash flows from financing activities:Repayment of debt


(225,900
)
















(225,900
)Proceeds from borrowings


155,235

















155,235Payment of preferred stock dividends






(9,583
)












(9,583
)Issuance of common stock and other






117













117Net cash used in financing activities


(70,665
)


(9,466
)












(80,131
)Cash and cash equivalents:Net increase














280





280Balance at beginning of period














4,012





4,012Balance at end of period

$



$



$



$
4,292

$


$
4,292




20




---




Item 2.    Managements Discussion and Analysis of Financial Condition and
Results of Operations





Overview





We are the leading manufacturer of folding cartons in North America according to a Corrugated and Paperboard Boxes study, dated February 2002, prepared by the Freedonia
Group, Inc. We have an estimated 13% market share. Our business strategy is to maintain and improve our customer relationships and market leadership, while leveraging our low cost position.





GPIC was incorporated in Colorado in August 1992 as a holding company for the packaging, ceramics, aluminum and developmental businesses formerly owned by Adolph Coors
Company, or ACCo. In December 1992, ACCo distributed to its shareholders all outstanding shares of GPICs stock. During our initial years, we operated packaging, ceramics, aluminum and various developmental businesses. Through various
acquisitions and divestitures, a spin-off and other transactions, we are now strategically focused on the folding carton segment of the fiber-based product packaging industry.





Segment Information





Our reportable segments are based on our method of internal reporting, which is based on product category. Since January 1, 2000, we have operated principally in the United States and in only one reportable segmentPackaging.





Factors That Impact Our Business





Sales.    We sell our products primarily to major consumer product manufacturers in non-cyclical industries, such as food and beverage providers.
Sales are driven primarily by consumer buying habits in the markets our customers serve. New product introductions and promotional activity by our customers, and our introduction of innovative packaging solutions, also impact our sales.





Our products are used in the following end-use markets:





| |  |  | foodcereal; desserts; frozen and microwave foods; pet foods; prepared foods; snacks; and food service products;
| | - |  | ----------------------------------------------------------------------------------------------------------------




| |  |  | beveragebottle and can carriers; labels and cases;
| | - |  | ---------------------------------------------------




| |  |  | household productsdishwasher and laundry detergent; sporting goods; healthcare; and tissues and papers; and
| | - |  | ------------------------------------------------------------------------------------------------------------




| |  |  | tobaccofliptop boxes and cartons.
| | - |  | ----------------------------------




We market our products directly to our customers through an internal sales force and, to a lesser extent, through brokers. Our top 20 customers, with whom we have long-term relationships, represent
approximately 80% of our gross sales in the first nine months of 2002. Our competition includes other large national folding carton companies, as well as numerous smaller regional companies. Our primary competitors include: Caraustar Industries,
Inc., Field Container Company, L.P., Gulf States Paper Corporation, Rock-Tenn Company and Smurfit-Stone Container Corporation. We work to maintain our market share through quality, service, efficiency, innovation, competitive pricing and strategic
sourcing to our customers.





In addition, we believe that we have the opportunity to expand the folding carton
market by developing new products that can replace other types of packaging. Our research and development organization is closely involved with our customers in the development of new packaging alternatives.





Cost of Goods Sold.    Our costs of goods sold consist primarily of recycled paper fiber, purchased paperboard,
ink, plastic films, resins and labor, which are all variable cost components. Variable costs are approximately 80% and fixed costs are approximately 20% of total costs.





In light of rising margin pressure throughout our industry, we have aggressively reduced costs. We have controlled costs in our converting facilities by coordinating and
determining the optimal configuration of equipment




21




---

among our facilities. A substantial portion of our production is centrally planned and can be allocated among different plants in the system in
order to take advantage of equipment optimization, capacity scheduling, staffing and freight. Our ability to work as an integrated business, as opposed to different units, has given us opportunities to reduce production overhead costs and to take
advantage of economies of scale in purchasing, customer service, freight and other areas common to all of our facilities. In 2000, we began to introduce a company-wide Six Sigma process to reduce our variable manufacturing costs. The term Six
Sigma refers to a measure of business capability. A company that performs at a Six Sigma level has demonstrated one of the following:





1.  the amount of variation in its process is so tightly controlled that there are six standard deviations between the mean and the nearest customer specification (upper and lower control
limit); or





2.  it produces products with a defect rate of not more than 3.4 defects for
every 1 million opportunities.





