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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

For the quarterly period ended June 30, 2003

OR

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

For the transition period from to .

Commission file number: 001-14060

GRAPHIC PACKAGING INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)


Colorado (State or other jurisdiction of incorporation or organization)		84-1208699 (I.R.S. Employer Identification No.)
4455 Table Mountain Drive, Golden, Colorado (Address of principal executive offices)		80403 (Zip Code)

(303) 215-4600
(Registrant’s telephone number, including area code)

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


Yes x		No o

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


Yes x		No o

There were 36,136,176 shares of common stock outstanding as of August 1, 2003.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of the Shareholders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
EX-31 Certifications Pursuant to Section 302
EX-32 Certifications Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)


		Three months ended						Six months ended
		June 30,						June 30,

		2003			2002			2003			2002

Net sales		$	274,994		$	263,917		$	535,877		$	527,641
	Cost of goods sold		242,527			231,022			474,701			460,454

Gross profit			32,467			32,895			61,176			67,187
	Selling, general and administrative expense		18,483			15,808			35,151			30,695
	Merger and acquisition transaction costs		1,331			—			4,029			—

Operating income			12,653			17,087			21,996			36,492
Interest expense			(9,697	)		(12,453	)		(19,113	)		(23,749	)
Loss on early extinguishment of debt			—			—			—			(15,766	)

Income (loss) before income taxes and cumulative effect of change in accounting principle			2,956			4,634			2,883			(3,023	)
Income tax (expense) benefit			(1,212	)		(1,808	)		(1,182	)		1,178

Income (loss) before cumulative effect of change in accounting principle			1,744			2,826			1,701			(1,845	)
Cumulative effect of change in goodwill accounting, net of tax of $0			—			—			—			(180,000	)

Net income (loss)			1,744			2,826			1,701			(181,845	)
Preferred stock dividends declared			2,500			2,500			5,000			5,000

Net income (loss) attributable to common shareholders			($756	)	$	326			($3,299	)		($186,845	)

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)


	Three months ended					Six months ended
	June 30,					June 30,

	2003			2002		2003			2002

Net income (loss) attributable to common shareholders per basic and diluted share:
Before cumulative effect of change in accounting principle		($0.02	)	$	0.01		($0.10	)		($0.21	)
Cumulative effect of change in goodwill accounting		—			—		—			(5.55	)

		($0.02	)	$	0.01		($0.10	)		($5.76	)

Weighted average shares outstanding – basic		33,709			32,567		33,648			32,456

Weighted average shares outstanding — diluted		33,709			34,093		33,648			32,456

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands)


		Three months ended					Six months ended
		June 30,					June 30,

		2003		2002			2003			2002

Net income (loss)		$	1,744	$	2,826		$	1,701			($181,845	)
Other comprehensive income (loss):
	Foreign currency translation adjustments		85		355			(132	)		341
	Recognition of hedge results to interest expense during the period, net of tax of $882 and $1,819, respectively		—		1,421			—			2,928
	Amortization of cancelled interest rate swap, net of tax of $137 and $183, respectively		—		220			—			293
	Change in fair value of cash flow hedges during the period, net of tax of $82 and $130, respectively		—		(132	)		—			(208	)

Other comprehensive income (loss)			85		1,864			(132	)		3,354

Comprehensive income (loss)		$	1,829	$	4,690		$	1,569			($178,491	)

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)


				June 30,			December 31,
				2003			2002

ASSETS
Current assets:
Cash and cash equivalents				$	6,959		$	28,626
Accounts receivable, net					76,899			63,546
Inventories:
		Finished			63,693			50,771
		In process			9,754			11,298
		Raw materials			26,924			25,174

Total inventories					100,371			87,243
Other assets					22,589			21,686

			Total current assets		206,818			201,101

Properties, net					399,248			410,592
Goodwill, net					391,803			379,696
Other assets					28,099			29,477

Total assets				$	1,025,968		$	1,020,866

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current maturities of long-term debt				$	3,626		$	3,432
Accounts payable					93,673			82,106
Interest payable					9,958			11,117
Other current liabilities					56,118			58,334

		Total current liabilities			163,375			154,989
Long-term debt					471,512			474,899
Pension liability					43,191			42,310
Other long-term liabilities					42,789			41,630

		Total liabilities			720,867			713,828
Shareholders’ equity
Preferred 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			100,000
Common stock, $0.01 par value 100,000,000 shares authorized and 33,723,676 and 33,477,300 issued and outstanding at June 30, 2003, and December 31, 2002, respectively					337			335
Paid-in capital					412,231			416,048
Unearned compensation					(2,112	)		(2,421	)
Retained deficit					(177,511	)		(179,212	)
Accumulated other comprehensive loss					(27,844	)		(27,712	)

		Total shareholders’ equity			305,101			307,038

Total liabilities and shareholders’ equity				$	1,025,968		$	1,020,866

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)


				Six months ended

							June 30,
				2003			2002

Cash flows from operating activities:
	Net income (loss)			$	1,701			($181,845	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation			31,201			30,716
		Amortization of debt issuance costs			1,152			1,945
		Loss on early extinguishment of debt			—			15,766
		Goodwill impairment			—			180,000
		Compensation expense settled in stock			1,422			2,237
		Change in current assets and current liabilities, net of effects of acquisition:
			Accounts receivable		(13,353	)		(14,935	)
			Inventory		(11,511	)		(5,554	)
			Other current assets		(903	)		5,833
			Accounts payable		9,967			(11,337	)
			Interest payable		(1,159	)		8,610
			Other current liabilities		(2,216	)		8,540
		Other			2,172			423

Net cash provided by operating activities					18,473			40,399

Cash flows from investing activities:
		Capital expenditures			(13,956	)		(15,454	)
		Acquisition of J.D. Cahill Co. assets			(18,088	)		—

Net cash used in investing activities					(32,044	)		(15,454	)

Cash flows from financing activities:
		Proceeds from borrowings			139,547			613,100
		Repayment of debt			(142,740	)		(619,343	)
		Preferred stock dividends paid			(5,000	)		(5,000	)
		Debt issuance costs			—			(15,922	)
		Common stock issuance and other			97			436

Net cash used in financing activities					(8,096	)		(26,729	)

Cash and cash equivalents:
	Net decrease in cash and cash equivalents				(21,667	)		(1,784	)
	Balance at beginning of period				28,626			6,766

	Balance at end of period			$	6,959		$	4,982

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

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, 2002.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to fairly state the financial position of the Company at June 30, 2003, 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 and six month periods ended June 30, 2003 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.

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.

Goodwill Accounting: SFAS No. 142, “Goodwill and Other Intangible Assets,” 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. Management re-evaluated the Company’s goodwill for impairment upon signing the merger agreement discussed in Note 5 below. Management determined that the Company’s goodwill is not impaired.

Effective January 1, 2002, the Company assigned the carrying value of its goodwill, totaling $560 million, to one reporting unit. Management completed the transitional impairment testing of the Company’s goodwill and determined that the Company’s goodwill was impaired by $180 million at January 1, 2002. The fair value of the goodwill was derived using the discounted cash flow method. The transitional impairment loss is reflected as a cumulative effect of change in accounting principle in the accompanying statement of operations. 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 was deductible for Federal income tax purposes and $142 million was 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. The Company 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 statement of operations is net of $0 tax benefit.

