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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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Form 10-K



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(Mark One)

|   |  |                                                                                         
|-- |  | ----------------------------------------------------------------------------------------
|x  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|   |  |                                                                                         
|   |  | For the fiscal year ended December 31, 2002                                             
|   |  |                                                                                         
|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 0-20646

CARAUSTAR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


|                                                                                |  |                                              
|------------------------------------------------------------------------------- |  | ---------------------------------------------
|North Carolina(State or other jurisdiction of incorporation or organization)    |  | 581388387(I.R.S. Employer Identification No.)
|                                                                                |  |                                              
|3100 Joe Jerkins Blvd.
Austell, Georgia(Address of principal executive offices) |  | 30106(Zip Code)                              

(770) 948-3101(Registrants telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:Common Stock, $.10 par value(Title of Class)



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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 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   o

Indicated by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
   
Yes   x   
No   o

The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2002, computed by reference to the closing sale
price on such date, was $347,590,065. For purposes of calculating this amount
only, all directors and executive officers are treated as affiliates. This
determination of affiliate status shall not be deemed conclusive for other
purposes. As of the same date, 27,851,768 shares of Common Stock, $.10 par
value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive Proxy Statement pertaining to the
2003 Annual Meeting of Shareholders (the Proxy Statement) and filed pursuant
to Regulation 14A are incorporated herein by reference into Part III.



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TABLE OF CONTENTS



|                                                |  |  |  |  |  |  |  | 
|----------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                         
|PART II                                        
|CONSOLIDATED BALANCE SHEETS                    
|CONSOLIDATED STATEMENTS OF OPERATIONS          
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|CONSOLIDATED STATEMENTS OF CASH FLOWS          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|PART III                                       
|PART IV                                        
|SIGNATURES                                     
|CERTIFICATIONS                                 
|EXHIBIT INDEX                                  
|EX-12.01 COMPUTATION OF RATIO OF EARNINGS      
|EX-21.01 SUBSIDIARIES OF CARAUSTAR             
|EX-23.03 CONSENT OD DELOITTE & TOUCHE LLP      
|EX-23.03 CONSENT OF ERNST & YOUNG LLP          
|EX-23.04 CONSENT OF ERNST & YOUNG LLP          
|EX-99.01 SECTION 906 CERTIFICATION OF THE CEO  
|EX-99.02 SECTION 906 CERTIFICATION OF THE CFO  
|EX-99.04 FINANCIAL STATEMENTS                  



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INTRODUCTION

Caraustar Industries,
Inc. operates its business through 25 subsidiaries
across the United States, Canada, Mexico and the United Kingdom. As used
herein, we, our, us, (or similar terms), the Company or Caraustar
includes Caraustar Industries, Inc. and its subsidiaries, except that when used
with reference to common shares or other securities described herein and in
describing the positions held by management of the Company, the term includes
only Caraustar Industries, Inc. Our corporate website is www.caraustar.com.
You can access our annual report on Form 10-K, our quarterly reports on Form
10-Q, our current reports on Form 8-K, and amendments to those filings, as well
as our other SEC filings, free of charge on our website via hyperlink to a
third party database of documents filed electronically with the SEC. These
documents are available for access as soon as reasonably practicable after we
electronically file these documents with the SEC.

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K, including Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains various
forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, that are based on our beliefs and assumptions,
as well as information currently available to us. When used in this document,
the words believe, anticipate, estimate, expect, intend, should,
would, could, or may and similar expressions may identify forward-looking
statements. These statements involve risks and uncertainties that could cause
our actual results to differ materially depending on a variety of important
factors, including, but not limited to, those identified under the caption 
Risk Factors in Part I, Item 1 of this Report and other factors discussed
elsewhere in this Report and the Companys other filings with the Securities
and Exchange Commission. These documents are available from us, and also may be
examined at public reference facilities maintained by the Securities and
Exchange Commission or, to the extent filed via EDGAR, accessed through the Web
Site of the Securities and Exchange Commission (http://www.sec.gov). We do not
undertake any obligation to update any forward-looking statements we make.




PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview

We are a major manufacturer of 100% recycled paperboard and converted
paperboard products. We manufacture products primarily from recovered fiber,
which is derived from recycled paper. We operate in three business segments:



| |  | Paperboard                        
|- |  | ----------------------------------
| 
| |  | Tube, core and composite container
| 
| |  | Carton and custom packaging       

We report certain financial information by segment in the notes to the
consolidated financial statements included in Part II, Item 8 of this Report.

Operations and Products

Paperboard.Our principal manufacturing activity is the production of
uncoated and clay-coated recycled paperboard. In this manufacturing process, we
reduce recovered fiber to pulp, clean and refine it and then process it into
various grades of paperboard for internal consumption by our converting
facilities or sale in the following four end-use markets:



| |  | Tube, core and composite containers
|- |  | -----------------------------------
| 
| |  | Folding cartons                    
| 
| |  | Gypsum wallboard facing paper      

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| |  | Other specialty products
|- |  | ------------------------

We currently operate a total of 17 paperboard mills, including one owned
in a joint venture. These mills are located in the following states:
Connecticut, Georgia, Indiana, Iowa, New York, North Carolina, Ohio,
Pennsylvania, South Carolina, Tennessee, Washington and Virginia.

In 2002, approximately 39% of the recycled paperboard sold by our
paperboard mills was consumed internally by our converting facilities; the
remaining 61% was sold to external customers. Sales of unconverted paperboard
to external customers as a percentage of total sales by end-use market were as
follows (excludes sales from the 50%-owned Premier Boxboard joint venture):

|                                    |  |                          |      |      |  |      |      |   |  |  |      |  
|----------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                    |  | Years Ended December 31,
|                                    |  |                         
|End-use Market                      |  | 2000                     |      | 2001 |  | 2002
|                                    |  |                          |      |      |  |     
|Tube, core and composite containers |  |                          | 1.7  | %    |  |      | 1.6  | % |  |  | 1.8  | %
|Folding cartons                     |  |                          | 12.6 | %    |  |      | 11.5 | % |  |  | 12.1 | %
|Gypsum wallboard facing paper       |  |                          | 10.2 | %    |  |      | 7.9  | % |  |  | 6.8  | %
|Other specialty products(1)         |  |                          | 11.0 | %    |  |      | 10.7 | % |  |  | 10.2 | %



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|(1) |  | Includes sales of unconverted paperboard and certain specialty converted
products.
|--- |  | ----------------------------------------------------------------------------------

Three of our paperboard mills operate specialty converting facilities that
supply other specialty converted and laminated products to the bookbinding,
game, puzzleboard, printing and furniture industries. We also operate two
specialty converting facilities that supply die cut and foam laminated products
and manufacture jigsaw puzzles and other specialty products.

Each of our paperboard mills and most of our converting plants have onsite
recovered fiber facilities that collect and bale recovered fiber. In addition,
we operate 8 stand-alone recovered fiber recycling and brokerage facilities
that collect, sell and broker recovered fiber to external customers and to our
own mills. Sales of recovered fiber to external customers accounted for 5.0%,
4.0% and 5.6% of our total sales in 2002, 2001 and 2000, respectively.

Tube, Core and Composite Container.Our largest converting operation is
the production of tubes and cores. The principal applications of these products
are cloth cores, paper mill cores, yarn carriers, carpet cores and film, foil
and metal cores. On September 30, 2002 we acquired certain operating assets of
the Smurfit Industrial Packaging Group, a business unit of Jefferson Smurfit
Corporation (U.S.). The acquisition included 17 tube and core converting
plants. This acquisition significantly increased our number of converting
facilities and tube and core volume. Our 42 tube and core converting plants
obtain approximately 86% of their paperboard needs from our paperboard mills
and the remaining 14% from other manufacturers. Paper tubes are designed to
provide specific physical strength properties, resistance to moisture and
abrasion, and resistance to delamination at extremely high rotational speeds.
Because of the relatively high cost of shipping tubes and cores, these
facilities generally serve customers within a relatively small geographic area.
Accordingly, most of our tube and core converting plants are located close to
concentrations of customers.

We continually seek to expand our presence in the markets for more
sophisticated tubes and cores, which require stronger paper grades, higher
skill and new converting technology. These markets include the yarn carrier and
plastic film markets, as well as the market for cores used in certain segments
of the paper industry. We believe these markets offer significant growth
potential, as well as potentially higher operating margins.

In addition to tube and core converting facilities, our tube, core and
composite container division operates four facilities that produce specialty
converted products used in industrial packaging protection applications (edge
protectors). Our tube, core and related sales to external customers accounted
for 23.9%, 22.1% and 21.3% of our total sales to external customers in 2002,
2001 and 2000, respectively.

Our tube, core and composite container division also produces composite
containers used in the adhesive, sealant, food and food service markets, as
well as grease cans, tubes, cartridges and other components. The group has
three composite container plants located in Stevens Point, Wisconsin, Saint
Paris, Ohio and Orrville, Ohio and a transportation operation in Ohio.
Composite container sales accounted for 4.5%, 4.4% and 3.9% of our total sales
to external customers in 2002, 2001 and 2000, respectively.

We manufacture injection-molded and extruded plastic products, including
plastic cores for the textile industry, plastic cores for the film, paper and
other industries and other specialized products. These plastic products are, to
a large extent, complementary to our tube and core products. We own 80%
of a company in Union, South Carolina that produces such plastic products.

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Some of this plants customers also purchase our tubes and cores. This
plant currently has six plastic extrusion lines and 24 injection-molding
machines, using the latest available process control technology. We also
produce injection-molded plastic parts at our facility in Georgetown, Kentucky.
These parts are primarily used as components in the manufacture of our
composite containers. We produce plastic cartridges at a facility located in
New Smyrna Beach, Florida. Plastic product and related sales to external
customers accounted for 1.9%, 2.1% and 2.3% of our total sales to external
customers in 2002, 2001 and 2000, respectively.

Carton and Custom Packaging.Our other converting operations produce
folding cartons and rigid set-up boxes at 15 plants. These plants obtain
approximately 49% of their paperboard needs from our paperboard mills and the
remaining 51% from other manufacturers. Our boxes and cartons are used
principally as containers for paper goods, hardware, candy, sports-related
items, frozen foods, dry food, film and various other industrial applications,
including textile and apparel applications.

We operate seven specialty packaging facilities: three in Ohio, two in New
Jersey and one each in Massachusetts and North Carolina. These facilities
perform contract manufacturing and custom contract packaging for a variety of
consumer product companies. Additionally, we operate a digital imaging facility
in Ohio and a prepress reproduction facility in Connecticut.

Carton and custom packaging sales accounted for 33.7% of our total sales
to external customers in 2002, 35.6% in 2001 and 31.4% in 2000.

Our consolidated sales for the twelve months ended December 31, 2002 were
$949.9 million. We estimate that our three business segments accounted for the
following percentages of sales for the twelve months ended December 31, 2002:



| |  | Paperboard  36%                        
|- |  | ----------------------------------------
| 
| |  | Tube, core and composite container  30%
| 
| |  | Carton and custom packaging  34%       

Joint Ventures.We also operate two joint ventures with Temple-Inland,
Inc., in which we own 50% interests. One of the joint ventures, Premier
Boxboard Limited LLC, formed in 1999, produces a new, lightweight gypsum facing
paper along with other containerboard grades. The other joint venture, Standard Gypsum,
L.P. (Standard Gypsum), formed in 1996, manufactures gypsum wallboard. We
manage the day-to-day operations of our Premier Boxboard joint venture, and
Temple-Inland manages the day-to-day operations at our Standard Gypsum joint
venture.

We also have an equity interest as the nonoperating partner in a tube
plant located in Tacoma, Washington that manufactures spiral-wound tubes and
edge protectors. We acquired our joint venture partners ownership interest in
January 2003 and we now own 100% of this facility.

Raw Materials.Recovered fiber derived from recycled paperstock is the
only significant raw material we use in our mill operations. We purchase
approximately 62% of our recovered fiber requirements from independent sources,
such as major retail stores, distribution centers and manufacturing plants. We
obtain the balance from a combination of other sources. We collect some
recovered fiber from small collectors and waste collection businesses. Our
recovered fiber recycling and processing facilities sort and bale this
recovered fiber and then either transfer it to our mills for processing or sell
it to third parties. We also obtain recovered fiber from customers of our
converting operations and from waste handlers and collectors who deliver loose
recovered fiber to our mill sites for direct use without baling. We obtain
another portion of our requirements from our small baler program, in which we
lease, sell or furnish small baling machines to businesses that bale their own
recovered fiber for our periodic collection.

We closely monitor our recovered fiber costs, which can fluctuate
significantly. Our paperboard mills continually pursue operational methods and
alternative fiber sources to minimize our recovered fiber costs. One of these
initiatives is to further increase our unbaled recovered fiber purchases, as a
percentage of our total recovered fiber needs and to increase our reliance on
purchases from our small baler program.

Energy Costs.Excluding labor, energy is our most significant
manufacturing cost. We use energy, including electricity, natural gas, fuel oil
and coal, to generate steam used in the paper making process and to operate our
paperboard machines and our other converting machinery. We purchase energy from
local suppliers at market rates.

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Product Distribution.Each of our manufacturing and converting facilities
has its own sales staff and maintains direct sales relationships with its
customers. We also employ divisional and corporate level sales personnel who
support and coordinate the sales activities of individual facilities.
Divisional and corporate sales personnel also provide sales management,
marketing and product development assistance in markets where customers are
served by more than one of our facilities. Approximately 186 of our employees
are devoted exclusively to sales and customer service activities, although many
other employees participate generally in sales efforts. We generally do not
sell our products through independent sales representatives. Our advertising is
limited to trade publications.

Customers.We manufacture most of our converted products pursuant to
customers orders. We do, however, maintain minimal inventory levels of certain
products. Our business generally is not dependent on any single customer or
upon a small number of major customers. However, in 2000, Georgia-Pacific,
formerly our largest gypsum facing paper customer, refused to continue
purchasing its requirements of gypsum facing paper for certain plants pursuant
to the terms of a long-term supply contract. In 2002, we negotiated a new
supply agreement at significantly lower volume than the original contract. Our
operating results and financial condition have been materially and adversely
affected by the reduced contract volume from Georgia-Pacific. Other than
Georgia-Pacific, we do not believe that the loss of any one customer would have
a material adverse effect on our financial condition or results of operations.

Competition.Although we compete with numerous other manufacturers and
converters, our competitive position varies greatly by geographic area and
within the various product markets of the recycled paperboard industry. In most
of our markets, our competitors are capable of supplying products that would
meet customer needs. Some of our competitors have greater financial resources
than we do. We compete in our markets on the basis of price, quality and
service. We believe that it is important in all of our markets to work closely
with our customers to develop or adapt products to meet customers specialized
needs. We also believe that we compete favorably on the basis of all of the
above factors.

Tube, core and composite containers.In the southeastern United States,
where we historically have marketed our tubes and cores, we believe that we and
Sonoco Products Company are the major competitors. On a national level, Sonoco
is our dominant competitor in the tube and core market. According to industry
data, Sonoco had more than 50% of the total tube and core market in the United
States in 2002. We also compete with several regional companies and numerous
small local companies in the tube and core market.

Carton and custom packaging.The folding carton and custom packaging
market in the United States is served by several large national and regional
companies and numerous small local companies. Nationally, none of the major
competitors is dominant, although certain competitors may be dominant in
particular geographic areas or market niches. In the markets served by our
carton plants, the dominant competitors are Rock-Tenn Company, Smurfit-Stone
Container Corporation and Graphic Packaging, Inc.

Gypsum wallboard facing paper.The gypsum wallboard industry is divided
into independent gypsum wallboard manufacturers, which either do not produce
their own gypsum wallboard facing paper or cannot fill all of their needs
internally, and integrated wallboard manufacturers, which supply all of their
own gypsum wallboard facing paper requirements internally. We believe that the
two largest integrated gypsum wallboard manufacturers, USG Corporation and
National Gypsum Company, do not have significant sales of gypsum wallboard
facing paper to the independent gypsum wallboard manufacturers. We believe that
we have the largest market share of the supply of gypsum wallboard facing paper
to independent wallboard manufacturers in North America.

We also compete in the gypsum wallboard industry through a joint venture
with Temple-Inland. Our joint venture, Standard Gypsum, competes with larger
integrated wallboard manufacturers such as USG Corporation and National Gypsum,
who have greater financial resources and superior marketing strength due to
their greater number of locations and national presence. Standard Gypsum
competes primarily on the basis of product quality, dependability, timeliness
of delivery and price.

Other specialty products.In our sales of specialty products and in sales
of recycled paperboard to other manufacturers for the production of tubes,
cores and composite containers, folding cartons and boxes and miscellaneous
converted products (other than gypsum wallboard facing paper), we compete with
a number of recycled paperboard manufacturers, including Rock-Tenn,
Smurfit-Stone Container Corporation and The Newark Group, Inc. We believe that
none of our competitors is dominant in any of these markets.

Competitive position.Recovered fiber costs were higher on average in
2002 compared to 2001. Our average same-mill cost for recovered fiber per ton
of recycled paperboard produced was approximately $85 during 2002, a 31%
increase from $65 per ton in 2001. Although no specific information is
available about competitors actual recovered fiber costs, we believe that our
delivered recovered fiber costs are among the lowest in the recycled paperboard
industry. Relative to other competitors, we believe that our

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lower recovered fiber costs are attributable in part to lower shipping
costs resulting from the location of our paperboard mills and recovered fiber
facilities near major metropolitan areas that generate substantial supplies of
recovered fiber. Many of the paperboard mills operated by our principal
competitors are located away from major metropolitan areas, and we believe,
based on our knowledge of freight rates, that these competitors incur higher
freight costs associated with their fiber recovery efforts, adding to their
total cost of delivered recovered fiber.

Our relatively low recovered fiber costs are also attributable to our
emphasis on certain recovery methods that enable us to avoid baling operations.
We believe that our competitors rely primarily on off-site, company-owned and
operated recovered fiber baling operations that collect and bale recovered
fiber for shipment and processing at the mill site. We also operate such
facilities, and our experience is that the baling operation results in $25-$30
per ton higher recovered fiber costs. We equip most of our paperboard mills to
accept unbaled recovered fiber for processing directly into its pulpers. In
2002 and 2001, unbaled recovered fiber represented approximately 5% and 6%,
respectively, of our total recovered fiber purchases. We also use other fiber
recovery methods  our small baler program and our recovery of fiber from
customers  that result in lower recovered fiber costs.

Environmental Matters.Our operations are subject to various
international, federal, state and local environmental laws and regulations.
These laws and regulations are administered by international, federal, state
and local agencies. Among other things, these laws and regulations regulate the
discharge of materials into the water, air and land, and govern the use and
disposal of hazardous substances. We believe that our operations are in
substantial compliance with all applicable environmental laws and regulations,
except for violations that we believe would not have a material adverse effect
on our business or financial position.

Our recycled paperboard mills use substantial amounts of water in the
papermaking process. Our mills discharge process wastewater into local sewer
systems or directly into nearby waters pursuant to wastewater discharge
permits. We use only small amounts of hazardous substances, and we believe the
concentration of these substances in our wastewater discharge generally is
below permitted maximums. From time to time, the imposition of stricter limits
on the solids, sulfides, BOD (biological oxygen demand) or metals content of a
mills wastewater requires us to alter the content of our wastewater. We can
effect reductions by additional screening of the wastewater, by otherwise
changing the flow of process wastewater from the mill or from pretreatment
ponds into the sewer system, and by adding chemicals to the wastewater. We also
are subject to regulatory requirements related to the disposal of solid wastes
and air emissions from our facilities. We are not currently aware of any
required expenditures relating to wastewater discharge, solid waste disposal or
air emissions that we expect to have a material adverse effect on our business
or financial condition, but we are unable to give assurance that we will not
incur material expenditures in these areas in the future.

In addition, under certain environmental laws, we can be held strictly
liable if hazardous substances are found on real property we have owned,
operated or used as a disposal site. In recent years, we have adopted a policy
of assessing real property for environmental risks prior to purchase. We are
aware of issues regarding hazardous substances at certain facilities, but in
each case we believe that any possible liabilities will not have a material
adverse effect on our business or financial position.

Employees.As of December 31, 2002, the 118 facilities we operate had
approximately 6,437 employees, of whom 5,080 are hourly and 1,357 are salaried.
Approximately 2,747 of our hourly employees are represented by labor unions.
All principal union contracts expire during the period 2003-2009. We consider
our relations with our employees to be excellent.