To achieve Six Sigma, we identify and address the Cost of Poor Quality in both
manufacturing and transactional processes through a disciplined project methodology (Measure, Analyze, Improve, and Control) executed by skilled project leaders called Black Belts and Green Belts.





We have also taken steps to reduce our fixed manufacturing and selling, general and administrative costs. In addition to closing plants
and moving equipment and business to other facilities, we have eliminated positions to reduce fixed personnel costs and have begun to use the Six Sigma program to make our non-production business processes more cost effective.





Results of Operations





Net sales for the three months ended September 30, 2002 were $270.0 million, a nominal decrease of $0.8 million, compared to the third quarter of 2001. Sales for the nine months ended September 30, 2002 were $797.6 million, a
decrease of $44.9 million, or 5%, compared to the same period in 2001. In the first nine months of 2001, we enjoyed exceptionally strong sales to customers for one-time product promotions and new, value-added business. By the end of the third
quarter of 2001, we started to experience lower sales, which trend has continued through the third quarter of 2002. We believe our customers are focused on managing their inventories as they face an uncertain economy and, in some cases, have
experienced lost sales due to recent industry consolidation and due to a softening in the dry foods market. This trend resulted in lower orders from customers and, in some cases, temporary plant shutdowns by our customers. The impact on our company
has been primarily reduced volume.





Gross profit, as a percentage of net sales, was 10.8% for the third quarter of
2002 and 12.1% for the nine months ended September 30, 2002. Gross profit, as a percentage of net sales, was 13.5% and 14.1% for the comparable periods in 2001. Gross profit as a percentage of sales in the first nine months of 2002 was negatively
impacted by lower sales and the resulting lower absorption of fixed costs, as well as increases in recycled paper fiber costs at our Kalamazoo mill totaling approximately $2.9 million year-to-date. Furthermore, our year-to-date costs in 2002 have
increased over 2001 levels due to the incremental costs related to the Kalamazoo labor dispute of an estimated $4.5 million and the depreciation and maintenance costs of a new manufacturing information technology system totaling $3.5 million. Absent
these additional costs, our gross profit percentage for the nine months ended September 30, 2002 would have been 13.4%. Our system-wide optimization and restructuring activities and emphasis on cost control programs, like Six Sigma, have partially
offset some of the margin decreases.





Selling, general and administrative expenses were $16.2 million, or 6.0% of
net sales, for the three months ended September 30, 2002, and $46.9 million, or 5.9% of net sales, for the nine months ended September 30, 2002. In the comparable periods of 2001, these expenses were $16.1 million and $47.0 million, or 5.9% and 5.6%
of sales, respectively. SG&A expenses have been relatively consistent year over year, with reduced management incentives being offset by costs related to the installation of an ERP information system in 2002. Our goal is to keep selling, general
and administrative expense at or under 6% of net sales.





Interest expense decreased $1.1 million, or 9%, in the
third quarter of 2002, compared to the third quarter of 2001. Year-to-date 2002 interest expense is lower than 2001 by $7.0 million, or 17%, primarily as a result of lower debt balances and lower market interest rates. The interest rate impact from
our February 28, 2002 senior subordinated notes issuance partially offsets the favorable impact of lower market interest rates and lower debt




22




---

balances throughout 2002. The senior subordinated notes have a higher fixed interest rate of 85/8% as long term financing versus the shorter term variable rate bank financing they replaced. The Companys interest expense in 2002 has also been
impacted by net interest payments under several interest rate swap contracts that were entered into when market interest rates were significantly higher. While all the Companys interest rate swap contracts have expired as of September 30,
2002, they resulted in net interest expense of approximately $1.5 million and $6.8 million for the three months and nine months ended September 30, 2002, respectively. In light of our recapitalization in February 2002, management has elected not to
replace these contracts. Our fourth quarter 2002 interest expense will be positively impacted by the absence of these contracts by approximately $1.5 million when compared to the third quarter of 2002.