Stock-Based Compensation: The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock options or the employee stock purchase plan as all options were granted at the market price. If the Company had elected to recognize compensation cost based on the fair value of the stock options at grant date as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation,” pre-tax compensation expense of $0.3 million and $0.4 million would have been recorded for the quarterly periods ended June 30, 2003 and 2002, respectively; and $1.6 million and $0.8 million would have been recorded for the six month periods ended June 30, 2003 and 2002, respectively. Net loss attributable to common shareholders and loss per share would have been reduced to the pro forma amounts indicated below:


		Three Months Ended June 30,						Six Months Ended June 30,

		2003			2002			2003			2002

					(in thousands, except per share data)
Net income (loss) attributable to common shareholders, as reported			($756	)	$	326			($3,299	)		($186,845	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(177	)		(244	)		(944	)		(488	)

Pro forma net income (loss) attributable to common shareholders			($933	)	$	82			($4,243	)		($187,333	)

Income (loss) per share—basic and diluted:
	As reported		($0.02	)	$	0.01			($0.10	)		($5.76	)

	Pro forma		($0.03	)	$	—			($0.13	)		($5.77	)

Note 2. Loss on Early Extinguishment of Debt

It is the Company’s policy to implement all new accounting pronouncements as they are issued and become effective for the Company. During the first half of 2003, one new accounting pronouncement was adopted.

In connection with its first quarter 2002 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 $15.8 million, pretax, which was reflected as an extraordinary loss in the 2002 statement of operations. The FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” in April 2002. SFAS No. 145 includes, among other things, the rescission of SFAS No. 4, which required that gains and losses from early extinguishment of debt be classified as an extraordinary item, net of related income tax effects. Under the new guidance of SFAS No. 145, losses from early extinguishment of debt are classified as extraordinary items only when the losses are considered unusual in nature and infrequent in occurrence. SFAS No. 145 was effective for the Company on January 1, 2003, at which time the Company reclassified its first quarter 2002 loss on early extinguishment of debt ($.30 per share) as a non-extraordinary item.

Note 3. Acquisition of J.D. Cahill Co.

On March 6, 2003, the Company acquired the business of J.D. Cahill Co., Inc. in an asset acquisition for approximately $20.0 million, consisting of approximately $18.1 million in cash and assumption of approximately $1.9 million of liabilities. The assets acquired and liabilities assumed, which consisted of inventories, fixed assets, intangible assets and accounts payable, were valued at approximately $7.9 million, resulting in goodwill of $12.1 million. The change in the carrying amount of the Company’s goodwill during the first half of 2003 relates entirely to the Cahill acquisition. Consolidated operating results for the first half of 2003 include the results of Cahill beginning March 6, 2003. Among other expected benefits, the Company expects to avoid approximately $10 million of future capital spending as a result of this acquisition.

Note 4. New Accounting Pronouncements

Financial Accounting Standards Board Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities,” was issued in January 2003. FIN No. 46 defines a variable interest entity as a legal entity in which, among other things, the equity investments at risk are not sufficient to finance the operating and closing activities of the entity without additional subordinated financial support from the entity’s investors. The Company is a partner in the Kalamazoo Valley Group Partnership (KVG), which qualifies as a variable interest entity, as defined by FIN No. 46. KVG is a partnership formed to develop and operate a landfill for the partners’ disposal of paper residuals from their respective paperboard mills. KVG borrowed $1.5 million for the construction of the landfill, of which approximately $300 thousand remains unpaid at June 30, 2003. The partners contribute capital annually to meet the partnership’s operating losses. The Company’s annual contribution for the past two years has been approximately $200 thousand. The landfill has been in operation since December 1997; however, since 2000, two of the other partners have closed their paperboard mills and one minority partner was permitted to withdraw by the bankruptcy court. The Company is evaluating its alternatives and liabilities under the partnership agreement and related note, while continuing to use the landfill. However, if the partnership were to close the landfill, the Company’s share of estimated closing costs, perpetual care obligations and debt repayment would approximate $2.5 million under the terms of the partnership agreement. The Company accounts for its interest in KVG using the equity method. The investment balance at June 30, 2003 was negligible. Management is also evaluating its accounting method in light of the new requirements under FIN No. 46, and may conclude that its interest in KVG should be consolidated into the Company’s accounts. FIN No. 46 is effective for the Company’s 2003 third quarter.

In April 2003, the FASB issued SFAS No. 149. "Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” or SFAS No. 149. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. SFAS No. 149 will be applicable to existing contracts and new contracts entered into after June 30, 2003. The Company does not expect that the adoption of SFAS No. 149 will have a material effect on its financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” or SFAS No. 150. SFAS No. 150 establishes standards for classification of certain financial instruments that have characteristics of both liabilities and equity in the statement of financial position. SFAS No. 150 is effective for all contracts created or modified after the date the statement was issued and otherwise effective for the Company July 1, 2003. Management does not expect the adoption of SFAS 150 to have a material impact on its financial statements.

Note 5. Proposed Merger with Riverwood

On March 25, 2003, GPIC entered into a merger agreement with Riverwood Holding, Inc. to effect a stock-for-stock merger with Riverwood. Riverwood will be the accounting acquiror of GPIC and will survive as the new public company listed on the New York Stock Exchange. The new company will take the name Graphic Packaging Corporation. Prior to the merger, Riverwood will complete a 15.21 to 1 stock split of its common stock. GPIC shareholders are expected to receive one share of Riverwood common stock for each share of GPIC common stock they hold. As a condition to closing the merger, the Grover C. Coors Trust will convert its preferred shares into 48,484,848 shares of common stock. Assuming the conversion occurs on August 8, 2003, Riverwood will pay the Grover C. Coors Trust an estimated $19.8 million as consideration for early conversion of the preferred stock. Immediately after the merger, GPIC shareholders will own approximately 42.5% and Riverwood shareholders will own approximately 57.5% of the combined company on a fully diluted basis.

On May 12, 2003, the thirty-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) expired. Accordingly, the condition to the merger requiring the expiration or termination of the HSR waiting period has been satisfied. In addition to this and other conditions to the merger, the merger must be approved by two-thirds of the combined voting power of GPIC common stock and two thirds of the preferred stock voting as a separate class. The Coors family shareholders, who collectively owned approximately 65.1% of the combined voting power of the Company before the merger, signed a voting agreement with Riverwood in which they agreed to vote in favor of the merger. At a meeting of the shareholders held on August 7, 2003, the merger was approved and is expected to be consummated on August 8, 2003.

The combined company has commitment letters from a banking syndicate for financing totaling $1.6 billion at the time of merger. Management estimates that up to $1.3 billion will be drawn at the time of merger to repay existing bank debt and to pay transaction costs. The combined company may also refinance GPIC’s and Riverwood’s senior and senior subordinated notes in the principal amount of $850 million. Assuming the GPIC existing senior bank credit facility and the senior subordinated notes are refinanced, a loss on early extinguishment of debt will occur totaling approximately $20 million, consisting of cash tender premiums and non-cash unamortized debt issuance costs.