Executive Officers.The names and ages, positions and period of service
of each of our Companys executive officers are set forth below. The term of
office for each executive officer expires upon the earlier of the appointment
and qualification of a successor or such officers death, resignation,
retirement, removal or disqualification.

|                      |  |                                                             |  |                                                                                                                                                                                                                                                          
|--------------------- |  | ----------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |                                                             |  | Period of Service as Executive Officer and                                                                                                                                                                                                               
|                      |  |                                                             |  | pre-Executive Officer experience (if an                                                                                                                                                                                                                  
|Name and Age          |  | Position                                                    |  | Executive Officer for less than 5 years)                                                                                                                                                                                                                 
|                      |  |                                                             |  |                                                                                                                                                                                                                                                          
|Thomas V. Brown(62)   |  | President and Chief Executive
Officer; Director             |  | President since 1/1991; CEO since 10/1991;
Director since 4/1991                                                                                                                                                                                         
|Michael J. Keough(51) |  | Senior Vice President and Chief
Operating Officer; Director |  | Since 3/2002; 2000-2002, President and
Chief Operating Officer and 1993-2000, Vice
President and General Manager, Container
Operations, of Gaylord Container Corporation, a
manufacturer and distributor of corrugated
containers. Director since 10/2002

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|                        |  |                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                             
|----------------------- |  | ------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |  |                                                        |  | Period of Service as Executive Officer and                                                                                                                                                                                                                                                                                                                                                  
|                        |  |                                                        |  | pre-Executive Officer experience (if an                                                                                                                                                                                                                                                                                                                                                     
|Name and Age            |  | Position                                               |  | Executive Officer for less than 5 years)                                                                                                                                                                                                                                                                                                                                                    
|                        |  |                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                             
|Ronald J. Domanico(44)  |  | Vice President and Chief
Financial Officer             |  | Vice President and CFO since 10/2002;
2000-2002, Executive Vice President and Chief
Financial Officer of AHL Services, Inc., a
provider of marketing support services;
1997-2000, CFO, Nabisco International, a
manufacturer and distributor of packaged foods;
1981-1997, Chief Financial Officer, Kraft, Inc.,
International Operations, a manufacturer and
distributor of packaged foods.
|William A. Nix, III(51) |  | Vice President, Treasurer and
Controller               |  | Since 4/2001; 1995-2000, Vice President,
Treasurer, AGCO Corporation, a worldwide
manufacturer and distributor of agricultural
equipment.                                                                                                                                                                                                                                                   
|Jimmy A. Russell(55)    |  | Vice President, Industrial and
Consumer Products Group |  | Vice President since 4/1993; CEO of Star
Paper Tube, Inc., the predecessor of the
Industrial and Consumer Products Group, since
1/1993                                                                                                                                                                                                                                                      
|James L. Walden(57)     |  | Vice President, Custom Packaging
Group                 |  | Since 2/1993                                                                                                                                                                                                                                                                                                                                                                                
|Barry A. Smedstad(56)   |  | Vice President, Human Resources
and Public Relations   |  | Since 1/1999; 1997-1998, Vice President,
Human Resources, Box USA, a manufacturer of
corrugated shipping containers; 1996-1997,
Director of Human Resources, Northeast Region,
Baxter Healthcare Corporation, a diversified
healthcare products and technology manufacturer;
1985-1996, Director, Labor & Employee Relations,
Federal Paper Board Company, Inc., a paper
manufacturer.      
|John R. Foster(57)      |  | Vice President, Sales and
Marketing                    |  | Since 9/1996                                                                                                                                                                                                                                                                                                                                                                                

Website.Our corporate website is www.caraustar.com. There you can access
general information about our company, as well as our SEC filings. See
Introduction above for more information regarding our website.



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Risk Factors

Investors should consider the following risk factors, in addition to the
other information presented in this Report and the other Reports and
registration statements we file from time to time with the Securities and
Exchange Commission, in evaluating us, our business and an investment in our
securities. Any of the following risks, as well as other risks and
uncertainties, could harm our business and financial results and cause the
value of our securities to decline, which in turn could cause investors to lose
all or part of
their investment in our Company. The risks below are not the only ones
facing our Company. Additional risks not currently known to us or that we
currently deem immaterial also may impair our business.

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Our business and financial performance may be harmed by future increases in raw
material costs.

Our primary raw material is recycled paper, which is known in our industry
as recovered fiber. The cost of recovered fiber has, at times, fluctuated
greatly because of factors such as shortages or surpluses created by market or
industry conditions. Although we have historically raised the selling prices of
our products in response to raw material price increases, sometimes raw
material prices have increased so quickly or to such levels that we have been
unable to pass the price increases through to our customers on a timely basis,
which has adversely affected our operating margins. We cannot give assurance
that we will be able to pass such price changes through to our customers on a
timely basis and maintain our margins in the face of raw material cost
fluctuations in the future.

Our operating margins, cash flow and debt covenant compliance may be adversely
affected by rising energy costs.

Excluding labor, energy is our most significant manufacturing cost. We use
energy to generate steam used in the paper making process and to operate our
paperboard machines and all of our other converting machinery. Our energy costs
decreased steadily throughout 2001 and in the first three quarters of 2002
before increasing sharply in the fourth quarter of 2002. In 2001, the average
energy cost in our mill system was approximately $57 per ton. In 2002, energy
costs decreased by 12.3% to $50 per ton. This was due primarily to decreases in
natural gas and fuel oil costs, until the fourth quarter of 2002, when prices
rose sharply. We expect that prices may continue to rise in response to the
threat or commencement of armed conflict in the Middle East and the
uncertainties regarding the outcome and implications of such a conflict. Until
the last few years, our business had not been significantly affected by energy
costs, and we historically have not passed energy costs through to our
customers. We have not been able to pass through to our customers all of the
energy cost increases we incurred during the last few years. Although we
continue to evaluate our energy costs and consider ways to factor energy costs
into our pricing we cannot give assurance that our operating margins and
results of operations will not continue to be adversely affected by rising
energy costs.

Our business and financial performance may be adversely affected by downturns
in industrial production, housing and construction and the consumption of
nondurable and durable goods.

Demand for our products in our four principal end use markets is primarily
driven by the following factors:



| |  |  | Tube, core and composite container  industrial production, construction spending and consumer nondurable consumption              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Folding cartons  consumer nondurable consumption and industrial production                                                        
|
| |  |  | Gypsum wallboard facing paper  single and multifamily construction,
repair and remodeling construction and commercial construction
|
| |  |  | Other specialty products  consumer nondurable consumption and
consumer durable consumption.                                       

Downturns in any of these sectors will result in decreased demand for our
products. In particular, our business has been adversely affected in recent
periods by the general slow down in industrial demand. These conditions are
beyond our ability to control, but have had, and will continue to have, a
significant impact on our sales and results of operations.

In addition, the September 11, 2001 terrorist attacks and the
uncertainties surrounding those events have contributed to the general slowdown
in U.S. economic activity. If those events, other terrorist activities, the
U.S. military response and the resulting uncertainties continue to adversely
affect the United States economy in general, the sectors above may be
negatively impacted, which would cause our business to be adversely affected.

We are adversely affected by the cycles, conditions and problems inherent in
our industry.

Our operating results tend to reflect the general cyclical nature of the
business in which we operate. In addition, our industry has suffered from
excess capacity. Our industry also is capital intensive, which leads to high
fixed costs and generally results in continued production as long as prices are
sufficient to cover marginal costs. These conditions have contributed to
substantial price competition and volatility within our industry. In the event
of a recession, demand and prices are likely to drop substantially. Our
profitability historically has been more sensitive to price changes than to
changes in volume. Future decreases in prices for our products would
adversely affect our operating results. These factors, coupled with our
substantially leveraged financial position, may adversely affect our ability to
respond to competition and to other market conditions or to otherwise take
advantage of business opportunities.

7



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##### Table of Contents



Our business may suffer from risks associated with growth and acquisitions.

Historically, we have grown our business, revenues and production capacity
to a significant degree through acquisitions. In the current difficult
operating climate facing our industry and our financial position, the pace of
our acquisition activity (with the exception of our recent purchase of certain
assets of the Smurfit Industrial Packaging Group), and accordingly, our revenue
growth, has slowed significantly as we have focused on conserving cash and
maximizing the productivity of our existing facilities. However, we expect to
continue evaluating and pursuing acquisition opportunities on a selective
basis, subject to available funding and credit flexibility. Growth through
acquisitions involves risks, many of which may continue to affect us based on
acquisitions we have completed in the past. For example, we have suffered
significant unexpected losses at our Sprague mill in Versailles, Connecticut,
which we acquired from International Paper Company in 1999, resulting from
unfavorable fixed price contracts, low capacity utilization, high energy costs
and higher fiber costs that we were unable to pass through to our customers.
Sprague incurred operating losses of $5.8 million and $7.2 million in 2002 and
2001, respectively, including the reversal of reserves related to unfavorable
supply contracts. See Managements Discussion and Analysis of Financial
Condition and Results of Operations. We cannot give assurance that our
acquired businesses will achieve the same levels of revenue, profit or
productivity as our existing locations or otherwise perform as we expect.

Acquisitions also involve specific risks. Some of these risks include:



| |  |  | assumption of unanticipated liabilities and contingencies;
| | - |  | ----------------------------------------------------------
|
| |  |  | diversion of managements attention; and                  
|
| |  |  | possible reduction of our reported earnings because of:   



| |   |  | increased goodwill and intangible write-offs;   
| | --- |  | ------------------------------------------------
|
| |   |  | increased interest costs;                       
|
| |   |  | issuances of additional securities or debt; and 
|
| |   |  | difficulties in integrating acquired businesses.

As we grow, we can give no assurance that we will be able to:



| |  |  | use the increased production capacity of any new or improved facilities;
| | - |  | ------------------------------------------------------------------------
|
| |  |  | identify suitable acquisition candidates;                               
|
| |  |  | complete additional acquisitions; or                                    
|
| |  |  | integrate acquired businesses into our operations.                      

If we cannot raise the necessary capital for, or use our stock to finance,
acquisitions, expansion plans or other significant corporate opportunities, our
growth may be impaired.

As described under Managements Discussion and Analysis of
Financial Condition and Results of Operations  Subsequent
Events, we have entered into an amendment to our senior credit
facility that, among other things, effectively prohibits us from
making acquisitions or other strategic investments unless our
financial performance significantly improves. Without additional capital,
or replacement of our existing senior credit facility, we may have to curtail any acquisition and
expansion plans or forego other significant corporate opportunities that may be
vital to our long-term success. If our revenues and cash flow do not meet
expectations, then we may lose our ability to borrow money or to do so on terms
that we consider favorable. Conditions in the capital markets also will affect
our ability to borrow, as well as the terms of those borrowings. In addition,
our financial performance and the conditions of the capital markets will also
affect the value of our common stock, which could make it a less attractive
form of consideration in making acquisitions. All of these factors could also
make it difficult or impossible for us to expand in the future.

Our substantial indebtedness could adversely affect our cash flow and our
ability to fulfill our obligations under our indebtedness.

8



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##### Table of Contents



We have a substantial amount of outstanding indebtedness. See Selected
Financial Data, Managements Discussion and Analysis of Financial Condition
and Results of Operations and Financial Statements and Supplemental Data
included in Part II of this Report. In addition, as described in Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Subsequent Events, we
have guaranteed indebtedness of, or provided similar credit support
to, our joint ventures for which we could also be
liable. Our substantial level of indebtedness increases the possibility that we
may be unable to generate cash sufficient to pay when due the principal of,
interest on or other amounts due in respect of our indebtedness. We may also
obtain additional long-term debt, increasing the risks discussed below. Our
substantial leverage could have significant consequences to holders of our debt
and equity securities. For example, it could:



| |  |  | make it more difficult for us
to satisfy our obligations with respect to our indebtedness,
including compliance with financial covenants;                                                                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increase our vulnerability to general adverse economic and industry conditions;                                                                                                                                                                       
|
| |  |  | limit our ability to obtain additional financing;                                                                                                                                                                                                     
|
| |  |  | require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, reducing the amount of our
cash flow available for other purposes, including capital expenditures
and other general corporate purposes;
|
| |  |  | require us to sell debt or equity securities or to sell some of our
core assets, possibly on unfavorable terms, to meet payment obligations;                                                                                                          
|
| |  |  | restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;                                                                                                                                    
|
| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and our industry;                                                                                                                                                      
|
| |  |  | place us at a possible competitive disadvantage compared to our competitors that have less debt;                                                                                                                                                      
|
| |  |  | adversely affect the value of
our common stock; and                                                                                                                                                                                                   
|
| |  |  | affect our viability as a
going concern.                                                                                                                                                                                                              

Our interest expense could be adversely affected by risks associated with our
interest rate swap agreements.

Interest rate swap agreements carry a certain inherent element of interest
rate risk. During 2001, we entered into four interest rate swap agreements in
order to take advantage of the current market conditions. These agreements
converted a significant portion of our fixed rate 9 7/8% senior subordinated
notes and our fixed rate 7 3/8% senior notes into variable rate obligations.
The variable rates are based on the three-month LIBOR plus a fixed margin.
These swap agreements lowered our interest expense in 2001 and 2002, and we
expect these agreements to continue to positively impact our interest expense.
If, however, LIBOR increases significantly, our interest expense could be
adversely affected. See Managements Discussion and Analysis of Financial
Condition and Results of Operations for additional information on our swap
agreements.

We are subject to many environmental laws and regulations that require
significant expenditures for compliance and remediation efforts, and changes in
the law could increase those expenses and adversely affect our operations.

Compliance with the environmental requirements of international, federal,
state and local governments significantly affects our business. Among other
things, these requirements regulate the discharge of materials into the water,
air and land and govern the use and disposal of hazardous substances. Under
environmental laws, we can be held strictly liable if hazardous substances are
found on real property we have ever owned, operated or used as a disposal site.
In recent years, we have adopted a policy of assessing real property for
environmental risks prior to purchase. We are aware of issues regarding
hazardous substances at some facilities, and we have put into place a remedial
plan at each site where we believe such a plan is necessary. We regularly make
capital and operating expenditures to stay in compliance with environmental
laws. Despite these compliance efforts, risk of environmental liability is part
of the nature of our business. We cannot give assurance that environmental
liabilities, including compliance and remediation costs, will not have a
material adverse effect on us in the future. In addition, future events may
lead to additional compliance or other costs that could have a material adverse
effect on our business. Such future events could include changes in, or new
interpretations of, existing laws, regulations or enforcement policies or
further investigation of the potential health hazards of certain products or
business activities.

ITEM 2. PROPERTIES

9



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##### Table of Contents



Facilities.The following table sets forth certain information concerning our
facilities. Unless otherwise indicated, we own such facilities.

|                                                     |  |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------- |  | ---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                     |  | Number of  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Type of Facility                                     |  | Facilities |  | Locations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                     |  |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|PAPERBOARD                                           |  |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                    
|Paperboard Mills (1)                                 |  | 16         |  | Versailles, CT; Austell, GA (Mill #1); Austell, GA
(Mill #2); Austell, GA (Sweetwater);
Cedartown, GA; Tama, IA; Lafayette, IN;
Charlotte, NC; Lockport, NY; Cincinnati, OH;
Rittman, OH (two machines); Sinking Spring, PA; Taylors, SC;
Chattanooga, TN; Richmond, VA; Tacoma, WA                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Specialty Converting Plants                          |  | 8          |  | Austell, GA (one facility); Covington, GA;
Fayetteville, NC; Charlotte, NC; Mooresville, NC;
Frenchtown, NJ; Litchfield, IL; Taylors, SC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Recovered Fiber Collection and
Processing Plants (2) |  | 8          |  | Columbus, GA; Dalton, GA; Doraville, GA;
Charlotte, NC; Cleveland, OH; Rittman, OH;
Hardeeville, SC; Texarkana, TX (leased)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                    
|TUBE, CORE AND COMPOSITE CONTAINER                   |  |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                    
|Tube and Core Plants                                 |  | 42         |  | Eufaula, AL; Linden, AL; Mobile, AL; Crossett, AR;
McGehee, AR (leased); Phoenix, AZ (leased);
Vacaville, CA; Kingston, Ontario, Canada;
Scarborough, Ontario, Canada; Cantonment, FL;
Palatka, FL; Austell, GA; Cedar Springs, GA;
Dalton, GA; Beardstown, IL; Franklin, KY;
DeQuincy, LA; West Monroe, LA; Grand Rapids, MI;
Saginaw, MI; Corinth, MS; Kernersville, NC;
Mountain Home, NC; Columbus, OH; Minerva, OH;
Perrysburg, OH; Lancaster, PA (leased); Rock Hill, SC;
Taylors, SC; Amarillo, TX (leased); Arlington, TX;
Houston, TX; Lufkin, TX; Silsbee, TX;
Texarkana, TX; Leyland, Lancaster, United Kingdom;
Salt Lake City, UT (leased); Danville, VA; Franklin, VA;
West Point, VA; Weyers Cave, VA; Tacoma, WA
|Composite Container Plants                           |  | 3          |  | Orrville, OH; Saint Paris, OH; Stevens Point, WI                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Specialty Converting Plants                          |  | 4          |  | Austell, GA; Lancaster, PA; Arlington, TX;
Tacoma, WA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Plastics Plants                                      |  | 3          |  | New Smyrna Beach, FL (leased); Georgetown, KY; Union,
SC (80% interest)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Special Services and Other
Facilities                |  | 2          |  | Kernersville, NC (leased); Saint Paris, OH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                    
|CARTON AND CUSTOM PACKAGING                          |  |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                    
|Carton Plants                                        |  | 15         |  | Birmingham, AL (leased); Denver, CO; Versailles, CT;
Thorndike, MA; Hunt Valley, MD; Burlington, NC;
Charlotte, NC; Randleman, NC; Ashland, OH;
Mentor, OH; Grand Rapids, MI; St. Louis, MO;
York, PA; Kingston Springs, TN; Chicago, IL (leased)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Contract Packaging and Contract
Manufacturing Plants |  | 7          |  | Thorndike, MA; Clifton, NJ; Pine Brook, NJ (leased);
Robersonville, NC; Bucyrus, OH; Strasburg, OH
(two facilities)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Special Services                                     |  | 3          |  | Versailles, CT; Grand Rapids, MI; Cleveland, OH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

10



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##### Table of Contents



|                                            |  |            |  |                                                            
|------------------------------------------- |  | ---------- |  | -----------------------------------------------------------
|                                            |  | Number of  |  |                                                            
|Type of Facility                            |  | Facilities |  | Locations                                                  
|                                            |  |            |  |                                                            
|JOINT VENTURES                              |  |            |  |                                                            
|                                           
|Gypsum Wallboard                            |  | 2          |  | Cumberland, TN (50% interest); McQueeney, TX (50%
Interest)
|Paperboard Mill                             |  | 1          |  | Newport, IN (50% interest)                                 
|Tube and Core Plant                         |  | 1          |  | Mexico City, Mexico (65% interest)                         
|Tube and Core Specialty
Converting Facility |  | 1          |  | Mexico City, Mexico (65% interest)                         



---

|(1) |  | All of our paperboard mills produce uncoated recycled paperboard with the
exceptions of our Rittman, OH, Tama, IA and Versailles, CT paperboard
mills, which also produce clay-coated boxboard.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Recovered fiber collection and/or processing also occurs at each of our
mill sites and all of our carton plants and tube and core plants.                                                      

ITEM 3. LEGAL PROCEEDINGS

From time to time claims are asserted against the Company arising out of
its operation in the normal course of business. Management does not believe
that the Company is a party to any litigation that will have a material adverse
effect on its financial condition or results of operations.

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

There were no matters submitted to the Companys security holders during
the fourth fiscal quarter ended December 31, 2002.