The effective tax rate for the first nine months of 2002 was approximately 39%, compared to 40% in the first nine months of 2001. Because
some of our goodwill amortization is nondeductible for tax purposes, our effective tax rate is lower as a result of implementing SFAS No. 142, which eliminated goodwill amortization expense for financial reporting purposes effective January 1, 2002.
See discussion of our new goodwill accounting below. We expect to maintain an effective tax rate of approximately 39% for the remainder of 2002.





Kalamazoo Labor Dispute





The labor agreement between GPC and the Paper, Allied-Industrial,
Chemical and Energy Workers International (PACE) and PACE Local 6-1010, which represents approximately 400 workers at our Kalamazoo, Michigan paperboard mill and folding carton plant, expired on July 27, 2002, following a four-day extension. On July
22, 2002, the membership of the local voted against ratification of our companys offer and voted to strike pending the approval of the international leadership of PACE. As a result of the unions failure to ratify the contract or act on
the strike vote by the end of the extension, we staffed the operations of the two facilities with salaried and non-union employees of GPC to ensure the uninterrupted supply of product to our customers. We locked out the union employees pending
resolution of the contract issues. It is not possible at this time to estimate how long the lockout at these plants will last. Net incremental costs to our company due to this labor dispute were approximately $4.5 million before tax through
September 30, 2002. These costs include labor, the incremental cost of outside paperboard purchases, additional security, travel and lodging for temporary workers, and other related expenses. By mid-September, both facilities were running at normal
or higher production rates and efficiencies compared to levels prior to the labor dispute and, as a result, management believes the labor dispute will not have a material impact on our future results of operations, financial position, or cash flows.





Restructuring Charges





We recorded restructuring charges totaling $2.4 million in the fourth quarter of 2001 in connection with the announced closure of the Newnan, Georgia plant. The restructuring charges relate to
severance packages for 105 plant personnel that were communicated to employees in December 2001. We shut down the plants operations during the third quarter of 2002 and plan to sell the plants building and land which has a combined net
book value of $1.8 million. We substantially completed the Newnan restructuring plan during the third quarter of 2002. Restructuring payments made during the first nine months of 2002 under this program totaled $0.9 million.




23




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The following table summarizes accruals related to all of our restructuring
activities during the first nine months of 2002 (in millions):





2000 Saratoga Springs Closure


2000/2001 Reduction in Force


2001 Newnan Plant Closure


TotalsBalance, December 31, 2001

$
0.1


$
0.2


$
2.4


$
2.7Cash paid


(0.1
)


(0.2
)






(0.3
)Balance, March 31, 2002


0.0



0.0



2.4



2.4Cash paid










(0.2
)


(0.2
)Balance, June 30, 2002


0.0



0.0



2.2



2.2Cash paid










(0.7
)


(0.7
)Balance, September 30, 2002

$
0.0


$
0.0


$
1.5


$
1.5





Asset Sales





We have closed several noncore or underperforming facilities over the past two years. We sold our Saratoga Springs, New York building and land in June 2001 and our
Perrysburg, Ohio building and land in July 2001 for cash proceeds of $3.4 million and $1.9 million, respectively. No gain or loss was recognized on the sales.





In the first quarter of 2001, a pre-tax gain of $3.6 million was recognized upon receipt of additional consideration for assets of our former developmental businesses.





Goodwill Accounting





SFAS No. 142, Goodwill and Other Intangible Assets,was issued in 2001 and became effective for us on January 1, 2002. This statement establishes new accounting and reporting standards that, among other things, eliminate
amortization of goodwill and certain intangible assets with indefinite useful lives. We do not have any intangible assets with indefinite useful lives; however, as required by the new standard, our goodwill will be evaluated annually for impairment
using a fair-value based approach and, if there is impairment, the carrying amount of goodwill will be written down to its implied fair value.