For the six months ended June 30, 2003, the Company incurred approximately $3.5 million of merger related costs. Management expects to incur an estimated additional $9 million of transaction costs prior to closing for merger related investment banking, legal and accounting fees. For the six months ended June 30, 2003, the Company also incurred approximately $500 thousand evaluating acquisitions that were not consummated.

Relating to the proposed merger, Riverwood filed a registration statement with the Securities and Exchange Commission which contains a proxy statement/prospectus that was sent to GPIC shareholders on July 18, 2003.

Note 6. Guarantees, Commitments and Contingencies

In the ordinary course of business, the Company is subject to various pending claims, lawsuits and contingent liabilities, including claims by current or former employees. In each of these cases, the Company is vigorously defending against them. Although the eventual outcome cannot be predicted, it is management’s opinion that disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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. The complaint alleges that the defendants breached their fiduciary duties in connection with the issuance on August 15, 2000, of the Company’s Series B Preferred Stock to the Grover C. Coors Trust (the Trust). Plaintiff is seeking damages in the amount of $43 million or, alternatively, to require transfer to the class of some or all of the Trust’s GPIC common stock into which the convertible preferred stock will be converted. 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 is continuing to provide a defense to this action pursuant to its indemnification obligations. Currently, discovery is being conducted. By order dated June 12, 2003, the court certified a class comprised of all owners of GPIC common stock as of August 2, 2000, excluding the defendants and members of the Coors family and their affiliates and excluding any additional shares purchased by class members after August 2, 2000. The Company believes that the transaction was in the best interest of the Company and its shareholders.

On April 2, 2003, two separate lawsuits were filed in District Court, Jefferson County, Colorado, against the Company, the Company’s directors and Riverwood relating to the merger between GPIC and Riverwood pursuant to the merger agreement. The complaints were filed by Robert F. Smith and Harold Lightweis, on behalf of themselves and all others similarly situated. Each of the two complaints alleges breach of fiduciary duties by the Company’s directors to the Company’s public shareholders in connection with the merger and that Riverwood aided and abetted the alleged breach. The complaint alleges that the Coors family stockholders negotiated the merger consideration in their own interest and not in the interest of the public stockholders. The complaint seeks an injunction against consummation of the merger, rescission of the merger if it is consummated, unspecified damages, costs and other relief permitted by law and equity. On July 3, 2003, a third lawsuit was filed in District Court of Jefferson County in Colorado, on behalf of a purported class of the Company’s stockholders against the Company, the Company’s directors and Riverwood, alleging that the Company’s directors breached their fiduciary duties to the stockholders of the Company in connection with the negotiation of the proposed merger and that the Company and Riverwood aided and abetted the alleged breach. The complaint alleges that the defendants negotiated the terms of the merger in their own interest and in the interest of certain other insiders (including the Coors family stockholders), to the detriment of

the public stockholders. The complaint, which is encaptioned James A. Bederka, On behalf of Himself and All Other Similarly Situated v. Riverwood Holdings Inc., et al., seeks certain equitable relief, including an injunction against the consummation of the merger, rescission of the merger if it is consummated, rescission of the sale on August 15, 2000 of the convertible preferred stock to the Trust and injunction against the conversion of the convertible preferred stock and costs. We believe that these three lawsuits are without merit.

During its normal course of business, the Company has entered into certain indemnification agreements with directors and officers of the Company to the maximum extent permitted under the laws of the State of Colorado, which are insured under directors and officers liability policies.

In connection with the sale of various businesses, the Company has periodically agreed to guarantee the collectibility of accounts receivable and indemnify purchasers for certain liabilities for a specified period of time. Such liabilities include, but are not limited to, environmental matters and the indemnification periods generally last for 2 to 15 years. At June 30, 2003, the Company has accrued approximately $3.0 million related to these guarantees and indemnifications.

In connection with the resale of its aluminum business in 1999, the Company guaranteed accounts receivable owed by the former owner of the business. After the resale, the former owner refused to pay the amounts owed, equal to $2.4 million. Pursuant to the terms of the resale agreement, the Company paid this amount and sued the former owner in the United States District Court for the District of Colorado on April 18, 2000. The former owner counterclaimed for an additional $11.0 million for certain spare parts, and the Company amended its claim to seek an additional $16.0 million in overpayment for raw materials to run the business prior to resale. This claim increased from $14.3 million to $16.0 million after making an adjustment for certain offsets to which the Company was entitled. The parties have filed motions for summary judgment. The Company does not believe that this litigation will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Note 7. Related Party Supply Agreement

On December 28, 1992, the Company was spun off from Adolph Coors Company (ACCo) and since that time ACCo has had no ownership interest in the Company. However, certain Coors family trusts have significant interests in both GPIC and ACCo. The Company has also entered into various business arrangements with the Coors family trusts and related entities from time-to-time since the spin-off. The Company’s policy is to negotiate market prices and competitive terms with all parties, including related parties.

The Company originated as the packaging division of Coors Brewing Company, a subsidiary of ACCo. At the time of spin-off from ACCo the Company entered into an agreement with Coors Brewing to continue to supply their packaging needs. The initial agreement had a stated term of five years and has resulted in substantial revenues for GPIC. The Company continues to sell packaging products to Coors Brewing. Coors Brewing accounted for approximately 11% of the Company’s consolidated gross sales in the second quarter of 2003 and 2002. The loss of Coors Brewing as a customer in the foreseeable future could have a material effect on the Company’s results of operations. In the first quarter of 2003, the Company executed a new supply agreement, effective April 1, 2003, with Coors Brewing that will not expire until December 31, 2006.

Note 8. Shareholders’ Rights Plan

On June 1, 2000, the Company effected a dividend distribution of shareholder rights (the Rights) that carry certain conversion rights in the event of a significant change in beneficial ownership of the Company. One right is attached to each share of the Company’s common stock outstanding and is not detachable until such time as beneficial ownership of 15% or more of the Company’s outstanding common stock has occurred (a Triggering Event) by a person or group of affiliated or associated persons (an Acquiring Person). Each Right entitles each registered holder (excluding the Acquiring Person) to purchase from the Company one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, at a purchase price of $42.00. Registered holders receive shares of the Company’s common stock valued at twice the exercise price of the Right upon exercise. Upon a Triggering Event, the Company is entitled to exchange one share of the Company’s common stock for each right outstanding or to redeem the Rights at the price of $.001 per Right. The Rights will expire on June 1, 2010.

In connection with the proposed merger, the Company and the rights agent amended the terms of the rights agreement so that the execution and delivery of the merger agreement and voting agreement and the consummation of the transactions contemplated by the merger agreement will not constitute a triggering event. This means that holders of the Company’s common stock will not obtain the detachable rights in connection with the proposed merger.

Note 9. Supplemental Information

Graphic Packaging Corporation (GPC), a wholly-owned subsidiary of GPIC, 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); (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 June 30, 2003 and 2002, and $5.0 million of interest expense in the six months ended June 30, 2003 and 2002, pursuant to a $100 million intercompany loan from GPIC.