11



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##### Table of Contents






PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since October 1, 1992, our common shares, $.10 par value (the Common
Shares) have traded on the National Association of Securities Dealers, Inc.
NASDAQ National Market System (NASDAQ) under the symbol CSAR. As of March 14,
2003, there were approximately 508 shareholders of record and, as of that date,
we estimate that there were approximately 2,100 beneficial owners holding stock
in nominee or street name. The table below sets forth quarterly high and low
stock prices and dividends declared during the years 2002 and 2001.

|               |  |      |       |     |  |          |      |  |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | -------- | ---- |  |  | - | ---- | 
|               |  | High |       | Low |  | Dividend
|               |  |      |       |     |  |         
|2001           |  |      |       |     |  |          |      |  |  |   |      | 
|First Quarter  |  | $    | 13.38 |     |  | $        | 6.78 |  |  | $ | 0.09 | 
|Second Quarter |  |      | 11.08 |     |  |          | 6.35 |  |  |   | 0.03 | 
|Third Quarter  |  |      | 10.70 |     |  |          | 7.51 |  |  |   | 0.03 | 
|Fourth Quarter |  |      | 9.50  |     |  |          | 6.06 |  |  |   | 0.03 | 
|2002           |  |      |       |     |  |          |      |  |  |   |      | 
|First Quarter  |  | $    | 11.00 |     |  | $        | 6.80 |  |  | $ | 0.00 | 
|Second Quarter |  |      | 13.99 |     |  |          | 9.96 |  |  |   | 0.00 | 
|Third Quarter  |  |      | 13.40 |     |  |          | 7.97 |  |  |   | 0.00 | 
|Fourth Quarter |  |      | 10.57 |     |  |          | 8.01 |  |  |   | 0.00 | 

We paid dividends of $0.18 per share during each quarter of 2000. In
February 2001, we announced that the first quarter dividend was reduced by
one-half to $0.09 per issued and outstanding common share. In June 2001, we
reduced our second, third and fourth quarter dividend from $0.09 to $0.03 per
issued and outstanding common share. We suspended future payments of quarterly
dividends, beginning in the first quarter of 2002. The decision to reduce the
quarterly dividend was made to preserve our financial flexibility in light of
difficult industry conditions. As described under
Management's Discussion and Analysis of Financial Condition and
Results of Operations  Subsequent Events, our senior credit facility
currently prohibits us from paying any dividends.

12



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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA

|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ------------------------------------------------ | ------- | ---- |  | ---- | --------- | - |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2002                    |         | 2001 |  | 2000                                             |         | 1999 |  | 1998
|                                                        |  |                         |         |      |  |                                                  |         |      |  |     
|                                                        |  |                         |         |      |  | (In thousands, except per share data and ratios) |         |      |  |     
|Summary of Operations                                   |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Sales                                                   |  | $                       | 949,926 |      |  | $                                                | 913,686 |      |  | $    | 1,014,615 |   |  | $ | 936,928 |   |  | $ | 774,312 |  
|Cost of sales                                           |  |                         | 724,045 |      |  |                                                  | 680,172 |      |  |      | 759,521   |   |  |   | 683,772 |   |  |   | 536,890 |  
|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Gross profit                                            |  |                         | 225,881 |      |  |                                                  | 233,514 |      |  |      | 255,094   |   |  |   | 253,156 |   |  |   | 237,422 |  
|Freight costs                                           |  |                         | 57,057  |      |  |                                                  | 52,806  |      |  |      | 51,184    |   |  |   | 46,839  |   |  |   | 37,454  |  
|Selling, general and administrative expenses            |  |                         | 150,131 |      |  |                                                  | 146,934 |      |  |      | 145,268   |   |  |   | 125,784 |   |  |   | 105,052 |  
|Restructuring and other costs                           |  |                         | 12,713  |      |  |                                                  | 7,083   |      |  |      | 16,777    |   |  |   |        |   |  |   |        |  
|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Operating income                                        |  |                         | 5,980   |      |  |                                                  | 26,691  |      |  |      | 41,865    |   |  |   | 80,533  |   |  |   | 94,916  |  
|Other (expense) income:                                 |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Interest expense                                        |  |                         | (38,115 | )    |  |                                                  | (41,153 | )    |  |      | (34,063   | ) |  |   | (25,456 | ) |  |   | (16,072 | )
|Interest income                                         |  |                         | 1,652   |      |  |                                                  | 986     |      |  |      | 412       |   |  |   | 603     |   |  |   | 334     |  
|Gain (loss) on extinguishment of debt                   |  |                         | 87      |      |  |                                                  | (4,305  | )    |  |      |          |   |  |   |        |   |  |   |        |  
|Equity in income (loss) of unconsolidated affiliates    |  |                         | 2,488   |      |  |                                                  | (2,610  | )    |  |      | 6,533     |   |  |   | 9,224   |   |  |   | 4,308   |  
|Other, net                                              |  |                         | 130     |      |  |                                                  | (1,904  | )    |  |      | (918      | ) |  |   | (459    | ) |  |   | (433    | )
|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|                                                        |  |                         | (33,758 | )    |  |                                                  | (48,986 | )    |  |      | (28,036   | ) |  |   | (16,088 | ) |  |   | (11,863 | )
|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|(Loss) income before minority interest and income taxes |  |                         | (27,778 | )    |  |                                                  | (22,295 | )    |  |      | 13,829    |   |  |   | 64,445  |   |  |   | 83,053  |  
|Minority interest in losses (income)                    |  |                         | 235     |      |  |                                                  | 180     |      |  |      | (169      | ) |  |   | (356    | ) |  |   | (730    | )
|(Benefit) provision for income taxes                    |  |                         | (9,623  | )    |  |                                                  | (7,513  | )    |  |      | 5,485     |   |  |   | 23,142  |   |  |   | 30,483  |  
|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Net (loss) income                                       |  | $                       | (17,920 | )    |  | $                                                | (14,602 | )    |  | $    | 8,175     |   |  | $ | 40,947  |   |  | $ | 51,840  |  
|                                                        |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Diluted weighted average shares outstanding             |  |                         | 27,871  |      |  |                                                  | 27,845  |      |  |      | 26,301    |   |  |   | 25,199  |   |  |   | 25,423  |  
|Per Share Data                                          |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Diluted net (loss) income                               |  |                         | (0.64   | )    |  |                                                  | (0.52   | )    |  |      | 0.31      |   |  |   | 1.62    |   |  |   | 2.04    |  
|Cash dividends declared                                 |  |                         | 0.00    |      |  |                                                  | 0.18    |      |  |      | 0.72      |   |  |   | 0.72    |   |  |   | 0.66    |  
|Market price on December 31                             |  | $                       | 9.48    |      |  | $                                                | 6.93    |      |  | $    | 9.38      |   |  | $ | 24.00   |   |  | $ | 28.56   |  
|Shares outstanding December 31                          |  |                         | 27,907  |      |  |                                                  | 27,854  |      |  |      | 26,205    |   |  |   | 25,488  |   |  |   | 24,681  |  
|Total Market Value of Common Stock                      |  | $                       | 264,558 |      |  | $                                                | 193,028 |      |  | $    | 245,803   |   |  | $ | 611,712 |   |  | $ | 704,889 |  
|Balance Sheet Data                                      |  |                         |         |      |  |                                                  |         |      |  |      |           |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $                       | 34,314  |      |  | $                                                | 64,244  |      |  | $    | 8,900     |   |  | $ | 18,771  |   |  | $ | 2,610   |  
|Property, plant and equipment, net                      |  |                         | 443,395 |      |  |                                                  | 450,376 |      |  |      | 483,309   |   |  |   | 479,856 |   |  |   | 324,470 |  
|Depreciation and amortization expense                   |  |                         | 54,246  |      |  |                                                  | 64,340  |      |  |      | 60,858    |   |  |   | 52,741  |   |  |   | 38,705  |  
|Capital expenditures                                    |  |                         | 22,542  |      |  |                                                  | 28,059  |      |  |      | 58,306    |   |  |   | 35,696  |   |  |   | 40,716  |  
|Total assets                                            |  |                         | 985,214 |      |  |                                                  | 960,981 |      |  |      | 934,097   |   |  |   | 879,880 |   |  |   | 620,156 |  
|Current maturities of long-term debt                    |  |                         | 70      |      |  |                                                  | 48      |      |  |      | 1,259     |   |  |   | 16,615  |   |  |   | 26,103  |  
|Revolving credit loans                                  |  |                         |        |      |  |                                                  |        |      |  |      | 194,000   |   |  |   | 140,000 |   |  |   | 147,000 |  
|Long-term debt, less current maturities                 |  |                         | 532,715 |      |  |                                                  | 508,691 |      |  |      | 272,813   |   |  |   | 269,739 |   |  |   | 82,881  |  
|Shareholders equity                                    |  |                         | 241,681 |      |  |                                                  | 279,579 |      |  |      | 279,808   |   |  |   | 279,184 |   |  |   | 234,221 |  
|Total shareholders equity and debt                     |  | $                       | 774,466 |      |  | $                                                | 788,318 |      |  | $    | 747,880   |   |  | $ | 705,538 |   |  | $ | 490,205 |  



---

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a major manufacturer of recycled paperboard and converted
paperboard products. We operate in three business segments. The paperboard
segment manufactures 100% recycled uncoated and clay-coated paperboard and
collects recycled paper and brokers recycled paper and other paper rolls. The
tube, core and composite container segment produces spiral and convolute-wound
tubes, cores and cans. The carton and custom packaging segment produces printed
and unprinted folding carton and set-up boxes and provides contract
manufacturing and packaging services.

Our business is vertically integrated to a large extent. This means that
our converting operations consume a large portion of our own paperboard
production, approximately 39% in 2002. The remaining 61% of our paperboard
production is sold to external customers in any of the four recycled paperboard
end-use markets: tube, core and composite containers; folding cartons; gypsum
wallboard facing paper and other specialty products. As part of our strategy to
optimize our operating efficiency, each of our mills can produce recycled
paperboard for more than one end-use market. This allows us to shift production
between mills in response to customer or market demands.

Recovered fiber, which is derived from recycled paper stock, is our most
significant raw material. Historically, the cost of recovered fiber has
fluctuated significantly due to market and industry conditions. For example,
our average recovered fiber cost per

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ton of paperboard produced increased from $43 per ton in 1993 to $144 per
ton in 1995, an increase of 235%, before dropping to $66 per ton in 1996.
Same-mill recovered fiber cost per ton averaged $85 and $65 during 2002 and
2001, respectively.

We raise our selling prices in response to increases in raw material
costs. However, we often are unable to pass the full amount of these costs
through to our customers on a timely basis, and as a result often cannot
maintain our operating margins in the face of dramatic cost increases. We
experience margin shrinkage during all periods of price increases due to
customary time lags in implementing our price increases. We cannot give
assurance that we will be able to recover any future increases in the cost of
recovered fiber by raising the prices of our products. Even if we are able to
recover future cost increases, our operating margins and results of operations
may still be materially and adversely affected by time delays in the
implementation of price increases. See Part I, Item 1,  Risk Factors  Our
business and financial performance may be harmed by future increases in raw
material costs.

Excluding labor, energy is our most significant manufacturing cost. Energy
consists of electrical purchases and fuel used to generate steam used in the
paper making process and to operate our paperboard machines and all of our
other converting machinery. Our energy costs increased steadily throughout 2000
and the first quarter of 2001 before showing some improvement by the end of
2001. In 2000, the average energy cost in our mill system was approximately $52
per ton compared to $57 per ton in 2001, a 9.6% increase. In 2002 energy
costs averaged $50 per ton, a decline of 12.3% from 2001. The increase in 2000
and 2001 was due primarily to increases in natural gas and fuel oil costs. We
expect that prices may continue to rise in response to armed conflict in the Middle East and the uncertainties
regarding the outcome and implications of such a conflict. Until the last few
years, our business had not been significantly affected by energy costs, and we
historically have not passed increases in energy costs through to our
customers. Consequently, we were not able to pass through to our customers all
of the energy cost increases we incurred in 2000 and 2001. As a result, our
operating margins were adversely affected. Although we continue to evaluate our
energy costs and consider ways to factor energy costs into our pricing we
cannot give assurance that our operating margins and results of operations will
not continue to be adversely affected by rising energy costs. See Part I, Item
1,  Risk Factors  Our operating margins may be adversely affected by rising
energy costs.

Historically, we have grown our business, revenues and production capacity
to a significant degree through acquisitions. Based on the difficult operating
climate for our industry and our financial position over the last two years,
the pace of our acquisition activity, and accordingly, our revenue growth, has
slowed as we have focused on conserving cash and maximizing the productivity of
our existing facilities. However, during 2002, we purchased our joint venture
partners interest in our Design Tubes Company Limited Canadian joint venture
and acquired certain operating assets (excluding accounts receivable) of
Smurfit-Stones Industrial Packaging Group, see Liquidity and Capital
Resources Acquisitions.

We are a holding
company that currently operates our business through 25
subsidiaries. We also own a 50% interest in two joint ventures with
Temple-Inland, Inc. We have an additional joint venture with an unrelated
entity in which our investment and share of earnings are immaterial. We account
for these interests in our joint ventures under the equity method of
accounting. See Liquidity and Capital Resources below.

Critical Accounting Policies

Our accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
of America, which require management to make estimates that affect the amounts
of revenues, expenses, assets and liabilities reported. The following are
critical accounting matters which are both very important to the portrayal of
our financial condition and results and which require some of managements most
difficult, subjective and complex judgments. The accounting for these matters
involves the making of estimates based on current facts, circumstances and
assumptions which, in managements judgment, could change in a manner that
would materially affect managements future estimates with respect to such
matters and, accordingly, could cause future reported financial condition and
results to differ materially from financial results reported based on
managements current estimates.

Revenue Recognition.We recognize revenue and the related account
receivable when the following four criteria are met: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred; (3) the selling price is
fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (4) is based on managements judgments regarding the
collectibility of our accounts receivable. Generally, we recognize revenue
when we ship our manufactured products or when we complete a service and title
and risk of loss passes to our customers. Provisions for discounts, returns,
allowances, customer rebates and other adjustments are provided for in the same
period as the related revenues are recorded.

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Accounts Receivable.We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the
customers current credit worthiness, as determined by our review of their
current credit information. We continuously monitor collections from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.
These estimates may prove to be inaccurate, in which case we may have
overstated or understated the reserve required for uncollectible accounts
receivable.

Inventory.Inventories are carried at the lower of cost or market. Cost
includes materials, labor and overhead. Market, with respect to all
inventories, is replacement cost or net realizable value. Management frequently
reviews inventory to determine the necessity of write-offs for excess, obsolete
or unsaleable inventory. These reviews require management to assess customer
and market demand. These estimates may prove to be inaccurate, in which case we
may have overstated or understated the reserve required for excess, obsolete or
unsaleable inventory.

Goodwill.Effective January 1, 2002, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets. This pronouncement requires us to
perform a goodwill impairment test at least annually. See the notes to the
consolidated financial statements for additional information regarding our
goodwill accounting. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events could cause us to
conclude that impairment indicators exist and that goodwill associated with our
acquired businesses is impaired. Evaluating the impairment of goodwill also
requires us to estimate future operating results and cash flows, which also
require judgment by management. Any resulting impairment loss could have a
material adverse impact on our financial condition and results of operations.

Impairment of Long-Lived Assets. Pursuant to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, we periodically evaluate
long-lived assets, including property, plant and equipment and definite lived
intangible assets whenever events or changes in conditions may indicate that
the carrying value may not be recoverable. Factors that management considers
important that could initiate an impairment review include the following:



| |  |  | significant operating losses;                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | significant declines in demand for a product whereby an asset is only able to produce that product;
|
| |  |  | assets that are idled;                                                                             
|
| |  |  | assets that are likely to be divested                                                              

The impairment review requires management to estimate future undiscounted
cash flows associated with an asset or group of assets and sum the estimated
future cash flows. If the future undiscounted cash flows is less than the
carrying amount of the asset, then we must estimate the fair value of the
asset. If the fair value of the asset exceeds the carrying value then the
difference will be written-off. Estimating future cash flows requires
management to make judgments regarding future economic conditions, product
demand and pricing. Although we believe our estimates are appropriate,
significant differences in the actual performance of the asset or group of
assets may materially affect our asset values and results of operations.

Self-Insurance.We are self-insured for the majority of our workers
compensation costs and health care costs, subject to specific retention levels.
Consulting actuaries and administrators assist us in determining our liability
for self-insured claims. Our self-insured workers compensation liability is
estimated based on actual claims that are established by a third party
administrator. The actual claims are then increased by factors that reflect
our historical claim development. The developed claim is the liability that
we record in our financial statements. Our self-insured health care liability
is estimated based on our actual claim experience and multiplied by a lag
factor. The lag factor represents claims that have been incurred and should be
recorded as a liability, but have not been reported. While we believe that our
assumptions are appropriate, significant differences in our actual experience
or significant changes in our assumptions may materially affect our workers
compensation costs and group health insurance costs.

Accounting for Income Taxes.As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure, together with assessing temporary
differences resulting from differing treatment of items for tax and financial
reporting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We

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must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. We record valuation
allowances due to uncertainties related to our ability to utilize some of our
deferred tax assets, primarily consisting of certain state net operating losses
carried forward and state tax credits, before they expire. The valuation
allowance is based on our estimates of taxable income by jurisdiction in which
we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to establish an
additional valuation allowance which could have a material negative impact on
our statement of operations and our balance sheet.

Pension and Other
Postretirement Benefits.We maintain a noncontributory defined
benefit pension plan (the Pension Plan). The Pension Plan
provides benefits to be paid to all eligible employees at retirement
based primarily on years of service with the Company and compensation
rates in effect near retirement. Our policy is to fund benefits
attributed to employees services to date as well as service
expected to be earned in the future. Contributions were approximately
$5.1 million, $8.3 million and $7.1 million for the
years ended December 31, 2000, 2001, and 2002, respectively.
During 2003 we can make contributions to the Pension Plan between $0
and approximately $11.3 million. We currently plan to make the
maximum deductible contribution of $11.3 million.

During 1996, we
adopted a supplemental executive retirement plan (SERP),
which provides benefits to participants based on average
compensation. The SERP covers certain executives of the Company
commencing upon retirement. The SERP was unfunded at
December 31, 2002.

Our net pension
expense for the Pension Plan and the SERP was approximately
$3.1 million, $3.7 million and $4.8 million for the
years ended December 31, 2000, 2001 and 2002, respectively. Net
pension expense for 2003 is expected to be approximately
$9.7 million. In addition, we recorded an additional minimum
pension liability of approximately $37.2 million in 2002 related to the
Pension Plan representing the excess of unfunded
accumulated benefit obligations over previously recorded pension
liabilities. The additional minimum pension liability was offset by
an intangible asset of approximately $1.3 million related to
unrecognized prior service cost. The remaining minimum pension
liability of approximately $35.9 million was recorded as a
component of other comprehensive loss, net of the tax benefit.

The determination of
our pension expense and benefit obligation is dependent on our
selection of certain assumptions used by actuaries in calculating
such amounts. Those assumptions include, among others, the weighted
average discount rate, the weighted average expected rate of return
on plan assets and the weighted average rate of compensation
increase. Following is a summary of the significant assumptions used
to determine net periodic pension expense and the projected benefit
obligation:

|                                                            |  |              |      |      |  |  |      |  
|----------------------------------------------------------- |  | ------------ | ---- | ---- |  |  | ---- | -
|                                                            |  |             
|                                                            |  | December 31,
|                                                            |  | 2002         |      | 2001
|                                                            |  |              |      |     
|Weighted average discount rate                              |  |              | 6.75 | %    |  |  | 7.50 | %
|Weighted average expected rate of return on plan
    assets |  |              | 9.00 | %    |  |  | 9.50 | %
|Weighted average rate of compensation increase              |  |              | 3.00 | %    |  |  | 3.00 | %

In developing our
weighted average discount rate, we evaluated input from our
actuaries, including reviewing the rating and maturity of long-term
bonds that receive one of the two highest ratings given by a
recognized rating agency. The discount rate determined on the basis
was lowered from 7.50% at December 31, 2001 to 6.75% at
December 31, 2002. A .25% change in the discount rate would
result in a change in the additional minimum pension liability of
approximately $2.2 million. Based on our analysis of the rating
and maturity of the long-term bonds and the input from our
actuaries, we believe that a discount rate of 6.75% is reasonable.
Future actual pension expense and benefit obligation will depend on
future investment performance, changes in future discount rates and
various other factors related to populations participating in our
pension plans.

In developing our
expected long-term rate of return, we evaluated such criteria as
return expectation by asset class and long-term inflation
assumptions. Our expected long-term rate of return is based on an
asset allocation assumption of 80% equity and 20% fixed income. We
regularly review our asset allocation and periodically rebalance our
investments to our targeted allocation when considered appropriate.
As a result of our analysis, we lowered the expected rate of return
from 9.5% at December 31, 2001 to 9.0% at December 31,
2002. The actual value of the Pension Plan assets decreased from
approximately $60.5 million to approximately $52.3 million
as a result of the recent market downturn, however, we continue to
believe that 9.0% is a reasonable long-term rate of return. We will
continue to evaluate our actuarial assumptions, including our
expected rate of return, at least annually, and will adjust as
necessary.

The investment
performance returns and declining discount rates increased our
unfunded status of the Pension Plan and the SERP plan by
approximately $23.3 million in 2002. While we believe that the
assumptions we have used are appropriate, significant differences in
our actual experience or significant changes in our assumptions may
materially affect our pension plan and SERP liability.