Effective January 1, 2002, we assigned the carrying value of our goodwill, totaling $560 million, to one reporting unit. Management has completed the transitional impairment testing of our goodwill and
has determined that our goodwill was impaired by $180 million at January 1, 2002. The fair value of the goodwill was derived using a discounted cash flow method. The transitional impairment loss is reflected as a cumulative effect of change in
accounting principle in the accompanying income statement. Future impairments of goodwill, if any, will be charged to operating income in the period in which impairment arises.





Of the $560 million carrying value of goodwill at December 31, 2001, $418 million is deductible for Federal income tax purposes and $142 million is not deductible. The $180
million goodwill impairment charge consists of approximately $131 million of deductible goodwill and approximately $49 million of non-deductible goodwill. The $131 million tax deductible portion of the impairment charge resulted in a deferred tax
benefit/asset of approximately $50 million. We recorded a 100% valuation allowance against the approximately $50 million deferred tax asset resulting from recognition of the transitional goodwill impairment loss. Therefore, the cumulative effect of
change in accounting principle reflected in the accompanying income statement is net of $0 tax benefit.





Effective
January 1, 2002, we stopped amortizing our goodwill as required by SFAS No. 142. The annual reduction in amortization expense is approximately $20.6 million before taxes. Because some of our goodwill




24




---

amortization is nondeductible for tax purposes, our effective tax rate is lower as a result of implementing SFAS No. 142. The change in the
carrying amount of our goodwill consists entirely of the impairment loss of $180 million for the nine months ended September 30, 2002.





New Accounting Pronouncements





In 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations. SFAS No. 143 requires the recognition of a liability and offsetting asset for any legal obligation associated with the retirement of long-lived assets. The asset retirement cost is depreciated over the life of the
related asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not believe SFAS No. 143 will have a significant effect on our company.





SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was
issued on April 30, 2002. SFAS No. 145 includes, among other things, the rescission of SFAS No. 4, which required that gains and losses from early extinguishment of debt be classified as an extraordinary item, net of related income tax effects.
Under the new guidance of SFAS No. 145, losses from early extinguishment of debt will be classified as extraordinary items only when the losses are considered unusual in nature and infrequent in occurrence. SFAS No.145 will be effective for us on
January 1, 2003, at which time we will reclassify our first quarter 2002 loss on early extinguishment of debt as a non-extraordinary item.





SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,was issued on July 30, 2002. SFAS No. 146 will require companies to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for us on January 1, 2003 and will have no effect on our companys historical financial results.





Related Party Transaction





We entered into a warehouse sublease on September 1, 2002 with Rocky Mountain Bottle Company, a partnership partially owned by Coors Brewing Company, a related party. Monthly rent under the sublease is $8,250 and will continue
through July 2006.





Liquidity and Capital Resources





Our liquidity is generated from both internal and external sources and is used to fund short-term working capital needs, capital expenditures (estimated to be $30 million
in 2002), preferred stock dividends and other general corporate purposes.





Capital Structure





On February 28, 2002, we refinanced our existing senior bank credit facility with $300 million of senior subordinated notes, carrying
interest at 8 5/8%, payable semi-annually and due in 2012, and a new $450 million senior bank credit facility. We collectively refer to these transactions as the Refinancing Transactions.