The following condensed consolidating financial statements are presented on 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.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING INCOME STATEMENT

Three Months Ended June 30, 2003
(in thousands)


							Guarantor			Nonguarantor						Consolidated
	Issuer			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net sales	$	273,511		$	—		$	—		$	1,483		$	—		$	274,994
Cost of goods sold		241,197			—			—			1,330			—			242,527

Gross profit		32,314			—			—			153			—			32,467
Selling, general and administrative expense and merger and acquisition transaction costs		19,814			—			—			—			—			19,814
Equity in (earnings) of subsidiaries subsidiaries		115			(219	)		(53	)		—			157			—

Operating income		12,385			219			53			153			(157	)		12,653
Interest (expense) income		(11,935	)		2,500			(6	)		(256	)		—			(9,697	)

Income (loss) before taxes		450			2,719			47			(103	)		(157	)		2,956
Income tax (expense) benefit		(185	)		(1,114	)		(79	)		102			64			(1,212	)

Net income (loss)		265			1,605			(32	)		(1	)		(93	)		1,744
Preferred stock dividends declared		—			(2,500	)		—			—			—			(2,500	)

Net income (loss) attributable to common shareholders	$	265			($895	)		($32	)		($1	)		($93	)		($756	)

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING INCOME STATEMENT

Three Months Ended June 30, 2002
(in thousands)


							Guarantor			Nonguarantor						Consolidated
	Issuer			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net sales	$	262,199		$	—		$	—		$	1,718		$	—		$	263,917
Cost of goods sold		229,779			—			—			1,243			—			231,022

Gross profit		32,420			—			—			475			—			32,895
Selling, general and administrative expense		15,787			—			—			21			—			15,808
Equity in (earnings) of subsidiaries subsidiaries		(250	)		(10,926	)		(402	)		—			11,578			—

Operating income		16,883			10,926			402			454			(11,578	)		17,087
Interest (expense) income		(14,968	)		2,500			—			15			—			(12,453	)

Income before taxes		1,915			13,426			402			469			(11,578	)		4,634
Income tax (expense) benefit		(757	)		(5,227	)		(319	)		(21	)		4,516			(1,808	)

Net income		1,158			8,199			83			448			(7,062	)		2,826
Preferred stock dividends declared		—			(2,500	)		—			—			—			(2,500	)

Net income attributable to common shareholders	$	1,158		$	5,699		$	83		$	448			($7,062	)	$	326

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING INCOME STATEMENT

Six Months Ended June 30, 2003
(in thousands)


								Guarantor			Nonguarantor						Consolidated
		Issuer			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net sales		$	532,835		$	—		$	—		$	3,042		$	—		$	535,877
Cost of goods sold			471,786			—			—			2,915			—			474,701

Gross profit			61,049			—			—			127			—			61,176
Selling, general and administrative expense and merger and acquisition transaction costs			39,180			—			—			—			—			39,180
Equity in (earnings) of subsidiaries			167			1,326			(26	)		—			(1,467	)		—

Operating income (loss)			21,702			(1,326	)		26			127			1,467			21,996
Interest (expense) income			(23,833	)		5,000			—			(280	)		—			(19,113	)

Income (loss) before taxes			(2,131	)		3,674			26			(153	)		1,467			2,883
Income tax (expense) benefit			873			(1,506	)		(70	)		123			(602	)		(1,182	)

Net income (loss)			(1,258	)		2,168			(44	)		(30	)		865			1,701
Preferred stock dividends declared			—			(5,000	)		—			—			—			(5,000	)

	Net income (loss) attributable to common shareholders common shareholders		($1,258	)		($2,832	)		($44	)		($30	)	$	865		$	(3,299	)

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING INCOME STATEMENT

Six Months Ended June 30, 2002
(in thousands)


							Guarantor			Nonguarantor						Consolidated
	Issuer			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net sales	$	524,551		$	—		$	—		$	3,090		$	—		$	527,641
Cost of goods sold		457,898			—			—			2,556			—			460,454

Gross profit		66,653			—			—			534			—			67,187
Selling, general and administrative expense		30,651			—			—			44			—			30,695
Equity in (earnings) of subsidiaries subsidiaries		(269	)		(4,695	)		(460	)		—			5,424			—

Operating income		36,271			4,695			460			490			(5,424	)		36,492
Interest (expense) income		(28,745	)		5,000			—			(4	)		—			(23,749	)
Loss on early extinguishment of debt		(15,766	)		—			—			—			—			(15,766	)

Income (loss) before taxes and cumulative effect of change in accounting principle		(8,240	)		9,695			460			486			(5,424	)		(3,023	)
Income tax (expense) benefit		3,213			(3,781	)		(369	)		—			2,115			1,178

Income (loss) before cumulative effect of change in accounting principle		(5,027	)		5,914			91			486			(3,309	)		(1,845	)
Cumulative effect of change in goodwill accounting, net of tax		(180,000	)		—			—			—			—			(180,000	)

Net income (loss)		(185,027	)		5,914			91			486			(3,309	)		(181,845	)
Preferred stock dividends declared		—			(5,000	)		—			—			—			(5,000	)

Net income (loss) attributable to common shareholders		($185,027	)	$	914		$	91		$	486			($3,309	)		($186,845	)

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET

At June 30, 2003
(in thousands)


									Guarantor			Nonguarantor						Consolidated
				Issuer			Parent		Subsidiaries			Subsidiaries			Eliminations			Total

ASSETS Current assets Cash and cash equivalents				$	1,441		$	2,375	$	—		$	3,143		$	—		$	6,959
	Accounts receivable				74,169			2,437		—			293			—			76,899
	Inventories				99,775			—		—			596			—			100,371
	Other assets				22,500			—		—			24,059			(23,970	)		22,589

			Total current assets		197,885			4,812		—			28,091			(23,970	)		206,818
	Properties, net				390,656			—		—			8,592			—			399,248
	Goodwill, net				391,803			—		—			—			—			391,803
	Other assets				27,924			816,839		6,554			18,393			(841,611	)		28,099

			Total assets	$	1,008,268		$	821,651	$	6,554		$	55,076			($865,581	)	$	1,025,968

LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Current maturities of long-term debt				$	2,129		$	—	$	—		$	1,497		$	—		$	3,626
	Accounts payable				93,290			—		—			383			—			93,673
	Interest payable				9,958			—		—			—			—			9,958
	Other current liabilities				52,635			24,359		2,525			569			(23,970	)		56,118

			Total current liabilities		158,012			24,359		2,525			2,449			(23,970	)		163,375
Long-term debt					471,512			—		—			233,281			(233,281	)		471,512
Other long-term liabilities					187,957			1,863		—			—			(103,840	)		85,980

	Total liabilities				817,481			26,222		2,525			235,730			(361,091	)		720,867
Shareholders’ equity:
	Preferred stock				—			100,000		—			—			—			100,000
	Common stock				—			337		1,829			1,540			(3,369	)		337
	Paid-in capital				413,637			447,937		241,459			(180,057	)		(512,857	)		410,119
	Retained earnings (deficit)				(195,959	)		247,155		(239,259	)		(1,184	)		11,736			(177,511	)
		Accumulated other comprehensive income (loss)			(26,891	)		—		—			(953	)		—			(27,844	)