We also provide
postretirement medical benefits at certain of our subsidiaries. Our
net periodic postretirement benefit cost for medical costs was
approximately $497 thousand, $507 thousand and
$548 thousand for the years ended December 31, 2000, 2001
and 2002, respectively. The accumulated postretirement benefit
obligations at December 31, 2001 and 2002 were determined using
a weighted average discount rate of 7.5% and 6.75%, respectively. The
rate of increase in the costs of covered health care benefits is
assumed to be 8.5% in 2002, decreasing 0.5% each year to 4.5% by the
year 2010. Increasing the assumed health care costs trend rate by one
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 2002 by approximately
$811 thousand and would increase net periodic postretirement
benefit cost by approximately $71 thousand for the year ended
December 31, 2002.

Depreciation.Management is required to make estimates regarding useful
lives and salvage values of long-lived assets. These estimates can
significantly impact depreciation expense and accordingly, both results of
operations and the asset values reflected on the balance sheet. During the
fourth quarter of 2002, we engaged independent professional valuation advisors
to assist management in evaluating the appropriate remaining estimated useful
lives for the acquired Smurfit Industrial Packaging Group machinery and
equipment and for our existing machinery and equipment. Management initiated
this review based on industry practice, our actual experience and the lives
assigned by the former owner of the acquired Smurfit assets. This review
resulted in a change in the average estimated useful lives of machinery and
equipment from approximately 10 years to approximately 20 years. The change in
estimate lowered depreciation expense in the fourth quarter of 2002
approximately $7.6 million.

Results of Operations 2001  2002

The following table shows volume, gross paper margins and related data for
the periods indicated. The volume information shown below includes shipments of
unconverted paperboard and converted paperboard products. Tonnage volumes from
our business segments, excluding tonnage produced or converted by our
unconsolidated joint ventures, are combined and presented along end-use market
lines. Additional financial information is reported by segment in the notes to
the consolidated financial statements.

|                                                          |                                 |  |  |                          |  |              |         |       |  |        |         |        |  |  |      |      |   |  |     |  
|--------------------------------------------------------- | ------------------------------- |  |  | ------------------------ |  | ------------ | ------- | ----- |  | ------ | ------- | ------ |  |  | ---- | ---- | - |  | --- | -
|                                                          |                                 |  |  |                          |  | Years Ended  |         |       |  |        |         |        |  | 
|                                                          |                                 |  |  |                          |  | December 31, |         |       |  |        |         |        |  | 
|                                                          |                                 |  |  |                          |  |              |         |       |  |        |         | %     
|                                                          |                                 |  |  |                          |  | 2001         |         | 2002  |  | Change |         | Change
|                                                          |                                 |  |  |                          |  |              |         |       |  |        |         |       
|Production source of paperboard tons sold (in thousands): |                                 |  |  |                          |  |              |         |       |  |        |         |        |  |  |      |     
|                                                          | From paperboard mill production |  |  | 892.4                    |  |              |         | 952.7 |  |        |         | 60.3   |  |  |      | 6.8  | %
|                                                          | Outside purchases               |  |  | 123.1                    |  |              |         | 141.7 |  |        |         | 18.6   |  |  |      | 15.1 | %
|                                                          |                                 |  |  |                          |  |              |         |       |  |        |         |        |  |  |      |     
|                                                          |                                 |  |  | Total paperboard tonnage |  |              | 1,015.5 |       |  |        | 1,094.4 |        |  |  | 78.9 |      |   |  | 7.8 | %
|                                                          |                                 |  |  |                          |  |              |         |       |  |        |         |        |  |  |      |     
|Tons sold by market (in thousands):                       |                                 |  |  |                          |  |              |         |       |  |        |         |        |  |  |      |     
|Tube,
core and composite container volume                 |                                 |  |  |                          |  |              |         |       |  |        |         |        |  |  |      |     

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|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |      |      |    |      |   
|------------------------------------ | ----------------------------------------------------- | --------------------------------------- | ---- | ----------------------------------------- | ----- | ------------ | ------- | ----- | ----- | ------ | ------- | ------ | ---- | - | ----- | ---- | ---- | -- | ---- | --
|                                     |                                                       |                                         |      |                                           |       | Years Ended  |         |       |       |        |         |        |      |  
|                                     |                                                       |                                         |      |                                           |       | December 31, |         |       |       |        |         |        |      |  
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         | %     
|                                     |                                                       |                                         |      |                                           |       | 2001         |         | 2002  |       | Change |         | Change
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |       
|                                     |                                                       | Paperboard (internal)                   |      |                                           | 187.6 |              |         |       | 206.5 |        |         |        | 18.9 |   |       |      | 10.1 | % 
|                                     |                                                       | Outside purchases                       |      |                                           | 25.9  |              |         |       | 33.6  |        |         |        | 7.7  |   |       |      | 29.7 | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     | Tube, core and composite container converted products |                                         |      | 213.5                                     |       |              |         | 240.1 |       |        |         | 26.6   |      |   |       | 12.5 | %   
|                                     | Unconverted paperboard                                |                                         |      | 32.7                                      |       |              |         | 39.5  |       |        |         | 6.8    |      |   |       | 20.8 | %   
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Tube, core and composite container volume |       |              | 246.2   |       |       |        | 279.6   |        |      |   | 33.4  |      |      |    | 13.6 | % 
|Folding
carton volume                |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       | Paperboard (internal)                   |      |                                           | 85.2  |              |         |       | 97.2  |        |         |        | 12.0 |   |       |      | 14.1 | % 
|                                     |                                                       | Outside purchases                       |      |                                           | 92.2  |              |         |       | 99.4  |        |         |        | 7.2  |   |       |      | 7.8  | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     | Folding carton converted products                     |                                         |      | 177.4                                     |       |              |         | 196.6 |       |        |         | 19.2   |      |   |       | 10.8 | %   
|                                     | Unconverted paperboard                                |                                         |      | 232.4                                     |       |              |         | 265.6 |       |        |         | 33.2   |      |   |       | 14.3 | %   
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Folding carton volume                     |       |              | 409.8   |       |       |        | 462.2   |        |      |   | 52.4  |      |      |    | 12.8 | % 
|Gypsum wallboard facing paper volume |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Unconverted paperboard                    |       |              | 151.5   |       |       |        | 138.1   |        |      |   | (13.4 | )    |      |    | (8.8 | )%
|                                     | Other specialty products volume                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |      |     
|                                     |                                                       | Paperboard (internal)                   |      |                                           | 68.0  |              |         |       | 64.8  |        |         |        | (3.2 | ) |       |      | (4.7 | )%
|                                     |                                                       | Outside purchases                       |      |                                           | 5.0   |              |         |       | 8.7   |        |         |        | 3.7  |   |       |      | 74.0 | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|Other
specialty converted products   |                                                       |                                         | 73.0 |                                           |       |              | 73.5    |       |       |        | 0.5     |        |      |   | 0.7   | %   
|                                     | Unconverted paperboard                                |                                         |      | 135.0                                     |       |              |         | 141.0 |       |        |         | 6.0    |      |   |       | 4.4  | %   
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Other specialty products volume           |       |              | 208.0   |       |       |        | 214.5   |        |      |   | 6.5   |      |      |    | 3.1  | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Total paperboard tonnage                  |       |              | 1,015.5 |       |       |        | 1,094.4 |        |      |   | 78.9  |      |      |    | 7.8  | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|Gross paper margins ($/ton):         |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     | Paperboard mill:                                      |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |      |     
|                                     |                                                       | Average same-mill net selling price     |      | $                                         | 413   |              |         | $     | 402   |        |         | $      | (11  | ) |       |      | (2.7 | )%
|                                     |                                                       | Average same-mill recovered fiber cost  |      |                                           | 65    |              |         |       | 85    |        |         |        | 20   |   |       |      | 30.8 | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Paperboard mill gross paper margin        |       | $            | 348     |       |       | $      | 317     |        |      | $ | (31   | )    |      |    | (8.9 | )%
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     | Tube and core:                                        |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |      |     
|                                     |                                                       | Average same-facility net selling price |      | $                                         | 783   |              |         | $     | 785   |        |         | $      | 2    |   |       |      | 0.3  | % 
|                                     |                                                       | Average same-facility paperboard cost   |      |                                           | 447   |              |         |       | 444   |        |         |        | (3   | ) |       |      | (0.7 | )%
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     
|                                     |                                                       |                                         |      | Tube and core gross paper margin          |       | $            | 336     |       |       | $      | 341     |        |      | $ | 5     |      |      |    | 1.5  | % 
|                                     |                                                       |                                         |      |                                           |       |              |         |       |       |        |         |        |      |   |       |     

Sales.Our consolidated sales for the year ended December 31, 2002 increased
4.0% to $949.9 million from $913.7 million in 2001. Acquisitions completed
during 2002 accounted for $36.1 million of sales during 2002. These
acquisitions included certain assets of the Smurfit Industrial Packaging Group,
a business unit of Jefferson Smurfit Corporation (U.S.) and Design Tubes Co.,
Ltd. The results of operations for these acquisitions were included only from
and after the date of the acquisition. Excluding acquisitions completed during
2002, sales were essentially unchanged from 2001. Although total sales were
unchanged, sales increased in the paperboard segment during 2002, but were
offset by a decline in sales in the carton and custom packaging segment. Sales
in the paperboard segment increased due to higher sales of unconverted coated
paperboard to external customers partially offset by a decline in selling
prices. The decline in sales in the carton and custom packaging segment was
due to a significant decrease in selling prices resulting from intense
competitive pressures, partially offset by an increase in volume.

Total paperboard tonnage for 2002 increased 7.8% to 1,094.4 thousand tons
from 1,015.5 thousand tons in 2001. Excluding acquisitions completed during
2002, total paperboard tonnage increased 4.4% to 1,059.7 thousand tons. This
increase was primarily due to higher internal conversion by our operations in
the carton and custom packaging and the tube, core and composite container
segments and higher shipments of unconverted paperboard to external customers
in the folding carton, tube, core and composite container and other specialty
markets. These improvements were partially offset by a decrease in gypsum
wallboard facing paper volume. However, including gypsum facing paper volume
transferred to our 50% owned, unconsolidated Premier Boxboard joint venture,
gypsum facing paper volume was essentially unchanged compared to prior year.
Excluding 2002 acquisitions, outside purchases increased 7.0% to 131.7 thousand
tons due primarily to higher purchases by our carton and custom packaging
segment. Tons sold from paperboard mill production increased 6.8% for 2002 to
952.7 thousand tons, compared with 892.4 thousand tons for 2001. Total tonnage
converted increased 10.0% for 2002 to 510.2 thousand tons compared to 463.9
thousand tons in 2001, and increased 4.3% from 2001, excluding acquisitions.
Excluding acquisitions completed during 2002, volumes in the folding carton and
tube, core and composite container end-use markets increased 11.5% and 5.1%,
respectively.

Gross Profit Margin.Gross profit margin for 2002 decreased to 23.8% of sales
from 25.6% in 2001. Excluding acquisitions completed during 2002 and the net
impact of the change in estimated useful lives of machinery and equipment from
2002 results and excluding the $7.1 million reduction in reserves related to
expiring unfavorable supply contracts at the Sprague paperboard mill from 2001
results, gross profit margin was 23.3% and 24.8% for 2002 and 2001,
respectively. This margin decrease was due primarily to lower margins in the
paperboard segment, partially offset by improved margins in the tube, core and
composite container segment.

17



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Margins in the paperboard segment decreased due to a decline in selling prices
and an increase in recovered fiber costs. Margins in the tube, core, and
composite container segment improved due to higher selling prices and slightly
lower paperboard costs.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses were $150.1 million in 2002, an increase of 2.2% from
2001. Excluding the impact of acquisitions from 2002 and excluding goodwill
amortization from 2001, selling, general and administrative expenses were
$146.5 million or 15.4% of sales for 2002, compared to $142.5 million or 15.6%
of sales in 2001. The decline in selling, general and administrative expenses
as a percentage of sales was the result of closing facilities and cost cutting
efforts throughout all of our business segments. These reductions were
partially offset by higher corporate expenses related to amendment fees for our
senior credit facility, executive recruiting and severance costs, costs related
to a proposed debt issuance that was aborted and noncapitalized costs related
to acquisitions.

Restructuring and Other Costs.In June 2002, we recorded a $985 thousand
noncash, pretax restructuring charge related to the permanent closure of our
Camden and Chicago paperboard mills, which were shut down in 2000 and 2001,
respectively. The $985 thousand charge represents a revised estimate of fixed
asset disposals at these mills.

In December 2002, we initiated a plan to restructure our carton plant in
Ashland, Ohio to serve a smaller, more focused carton market and recorded a
pretax charge to operations of approximately $2.4 million. The $2.4 million
charge included a $1.2 million noncash write down of assets.

In December 2002, we initiated a plan to permanently close our Halifax
paperboard mill located in Roanoke Rapids, North Carolina and recorded a pretax
charge to operations of approximately $3.4 million. The $3.4 million charge
included a $3.0 million noncash write down of assets.

In December 2002, we initiated a plan to consolidate our converting
operations in Fayetteville, North Carolina into Carolina Component Concepts,
also located in North Carolina, and recorded a pretax charge to operations of
approximately $6.0 million. The $6.0 million charge included a $2.4 million
noncash write down of assets.

In January 2001, we initiated a plan to close our paperboard mill located
in Chicago, Illinois and recorded a pretax charge to operations of
approximately $4.4 million. The $4.4 million charge included a $2.2 million
noncash write down of assets.

In March 2001, we initiated a plan to consolidate the operations of our
Salt Lake City, Utah carton plant into our Denver, Colorado carton plant and
recorded a pretax charge to operations of approximately $2.6 million. The $2.6
million charge included a $1.8 million noncash write down of assets.

See the notes to the consolidated financial statements for additional
information regarding our restructuring plans.

Operating Income.Operating income for 2002 was $6.0 million, a decrease
of $20.7 million, or 77.5% from 2001. The decrease in operating income was the
result of the following:



| |  |  | Higher recovered fiber costs and lower selling prices in the paperboard segment.                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Lower selling prices in the carton and custom packaging segment.                                                                     
|
| |  |  | Higher restructuring costs in 2002 compared with 2001.                                                                               
|
| |  |  | The 2001 results included a $7.1 million accrual reversal related
to expiring unfavorable supply contracts at the Sprague paper mill.
|
| |  |  | Higher corporate expenses as described above.                                                                                        

The items listed above explaining the decrease in operating income were partially offset by the following:



| |  |  | The $6.5 million net impact of the change in estimated useful lives of machinery and equipment.         
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | The 2001 results include goodwill amortization expense of $4.4 million which was not recognized in 2002.

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| |  |  | The 2002 results include
operating income of $2.4 million from the Smurfit Industrial Packaging Group acquisition.
| | - |  | ------------------------------------------------------------------------------------------------------------------

Other Income (Expense).Interest expense decreased 7.5% to $38.1 million for
2002 from $41.2 million in 2001. This decrease was due to savings from interest
rate swap agreements that effectively converted portions of our fixed rate
notes into variable rate obligations. See Liquidity and Capital Resources
for additional information regarding our debt, interest expense and interest
rate swap agreements.

Equity in income from unconsolidated affiliates was $2.5 million in 2002,
an improvement of $5.1 million from equity in loss from unconsolidated
affiliates of $2.6 million in 2001. This increase was primarily due to improved
operating results for Standard Gypsum, L.P., our gypsum wallboard joint venture
with Temple-Inland. The improved results were due primarily to higher selling
prices in 2002 compared to 2001. Standard Gypsums improved results were
partially offset by increased losses at Premier Boxboard Limited, our paper
mill joint venture with Temple-Inland. The increased losses at Premier
Boxboard were due to lower selling prices and higher recovered fiber costs.

Net Loss.Net loss for 2002 was $17.9 million versus a loss of $14.6 million
in 2001. The increase in net loss was the result of the following:



| |  |  | Lower operating income in 2002 compared to 2001 as explained above.
| | - |  | -------------------------------------------------------------------

Partially offset by:



| |  |  | Lower interest expense due to benefits derived from interest rate swaps.                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Higher interest income due to higher cash balances.                                                                                                       
|
| |  |  | A gain of $87 thousand on extinguishment of debt in 2002 compared with a $4.3 million loss in 2001.                                                       
|
| |  |  | A $5.1 million improvement in results from our unconsolidated joint
ventures, primarily due to higher selling prices at our Standard Gypsum
joint venture.

Results of Operations 2000  2001

The following table shows volume, gross paper margins and related data for
the periods indicated. The volume information shown below includes shipments of
unconverted paperboard and converted paperboard products. Tonnage volumes from
our business segments, excluding tonnage produced or converted by our
unconsolidated joint ventures, are combined and presented along end-use market
lines. Additional financial information is reported by segment in the notes to
the consolidated financial statements.

|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |      |      |   
|--------------------------------------------------------- | ----------------------------------------------------- | --------------------- | ----------------------------------------- | ----- | ------------ | ------- | ---- | ----- | ------ | ------- | ------ | ------ | ----- | ------ | - | ----- | ---- | ---- | --
|                                                          |                                                       |                       |                                           |       | Years Ended  |         |      |       |        |         |        |        |      
|                                                          |                                                       |                       |                                           |       | December 31, |         |      |       |        |         |        |        |      
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         | %     
|                                                          |                                                       |                       |                                           |       | 2000         |         | 2001 |       | Change |         | Change
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |       
|Production source of paperboard tons sold (in thousands): |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |      
|                                                          | From paperboard mill production                       |                       |                                           | 999.1 |              |         |      | 892.4 |        |         |        | (106.7 | )     |        |   | (10.7 | )%  
|                                                          | Outside purchases                                     |                       |                                           | 122.4 |              |         |      | 123.1 |        |         |        | 0.7    |       |        |   | 0.6   | %   
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |     
|                                                          |                                                       |                       | Total paperboard tonnage                  |       |              | 1,121.5 |      |       |        | 1,015.5 |        |        |       | (106.0 | ) |       |      | (9.5 | )%
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |     
|Tons sold by market (in thousands):                       |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |      
|Tube,
core and composite container volume                 |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |      
|                                                          |                                                       | Paperboard (internal) |                                           |       | 202.9        |         |      |       | 187.6  |         |        |        | (15.3 | )      |   |       | (7.5 | )%  
|                                                          |                                                       | Outside purchases     |                                           |       | 25.9         |         |      |       | 25.9   |         |        |        |      |        |   |       | 0.0  | %   
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |     
|                                                          | Tube, core and composite container converted products |                       |                                           | 228.8 |              |         |      | 213.5 |        |         |        | (15.3  | )     |        |   | (6.7  | )%  
|                                                          | Unconverted paperboard                                |                       |                                           | 37.6  |              |         |      | 32.7  |        |         |        | (4.9   | )     |        |   | (13.0 | )%  
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |     
|                                                          |                                                       |                       | Tube, core and composite container volume |       |              | 266.4   |      |       |        | 246.2   |        |        |       | (20.2  | ) |       |      | (7.6 | )%
|Folding
carton volume                                     |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |      
|                                                          |                                                       | Paperboard (internal) |                                           |       | 67.9         |         |      |       | 85.2   |         |        |        | 17.3  |        |   |       | 25.5 | %   
|                                                          |                                                       | Outside purchases     |                                           |       | 86.8         |         |      |       | 92.2   |         |        |        | 5.4   |        |   |       | 6.2  | %   
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |     
|                                                          | Folding carton converted products                     |                       |                                           | 154.7 |              |         |      | 177.4 |        |         |        | 22.7   |       |        |   | 14.7  | %   
|                                                          | Unconverted paperboard                                |                       |                                           | 270.2 |              |         |      | 232.4 |        |         |        | (37.8  | )     |        |   | (14.0 | )%  
|                                                          |                                                       |                       |                                           |       |              |         |      |       |        |         |        |        |       |        |   |       |     