We intend to fund future working capital needs, capital expenditures, preferred stock dividends and acquisitions through cash flow generated from operations and borrowings
under our new senior bank credit facility. GPC is the borrower under the new senior bank credit facility and the senior subordinated notes, and GPIC has guaranteed the loans. The new senior bank credit facility consists of a $275 million, five-year
revolving credit facility, or the Revolver, and a $175 million, seven-year term loan, or the Term Loan. The Revolver bears interest at various pricing options, including LIBOR plus a spread tied to our leverage, with a single principal payment due
at maturity. The interest rate for the Revolver was 3.80% at September 30, 2002, although no amounts were outstanding at September 30, 2002. The Term Loan bears interest at various pricing options, including LIBOR plus 275 basis points, with
principal amortization of 1% a year and the balance due at maturity. The interest rate for the Term Loan was 4.57% at September 30, 2002. The facilities must also be prepaid with a cash flow recapture calculation, and with certain proceeds from
asset sales, and debt or equity offerings. The facility is collateralized by first priority liens on all material assets of the Company and all of its domestic subsidiaries. The facility limits the Companys ability to pay dividends other than
permitted dividends on the preferred stock, and imposes limitations on the incurrence of additional debt, acquisitions, capital expenditures and the sale of assets.




25




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We used the net proceeds from the Refinancing Transactions to repay our existing
bank debt, to repurchase the existing $50 million of subordinated notes at par from Golden Heritage, LLC, a related party, and to pay related interest, fees and expenses.





In connection with the Refinancing Transactions, we incurred a non-cash charge in 2002 to write off our remaining unamortized debt issuance costs associated with the
refinanced debt. These costs amounted to $15.8 million, pretax, at February 28, 2002.





Our borrowings at September
30, 2002 and December 31, 2001 consist of the following (in thousands):





September 30, 2002

December 31, 2001Seven-year term facility due 2009, variable interest currently at 4.57%

$
173,688

$
Five-year revolving credit facility due 2007, variable interest currently at 3.8%





8-5/8% senior subordinated notes due 2012


300,000


Five-year term facility, variable interest at 4.18%, refinanced in 2002





247,035Revolving credit facility, variable interest at 4.18%, refinanced in 2002





222,75010% subordinated notes, refinanced in 2002





50,000Other notes payable


5,222


5,974Total


478,910


525,759Less current maturities


3,610


37,373Long-term maturities

$
475,300

$
488,386





Our maturities of long-term debt as of September 30, 2002 are as
follows (in thousands):





2002 (remaining three months)

$
2,1262003


1,9272004


1,9232005


1,941Thereafter


470,993$
478,910





Our policies permit the use of derivative instruments to minimize
significant, unanticipated earnings fluctuations that may arise from volatility in interest rates. Specifically, our goals are to (1) manage interest rate sensitivity by modifying the re-pricing or maturity characteristics of some of our debt and
(2) lower (where possible) the cost of our borrowed funds. In accordance with our interest rate risk-management strategy, we had contracts in place at December 31, 2001 to hedge the interest rates on our variable rate borrowings in the form of swap
agreements on $225 million of borrowings. On February 28, 2002, we terminated a $35 million notional value interest rate swap contract and the remaining swap contracts expired by the end of September 2002. We paid net interest on these contracts of
approximately $1.5 million and $6.8 million for the three months and nine months ended September 30, 2002, respectively. In light of our recapitalization in February 2002, we have not elected to enter into replacement swap contracts at this time,
although our policy allows management to enter into new contracts in the future.





Our capital structure also
includes $100 million of Series B preferred stock, issued on August 15, 2000 to the Grover C. Coors Trust, a related party. The Series B preferred stock is convertible into shares of our common stock at $2.0625 per share and is entitled to receive a
dividend payable quarterly at an annual rate of 10%. We may redeem the Series B preferred stock beginning on August 15, 2005 at 105% of par. This premium decreases by 1% per year until August 15, 2010, at which time we can elect to redeem the shares
at par. The Series B preferred stock has a liquidation preference over our common stock and is entitled to one vote for every two shares held on an as-converted basis.




26




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Working Capital





Our working capital before current maturities of long-term debt decreased $19.5 million during the nine months ended September 30, 2002. Our working capital is dependent
upon our ability to manage our inventories, collect our receivables on a timely basis, and maintain favorable terms with our vendors. Our working capital can be negatively impacted if our operations run less efficiently, particularly at times when
business is moved among plants or new plants are acquired, or if inventories build up due to lower than planned sales during a period. The decrease in working capital during the nine months ended September 30, 2002 reflects better management of our
payables and cash, partially offset by increased receivables after having unusually low sales volume during December 2001.