			Total shareholders’ equity		190,787			795,429		4,029			(180,654	)		(504,490	)		305,101

Total liabilities and shareholders’ equity				$	1,008,268		$	821,651	$	6,554		$	55,076			($865,581	)	$	1,025,968

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET

At December 31, 2002
(in thousands)


								Guarantor			Nonguarantor
			Issuer			Parent		Subsidiaries			Subsidiaries			Eliminations			Consolidated Total

ASSETS Current assets Cash and cash equivalents			$	25,565		$	—	$	—		$	3,061		$	—		$	28,626
	Accounts receivable			60,231			2,437		—			878			—			63,546
	Inventories			86,740			—		—			503			—			87,243
	Other assets			21,609			—		1			24,046			(23,970	)		21,686

		Total current assets		194,145			2,437		1			28,488			(23,970	)		201,101
	Properties, net			401,889			—		—			8,703			—			410,592
	Goodwill, net			379,696			—		—			—			—			379,696
	Other assets			29,781			561,410		6,880			18,393			(586,987	)		29,477

Total assets			$	1,005,511		$	563,847	$	6,881		$	55,584			($610,957	)	$	1,020,866

LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Current maturities of long-term debt			$	1,976		$	—	$	—		$	1,456		$	—		$	3,432
	Accounts payable			81,519			24		—			563			—			82,106
	Interest payable			11,117			—		—			—			—			11,117
	Other current liabilities			55,426			23,691		2,536			651			(23,970	)		58,334

		Total current liabilities		150,038			23,715		2,536			2,670			(23,970	)		154,989
Long-term debt				472,798			—		—			235,383			(233,282	)		474,899
Other long-term liabilities				185,968			1,826		—			—			(103,854	)		83,940

	Total liabilities			808,804			25,541		2,536			238,053			(361,106	)		713,828
Shareholders’ equity:
	Preferred stock			—			100,000		—			—			—			100,000
	Common stock			—			335		1,829			1,540			(3,369	)		335
	Paid-in capital			418,299			192,984		241,774			(182,077	)		(257,353	)		413,627
	Retained earnings (deficit)			(194,701	)		244,987		(239,258	)		(1,111	)		10,871			(179,212	)
	Accumulated other comprehensive loss			(26,891	)		—		—			(821	)		—			(27,712	)

		Total shareholders’ equity		196,707			538,306		4,345			(182,469	)		(249,851	)		307,038

Total liabilities and shareholders’ equity			$	1,005,511		$	563,847	$	6,881		$	55,584			($610,957	)	$	1,020,866

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2003
(in thousands)


								Guarantor		Nonguarantor				Consolidated
		Issuer			Parent			Subsidiaries		Subsidiaries		Eliminations		Total

Net cash provided by operating activities		$	11,113		$	7,278		$	—	$	82	$	—	$	18,473

Cash flows from investing activities:
	Capital expenditures		(13,956	)		—			—		—		—		(13,956	)
	Acquisition of J.D Cahill Co. assets		(18,088	)		—			—		—		—		(18,088	)

Net cash used in investing activities			(32,044	)		—			—		—		—		(32,044	)
Cash flows from financing activities:
	Proceeds from borrowings		139,547			—			—		—		—		139,547
	Repayment of debt		(142,740	)		—			—		—		—		(142,740	)
	Preferred stock dividends paid		—			(5,000	)		—		—		—		(5,000	)
	Common stock issuance and other		—			97			—		—		—		97

Net cash used in financing activities			(3,193	)		(4,903	)		—		—		—		(8,096	)
Cash and cash equivalents:
	Net increase (decrease)		(24,124	)		2,375			—		82		—		(21,667	)
	Balance at beginning of period		25,565			—			—		3,061		—		28,626

	Balance at end of period	$	1,441		$	2,375		$	—	$	3,143	$	—	$	6,959

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2002
(in thousands)


								Guarantor			Nonguarantor						Consolidated
		Issuer			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net cash provided by (used in) operating activities		$	37,767		$	3,588			($1,200	)	$	244		$	—		$	40,399

Cash flows from investing activities:
	Capital expenditures		(15,454	)		—			—			—						(15,454	)
	Other investing activities		—			—			1,200			—			(1,200	)		—

Net cash provided by (used in) investing activities			(15,454	)		—			1,200			—			(1,200	)		(15,454	)
Cash flows from financing activities:
	Proceeds from borrowings		613,100			—			—			—			—			613,100
	Repayment of debt		(619,343	)		—			—			—			—			(619,343	)
	Preferred stock dividends paid		—			(5,000	)		—			—			—			(5,000	)
	Debt issuance costs		(15,922	)		—			—			—			—			(15,922	)
	Common stock issuance and other		—			436			—			(1,200	)		1,200			436

Net cash used in financing activities			(22,165	)		(4,564	)		—			(1,200	)		1,200			(26,729	)
Cash and cash equivalents:
	Net increase (decrease)		148			(976	)		—			(956	)		—			(1,784	)
	Balance at beginning of period		1,145			976			—			4,645			—			6,766

	Balance at end of period	$	1,293		$	—		$	—		$	3,689		$	—		$	4,982

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 Paperboard Packaging Magazine (January 2003). We have achieved our leadership position by focusing our operations on the folding carton segment of the fiber-based product packaging industry. 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.

As discussed below, we recently announced our intention to merge with Riverwood Holding, Inc. (Riverwood) in the third quarter of 2003. Riverwood is an integrated provider of paperboard packaging solutions to multinational beverage and consumer products companies.

Segment Information

Our reportable segments are based on our method of internal reporting, which is based on product category. Since 1999, we have operated principally in the United States and in only one reportable segment.

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. Recent economic conditions in the United States have had a significant impact on consumer buying even in non-cyclical industries. 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;

	•		household products — dishwasher and laundry detergent; sporting goods; healthcare; and tissues and papers;

	•		beverage — bottle and can carriers and cases; and

	•		tobacco — fliptop boxes and cartons.

We market our products directly to our customers through a relatively small internal sales force. Our top 20 customers represent approximately 80% of our gross sales in the first six months of 2003. 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, MeadWestvaco, 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, paper, aluminum foil, ink, plastic films, resins and labor, which are all variable cost components. Energy is also a component of our costs, particularly or our Kalamazoo, Michigan recycled paperboard mill, where

energy represents approximately 14% of cost of goods sold year-to-date. Consolidated variable costs are estimated to be 79% and fixed costs to be 21% of total costs year-to-date.

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 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. We have adopted 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.		the company 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 currently have 25 dedicated and numerous shared resources focused on achieving our Six Sigma objectives.

We have also taken steps to reduce our fixed manufacturing and corporate overhead costs, consisting of selling, general and administrative costs. In addition to closing plants and moving equipment and business to other facilities, we have also undertaken downsizing initiatives to reduce fixed personnel costs and are using the Six Sigma program to make our non-production business processes more cost effective.