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|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |        |       |   
|------------------------------------ | ---------------------------------- | -------------------------------------- | ------------------------------------ | ----- | ------------ | ------- | ---- | ----- | ------ | ------- | ------ | ----- | ----- | ------ | - | ----- | ------ | ----- | --
|                                     |                                    |                                        |                                      |       | Years Ended  |         |      |       |        |         |        |       |      
|                                     |                                    |                                        |                                      |       | December 31, |         |      |       |        |         |        |       |      
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         | %     
|                                     |                                    |                                        |                                      |       | 2000         |         | 2001 |       | Change |         | Change
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |       
|                                     |                                    |                                        | Folding carton volume                |       |              | 424.9   |      |       |        | 409.8   |        |       |       | (15.1  | ) |       |        | (3.6  | )%
|Gypsum
wallboard facing paper volume |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |      
|                                     |                                    | Unconverted paperboard                 |                                      |       | 196.1        |         |      |       | 151.5  |         |        |       | (44.6 | )      |   |       | (22.7  | )%   
|                                     |                                    | Outside purchases (for resale)         |                                      |       | 0.5          |         |      |       |       |         |        |       | (0.5  | )      |   |       | (100.0 | )%   
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     |                                    |                                        | Gypsum wallboard facing paper volume |       |              | 196.6   |      |       |        | 151.5   |        |       |       | (45.1  | ) |       |        | (22.9 | )%
|Other
specialty products volume      |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |      
|                                     |                                    | Paperboard (internal)                  |                                      |       | 108.7        |         |      |       | 68.0   |         |        |       | (40.7 | )      |   |       | (37.4  | )%   
|                                     |                                    | Outside purchases                      |                                      |       | 9.2          |         |      |       | 5.0    |         |        |       | (4.2  | )      |   |       | (45.7  | )%   
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     | Other specialty converted products |                                        |                                      | 117.9 |              |         |      | 73.0  |        |         |        | (44.9 | )     |        |   | (38.1 | )%    
|                                     | Unconverted paperboard             |                                        |                                      | 115.7 |              |         |      | 135.0 |        |         |        | 19.3  |       |        |   | 16.7  | %     
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     |                                    |                                        | Other specialty products volume      |       |              | 233.6   |      |       |        | 208.0   |        |       |       | (25.6  | ) |       |        | (11.0 | )%
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     |                                    |                                        | Total paperboard tonnage             |       |              | 1,121.5 |      |       |        | 1,015.5 |        |       |       | (106.0 | ) |       |        | (9.5  | )%
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|Gross paper margins ($/ton):         |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |      
|                                     | Paperboard mill:                   |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     |                                    | Average same-mill net selling price    |                                      | $     | 445          |         |      | $     | 413    |         |        | $     | (32   | )      |   |       | (7.2   | )%   
|                                     |                                    | Average same-mill recovered fiber cost |                                      |       | 104          |         |      |       | 65     |         |        |       | (39   | )      |   |       | (37.5  | )%   
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     |                                    |                                        | Paperboard mill gross paper margin   |       | $            | 341     |      |       | $      | 348     |        |       | $     | 7      |   |       |        | 2.1   | % 
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     | Tube and core:                     |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       
|                                     |                                    | Average net selling price              |                                      | $     | 786          |         |      | $     | 783    |         |        | $     | (3    | )      |   |       | (0.4   | )%   
|                                     |                                    | Average paperboard cost                |                                      |       | 441          |         |      |       | 447    |         |        |       | 6     |        |   |       | 1.4    | %    
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |      
|                                     |                                    |                                        | Tube and core gross paper margin     |       | $            | 345     |      |       | $      | 336     |        |       | $     | (9     | ) |       |        | (2.6  | )%
|                                     |                                    |                                        |                                      |       |              |         |      |       |        |         |        |       |       |        |   |       |       

Sales.Our consolidated sales for the year ended December 31, 2001 decreased
9.9% to $913.7 million from $1,014.6 million in 2000. Acquisitions completed
during 2000 accounted for $33.7 million of sales during 2001. These
acquisitions included MilPak, Inc., Arrow Paper Products Company and Crane
Carton Company, LLC. These acquisitions were accounted for using the purchase
method of accounting, and their results of operations were included only from
and after the date of the acquisition. Excluding acquisitions completed during
2000, sales decreased 13.3% during 2001. This decrease was due to lower selling
prices and volume from the paperboard and the tube, core and composite
container segments, along with lower selling prices from the carton and custom
packaging segment due to competitive pressures. The decline in volume from the
tube, core and composite container segment was primarily attributable to the
downturn in the textile industry.

Total paperboard tonnage for 2001 decreased 9.5% to 1,015.5 thousand tons
from 1,121.5 thousand tons in 2000. Excluding acquisitions completed during
2000, total paperboard tonnage declined 11.3% to 994.3 thousand tons. This
decrease was primarily due to lower shipments of unconverted paperboard to
external customers combined with lower internal conversion by our converting
operations in the other specialty products and the tube, core and composite
container markets. The decrease in shipments of unconverted paperboard was due
primarily to a decline in industry demand and partially attributable to the
dispute with Georgia-Pacific. Excluding 2000 acquisitions, outside purchases
decreased 16.5% to 101.9 thousand tons. Tons sold from paperboard mill
production decreased 10.7% for 2001 to 892.4 thousand tons, compared with 999.1
thousand tons for 2000. Total tonnage converted decreased 7.5% for 2001 to
463.9 thousand tons compared to 501.4 thousand tons in 2000, and decreased
12.2% from 2000, excluding acquisitions. Excluding acquisitions completed
during 2000, volumes in the folding carton and tube, core and composite
container end-use markets decreased 8.3% and 7.8%, respectively.

Gross Profit Margin.Gross profit margin for 2001 increased to 25.6% of sales
from 25.1% in 2000. Excluding the $7.1 million reduction in reserves related to
expiring unfavorable supply contracts at the Sprague paperboard mill, gross
profit margin was 24.8% for 2001. This margin decrease was due primarily to
lower margins in the carton and custom packaging and tube, core and composite
container segments, partially offset by improved margins in the paperboard
segment. Margins decreased in the carton and custom packaging segment due to
lower selling prices resulting from competitive pressures. Margins in the tube,
core and composite container segment decreased as a result of lower selling
prices, higher paperboard costs and a decline in the textile industry. The
improved margins in the paperboard segment were the result of cost-cutting
efforts to reduce expenses combined with the substantial decline in fiber
costs, which were partially offset by the decline in selling prices and the
increase in energy costs.

Restructuring and Other Costs.In January 2001, we initiated a plan to close
our paperboard mill located in Chicago, Illinois and recorded a pretax charge
to operations of approximately $4.4 million. The $4.4 million charge included a
$2.2 million noncash write down of assets.

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In March 2001, we initiated a plan to consolidate the operations of our
Salt Lake City, Utah carton plant into our Denver, Colorado carton plant and
recorded a pretax charge to operations of approximately $2.6 million. The $2.6
million charge included a $1.8 million noncash write down of assets.

In February 2000, we initiated a plan to close our paperboard mill located
in Baltimore, Maryland and recorded a pretax charge to operations of
approximately $6.9 million. The $6.9 million charge included a $5.7 million
noncash write down of assets.

In September 2000, we initiated a plan to close our paperboard mill
located in Camden, New Jersey and recorded a pretax charge to operations of
approximately $8.6 million. The $8.6 million charge included a $7.0 million
noncash write down of assets.

In December 2000, we recognized a charge of $1.3 million related to the
settlement of a dispute over abandoned property.

See the notes to the consolidated financial statements for additional
information regarding our restructuring plans.

Operating Income.Operating income for 2001 was $26.7 million, a decrease of
$15.2 million, or 36.2% from 2000. Operating income excluding the Sprague
reserve reduction, restructuring charges and 2000 acquisitions was $25.1
million for 2001, a decrease of $33.6 million, or 57.2%, from operating income
of $58.6 million in 2000, excluding restructuring charges and other
costs. This decline was due primarily to lower volume in the tube,
core and composite container and paperboard segments, partially attributable to
the dispute with Georgia-Pacific, and lower margins in the carton and custom
packaging and tube, core and composite container segments. Selling, general and
administrative expenses increased by $1.7 million, or 1.1%, in 2001 compared to
2000, but decreased $2.5 million, or 1.7%, excluding acquisitions. This
decrease was primarily due to mill closures in the paperboard segment.

Other Income (Expense).Interest expense increased 20.8% to $41.2 million for
2001 from $34.1 million in 2000. This increase was due to higher outstanding
debt balances at higher interest rates, partially offset by savings from
interest rate swap agreements which effectively converted portions of our fixed
rate notes into variable rate obligations. See Liquidity and Capital
Resources for additional information regarding our debt, interest expense and
interest rate swap agreements.

Equity in loss from unconsolidated affiliates was $2.6 million in 2001,
down $9.1 million from equity in income from unconsolidated affiliates of $6.5
million in 2000. This decrease was primarily due to lower operating results for
Standard Gypsum, L.P., our gypsum wallboard joint venture with Temple-Inland.
The lower results were due primarily to significantly lower selling prices in
2001 compared to 2000 due to excess capacity in that market.

Net Income (Loss).As discussed above, our results for 2001 included
restructuring charges recorded in conjunction with the closing of our Chicago,
Illinois paperboard mill and the consolidation of operations of our Salt Lake
City, Utah carton plant into our Denver, Colorado carton plant. These charges
were $7.1 million in the aggregate ($4.4 million, net of tax benefit, or $0.16
per common share on a diluted basis). Also included in the results for 2001 was
a loss of $4.3 million related to the extinguishment of debt ($2.7 million, net
of tax benefit, or $0.10 per common share on a diluted basis). Partially
offsetting these charges was the $7.1 million reduction in reserves related to
expiring unfavorable supply contracts at the Sprague paperboard mill ($4.5
million, net of tax provision, or $0.16 per common share on a diluted basis).
Net loss was $14.6 million in 2001, or $0.52 net loss per common share on a
diluted basis, compared with net income of $8.2 million, or $0.31 net income
per common share on a diluted basis, in 2000.

Liquidity and Capital Resources

Liquidity Sources and Risks.Our primary sources of liquidity are cash from
operations and borrowings under the various debt facilities described below.
Downturns in operations can significantly affect our ability to generate cash.
For example, in the difficult operating climate we experienced in 2001, we
generated $25.9 million less cash from operations than we did in 2000. Factors
that can affect our operating results and liquidity are discussed further in
this Report under  Risk Factors in Part I, Item 1. In 2002, we generated
$63.2 million in cash from operations, which is $6.0 million higher than 2001
despite the continuing difficult operating climate. Although the timing or
certainty cannot be assured, we believe that our existing cash and liquidity
position will be strengthened through the sale of the real estate at our
Chicago, Illinois and Baltimore, Maryland paperboard mills. Additionally, we
expect to receive a federal tax refund of approximately $14.3 million in the
first half of 2003. Although we believe that our liquidity will be
sufficient to meet expected needs for the foreseeable future, we
could require additional funds from external sources. However, our availability for borrowings under our senior credit
facility has been substantially reduced in connection with a sixth
amendment to the facility completed on March 28, 2003, as
described under "-- Subsequent Events." We intend to replace or
refinance our existing senior credit facility during the second
quarter of 2003. However, we can give no assurance that we will be
able to replace this credit facility at all or on terms that are
acceptable to us. In the event we are unable to do so, we can give no
assurance that we will have sufficient liquidity to meet our cash
needs should we face an unexpected downturn in operations.

On September 30, 2002, we acquired certain operating assets (excluding
accounts receivable) of the Smurfit Industrial Packaging Group for a purchase
price of $67.1 million, and the assumption of $1.7 million of indebtedness
outstanding under certain industrial

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development revenue bonds. See Acquisitions. In addition, because we
did not purchase trade accounts receivable as part of the acquisition, we
contributed working capital of approximately $15.3 million during the fourth
quarter of 2002. We funded the acquisition with cash on hand.

The availability of liquidity from borrowings is primarily affected by our
continued compliance with the terms of the debt agreements governing these
facilities, including the payment of interest and compliance with various
covenants and financial maintenance tests. In addition, as described below
under  Off-Balance Sheet Arrangements  Joint
Venture Financings and Subsequent Events, to the
extent we are unable to comply with financial maintenance tests under our
senior credit facility, we will fail to comply with identical financial
maintenance covenant tests under our guarantee of the credit
facilities of one of our
joint ventures, which could potentially materially and adversely affect us
through a series of cross-defaults under both our joint ventures and our own
debt obligations if we were unable to obtain appropriate waivers or amendments
with respect to the underlying violations and any related cross-defaults.

At December 31, 2001, we were not in compliance with certain financial
maintenance covenants under both our senior credit facility and our joint
venture guarantees, but we were able to obtain appropriate amendments
or waivers with respect to each instance of non-compliance.
Similarly, at December 31, 2002 we would not have been in
compliance with our senior credit facility and our joint venture
guarantees but again were able to obtain the appropriate amendments.
Absent further
material deterioration of the U.S. economy as a whole or the specific sectors
on which our business depends (see Part I, Item 1,  Risk Factors  Our
business and financial performance may be adversely affected by downturns in
industrial production, housing and construction and the consumption of durable
and nondurable goods), we believe it is unlikely that we will breach our
covenants under our debt agreements or joint venture credit support
arrangements during 2003,
after taking into account the amendments discussed below in  Subsequent
Events. However, we cannot give assurance
that we will achieve our expected future operating results or continued
compliance with our debt covenants, or that, in such event, necessary waivers
and amendments from our lenders would be available at all or on acceptable terms. If our debt or
that of our joint ventures were placed in default, or if we were called upon to
satisfy our joint venture support obligations, our liquidity and financial condition
would be materially and adversely affected.

Borrowings.At December 31, 2001 and 2002, total debt (consisting of current
maturities of debt, senior credit facility, and other long-term debt, as
reported on our consolidated balance sheets) was as follows (in thousands):

|                                 |  |      |         |      |  |   |         | 
|-------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                 |  | 2001 |         | 2002
|                                 |  |      |         |     
|Senior credit facility           |  | $    |        |      |  | $ |        | 
|9 7/8% senior subordinated notes |  |      | 277,326 |      |  |   | 295,312 | 
|7 1/4% senior notes              |  |      | 25,449  |      |  |   | 25,745  | 
|7 3/8% senior notes              |  |      | 197,716 |      |  |   | 201,848 | 
|Other notes payable              |  |      | 8,248   |      |  |   | 9,880   | 
|                                 |  |      |         |      |  |   |         | 
|Total debt                       |  | $    | 508,739 |      |  | $ | 532,785 | 
|                                 |  |      |         |      |  |   |         | 

On March 29, 2001, we completed a series of financing transactions
pursuant to which we (i) issued $29.0 million in aggregate principal amount of
7 1/4% senior notes due May 1, 2010 and $285.0 million in aggregate principal
amount of 9 7/8% senior subordinated notes due April 1, 2011, (ii) used the
proceeds from these notes to repay in full our former senior credit facility
and 7.74% senior notes, and (iii) obtained a new $75.0 million senior credit
facility. The 7 1/4% senior notes and 9 7/8% senior subordinated notes were
issued at a discount to yield effective interest rates of 9.4% and 10.5%,
respectively. Aggregate proceeds from the sale of these notes, net of issuance
costs, was approximately $291.2 million. In connection with the repayment of
the 7.74% senior notes, we incurred a prepayment penalty of approximately $3.6
million. We recorded a loss of $4.3 million which included the prepayment
penalty plus unamortized issuance costs of $705 thousand. The difference
between issue price and principal amount at maturity of our 7 1/4% senior notes
and 9 7/8% senior subordinated notes will be accreted each year as interest
expense in our consolidated financial statements. These publicly
traded notes are unsecured,
but are guaranteed, on a joint and several basis, by all of our domestic
subsidiaries (subsidiary guarantors), other than one that is not
wholly-owned.

Our senior credit
facility provides for a revolving line of credit, the aggregate
principal amount of which was reduced from $75.0 million to $47.0
million pursuant to the sixth amendment completed on March 28, 2003
and described under  Subsequent Events. The facility
includes subfacilities of $10.0 million for swingline loans and $15.0
million for letters of credit, usage of which reduces availability under the
facility. Pursuant to the sixth amendment described under
 Subsequent Events, the sub facility for
letters of credit was increased from $15.0 million to $43.0 million
and the maturity date of the
facility was shortened from March 29, 2005 to April 1, 2004. As of December 31, 2002, no borrowings were outstanding under the
facility, and an aggregate of $10.1 million in letter of credit obligations
were outstanding. No borrowings were outstanding under the facility as of
December 31, 2001. We intend to use the remaining balance of the facility for
working capital, capital expenditures and other general corporate purposes, if
necessary. As described below, a fourth amendment to the facility was completed
in which we were required, upon the closing of our acquisition of the Smurfit
Industrial Packaging Group, to enter into a security agreement under which we
and

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our subsidiary guarantors under the senior credit facility granted a first
priority security interest in our respective accounts receivable and inventory
to secure our obligations under the credit facility and our obligations under
our 50% credit support of the credit facilities of Standard Gypsum and Premier
Boxboard. In connection with the sixth amendment described under
 Subsequent Events, we amended the security
agreement to provide for a springing lien on our machinery and
equipment effective on July 1, 2003.

Borrowings under the facility bear interest at a rate equal to our option,
either (1) the base rate (which is equal to the greater of the prime rate most
recently announced by Bank of America, N.A., the administrative agent under the
facility, or the federal funds rate plus one-half of 1%) or (2) the adjusted
Eurodollar Interbank Offered Rate, in each case plus an applicable margin
determined by reference to our leverage ratio (which is defined under the
facility as the ratio of our total debt to our total capitalization). Based on
our leverage ratio at December 31, 2002, the current margins are 3.0% for
Eurodollar rate loans and 1.50% for base rate loans. Additionally, the undrawn
portion of the facility is subject to a facility fee at an annual rate that is
currently set at 0.55% based on our leverage ratio at December 31, 2002.

The facility contains covenants that restrict, among other things, our
ability and our subsidiaries ability to create liens, merge or consolidate,
dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase
or redeem capital stock and indebtedness, make certain investments or
acquisitions, enter into certain transactions with affiliates, make capital
expenditures or change the nature of our business. The facility also contains
several financial maintenance covenants, including covenants establishing a
maximum leverage ratio, minimum tangible net worth and a
minimum fixed charge coverage ratio.

The facility contains events of default including, but not limited to,
nonpayment of principal or interest, violation of covenants, incorrectness of
representations and warranties, cross-default to other indebtedness, bankruptcy
and other insolvency events, material judgments, certain ERISA events, actual
or asserted invalidity of loan documentation and certain changes of control of
our Company.

During 2001 and 2002, we completed five amendments to our senior credit
facility agreement. The first amendment, dated September 10, 2001, allows us to
acquire up to $30.0 million of our senior subordinated notes so long as no
default or event of default exists on the date of the transaction or will
result from the transaction.

The second amendment, dated November 30, 2001, provides for the issuance
of letters of credit under the senior credit facility having an original
expiration date more than one year from the date of issuance, if required under
related industrial revenue bond documents and agreed to by the issuing lender.

The third amendment was completed on January 22, 2002, with an effective
date of September 30, 2001. We obtained this amendment in order to avoid the
occurrence of an event of default under our senior credit facility agreement
resulting from a violation of the interest coverage ratio covenant contained in
the agreement. This amendment modified the definitions of Interest Expense,
Premier Boxboard Interest Expense and Standard Gypsum Interest Expense to
include interest income and the benefit or expense derived from interest rate
swap agreements or other interest hedge agreements. Additionally, the amendment
lowered the minimum allowable interest coverage ratio for the fourth quarter of
2001 from 2.5:1.0 to 2.25:1.0, for the first quarter of 2002 from 2.75:1.0 to
2.25:1.0, and for the second quarter of 2002 from 2.75:1.0 to 2.50:1.0.

In connection with the acquisition of the Smurfit Industrial Packaging
Group, we entered into a fourth amendment to our senior credit facility in
September 2002. The purpose of this amendment was to obtain the required lender
consent under the senior credit facility for the consummation of the
acquisition (and the incurrence of up to $60.0 million in subordinated debt
financing to refinance borrowings under the credit facility and restore cash
used to fund a portion of the acquisition price), to lower the minimum
allowable tangible net worth for all periods after the effective date of the
amendment, and to increase the maximum permitted leverage ratio covenant to
70.0% for the fiscal quarters ending December 31, 2002, March 31, 2003 and June
30, 2003, and 67.5% for the fiscal quarter ending September 30, 2003.
Additionally, the minimum interest coverage ratio covenant was replaced with a
minimum fixed charge coverage ratio covenant beginning with the third quarter
of 2002. These modifications, in addition to increasing our flexibility to
finance the acquisition, were necessary to enable us to avoid violations of the
leverage ratio and interest coverage ratio covenants for the third quarter of
2002 and violations of the leverage ratio covenant in future periods.

In exchange for these modifications, our lenders required an increase in
the applicable margin component of the interest rates applicable to borrowings
under the facility and the facility fee rate applicable to the undrawn portion
of the facility. The amendment also provided for a pricing increase of 0.25%
effective November 15, 2002, if we did not issue at least $50.0 million in
senior subordinated notes by that date, which we did not, and an increase of
0.25% every three months after that date until the first date on which our
balance of cash and cash equivalents is at least $50.0 million and we have no
loans outstanding under the facility (subject to a maximum interest margin of
3.75% for Eurodollar rate loans and 2.50% for base rate loans). In addition,
under the terms of the fourth amendment, we were required to enter into a
security agreement under which we and our subsidiary guarantors under the
senior

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credit facility granted a first priority security interest in our
respective accounts receivable and inventory to secure our obligations under
the credit facility and our obligations under our 50% credit support of the credit
facilities of Standard Gypsum and Premier Boxboard.