We currently expect that cash flows from operations and borrowings under our new credit facility will be adequate to meet our needs for working capital, financing for capital expenditures, acquisitions, and debt repayments for the
foreseeable future. Our working capital position (including current maturities of long term debt) at September 30, 2002 was $36.6 million, and $269.9 million was available under our revolving credit facility.





We expect our capital expenditures for 2002 to be approximately $30 million, and expect to fund our capital requirements with net cash
from operations.





Pension Plan Assumptions





Based upon preliminary actuarial valuations for the year ended December 31, 2002, we anticipate a significant increase to our minimum pension liability at year end. We are in compliance with our
required minimum pension contributions and expect to maintain this status; however, we did make additional contributions to the pension plan in the third quarter of 2002 totaling $2.3 million.





Inflation





The impact of inflation on our
financial position and results of operations has been minimal and is not expected to adversely affect future results.







27




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Item 3.  Quantitative and Qualitative Disclosures about Market Risk





Interest Rate Risk





As of September 30, 2002, our capital structure includes $173.7 million of debt that bears interest based upon an underlying rate that fluctuates with short-term interest rates, specifically LIBOR.
Since January 1, 2001, one-month LIBOR rates have fluctuated from a high of 5.6% in early 2001 to a low of 1.8% at present. A 1% rise in interest rates would impact annual pre-tax results by approximately $1.7 million. As of November 1, 2001, our
capital structure included $514 million of debt that bore interest based upon an underlying rate that fluctuated with short-term interest rates, specifically LIBOR. In 2001, we had interest rate swap agreements that locked LIBOR at 5.94% on $100
million of our borrowings and 6.98% on $125 million of our borrowings. Until May 2002, we had interest contracts that capped the LIBOR interest rate at 8.13% on $200 million of borrowings and 6.75% on $150 million of borrowings. Due to the LIBOR
declines in 2001 and 2002, our interest rate protection contracts were negatively impacting our interest expense. One year ago, a 1% rise in interest rates would have impacted annual pre-tax results by approximately $2.7 million.





Item 4.   Controls and Procedures





We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation.




28




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Factors That May Affect Future Results





Certain statements in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include words such as anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance or other events. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, a) we are dependent on key customers and strategic relationships, and the loss of key
customers or these relationships could adversely affect our business, financial condition and results of operations; b) we face intense competition and, if we are unable to compete successfully against other manufacturers of folding cartons, we
could lose customers and/or market share and our revenues may decline; c) sales might be lower than expected due to the economy, lower prices and customer inventory adjustments; d) market share estimations are based on third-party information that
may be or become obsolete or inaccurate; e) we have made acquisitions, which entail certain risks, and may do so again in the future, and we cannot guarantee that we will realize the expected benefits from future acquisitions or that our existing
operations will not be harmed as a result of any such acquisitions; f) price fluctuations in raw materials and energy costs could adversely affect our manufacturing costs and ability to obtain the materials we need to manufacture our products; g) we
may not be able to adequately protect our intellectual property and proprietary rights, which could harm our future success and competitive position; h) new products in development may not become commercially viable and anticipated new orders may
not materialize; i) we are subject to environmental laws and other governmental regulations, and costs related to compliance with, or any liability for failure to comply with, existing or future laws and regulations which could adversely affect our
business, financial condition and results of operations; j) our business may be adversely impacted by the Kalamazoo labor dispute and other labor relations matters; k) we may encounter difficulties in our restructuring and reorganization efforts,
which could prevent us from accommodating our existing business and capturing new business; l) capital expenditures might be higher than planned due to unexpected circumstances such as future opportunities, events or requirements; m) various Coors
family trusts own a significant interest in us and may exercise their control in a manner beneficial or detrimental to our other investors interests; n) terrorist attacks, such as those that occurred on September 11, 2001, and acts of
bioterrorism have contributed to economic instability in the United States and further acts of terrorism, bioterrorism, violence or war could affect the markets in which we operate, our business operations, our expectations and other forward-looking
statements contained in this document; o) we may be subject to losses that might not be covered in whole or in part by existing insurance coverage, and these uninsured losses could adversely affect our business, financial condition and results of
operations; p) selling, general and administrative costs might increase based on adding more staff and programs (including costs to meet increasing corporate compliance requirements), and general cost increases; q) we may be exposed to higher than
predicted interest rates on our debt and on any new debt we might incur; r) if we are unable to meet the financial covenants on our debt, we could be subject to higher interest rates or possible default (which could lead to our insolvency); s) we
may not be able to maintain our effective tax rate due to the current and future tax laws, our ability to identify and use our tax credits and other factors; t) purchase savings initiatives, and cost reduction and efficiency programs, such as Six
Sigma, might not realize significant future benefits; and u) the company might not be able to maintain its position as one of the lowest cost producers due to competitors more effectively reducing their costs and improving efficiencies.