Results of Operations

Net sales for the three months ended June 30, 2003 were $275.0 million, an increase of $11.1 million, or 4.2%, compared to the second quarter of 2002. Sales for the six months ended June 30, 2003 were $535.9 million, an increase of $8.3 million, or 1.6 %, compared to the same period in 2002. Net sales related to the March 6, 2003 J.D. Cahill Co. acquisition were $5.7 million in the second quarter of 2003 and $7.2 million in the six months ended June 30, 2003. Excluding the Cahill sales in 2003, net sales increased by $5.4 million or 2% quarter over quarter and increased by $1.1 million or 0.2% comparing the six month periods. We started to see stronger orders from our largest customers, beginning at the end of the first quarter of 2003, although increases in volume continue to be somewhat softened by pressures on pricing. We have added new business during the first half of 2003, totaling $6.7 million in sales, that also contributed to the improvement year-over-year.

Gross profit, as a percentage of net sales, was 11.8% for the second quarter of 2003 and 11.4% for the six months ended June 30, 2003. Gross profit, as a percentage of net sales, was 12.5% and 12.7% for the comparable periods in 2002. Price pressure and product mix contributed to the lower margins in 2003. Product mix issues in the first half of 2003 included costs such as scrap and learning curve inefficiencies associated with the introduction of new business.

Selling, general and administrative expenses, before merger and acquisition costs, were $18.5 million, or 6.7% of net sales, for the three months ended June 30, 2003, and $35.2 million, or 6.6% of net sales, for the six months ended June 30, 2003. In the comparable periods of 2002, these expenses were $15.8 million and $30.7 million, or 6.0% and 5.8% as a percentage of sales, respectively. The quarter-on-quarter increase relates to additional overhead expenses from the acquired J.D. Cahill business, additional legal expenses associated with litigation and patent activity, increased marketing efforts, and other general administrative spending. Increases from the previous year, in addition to those listed above, include additional depreciation and other expenses related to our information systems that had been placed in service during 2002 as well as changes in benefit plan expenses.

Our merger and acquisition activities in the first half of 2003 resulted in related expenses totaling $4.0 million, which are non-recurring to our business and separately presented in our statement of operations. We anticipate that our total merger and acquisition expenses, including costs related to the Riverwood merger will total approximately $13 million in 2003.

Interest expense decreased $2.8 million, or 22%, in the second quarter of 2003, compared to the second quarter of 2002. Year-to-date 2003 interest expense is lower than year-to-date 2002 by $4.6 million, or 20%, primarily as a result of lower debt balances, lower market interest rates, and the absence of unfavorable interest swap agreements that were in place during the first half of 2002.

The effective tax rate for the first half of 2003 was approximately 41%, compared to 39% in the first half of 2002. The effective tax rate could increase in the future due to merger-related costs that we expect will be nondeductible upon consummation of the Riverwood merger.

New Accounting Pronouncements

Financial Accounting Standards Board Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities,” was issued in January 2003. FIN No. 46 defines a variable interest entity as a legal entity in which, among other things, the equity investments at risk are not sufficient to finance the operating and closing activities of the entity without additional subordinated financial support from the entity’s investors. We are a partner in the Kalamazoo Valley Group Partnership (KVG), which qualifies as a variable interest entity, as defined by FIN No. 46. KVG is a partnership formed to develop and operate a landfill for the partners’ disposal of paper residuals from their respective paperboard mills. KVG borrowed $1.5 million for the construction of the landfill, of which approximately $300 thousand remains unpaid at June 30, 2003. The partners contribute capital annually to meet the partnership’s operating losses. Our annual contribution for the past two years has been approximately $200 thousand. The landfill has been in operation since December 1997; however, since 2000, two of the other partners have closed their paperboard mills and one minority partner was permitted to withdraw by the bankruptcy court. We are evaluating our alternatives and liabilities under the partnership agreement and related note, while continuing to use the landfill. However, if the partnership were to close the landfill, our share of estimated closing costs, perpetual care obligations and debt repayment would approximate $2.5 million under the terms of the partnership agreement. We account for our interest in KVG using the equity method. The investment balance at June 30, 2003 was negligible. Management is also evaluating its accounting method in light of the new requirements under FIN No. 46, and may conclude that its interest in KVG should be consolidated into our accounts. FIN No. 46 is effective for our 2003 third quarter.

In April 2003, the FASB issued SFAS No. 149. "Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” or SFAS No. 149. This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. SFAS No. 149 will be applicable to existing contracts and new contracts entered into after June 30, 2003. We do not expect that the adoption of SFAS No. 149 will have a material effect on our financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” or SFAS No. 150. SFAS No. 150 establishes standards for classification of certain financial instruments that have characteristics of both liabilities and equity in the statement of financial position. SFAS No. 150 is effective for all contracts created or modified after the date the statement was issued and otherwise effective for us July 1, 2003. We do not expect the adoption of SFAS 150 to have a material impact on our financial statements.

Related Party Transaction

On December 28, 1992, our company was spun off from ACCo and since that time ACCo has had no ownership interest in our company. However, certain Coors family trusts have significant interests in both GPIC and ACCo. We have also entered into various business arrangements with the Coors family trusts and related entities from time-to-time since our spin-off. Our policy is to negotiate market prices and competitive terms with all third parties, including related parties.

Our company originated as the packaging division of the Coors Brewing Company, a subsidiary of ACCo. At the time of spin-off from ACCo, we entered into an agreement with Coors Brewing to continue to supply their packaging needs. The initial agreements had a stated term of five years and have resulted in substantial revenues for us. We continue to sell packaging products to Coors Brewing. Coors Brewing accounted for approximately 11% of our consolidated gross sales in the second quarter of 2003 and 2002. The loss of Coors Brewing as a customer in the foreseeable future could have a material effect on our results of operations. In the fist quarter of 2003, we executed a new supply agreement, effective April 1, 2003, with Coors Brewing that will not expire until December 31, 2006.

Liquidity and Capital Resources

We generate our liquidity from both internal and external sources and use it to fund short-term working capital needs, capital expenditures (estimated to be $42 million in 2003), preferred stock dividends and acquisitions.

Capital Structure

On February 28, 2002, we refinanced our then 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. This refinancing provided the financial flexibility to consider acquisitions and converted a significant amount of our borrowings into long-term borrowings. We collectively refer to these transactions as the “Refinancing Transactions.”

We used the net proceeds from the Refinancing Transactions to repay our then existing bank debt, to repurchase our then existing $50.0 million of subordinated notes at par, and to pay related interest, fees and expenses. In connection with the Refinancing Transactions, we incurred a non-cash charge to write off our then remaining unamortized debt issuance costs from the refinanced debt. These costs were $15.8 million before taxes at February 28, 2002.

In connection with the Riverwood merger (discussed below), a change of control will occur as defined in the $300 million senior subordinated bond indenture. Under the terms of the indenture, the change of control requires us to commence an offer to purchase all of the senior subordinated notes at 101% of the principal amount outstanding. As of August 1, 2003, we have received acceptance on $297.9 million of an anticipatory offer to purchase these bonds at a price of 102.25% of the principle amount outstanding. In addition, these bondholders have consented to remove a majority of the financial covenants contained in the bond indenture. Consequently, these bonds will be refinanced in connection with the merger, as well as the $450 million senior bank credit facility and any additional bondholders that accept an offer to purchase subsequent to the merger.