On December 27, 2002, we completed a fifth amendment to our senior credit
facility. For the term of the agreement, this amendment modifies the
calculation of net worth for purposes of our leverage ratio and tangible net
worth financial maintenance covenants to exclude adjustments to other
comprehensive loss related to our defined benefit pension plan. This amendment
also allows us to exclude from these financial maintenance covenant
calculations any restructuring costs recorded in the fourth quarter of 2002 and
first quarter of 2003 as long as the aggregate of these restructuring costs
does not exceed $16.0 million, on an after tax basis.

On June 1, 1999, we issued $200.0 million in aggregate principal amount of
our 7 3/8% senior notes due June 1, 2009. Our 7 3/8% senior notes were issued
at a discount to yield an effective interest rate of 7.473%, are unsecured
obligations of our Company and pay interest semiannually. In connection with
the offering of our 7 1/4% senior notes and 9 7/8% senior subordinated notes,
our subsidiary guarantors also guaranteed our 7 3/8% senior notes. In February
2002, we purchased $6.75 million in principal amount of our 7 3/8% senior notes
in the open market. This purchase will lower our interest expense by
approximately $500 thousand annually.

We have certain obligations and commitments to make future payments under
contracts, such as debt and lease agreements. See the notes to the consolidated
financial statements, which detail these future obligations and commitments.

Interest Rate Swaps.During 2001, we entered into four interest rate swap
agreements in notional amounts totaling $285.0 million. The agreements, which
have payment and expiration dates that correspond to the terms of the note
obligations they cover, effectively converted $185.0 million of our fixed rate
9 7/8% senior subordinated notes and $100.0 million of our fixed rate 7 3/8%
senior notes into variable rate obligations. The variable rates are based on
the three-month LIBOR plus a fixed margin. These swap agreements decreased
interest expense by $3.8 million and $9.3 million in 2001 and 2002,
respectively. We expect our swap agreements to continue to lower our interest
expense; however, if the three-month LIBOR increases significantly, our
interest expense could be adversely affected. Based on notional amounts hedged
and the three-month LIBOR at December 31, 2002, our swaps would reduce our
interest expense by approximately $7.5 million in 2003 compared with $9.3
million in 2002, as mentioned above. If the three-month LIBOR increased 100
basis points, our savings on interest expense would be reduced by approximately
$1.9 million.

In October 2001, we unwound our $185.0 million interest rate swap
agreement related to the 9 7/8% senior subordinated notes and received $9.1
million from the bank counter-party. Simultaneously, we executed a new swap
agreement with a fixed spread that was 85 basis points higher than the original
swap agreement. The new swap agreement is the same notional amount, has the
same terms and covers the same notes as the original agreement. The $9.1
million gain will be accreted to interest expense over the remaining term of
the notes and will partially offset the increase in interest expense. The $9.1
million gain lowered the effective interest rate of the 9 7/8% senior
subordinated notes from 10.5% to 10.0%.

In August 2002, we unwound our $185.0 million interest rate swap agreement
related to the 9 7/8% senior subordinated notes and received $5.5 million from
the bank counter-party. Simultaneously, we executed a new swap agreement with a
fixed spread that was 17 basis points higher than the original swap agreement.
The new swap agreement is the same notional amount, has the same terms and
covers the same notes as the original agreement. In September 2002, we repaid
the $5.5 million and entered into a new swap agreement that lowered the fixed
spread by 7.5 basis points from the August 2002 swap.

In November 2002, we unwound $50.0 million of our $185.0 million interest
rate swap agreement related to the 9 7/8% senior subordinated notes, and
received approximately $2.8 million from the bank counter-party.
Simultaneously, we unwound $50.0 million of one of our interest rate swap
agreements related to the 7 3/8% senior notes, and received approximately $3.4
million. The $6.2 million gain will be accreted to interest expense over the
remaining term of the notes and will partially offset the increase in interest
expense. The $2.8 million gain lowered the effective interest rate of the 9
7/8% senior subordinated notes from 10.0% to 9.8%. The $3.4 million gain
lowered the effective interest rate of the 7 3/8% senior notes from 7.5% to
7.2%.

The following table identifies the debt instrument hedged, the notional
amount, the fixed spread and the three-month LIBOR at December 31, 2002 for
each of our interest rate swaps. The December 31, 2002 three-month LIBOR is
presented for informational purposes only and does not represent our actual
effective rates in place at December 31, 2002.

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|                                    |  |          |         |        |  |              |       |               |  |  |       |   |  |  |       |  
|----------------------------------- |  | -------- | ------- | ------ |  | ------------ | ----- | ------------- |  |  | ----- | - |  |  | ----- | -
|                                    |  | Notional |         |        |  |              |       | LIBOR at      |  |  |       |  
|                                    |  | Amount   |         | Fixed  |  | December 31, |       | Total        
|Debt Instrument                     |  | (000's)  |         | Spread |  | 2002         |       | Variable Rate
|                                    |  |          |         |        |  |              |       |              
|9 7/8% senior subordinated notes(1) |  | $        | 135,000 |        |  |              | 4.495 | %             |  |  | 1.383 | % |  |  | 5.878 | %
|7 3/8% senior notes                 |  |          | 25,000  |        |  |              | 1.445 |               |  |  | 1.383 |   |  |  | 2.828 |  
|7 3/8% senior notes                 |  |          | 25,000  |        |  |              | 1.775 |               |  |  | 1.383 |   |  |  | 3.158 |  

(1)  See  Subsequent Events regarding the unwind of $85.0 million of the
$135.0 million interest rate swap related to the 9 7/8% senior subordinated
notes.

Off-Balance Sheet Arrangements Joint Venture Financings.As noted above, we
own a 50% interest in two joint ventures with Temple-Inland, Inc.: Standard
Gypsum, L.P. and Premier Boxboard Limited LLC. Because we account for these
interests in our joint ventures under the equity method of accounting, the
indebtedness of these joint ventures is not reflected in the liabilities
included on our consolidated balance sheets.
Prior to March 28, 2003, we guaranteed 50% of certain
obligations of these joint ventures. As described
in the following paragraph and under  Subsequent
Events, on March 28, 2003 we entered into an amendment
under which we replaced our guarantee agreement for the Standard
Gypsum facility with a letter of credit issued under our senior
credit facility. The replaced guarantee agreement for Standard Gypsum
contained independent financial maintenance covenants that were
identical to the covenants under our senior credit facility, and we
are no longer obligated to comply with those covenants for the
benefit of the Standard Gypsum lenders. However, our guarantee
agreement for the Premier Boxboard credit facility remains in effect
and contains the same independent financial maintenance covenants. A
default under this guarantee also constitutes a default under the
credit facilities of these joint ventures and a default under our
senior credit facility.
Our default under one or more of
these covenants would technically permit the lenders under the joint venture
credit facilities and our joint venture partners respective guarantees of
those facilities, as well as the lenders under our senior credit facility, if
they so elected, to prohibit any future borrowings under these facilities and
to accelerate all such outstanding obligations under these facilities. The
resulting acceleration of our obligations could also cause further defaults and
accelerations under our 9 7/8% senior subordinated notes, our 7 1/4% senior
notes and our 7 3/8% senior notes. During 2002, we entered into agreements with
the Premier Boxboard Limited and Standard Gypsum lenders that correspond to the
amendments made in the third, fourth and fifth amendments to the senior credit
facility, as described above. At December 31, 2002, we and our joint venture
partner were in compliance with all covenants under these guarantees. However,
to the extent that we are unable to comply with, or are required to seek
waivers under, or modifications of, the financial maintenance covenants under
our senior credit facility in order to avoid possible events of noncompliance,
as described above, we will need similar waivers or modifications under the
Premier Boxboard guarantee.

Standard Gypsum is the obligor under reimbursement agreements pursuant to
which direct-pay letters of credit in the aggregate original amount of
approximately $56.2 million have been issued for its account in support of
industrial development bond obligations. We are severally obligated
for 50% of Standard Gypsums obligations for reimbursement of letter of
credit drawings, interest, fees and other amounts. The other Standard Gypsum
partner, Temple-Inland, has guaranteed 50% of Standard Gypsums
obligations. As of December 31, 2002, the outstanding letters of credit totaled
approximately $56.2 million, for one-half of which we are
obligated (approximately
$28.1 million). If either joint venture partner defaults under their
respective support arrangements, our total obligation is $28.1 million at
December 31, 2002. As described above and under
 Subsequent Events, on March 28, 2003 we entered
into an amendment of the Standard Gypsum facility under which we
replaced our guarantee with a letter of credit issued under our
senior credit facility. This letter of credit is in the amount of
$28.4 million and expires on January 15, 2004. If we are
unable to replace or refinance our existing senior credit facility or
to obtain a replacement letter of credit from another financing
source prior to such date, or if prior to such date there is an event of default
under the Standard Gypsum facility, the lenders under the Standard
Gypsum facility
will be entitled to draw under this letter of credit to satisfy our
support obligations.

Premier Boxboard is
the borrower under a credit facility the aggregate principal amount of
which was reduced from $30.0 million to $20.3 million pursuant to an
amendment completed on March 28, 2003 and described under
 Subsequent Events. Pursuant to this amendment, the maturity date of the facility was shortened
from June 29, 2005 to January 5, 2004. We have severally and unconditionally guaranteed
50% of Premier Boxboards obligations under the credit facility for principal
(including reimbursement of letter of credit drawings), interest, fees and
other amounts. Temple-Inland has similarly guaranteed 50% of Premier Boxboards
obligations. As of December 31, 2002, the outstanding principal amount of
borrowings under the facility was approximately $20.2 million (including a $200
thousand undrawn letter of credit), one-half of which we guarantee
(approximately $10.1 million). If either joint venture partner defaults under
their respective guarantee agreements, our total obligation is $10.1 million at
December 31, 2002.

In addition to the general default risks discussed above with respect to
the joint ventures, a substantial portion of the assets of Premier Boxboard are
pledged as security for $50.0 million in outstanding principal amount of senior
notes under which Premier Boxboard is the obligor. These notes are guaranteed
by Temple-Inland, but are not guaranteed by us. A default under the Premier
Boxboard credit facility would also constitute an event of default under these
notes. In the event of default under these notes, the holders would also have
recourse to the assets of Premier Boxboard that are pledged to secure these
notes. Thus, any resulting default under these notes could result in the assets
of Premier Boxboard being utilized to satisfy creditor claims, which would have
a material adverse effect on the financial condition and operations of Premier
Boxboard and, accordingly, our interest in Premier Boxboard. Further, in such
an event of default, these assets would not be available to satisfy obligations
owing to unsecured creditors of Premier Boxboard, including the lender under
the credit facility, which might make it more likely that our guarantee of the
Premier Boxboard credit facility would be the primary source of repayment under
the facility in the event Premier Boxboard cannot pay.

Additional contingencies relating to our joint ventures that could affect
our liquidity include possible additional capital contributions and buy-sell
triggers which, under certain circumstances, give us and our joint venture
partner either the right, or the obligation, to purchase the others interest
or to sell an interest to the other. In the case of both Standard Gypsum and
Premier Boxboard, neither joint venture partner is obligated or required to
make additional capital contributions without the consent of the

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other. With regard to buy-sell rights, under the Standard Gypsum joint
venture, in general, either party may purchase the others interest upon the
occurrence of certain purported unauthorized transfers or involuntary transfer
events (such as bankruptcy). In addition, under the Standard Gypsum joint
venture, either (i) in the event of an unresolved deadlock over a material
matter or (ii) at any time, either party may initiate a Russian roulette
buyout procedure by which it names a price at which the other party must agree
either to sell its interest to the initiating party or to purchase the
initiating partys interest. Under the Premier Boxboard joint venture, in
general, mutual buy-sell rights are triggered upon the occurrence of certain
purported unauthorized or involuntary transfers, but in the event of certain
change of control or deadlock events, the buy-sell rights are structured such
that we are always the party entitled, or obligated, as the case may be, to
purchase.

We generally consider our relationship with Temple-Inland to be good with
respect to both of our joint ventures and currently do not anticipate experiencing
material liquidity events resulting from either additional capital
contributions or buy-sell contingencies with respect to our joint ventures
during 2003. However, in light of the recent amendments to the
Premier Boxboard credit facility, as described in
 Subsequent Events, we could be required to
fund Premier Boxboards operations with additional cash
contributions to the extent it is unable to fund operations with
internally generated cash. We cannot give assurance that material
liquidity events will not arise with respect to our joint ventures,
and the occurrence of any such events could materially and adversely
affect our liquidity and financial condition.

Cash from Operations.Cash generated from operations was $63.2 million for the
year ended December 31, 2002, compared with $57.2 million in 2001. The increase
in 2002 compared to the same period in 2001 was due primarily to an increase in
distributions from our Standard Gypsum joint venture and an increase in federal
tax refunds, partially offset by an increase in accounts receivable related to
the acquisition of the Smurfit Industrial Packaging Group and lower net income.

Capital Expenditures.Capital expenditures were $22.5 million in 2002 versus
$28.1 million in 2001. Aggregate capital expenditures of approximately $24.0
million are anticipated for 2003. To conserve cash, we intend to limit capital
expenditures for 2003 to cost reduction, productivity improvement and
replacement projects.

Acquisitions.In April 2002, we acquired the remaining 51% of the outstanding
stock of Design Tubes Company Limited (Design Tubes), Toronto, Ontario,
Canada in consideration for shares of a subsidiary exchangeable at the holders
option (for no additional consideration) for approximately 141 thousand shares
of our common stock, valued at $1.5 million. We originally acquired our
minority interest in Design Tubes in November 1998 and accounted for our 49%
ownership using the equity method. Design Tubes manufactures paperboard tubes
and also produces paper tube manufacturing equipment for companies throughout
North America. Goodwill in the amount of $2.0 million was recorded in the
connection with the Design Tubes acquisition.

On September 30, 2002, we acquired certain operating assets (excluding
accounts receivable) of the Smurfit Industrial Packaging Group, a business unit
of Jefferson Smurfit Corporation (U.S.), for approximately $67.1 million, and
assumed $1.7 million of indebtedness outstanding under certain industrial
revenue bonds. The acquisition was funded with cash on hand. Goodwill and
intangible assets of approximately $40.6 million were recorded in conjunction
with the Smurfit Industrial Packaging Group acquisition.

Smurfit Industrial Packaging Group operations included 17 paper tube and
core plants, 3 uncoated recycled paperboard mills and 3 partition manufacturing
plants. These facilities are located in 16 states across the U.S. and in
Canada. We believe that these assets enhance our capabilities in the tube, core
and composite container market and position us as a prominent producer in this
market.

Also in September 2002, we acquired a provider of digital imaging services
for 34 thousand shares of our common stock valued at approximately $324
thousand.

Dividends.We paid cash dividends of $833 thousand in 2002 versus $8.9 million
in 2001. During 2001, we reduced our dividend payments from $0.18 to $0.03 per
issued and outstanding common share. Then in February 2002, we announced that
we would suspend future dividend payments on our common stock until our
earnings performance exceeds the dividend limitation provision of our senior
subordinated notes. We made these decisions to reduce the quarterly dividends
to preserve our financial flexibility in light of difficult industry conditions
and due to the limitations on dividend payments in our financial covenants. We
intend to continue assessing our ability to pay quarterly dividends in light of
difficult industry conditions, our need to preserve financial flexibility and
the limitations on dividends included in our financial covenants. As
described under  Subsequent Events, our senior
credit facility currently prohibits us from paying any dividends.

Share Purchases.We did not purchase any shares of our common stock during
2000, 2001 or 2002 under our common stock purchase plan. We have cumulatively
purchased 3.2 million shares since January 1996. Our board of directors has
authorized purchases of up to 831 thousand additional shares. However, our 9
7/8% senior subordinated notes and our senior credit facility currently
preclude us from purchasing our common stock based on our operating results for
the last twelve months.

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Inflation

Raw material price changes have had, and continue to have, a material
negative effect on our operations. Energy prices had a material effect on our
operations in 2001 and 2002. We do not believe that general economic inflation
is a significant determinant of our raw material price increases or that,
except as it relates to energy prices, it has a material effect on our
operations.

Subsequent Events

In January 2003, we effectively unwound $85.0 million of our $135.0
million interest rate swap agreement related to the 9 7/8% senior subordinated
notes by assigning our rights and obligations under the swap to one
of our lenders under the senior credit facility. In exchange, we received approximately $4.3 million. We will accrete this gain into interest expense over the remaining
term of the notes, which will partially offset the increase in interest
expense. The gain will lower the effective interest rate of the 9 7/8% senior
subordinated notes from 9.8% to 9.5%.

Also in January 2003, we completed the purchase of our venture partners
50% equity of Caraustar Northwest, LLC, located in Tacoma, WA, for
approximately $700 thousand. The Tacoma facility, which manufactures tubes,
cores and edge protectors and performs custom slitting for customers on the
West coast, will become a part of our Industrial & Consumer Products Group.

In February 2003, we
announced the indefinite idling of one of two coated recycled
paperboard machines at our Rittman, Ohio paperboard mill. Recently
completed upgrades in our mill system will facilitate the transfer of
production from the idled machine to our other mills. The Rittman
workforce will be indefinitely reduced by 80 hourly employees, and we
will recognize a related expense of approximately $1.2 million.

On March 28, 2003, we
completed a sixth amendment to our senior credit facility. This
amendment increased our maximum permitted leverage ratio to 70.0% for
the fiscal quarters ending September 30, 2003 and December 31, 2003
and 67.5% for each succeeding fiscal quarter, lowered our minimum
fixed charge coverage ratio from 1.50:1.0 for all fiscal quarters to
0.95:1.0 for the fiscal quarter ending March 31, 2003, 0.85:1.0 for
the fiscal quarters ending June 30, 2003 and September 30,
2003 and 1.05:1.0 for the fiscal quarter ending December 31, 2003, lowered our minimum
tangible net worth covenant for all periods on and after the
effective date of the amendment, and lowered our maximum permitted
capital expenditures to $30.0 million per fiscal year. For purposes
of calculating compliance with our leverage ratio and net worth
covenants, this amendment also establishes a maximum of $30.0 million
for aggregate adjustments to other comprehensive loss related to our
defined benefit pension plan. This amendment also increases to $43.0
million our subfacility for the issuance of letters of credit under
the facility, in order to permit us to obtain a letter of credit to
replace our Standard Gypsum joint venture guarantee as described
below. Finally, this amendment terminated the quarterly pricing
increase established under the fourth amendment to the facility
entered into in September 2002 and fixed our maximum interest margins
at 3.25% for LIBOR loans and 2.00% for base rate loans. The financial
covenant modifications were necessary to enable us to avoid possible
violations of our leverage ratio covenant for the third and fourth
quarters of 2003, our fixed charge coverage ratio covenant for all
quarters during 2003 and our net worth covenant for the second quarter of
2003.

In exchange for these
modifications, our lenders required us to permanently reduce the
aggregate commitments under the facility from $75.0 million to $47.0
million, to shorten the maturity of the facility from March 29, 2005
to April 1, 2004, and to pay a monthly fee beginning on July 1, 2003
equal to 1.0% of the aggregate commitments under the facility. Our
lenders also required the establishment of a borrowing base that
restricts availability under the facility based on monthly
computations of eligible accounts receivable and inventory, reduced
by our net hedging obligations owed to lenders under the facility and
by the amount of our guarantee obligations under our joint venture
guarantees that are not secured or replaced by letters of credit.
Additionally, we will not be permitted to borrow or request the
issuance of letters of credit under the facility unless we have less
than $10.0 million in freely available cash and cash equivalents on
our consolidated balance sheet both before and immediately after
giving effect to the application of the proceeds of such borrowing.
The amendment also requires us to prepay outstanding loans under the
facility and/or cash collateralize outstanding letters of credit with
the net cash proceeds from any issuance of debt or equity or, to the
extent not reinvested in similar assets, from any sale of assets or
insurance or condemnation award. The
amendment further requires us to provide consolidated financial
statements and joint venture financial statements to the lenders on a
monthly basis. Finally, the amendment prohibits us from incurring
capital leases or other indebtedness, making acquisitions or other
investments, or prepaying other indebtedness unless our fixed charge
coverage ratio for the most recently reported fiscal quarter exceeds
1.50:1.0 (calculated on a pro forma basis with regard to
acquisitions), and completely eliminates our ability to pay dividends
or repurchase shares of our stock.