These statements should be read in conjunction with the financial statements and notes thereto included in the
Companys Form 10-K/A for the year ended December 31, 2001. The accompanying financial statements have not been examined by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management, such
financial statements include all adjustments necessary to summarize fairly the Companys financial position and results of operations. Except for certain reclassifications made to consistently report the information contained in the financial
statements, all adjustments made to the interim financial statements presented are of a normal recurring nature. The results of operations for the third quarter ended September 30, 2002, may not be indicative of results that may be expected for the
year ending December 31, 2002.




29




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PART II.   OTHER INFORMATION





Item 1.   Legal Proceedings





On February 19, 2002, Chinyun Kim filed a putative class action claim in District Court, Jefferson County, Colorado against the Company and certain of its shareholders and directors alleging breach of fiduciary duty in
connection with the issuance on August 15, 2000, of the Companys Series B Preferred Stock to the Grover C. Coors Trust. The Court dismissed Plaintiffs claim against the Company for breach of fiduciary duty while allowing the Plaintiff to
proceed against the named directors and shareholders, including certain Coors Family Trusts. The Company believes that the transaction was in the best interests of the Company and its shareholders and that it acted appropriately. It intends to
continue to provide a vigorous defense to this action.





Item 6.   Exhibits and Reports on Form 8-K





(a)Exhibits:





Exhibit Number

Document Description10.1

Graphic Packaging Executive Incentive Plan as amended and restated February 1, 2002





(b)Reports on Form 8-K





No reports were filed on Form 8-K during the third quarter of 2002.




30




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.








By:

/s/    LUIS E. LEONLuis E. Leon (Chief Financial
Officer)








Date:
October 31, 2002








By:

/s/    JOHN S.
NORMANJohn S. Norman (Vice President
and Controller)








Date:
October 31, 2002





CERTIFICATIONS PURSUANT TO


18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002





In connection with the Quarterly Report of
Graphic Packaging International Corporation (the Company) on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Jeffrey H. Coors, Chief Executive Officer and
President of the Company, and Luis E. Leon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:





(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and





(2)  The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the Company.








By:

/s/    JEFFREY H.
COORSJeffrey H. Coors Chief
Executive Officer and President








Date:
October 31, 2002








By:

/s/    LUIS E. LEONLuis E. Leon Chief Financial
Officer








Date:
October 31, 2002




31




---




CERTIFICATIONS





I, Jeffrey H. Coors, certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Graphic Packaging International Corporation;





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:





a)  designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal
controls; and





6.  The registrants other certifying officers and I have indicated
in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.








By:

/s/    JEFFREY H.
COORSJeffrey H. Coors Chief
Executive Officer and President








October
31, 2002




32




---




CERTIFICATIONS





I, Luis E. Leon, certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Graphic Packaging International Corporation;





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:





a)  designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal
controls; and





6.  The registrants other certifying officers and I have indicated
in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.





By:

/s/    LUIS E.
LEON Luis E. Leon Chief Financial Officer





October 31, 2002




33