In the event the Riverwood merger is not consummated, 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 senior bank credit facility. One of our wholly-owned subsidiaries, Graphic Packaging Corporation (GPC), is the borrower under the senior bank credit facility and the senior subordinated notes, and GPIC has guaranteed the loans. The senior bank credit facility consists of a $275.0 million, five-year revolving credit facility, or the Revolver, and a $175.0 million, seven-year term loan, or the Term Loan. The Revolver bears interest at LIBOR or Prime Rate plus a spread tied to our leverage, with a single principal payment due at maturity. At August 1, 2003, the Revolver’s interest rate was 5.25%. The Term Loan bears interest at LIBOR or Prime Rate plus a spread, with principal amortization of 1% a year and the balance due at maturity. At August 1, 2003, the Term Loan’s interest rate was 5.75%. The facilities must also be prepaid with an annual cash flow recapture calculation, and with certain proceeds from asset sales, and debt or equity offerings. The senior bank credit facility is secured with first priority liens on all of GPIC’s, GPC’s and our domestic subsidiaries’ material assets. The facility limits our ability to pay dividends other than permitted dividends on the preferred stock, and imposes limitations on the incurrence of additional debt, acquisitions, capital expenditures, repurchase of Company stock and sale of assets.

Our borrowings consist of the following (in thousands):


	June 30,		December 31,
	2003		2002

Seven-year term loan due 2009 (variable interest rate at 3.87%)	$	172,375	$	173,250
Five-year revolving credit facility due 2007 (variable interest rate at 3.37%)		—		—
8-5/8% senior subordinated notes due 2012		300,000		300,000
Various notes payable (1)		2,763		5,081

Total		475,138		478,331
Less current maturities		3,626		3,432

Long-term maturities	$	471,512	$	474,899

(1)

The notes bear interest at rates ranging from 4.00% to 13.06% and mature from 2003 through 2008.

Our maturities of long-term debt as of June 30, 2003 are as follows (in thousands):


2003 (next twelve months)	$	3,626
2004		2,103
2005		2,018
2006		1,920
Thereafter		465,471

	$	475,138

We maintain an interest rate risk-management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates. Our specific 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 $225.0 million of borrowings and cap agreements on $350.0 million of borrowings. The swap agreements locked in an average LIBOR rate of 6.5%. $150 million of the caps provided upside protection to us if LIBOR moved above 6.75%, and $200.0 million of the caps provided upside protection to us if LIBOR moved above 8.13%. The hedging instruments expired in 2002 and were not replaced, principally because a significant portion of our referenced debt carries a fixed rate.

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.

Cash Flows

Cash and cash equivalents decreased $21.7 million during the first half of 2003, which was the net effect of positive cash flows from operations totaling $18.5 million, capital expenditures of $14.0 million, the purchase of J.D. Cahill Co., Inc. assets for $18.1 million and cash used in financing activities of $8.1 million. Cash provided by operating activities decreased $21.9 million in the first half of 2003 compared to the comparable period in 2002 due primarily to reduced operating income and a use of cash for working capital of $19.2 million in the first half of 2003, compared to a use of cash of $8.8 million in the first six months of 2002. The increase in cash used for working capital in 2003 results primarily from increases in inventories due to stronger sales and accrued interest and other accrued liabilities. Cash used for capital expenditures declined in the first half of 2003 compared to the same period in 2002 primarily due to reduced spending on the Company’s enterprise resource planning system and other information technology projects.

Working Capital

Our working capital levels are dependent upon our ability to manage our inventories, collect our receivables on a timely basis, and maintain favorable terms with our vendors. Low working capital levels are desirable to us, as we strive to maximize cash flow and reduce our debt. We believe that our working capital position is very favorable when compared to our industry. 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.

We currently expect that cash flows from operations and borrowings under our credit facility will be adequate to meet our needs for working capital, post-retirement obligations, temporary financing for capital expenditures and debt repayments for the foreseeable future. Our working capital position (including current maturities of long term debt) at June 30, 2003 was $43.4 million. We had $19.1 million borrowed against our revolver at August 1, 2003, with $247.5 million of availability under our $275.0 million facility, due to $8.4 million of letters of credit outstanding. Our letters of credit are used as security against our self-insurance obligations and an outstanding note payable.

During 2002 and 2003, we funded our capital requirements with net cash from operations and borrowings under our revolving credit facility. We expect our capital expenditures for 2003 to be approximately $42 million for planned capital expenditures for upgrades and replacements of equipment and systems as a result of ordinary business operations. We also plan to expand certain existing equipment and facilities in order to meet expected capacity needs.

Pension Plan Assumptions

We contributed $6.5 million, $2.3 million and $1.4 million to our defined benefit retirement plan in 2002, 2001 and 2000, respectively. Contributions to the pension plan in the first half of 2003 totaled $2.5 million. We expect to contribute a total of $10.0 million to the plan in 2003.

Our retirement plan assets and liabilities are measured at December 31 each year for financial reporting purposes. Market returns on assets invested in by the defined benefit retirement plan trust were negative during the past year. Additionally, because of the declines in interest rates and a corresponding decrease in the discount rates used to estimate our pension liability, we recorded after-tax charges to other comprehensive income of $12.8 million and $13.8 million to reflect minimum pension liabilities in 2002 and 2001, respectively. If asset returns do not improve or interest rates remain low, additional funding may be required to the defined benefit retirement plan.

Proposed Merger with Riverwood

On March 25, 2003, we entered into a merger agreement with Riverwood Holding, Inc. to effect a stock-for-stock merger with Riverwood. Riverwood will be the accounting acquiror of GPIC and will survive as the new public company listed on the New York Stock Exchange. The new company will take the name Graphic Packaging Corporation. Prior to the merger, Riverwood will complete a 15.21 to 1 stock split of its common stock. GPIC shareholders are expected to receive one share of Riverwood common stock for each share of GPIC common stock they hold. As a condition to closing the merger, the Grover C. Coors Trust will convert its preferred shares into 48,484,848 shares of common stock. Assuming the conversion occurs on August 8, 2003, Riverwood will pay the Grover C. Coors Trust an estimated $19.8 million as consideration for early conversion of the preferred stock. Immediately after the merger, GPIC shareholders will own approximately 42.5% and Riverwood shareholders will own approximately 57.5% of the combined company on a fully diluted basis.

On May 12, 2003, the thirty-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) expired. Accordingly, the condition to the merger requiring the expiration or termination of the HSR waiting period has been satisfied. In addition to this and other conditions to the merger, the merger must be approved by two-thirds of the combined voting power of GPIC common stock and two-thirds of the preferred stock voting as a separate class. The Coors family shareholders, who collectively owned approximately 65.1% of the combined voting power of the Company before the merger, signed a voting agreement with Riverwood in which they agreed to vote in favor of the merger. At a meeting of the shareholders held on August 7, 2003, the merger was approved and is expected to be consummated on August 8, 2003.