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In connection with this amendment, we were also
required to amend our security agreement to provide for a
springing lien on our machinery and equipment that will become
effective on July 1, 2003.

We intend to refinance our senior credit facility
with a new revolving credit facility, which we expect would be
an asset-based credit facility secured by substantially all of
our assets. We expect to complete this refinancing by the end of
the second quarter of 2003. In connection with this refinancing,
we also intend to refinance our joint venture credit facilities
and our credit support of such facilities. However, we cannot give
assurance that we will be able to complete a new credit facility
on terms that are acceptable to us, or that we will be able to
refinance our joint venture credit facilities and related credit
support as part of or in connection with any such new credit
facility.

Prior to this amendment to our senior credit
facility, our Standard Gypsum joint venture guarantee contained
financial maintenance covenants that were identical to those
contained in our senior credit facility. However, the lenders to
Standard Gypsum were unwilling to agree to the modifications
that we made under the amendment to the senior credit facility.
In order to avoid an event of default under that guarantee, we
obtained a letter of credit under our senior credit facility in
the face amount of $28.4 million. This letter of credit expires
on January 15, 2004, is
issued in favor of the Standard Gypsum lenders and replaces our
guarantee obligations. In exchange for this letter of credit,
the Standard Gypsum lenders terminated our guarantee agreement
and released their security interests in our accounts receivable
and inventory. We must also pay a fee on October 28, 2003
in the amount of 2% of the undrawn amount of this letter of credit
in the event the letter of credit remains outstanding on that
date. The letter of credit may be
drawn in the event of a default under the Standard Gypsum credit
facility. In the event we are unable to replace or refinance our
senior credit facility, or to obtain a replacement letter of credit
from another financing source, the lenders under the Standard Gypsum
facility will be entitled to draw under the letter of credit to
satisfy our support obligations, and as a result we may be unable to
reimburse our senior lenders for the amount of such drawing.

Concurrently with the amendments to our senior
credit facility and the issuance of the letter of credit to the
Standard Gypsum lenders as described above, we entered into an
amendment of our Premier Boxboard guarantee that made changes to
the financial covenants corresponding to those made in the sixth
amendment to our senior credit facility. In exchange for this
amendment, the Premier Boxboard lenders required that the
maturity of the Premier Boxboard credit facility be shortened
from June 26, 2005 to January 5, 2004 and that the
aggregate commitments under the facility be reduced to equal the
amount of outstanding loans and letters of credit of
$20.3 million. Any reductions of outstanding loans under
the facility may not be reborrowed and will permanently reduce
the commitments, thereby effectively
requiring us to fund Premier Boxboards operations from its
internal cash flow and from any cash contributions that we and
our joint venture partner are permitted to make. In addition, we will be required to pay a fee
to the Premier Boxboard lenders of $100,000 on July 1, 2003
and on the first day of each month thereafter until the facility
is terminated and all outstandings under the facility are fully
paid. If we are not
able fund Premier Boxboards operations in this manner, its
performance could be adversely affected. Further, if we are
unable to refinance this facility prior to January 5, 2004,
the entire facility would become immediately due and payable and
we would be required to satisfy our guarantee of 50% of the
obligations under the facility. Any acceleration of the
obligations under either or both of our joint venture facilities, or
any failure to satisfy our support obligations of either joint
venture when due, could also cause further defaults and acceleration under our
9 7/8% senior subordinated notes, our 7 1/4% senior
notes and our 7 3/8% senior notes.



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##### Table of Contents



In March 2003, we announced the permanent closure of our Buffalo
Paperboard mill located in Lockport, New York. We expect to record a
restructuring charge of approximately $5.0 million in connection with this
closure. Our Buffalo mill had an annual production capacity of approximately
72 thousand tons. In 2002, the mill operated at approximately 50% of capacity
and recorded approximately $9.0 million in trade sales. Buffalo sales will be
transferred to our other paperboard mills.

New Accounting Pronouncements

SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets. This
pronouncement prescribes the accounting practices for goodwill and other
intangible assets. Under this pronouncement, beginning January 1, 2002 goodwill
will no longer be amortized to earnings, but instead is reviewed periodically
(at least annually) for impairment. We completed the required transitional
impairment test as of January 1, 2002 and found no impairment of goodwill. On
an ongoing basis (absent any impairment indicators), we will perform our
impairment tests during the fourth quarter. See the notes to the consolidated
financial statements for additional information regarding goodwill accounting.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS no. 143). This pronouncement requires entities
to record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. When the liability is initially recorded,
the entity capitalizes the cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, the entity either
settles the obligation for the amount recorded or incurs a gain or loss. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. We are
currently assessing the impact of adopting this pronouncement and do not expect
a material impact on our consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). This
pronouncement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. We adopted SFAS
No. 144 as of January 1, 2002. The adoption of this pronouncement did not have
a material impact on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145 Recission of FASB Statements
No. 4, 44 and 46, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). This pronouncement eliminates the current
requirement that gains and losses on extinguishment of debt must be classified
as extraordinary items in the statement of operations. Instead, the
pronouncement requires that gains and losses on extinguishment of debt be
evaluated against the criteria in APB Opinion 30 to determine whether or not it
should be classified as an extraordinary item. Additionally, the pronouncement
contains other corrections to authoritative accounting literature in SFAS No.
4, 44 and 46. The changes in SFAS No. 145 related to debt extinguishment become
effective in fiscal 2003, and the other changes were effective for all of our
financial statements issued on or after May 15, 2002. We early adopted the
rules related to extinguishment of debt as of December 31, 2002 and
reclassified the extraordinary loss to other expense.

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146). This
pronouncement addresses accounting and reporting for costs associated with exit
or disposal activities and nullifies Emerging issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 becomes effective for exit or disposal activities
that are initiated after December 31, 2002. We do not expect this pronouncement
to have a material impact on our consolidated financial statements upon
adoption.

In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others (FIN 45) which
requires companies to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. FIN
45 provides specific guidance identifying the characteristics of contracts that
are subject to its guidance in its entirety from those only subject to the
initial recognition and measurement provisions. We have included the required
disclosures in our consolidated financial statements. The recognition and
measurement provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. We do not
expect the
adoption of the FIN 45 requirements will have a material effect on our
consolidated financial statements.

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In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). This statement amends Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation, (SFAS
123) and provides guidance to companies electing to voluntarily change to the
fair value method of accounting for stock-based compensation. In addition, this
statement amends SFAS 123 to require more prominent and more frequent
disclosures in financial statements regarding the effects of stock-based
compensation. We apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for our stock-based compensation plans and,
effective December 15, 2002, adopted the disclosure provisions of SFAS 148. The
adoption of the disclosure provisions of SFAS 148 did not have a material
effect on our financial statements disclosures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2002, we had outstanding borrowings of approximately
$507.3 million related to the issuance of debt securities registered with the
SEC. In June of 1999, we issued $200.0 million of 7 3/8% senior notes at a
discount to yield an effective interest rate of 7.473%. The 7 3/8% senior notes
pay interest semiannually, and are our unsecured obligations. In March of 2001,
we issued $285.0 million of 9 7/8% senior subordinated notes and $29.0 million
of 7 1/4% senior notes. These notes were issued at a discount to yield
effective interest rates of 10.5% and 9.4%, respectively. These 9 7/8% senior
subordinated notes and the 7 1/4% senior notes pay interest semiannually, and
are unsecured, but are guaranteed, on a joint and several basis, by all of our
domestic subsidiaries, other than one that is not wholly-owned. As of December
31, 2002, we had a senior credit facility that provides for a revolving line of
credit in the aggregate principal amount of $75.0 million for a term of three
years, including subfacilities of $10.0 million for swingline loans and $15.0
million for letters of credit, usage of which reduces availability under the
facility. Borrowings under the facility bear interest at a rate equal to, at
our option, either (1) the base rate (which is equal to the greater of the
prime rate most recently announced by Bank of America, N.A., the administrative
agent under the facility, or the federal funds rate plus one-half of 1%) or (2)
the adjusted Eurodollar Interbank Offered Rate, in each case plus an applicable
margin determined by reference to our leverage ratio (which is defined under
the facility as the ratio of our total debt to our total capitalization). Based
on our leverage ratio at December 31, 2002, the current margins are 3.0% for
Eurodollar rate loans and 1.50% for base rate loans. Additionally, the undrawn
portion of the facility is subject to a facility fee at an annual rate that is
currently set at 0.55% based on our leverage ratio at December 31, 2002. No
borrowings were outstanding under the facility as of December 31, 2002,
although approximately $10.1 million in letter of credit obligations were
outstanding.

During the second and third quarters of 2001, we entered into four
interest rate swap agreements in notional amounts totaling $285.0 million. The
agreements, which have payment and expiration dates that correspond to the
terms of the note obligations they cover, effectively converted $185.0 million
of our fixed rate 9 7/8% senior subordinated notes and $100.0 million of our
fixed rate 7 3/8% senior notes into variable rate obligations. The variable
rates are based on the three-month LIBOR plus a fixed margin. In November 2002
we unwound $50.0 million in interest rate swaps related to the 9 7/8% senior
subordinated notes and $50.0 million related to the 7 3/8% senior notes.

Our senior management establishes parameters, which are approved by the
board of directors, for our financial risk. We do not utilize derivatives for
speculative purposes.

The table below provides information about our debt obligations and
interest rate derivatives that are sensitive to changes in interest rates. For
debt obligations, the table presents principal cash flows and related effective
interest rates by expected maturity dates. For interest rate derivatives, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates for our interest rate swaps. Notional amounts are
used to calculate the contractual payments to be exchanged under the contract.
Weighted average variable rates are based on the fixed spread plus the
contractual three-month LIBOR in effect at December 31, 2002.

|                                    |                       |  |                            |   |      |  |      |   |      |  |            |   |       |  |   |   |  |   |         |      |   |   |         |      |  
|----------------------------------- | --------------------- |  | -------------------------- | - | ---- |  | ---- | - | ---- |  | ---------- | - | ----- |  | - | - |  | - | ------- | ---- | - | - | ------- | ---- | -
|                                    |                       |  | Contractual Maturity Dates
|                                    |                       |  |                           
|                                    |                       |  | 2003                       |   | 2004 |  | 2005 |   | 2006 |  | Thereafter |   | Total
|                                    |                       |  |                            |   |      |  |      |   |      |  |            |   |      
|                                    |                       |  | (In thousands)            
|Debt Obligations                    |                       |  |                            |   |      |  |      |   |      |  |            |   |       |  |   |   |  |   |         |      |   |   |         |     
|9 7/8% Senior Subordinated Notes(1) |                       |  |                           |   |      |  |     |   |      |  |           |   |       |  |  |   |  | $ | 285,000 |      |   | $ | 285,000 |     
|                                    | Average interest rate |  |                            |  |      |  |      |  |      |  |            |  |       |  |   |  |  |   |         | 10.5 | % |   |         | 10.5 | %
|7 1/4% Senior Notes(1)              |                       |  |                           |   |      |  |     |   |      |  |           |   |       |  |  |   |  | $ | 29,000  |      |   | $ | 29,000  |     
|                                    | Average interest rate |  |                            |  |      |  |      |  |      |  |            |  |       |  |   |  |  |   |         | 9.4  | % |   |         | 9.4  | %
|7 3/8% Senior Notes(1)              |                       |  |                           |   |      |  |     |   |      |  |           |   |       |  |  |   |  | $ | 193,250 |      |   | $ | 193,250 |     

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|                          |                         |  |                            |   |      |  |      |   |      |  |            |   |       |  |   |   |  |   |         |       |   |   |         |       |  
|------------------------- | ----------------------- |  | -------------------------- | - | ---- |  | ---- | - | ---- |  | ---------- | - | ----- |  | - | - |  | - | ------- | ----- | - | - | ------- | ----- | -
|                          |                         |  | Contractual Maturity Dates
|                          |                         |  |                           
|                          |                         |  | 2003                       |   | 2004 |  | 2005 |   | 2006 |  | Thereafter |   | Total
|                          |                         |  |                            |   |      |  |      |   |      |  |            |   |      
|                          |                         |  | (In thousands)            
|                          | Average interest rate   |  |                            |  |      |  |      |  |      |  |            |  |       |  |   |  |  |   |         | 7.47  | % |   |         | 7.47  | %
|Interest Rate Derivatives |                         |  |                            |   |      |  |      |   |      |  |            |   |       |  |   |   |  |   |         |       |   |   |         |      
|Fixed to Variable(1)      |                         |  |                           |   |      |  |     |   |      |  |           |   |       |  |  |   |  | $ | 185,000 |       |   | $ | 185,000 |      
|                          | Average pay rate        |  |                            |  |      |  |      |  |      |  |            |  |       |  |   |  |  |   |         | 9.199 | % |   |         | 9.199 | %
|                          | Average receive rate(2) |  |                            |  |      |  |      |  |      |  |            |  |       |  |   |  |  |   |         | 5.419 | % |   |         | 5.419 | %



---

|(1) |  | See the notes to the consolidated financial statements.                             
|--- |  | ------------------------------------------------------------------------------------
|   
|(2) |  | The average receive rate represents the actual rates in effect at
December 31, 2002.

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##### Table of Contents



ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CARAUSTAR INDUSTRIES, INC.




CONSOLIDATED BALANCE SHEETS

|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |          |         | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------- | --------------------------------- | ------- | ---- | ------- | -------- | ------- | 
|                                                     |                                                                                                                                                                 |                                    |         | December 31,                     
|                                                     |                                                                                                                                                                 |                                    |         |                                  
|                                                     |                                                                                                                                                                 |                                    |         | 2002                              |         | 2001
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |     
|                                                     |                                                                                                                                                                 |                                    |         | (In thousands, except share data)
|ASSETS                                               |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|CURRENT ASSETS:                                      |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     | Cash and cash equivalents                                                                                                                                       |                                    | $       | 34,314                            |         |      | $       | 64,244   |        
|                                                     | Receivables, net of allowances for doubtful accounts, returns, and discounts of $5,386 and
$4,250 in 2002 and 2001, respectively                                |                                    |         | 106,149                           |         |      |         | 86,297   |        
|                                                     | Inventories                                                                                                                                                     |                                    |         | 107,644                           |         |      |         | 101,823  |        
|                                                     | Refundable income taxes                                                                                                                                         |                                    |         | 14,926                            |         |      |         | 17,949   |        
|                                                     | Prepaid pension                                                                                                                                                 |                                    |         |                                  |         |      |         | 10,036   |        
|                                                     | Other current assets                                                                                                                                            |                                    |         | 8,498                             |         |      |         | 6,420    |        
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 | Total current assets               |         |                                   | 271,531 |      |         |          | 286,769 | 
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|PROPERTY, PLANT AND EQUIPMENT:                       |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     | Land                                                                                                                                                            |                                    |         | 14,337                            |         |      |         | 12,620   |        
|                                                     | Buildings and improvements                                                                                                                                      |                                    |         | 150,565                           |         |      |         | 135,727  |        
|                                                     | Machinery and equipment                                                                                                                                         |                                    |         | 643,863                           |         |      |         | 625,691  |        
|                                                     | Furniture and fixtures                                                                                                                                          |                                    |         | 14,894                            |         |      |         | 14,326   |        
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 |                                    | 823,659 |                                   |         |      | 788,364 |         
|                                                     | Less accumulated depreciation                                                                                                                                   |                                    |         | (380,264                          | )       |      |         | (337,988 | )      
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 | Property, plant and equipment, net |         |                                   | 443,395 |      |         |          | 450,376 | 
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|GOODWILL, net of accumulated amortization of $20,481 |                                                                                                                                                                 |                                    | 180,545 |                                   |         |      | 146,465 |         
|INVESTMENT IN UNCONSOLIDATED AFFILIATES              |                                                                                                                                                                 |                                    | 52,830  |                                   |         |      | 62,285  |         
|OTHER ASSETS                                         |                                                                                                                                                                 |                                    | 36,913  |                                   |         |      | 15,086  |         
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 | $                                  | 985,214 |                                   |         | $    | 960,981 |         
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |          |        
|LIABILITIES AND SHAREHOLDERS EQUITY                 |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|CURRENT LIABILITIES:                                 |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     | Current maturities of debt                                                                                                                                      |                                    | $       | 70                                |         |      | $       | 48       |        
|                                                     | Accounts payable                                                                                                                                                |                                    |         | 60,027                            |         |      |         | 52,133   |        
|                                                     | Accrued liabilities                                                                                                                                             |                                    |         | 58,456                            |         |      |         | 37,749   |        
|                                                     | Accrued pension                                                                                                                                                 |                                    |         | 11,279                            |         |      |         |         |        
|                                                     | Dividends payable                                                                                                                                               |                                    |         |                                  |         |      |         | 833      |        
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 | Total current liabilities          |         |                                   | 129,832 |      |         |          | 90,763  | 
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|SENIOR CREDIT FACILITY                               |                                                                                                                                                                 |                                    |        |                                   |         |      |        |         
|LONG-TERM DEBT, less current maturities              |                                                                                                                                                                 |                                    | 532,715 |                                   |         |      | 508,691 |         
|DEFERRED INCOME TAXES                                |                                                                                                                                                                 |                                    | 60,630  |                                   |         |      | 66,760  |         
|PENSION LIABILITY                                    |                                                                                                                                                                 |                                    | 13,572  |                                   |         |      |        |         
|DEFERRED COMPENSATION                                |                                                                                                                                                                 |                                    | 1,500   |                                   |         |      | 1,741   |         
|OTHER LIABILITIES                                    |                                                                                                                                                                 |                                    | 4,584   |                                   |         |      | 12,512  |         
|MINORITY INTEREST                                    |                                                                                                                                                                 |                                    | 700     |                                   |         |      | 935     |         
|COMMITMENTS AND CONTINGENCIES (Note 7)               |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|SHAREHOLDERS EQUITY:                                |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     | Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued                                                                                  |                                    |         |                                  |         |      |         |         |        
|                                                     | Common stock, $.10 par value; 60,000,000 shares authorized, 27,906,674 and 27,853,897
Shares issued and outstanding at December 31, 2002 and 2001, respectively |                                    |         | 2,791                             |         |      |         | 2,785    |        
|                                                     | Additional paid-in capital                                                                                                                                      |                                    |         | 182,224                           |         |      |         | 180,116  |        
|                                                     | Retained earnings                                                                                                                                               |                                    |         | 79,566                            |         |      |         | 97,488   |        
|                                                     | Accumulated other comprehensive loss                                                                                                                            |                                    |         | (22,900                           | )       |      |         | (810     | )      
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 |                                    | 241,681 |                                   |         |      | 279,579 |         
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |         
|                                                     |                                                                                                                                                                 | $                                  | 985,214 |                                   |         | $    | 960,981 |         
|                                                     |                                                                                                                                                                 |                                    |         |                                   |         |      |         |          |        

The accompanying notes are an integral part of these consolidated financial statements.