The combined company has commitment letters from a banking syndicate for financing totaling $1.6 billion at the time of merger. We estimate that up to $1.3 billion will be drawn at the time of merger and this, together with the new issuance of $850 million of senior subordinated notes, will be used to repay existing bank debt, transaction costs and to refinance GPIC’s and Riverwood’s senior and senior subordinated notes. Assuming the GPIC existing senior bank credit facility and the senior subordinated notes are refinanced, a loss on early extinguishment of debt will occur totaling approximately $20 million, consisting of cash tender premiums and non-cash unamortized debt issuance costs.

For the six months ended June 30, 2003, we incurred approximately $3.5 million of merger related costs. We expect to incur an estimated additional $9 million of transaction costs prior to closing for merger related investment banking, legal and accounting fees. For the six months ended June 30, 2003, we also incurred approximately $500 thousand evaluating acquisitions that were not consummated.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As of August 1, 2003, the Company’s capital structure includes $191.5 million that bears interest based upon an underlying rate that fluctuates with short-term interest rates, specifically LIBOR or Prime Rate. As of August 1, 2002, the Company’s capital structure included $202.8 million of debt that bears interest based upon an underlying rate that fluctuated with short-term interest rates, specifically LIBOR. At August 1, 2002, the Company

had interest rate swap agreements that locked LIBOR at 5.94% on $65 million of its borrowings. With the Company’s interest rate protection contracts in place last year, a 1% rise in interest rates would have impacted annual pre-tax results by approximately $1.4 million. Currently, a 1% rise in interest rates would impact the Company’s annual pre-tax results by approximately $1.9 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 as defined in Exchange Act Rule 13a-14 under supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of June 30, 2003. 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 in other factors that could significantly affect these controls subsequent to the date of their evaluation. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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, loss of business 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 and may make acquisitions, and are currently anticipating a merger with Riverwood Holding, Inc. which entails certain risks, and we cannot guarantee that we will realize the expected benefits from future acquisitions, the merger or that our existing operations will not be harmed as a result; 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 could adversely affect our business, financial condition and results of operations; j) we may encounter difficulties in our restructuring and reorganization efforts, which could prevent us from accommodating our existing business and capturing new business; k) various Coors family trusts own a significant interest in us and may exercise their control in a manner detrimental to our other investors’ interests; l) 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; m) 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; n) 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; o) we may be exposed to higher than predicted interest rates on our debt and on any new debt we might incur; p) 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); q) 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 credit s and other factors; r) purchase savings initiatives, and cost

reduction and efficiency programs, such as Six Sigma, might not realize significant future benefits; s) we might not be able to maintain our position as one of the lowest cost producers due to competitors more effectively reducing their costs and improving efficiencies; t) capital expenditures may be more or less than projected and may not be adequate to cover all possible business requirements; u) the company’s ability to generate cash flow may differ from past performance and the cash that is generated may not be used to reduce debt; v) the merger with Riverwood Holding may not result in a new leader in the paperboard industry or improved financial strengths or growth opportunities due to market conditions, customer response to the merger, integration issues, and similar issues; and w) the merger with Riverwood Holding may not be completed becaused of failure to meet other conditions detailed in the merger agreement. Investors are encouraged to read the proxy statement related to the proposed merger with Riverwood Holding that was mailed in July.

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, 2002. 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 second quarter ended June 30, 2003, may not be indicative of results that may be expected for the year ending December 31, 2003.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 4. Submission of Matters to a Vote of the Shareholders

At the May 13, 2003 annual meeting of the Company’s shareholders, the following matters were submitted for a vote of the shareholders. The report of the Inspectors of Election is below.

There were 57,946,100 shares of common stock (including voting rights of preferred stock) entitled to vote at the meeting and a total of 50,709,614 shares (87.51%) were represented at the meeting.

(1) Election of two directors for a three-year term.


	FOR		WITHHOLD
John D. Beckett		47,656,537		3,053,077
William K. Coors		50,245,054		464,560


	The other directors whose term of office continued after the meeting are Jeffrey H. Coors, Harold R. Logan, Jr., James K. Peterson and John H. Stookey.

(2) Approval of an amendment and restatement to the Company’s Executive Incentive Plan to, among other things, add additional financial measures which may be used to set financial goals for plan participants.


FOR	AGAINST		ABSTAIN		BROKER NON-VOTE
46,507,801		700,568		973,815		2,527,430

At the August 7, 2003 special meeting of the Company’s shareholders, the following matter was submitted for a vote of the shareholders. The report of the Inspectors of Election is below.

There were 57,966,100 shares of common stock and 1,000,000 shares of 10% Series B Convertible Preferred Stock entitled to vote at the meeting. A total of 46,064,883 shares of common stock (79.5%) and 1,000,000 shares of Preferred Stock (100%) were represented at the meeting.

(1) Approval of the Agreement and Plan of Merger by and among Riverwood Holding, Inc., Riverwood Acquisition Sub LLC, and Graphic Packaging International Corporation.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


Exhibit
Number		Document Description

2.1		Amendment No. 1 to Agreement and Plan of Merger, dated as of July 11, 2003, among Riverwood Holding, Inc., Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. (Incorporated by reference to Amendment No. 3 of Form S-4 filed on July 17, 2003)
2.2		Amendment No. 1 to Voting Agreement, dated as of July 11, 2003, between Riverwood Holding, Inc. and persons listed on the signature pages thereof. (Incorporated by reference to Amendment No. 3 of Form S-4 filed on July 17, 2003)
10.1		Amendment No. 2 to Stockholders Agreement, dated as of June 12, 2003, by and among Riverwood Holding, Inc., the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. (Incorporated by reference to Amendment No. 1 of Form S-4 filed June 13, 2003)
31		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On April 16, 2003, the Company filed a Current Report on Form 8-K disclosing two putative class action lawsuits relating to the proposed merger transaction between the Company and Riverwood Holding, Inc.

On May 5, 2003, the Company filed a Current Report on Form 8-K disclosing the first quarter 2003 earnings release on April 29, 2003, plus additional disclosures made during the subsequent conference call.

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.


		GRAPHIC PACKAGING INTERNATIONAL CORPORATION

Date: August 7, 2003		By /s/ Luis E. Leon Luis E. Leon (Chief Financial Officer)

Date: August 7, 2003		By /s/ John S. Norman John S. Norman (Vice President and Controller)

Exhibit Index


Exhibit
Number		Document Description

2.1		Amendment No. 1 to Agreement and Plan of Merger, dated as of July 11, 2003, among Riverwood Holding, Inc., Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. (Incorporated by reference to Amendment No. 3 of Form S-4 filed on July 17, 2003)
2.2		Amendment No. 1 to Voting Agreement, dated as of July 11, 2003, between Riverwood Holding, Inc. and persons listed on the signature pages thereof. (Incorporated by reference to Amendment No. 3 of Form S-4 filed on July 17, 2003)
10.1		Amendment No. 2 to Stockholders Agreement, dated as of June 12, 2003, by and among Riverwood Holding, Inc., the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. (Incorporated by reference to Amendment No. 1 of Form S-4 filed June 13, 2003)
31		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

BROKER NON-VOTE

GRAPHIC PACKAGING INTERNATIONAL CORP 10-Q