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CARAUSTAR INDUSTRIES, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |         |         | 
|------------------------------------------------------- | ---------------------------------------------------- | ---------------- | ------- | ------------------------------------- | ------- | ---- | ------- | ------- | ------- | - | --------- | ------- | ------- | 
|                                                        |                                                      |                  |         | For the Years Ended December 31,     
|                                                        |                                                      |                  |         |                                      
|                                                        |                                                      |                  |         | 2002                                  |         | 2001 |         | 2000   
|                                                        |                                                      |                  |         |                                       |         |      |         |        
|                                                        |                                                      |                  |         | (In thousands, except per share data)
|SALES                                                   |                                                      | $                | 949,926 |                                       |         | $    | 913,686 |         |         | $ | 1,014,615 |        
|COST OF SALES                                           |                                                      |                  | 724,045 |                                       |         |      | 680,172 |         |         |   | 759,521   |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|                                                        |                                                      | Gross profit     |         |                                       | 225,881 |      |         |         | 233,514 |   |           |         | 255,094 | 
|FREIGHT COSTS                                           |                                                      |                  | 57,057  |                                       |         |      | 52,806  |         |         |   | 51,184    |        
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |                                                      |                  | 150,131 |                                       |         |      | 146,934 |         |         |   | 145,268   |        
|RESTRUCTURING AND OTHER COSTS                           |                                                      |                  | 12,713  |                                       |         |      | 7,083   |         |         |   | 16,777    |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|                                                        |                                                      | Operating income |         |                                       | 5,980   |      |         |         | 26,691  |   |           |         | 41,865  | 
|OTHER (EXPENSE) INCOME:                                 |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|                                                        | Interest expense                                     |                  |         | (38,115                               | )       |      |         | (41,153 | )       |   |           | (34,063 | )      
|                                                        | Interest income                                      |                  |         | 1,652                                 |         |      |         | 986     |         |   |           | 412     |        
|                                                        | Gain (loss) on extinguishment of debt                |                  |         | 87                                    |         |      |         | (4,305  | )       |   |           |        |        
|                                                        | Equity in income (loss) of unconsolidated affiliates |                  |         | 2,488                                 |         |      |         | (2,610  | )       |   |           | 6,533   |        
|                                                        | Other, net                                           |                  |         | 130                                   |         |      |         | (1,904  | )       |   |           | (918    | )      
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|                                                        |                                                      |                  | (33,758 | )                                     |         |      | (48,986 | )       |         |   | (28,036   | )      
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |                                                      |                  | (27,778 | )                                     |         |      | (22,295 | )       |         |   | 13,829    |        
|MINORITY INTEREST IN LOSSES (INCOME)                    |                                                      |                  | 235     |                                       |         |      | 180     |         |         |   | (169      | )      
|(BENEFIT) PROVISION FOR INCOME TAXES                    |                                                      |                  | (9,623  | )                                     |         |      | (7,513  | )       |         |   | 5,485     |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|NET (LOSS) INCOME                                       |                                                      | $                | (17,920 | )                                     |         | $    | (14,602 | )       |         | $ | 8,175     |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|OTHER
COMPREHENSIVE (LOSS) INCOME:                      |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|                                                        | Pension
liability adjustment                         |                  |         | (22,313                               | )       |      |         |        |         |   |           |        |        
|                                                        | Foreign
currency translation adjustment              |                  |         | 223                                   |         |      |         | (57     | )       |   |           | (219    | )      
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|Comprehensive
(Loss) Income                             |                                                      |                  | (40,010 | )                                     |         |      | (14,659 | )       |         |   | 7,956     |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|BASIC                                                   |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|(LOSS) INCOME PER COMMON SHARE                          |                                                      | $                | (0.64   | )                                     |         | $    | (0.52   | )       |         | $ | 0.31      |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING           |                                                      |                  | 27,871  |                                       |         |      | 27,845  |         |         |   | 26,292    |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|DILUTED                                                 |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|(LOSS) INCOME PER COMMON SHARE                          |                                                      | $                | (0.64   | )                                     |         | $    | (0.52   | )       |         | $ | 0.31      |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        
|DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING   |                                                      |                  | 27,871  |                                       |         |      | 27,845  |         |         |   | 26,301    |        
|                                                        |                                                      |                  |         |                                       |         |      |         |         |         |   |           |        

The accompanying notes are an integral part of these consolidated financial statements.

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CARAUSTAR INDUSTRIES, INC.




CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except share data)


|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |       |   |         |         |   |   |             |         |   |   |         |         |  
|-------------------------- | -------------------------------------------------------------------------- |  | ------------ | --------- | ---------- | - | -------- | --- | ------------- | - | ------- | ------ | ----- | - | ------- | ------- | - | - | ----------- | ------- | - | - | ------- | ------- | -
|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |       |   |         |         |   |   | Accumulated |         |   |   |        
|                           |                                                                            |  | Common Stock |           | Additional |   |          |     |               |   | Other   |        |       |   |        
|                           |                                                                            |  |              |           | Paid-In    |   | Retained |     | Comprehensive |   |         |        |      
|                           |                                                                            |  | Shares       |           | Amount     |   | Capital  |     | Earnings      |   | Loss    |        | Total
|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |      
|BALANCE, December 31, 1999 |                                                                            |  | 25,488,280   |           |            | $ | 2,549    |     |               | $ | 149,509 |        |       | $ | 127,660 |         |   | $ | (534        | )       |   | $ | 279,184 |        
|                           | Net income                                                                 |  |              |          |            |   |          |    |               |   |         |       |       |   |         | 8,175   |   |   |             |        |   |   |         | 8,175   |  
|                           | Issuance of common stock for acquisitions                                  |  |              | 635,306   |            |   |          | 64  |               |   |         | 10,659 |       |   |         |        |   |   |             |        |   |   |         | 10,723  |  
|                           | Issuance of common stock under
nonqualified stock option plan              |  |              | 61,989    |            |   |          | 6   |               |   |         | 208    |       |   |         |        |   |   |             |        |   |   |         | 214     |  
|                           | Issuance of common stock under 1993
stock purchase plan                    |  |              | 338       |            |   |          |    |               |   |         | 254    |       |   |         |        |   |   |             |        |   |   |         | 254     |  
|                           | Issuance of common stock under 1998
stock purchase plan                    |  |              | 10,699    |            |   |          | 1   |               |   |         | 59     |       |   |         |        |   |   |             |        |   |   |         | 60      |  
|                           | Issuance of common stock under
director equity plan                        |  |              | 4,171     |            |   |          |    |               |   |         | 77     |       |   |         |        |   |   |             |        |   |   |         | 77      |  
|                           | Foreign currency translation adjustment                                    |  |              |          |            |   |          |    |               |   |         |       |       |   |         |        |   |   |             | (219    | ) |   |         | (219    | )
|                           | Dividends declared of $.72 per share                                       |  |              | 3,784     |            |   |          |    |               |   |         | 58     |       |   |         | (18,718 | ) |   |             |        |   |   |         | (18,660 | )
|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |       |   |         |         |   |   |             |         |   |   |         |        
|BALANCE, December 31, 2000 |                                                                            |  | 26,204,567   |           |            |   | 2,620    |     |               |   | 160,824 |        |       |   | 117,117 |         |   |   | (753        | )       |   |   | 279,808 |        
|                           | Net loss                                                                   |  |              |          |            |   |          |    |               |   |         |       |       |   |         | (14,602 | ) |   |             |        |   |   |         | (14,602 | )
|                           | Issuance of common stock for acquisitions                                  |  |              | 1,643,192 |            |   |          | 165 |               |   |         | 18,634 |       |   |         |        |   |   |             |        |   |   |         | 18,799  |  
|                           | Benefit from issuance of common stock
under nonqualified stock option plan |  |              |          |            |   |          |    |               |   |         | 408    |       |   |         |        |   |   |             |        |   |   |         | 408     |  
|                           | Forfeiture of common stock under 1993
stock purchase plan                  |  |              | (5,526    | )          |   |          | (1  | )             |   |         | 70     |       |   |         |        |   |   |             |        |   |   |         | 69      |  
|                           | Issuance of common stock under 1998
stock purchase plan                    |  |              | 451       |            |   |          |    |               |   |         | 80     |       |   |         |        |   |   |             |        |   |   |         | 80      |  
|                           | Issuance of common stock under
director equity plan                        |  |              | 8,339     |            |   |          | 1   |               |   |         | 75     |       |   |         |        |   |   |             |        |   |   |         | 76      |  
|                           | Foreign currency translation adjustment                                    |  |              |          |            |   |          |    |               |   |         |       |       |   |         |        |   |   |             | (57     | ) |   |         | (57     | )
|                           | Dividends declared of $.18 per share                                       |  |              | 2,874     |            |   |          |    |               |   |         | 25     |       |   |         | (5,027  | ) |   |             |        |   |   |         | (5,002  | )
|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |       |   |         |         |   |   |             |         |   |   |         |        
|BALANCE, December 31, 2001 |                                                                            |  | 27,853,897   |           |            |   | 2,785    |     |               |   | 180,116 |        |       |   | 97,488  |         |   |   | (810        | )       |   |   | 279,579 |        
|                           | Net loss                                                                   |  |              |          |            |   |          |    |               |   |         |       |       |   |         | (17,920 | ) |   |             |        |   |   |         | (17,920 | )
|                           | Issuance of common stock for acquisitions                                  |  |              | 34,003    |            |   |          | 3   |               |   |         | 321    |       |   |         |        |   |   |             |        |   |   |         | 324     |  
|                           | Issuance of common stock
under nonqualified stock option plan              |  |              | 3,239     |            |   |          | 1   |               |   |         | 30     |       |   |         |        |   |   |             |        |   |   |         | 31      |  
|                           | Forfeiture of common stock under 1993
stock purchase plan                  |  |              | (8,864    | )          |   |          | (1  | )             |   |         | (4     | )     |   |         |        |   |   |             |        |   |   |         | (5      | )
|                           | Issuance of common stock under 1998
stock purchase plan                    |  |              | 1,332     |            |   |          |    |               |   |         | 75     |       |   |         |        |   |   |             |        |   |   |         | 75      |  
|                           | Issuance of common stock under
director equity plan                        |  |              | 8,690     |            |   |          | 1   |               |   |         | 78     |       |   |         |        |   |   |             |        |   |   |         | 79      |  
|                           | Issuance of common stock under
employee benefit plan                       |  |              | 14,068    |            |   |          | 2   |               |   |         | 134    |       |   |         |        |   |   |             |        |   |   |         | 136     |  
|                           | Convertible shares issued for acquisition                                  |  |              |          |            |   |          |    |               |   |         | 1,472  |       |   |         |        |   |   |             |        |   |   |         | 1,472   |  
|                           | Pension liability adjustment, net of taxes of $13,595                      |  |              |          |            |   |          |    |               |   |         |       |       |   |         |        |   |   |             | (22,313 | ) |   |         | (22,313 | )
|                           | Foreign currency translation adjustment                                    |  |              |          |            |   |          |    |               |   |         |       |       |   |         |        |   |   |             | 223     |   |   |         | 223     |  
|                           | Stock dividend paid                                                        |  |              | 309       |            |   |          |    |               |   |         | 2      |       |   |         | (2      | ) |   |             |        |   |   |         |        |  
|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |       |   |         |         |   |   |             |         |   |   |         |        
|BALANCE, December 31, 2002 |                                                                            |  | 27,906,674   |           |            | $ | 2,791    |     |               | $ | 182,224 |        |       | $ | 79,566  |         |   | $ | (22,900     | )       |   | $ | 241,681 |        
|                           |                                                                            |  |              |           |            |   |          |     |               |   |         |        |       |   |         |         |   |   |             |         |   |   |         |        

The accompanying notes are an integral part of these consolidated financial statements.

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CARAUSTAR INDUSTRIES, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |          |         |          |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ------- | -------------------------------- | ------- | ------ | -------- | -------------- | ------- | ------ | -------- | ------- | -------- | -
|                                                     |                                                                                          |                                                                             |                                                     |         | For the Years Ended December 31,
|                                                     |                                                                                          |                                                                             |                                                     |         |                                 
|                                                     |                                                                                          |                                                                             |                                                     |         | 2002                             |         | 2001   |          | 2000          
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |               
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          | (In thousands) |         |        |          |        
|OPERATING ACTIVITIES:                                |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     | Net (loss) income                                                                        |                                                                             | $                                                   | (17,920 | )                                |         | $      | (14,602  | )              |         | $      | 8,175    |        
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     | Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |          |        
|                                                     |                                                                                          | (Gain) loss from extinguishment of debt                                     |                                                     |         | (87                              | )       |        |          | 4,305          |         |        |          |        |         
|                                                     |                                                                                          | Depreciation and amortization                                               |                                                     |         | 54,246                           |         |        |          | 64,340         |         |        |          | 60,858  |         
|                                                     |                                                                                          | Disposal of property, plant and equipment, net                              |                                                     |         | 1,267                            |         |        |          | 470            |         |        |          |        |         
|                                                     |                                                                                          | Equity in income or loss of unconsolidated affiliates, net of distributions |                                                     |         | 8,167                            |         |        |          | 3,610          |         |        |          | 6,967   |         
|                                                     |                                                                                          | Deferred income taxes                                                       |                                                     |         | 7,221                            |         |        |          | 15,811         |         |        |          | (239    | )       
|                                                     |                                                                                          | Provision for deferred compensation                                         |                                                     |         | 223                              |         |        |          | 226            |         |        |          | 227     |         
|                                                     |                                                                                          | Minority interest                                                           |                                                     |         | (235                             | )       |        |          | (180           | )       |        |          | 169     |         
|                                                     |                                                                                          | Restructuring costs                                                         |                                                     |         | 5,167                            |         |        |          | 3,987          |         |        |          | 12,734  |         
|                                                     |                                                                                          | Changes in operating assets and liabilities, net of acquisitions:           |                                                     |         |                                  |         |        |          |                |         |        |          |         |         
|                                                     |                                                                                          | Receivables                                                                 |                                                     |         | (18,547                          | )       |        |          | 6,848          |         |        |          | 19,508  |         
|                                                     |                                                                                          | Inventories                                                                 |                                                     |         | 5,580                            |         |        |          | 9,737          |         |        |          | (10,518 | )       
|                                                     |                                                                                          | Other assets and liabilities                                                |                                                     |         | (4,642                           | )       |        |          | (8,951         | )       |        |          | (1,485  | )       
|                                                     |                                                                                          | Accounts payable and accrued liabilities                                    |                                                     |         | 19,737                           |         |        |          | (14,770        | )       |        |          | (12,089 | )       
|                                                     |                                                                                          | Income taxes                                                                |                                                     |         | 3,023                            |         |        |          | (13,628        | )       |        |          | (1,854  | )       
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     |                                                                                          | Total adjustments                                                           |                                                     |         | 81,120                           |         |        |          | 71,805         |         |        |          | 74,278  |         
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     |                                                                                          | Net cash provided by operating activities                                   |                                                     |         | 63,200                           |         |        |          | 57,203         |         |        |          | 82,453  |         
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|INVESTING ACTIVITIES:                                |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     | Purchases of property, plant and equipment                                               |                                                                             |                                                     | (22,542 | )                                |         |        | (28,059  | )              |         |        | (58,306  | )      
|                                                     | Acquisition of businesses, net of cash acquired                                          |                                                                             |                                                     | (69,547 | )                                |         |        | (34      | )              |         |        | (4,306   | )      
|                                                     | Proceeds from disposal of property, plant and equipment                                  |                                                                             |                                                     | 2,145   |                                  |         |        | 267      |                |         |        |         |        
|                                                     | Investment in unconsolidated affiliates                                                  |                                                                             |                                                     | (200    | )                                |         |        |         |                |         |        | (50,709  | )      
|                                                     | Cash acquired in stock acquisition                                                       |                                                                             |                                                     |        |                                  |         |        |         |                |         |        | 1,100    |        
|                                                     | Other                                                                                    |                                                                             |                                                     | (230    | )                                |         |        | 436      |                |         |        | 2,986    |        
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     |                                                                                          |                                                                             | Net cash used in investing activities               |         |                                  | (90,374 | )      |          |                | (27,390 | )      |          |         | (109,235 | )
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|FINANCING ACTIVITIES:                                |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     | Proceeds from note issuance                                                              |                                                                             |                                                     |        |                                  |         |        | 291,200  |                |         |        |         |        
|                                                     | Proceeds from senior credit facility                                                     |                                                                             |                                                     | 38,000  |                                  |         |        | 18,000   |                |         |        | 192,000  |        
|                                                     | Repayments of senior credit facility                                                     |                                                                             |                                                     | (38,000 | )                                |         |        | (212,000 | )              |         |        | (138,000 | )      
|                                                     | Repayments of other long and short-term debt                                             |                                                                             |                                                     | (6,693  | )                                |         |        | (67,110  | )              |         |        | (18,196  | )      
|                                                     | Swap agreement unwind proceeds                                                           |                                                                             |                                                     | 6,163   |                                  |         |        | 9,093    |                |         |        |         |        
|                                                     | 7.74% senior notes prepayment penalty                                                    |                                                                             |                                                     |        |                                  |         |        | (3,565   | )              |         |        |         |        
|                                                     | Dividends paid                                                                           |                                                                             |                                                     | (833    | )                                |         |        | (8,870   | )              |         |        | (18,531  | )      
|                                                     | Proceeds from issuances of stock                                                         |                                                                             |                                                     | 135     |                                  |         |        |         |                |         |        | 460      |        
|                                                     | Other                                                                                    |                                                                             |                                                     | (1,528  | )                                |         |        | (1,217   | )              |         |        | (822     | )      
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     |                                                                                          |                                                                             | Net cash (used in) provided by financing activities |         |                                  | (2,756  | )      |          |                | 25,531  |        |          |         | 16,911   |  
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |                                                                                          |                                                                             | (29,930                                             | )       |                                  |         | 55,344 |          |                |         | (9,871 | )       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                          |                                                                             | 64,244                                              |         |                                  |         | 8,900  |          |                |         | 18,771 |         
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|CASH AND CASH EQUIVALENTS AT END OF YEAR             |                                                                                          | $                                                                           | 34,314                                              |         |                                  | $       | 64,244 |          |                | $       | 8,900  |         
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |          |        
|SUPPLEMENTAL DISCLOSURES:                            |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |         
|                                                     | Cash payments for interest                                                               |                                                                             | $                                                   | 36,199  |                                  |         | $      | 35,352   |                |         | $      | 35,136   |        
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |          |        
|                                                     | Cash payments for income taxes                                                           |                                                                             | $                                                   | 567     |                                  |         | $      | 1,967    |                |         | $      | 9,575    |        
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |          |        
|                                                     | Stock issued for acquisitions                                                            |                                                                             | $                                                   | 324     |                                  |         | $      | 18,799   |                |         | $      | 10,723   |        
|                                                     |                                                                                          |                                                                             |                                                     |         |                                  |         |        |          |                |         |        |          |        

The accompanying notes are an integral part of these consolidated financial statements.

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CARAUSTAR INDUSTRIES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001 and 2000

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Caraustar Industries, Inc. (the Parent Company) and subsidiaries
(collectively, the Company) are engaged in manufacturing, converting, and
marketing paperboard and related products.

Consolidation

The consolidated financial statements include the accounts of the Parent
Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers cash on deposit and investments with an original
maturity of three months or less to be cash equivalents.

Inventories

Inventories are carried at the lower of cost or market. Cost includes
materials, labor and overhead. Market, with respect to all inventories, is
replacement cost or net realizable value. The Company estimates reserves for
inventory obsolescence and shrinkage based on managements judgment of future
realization. All inventories are valued using the first-in, first-out method.

Inventories at December 31, 2002 and 2001 were as follows (in thousands):

|                                   |  |      |         |      |  |   |         | 
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                   |  | 2002 |         | 2001
|                                   |  |      |         |     
|Raw materials and supplies         |  | $    | 46,781  |      |  | $ | 40,357  | 
|Finished goods and work in process |  |      | 60,863  |      |  |   | 61,466  | 
|                                   |  |      |         |      |  |   |         | 
|Total inventory                    |  | $    | 107,644 |      |  | $ | 101,823 | 
|                                   |  |      |         |      |  |   |         | 

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for repairs
and maintenance not considered to substantially lengthen the asset lives or
increase capacity or efficiency are charged to expense as incurred. The
recoverability of property, plant, and equipment is periodically reviewed by
management based on current and anticipated conditions.

In the fourth quarter of 2002, the Company completed, with the assistance
from independent professional valuation advisors, a comprehensive review of the
remaining estimated useful lives of its machinery and equipment. As a result of
this review, the Company has revised its estimate of the useful lives for
production machinery and equipment from an average of approximately 10 years to
an average of approximately 20 years. The Company believes that the change more
appropriately reflects the useful lives of the assets. The effect of this
change in estimate has been accounted for on a prospective basis. The impact
of this change was a decrease in depreciation expense in the fourth quarter of
2002 of approximately $7.6 million. The decrease in depreciation
expense in 2003 compared with 2002
is expected to be approximately $22.5 million.

Depreciation is computed using the straight-line method over the following
estimated useful lives of the assets:

|                           |  |            
|-------------------------- |  | -----------
|Buildings and improvements |  | 10-45 years
|Machinery and equipment    |  | 3-25 years 
|Furniture and fixtures     |  | 5-10 years 

Use of Estimates

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The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. For example, significant management
judgment is required in determining: the credit worthiness of customers and
collectibility of accounts receivable; excess, obsolete or unsaleable inventory
reserves; the potential impairment of goodwill and intangibles; the accounting
for income taxes; the liability for self-insured claims; and the Companys
obligation and expense for pension and other postretirement benefits. Actual
results could differ from the Companys estimates and the differences could be
significant.

Revenue Recognition

The Company recognizes revenue when the following four criteria are met:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (4) is based on managements
judgments regarding the collectibility of the Companys accounts receivable.
Generally, the Company recognizes revenue and related account receivable when
it ships its manufactured products or when it completes a service and title and
risk of loss passes to its customers. Provisions for discounts, allowances,
customer rebates, and other adjustments are provided for in the same period as
the related revenues are recorded.

Freight Costs

The costs of delivering finished goods to the Companys customers are
recorded as freight costs. Those costs include the amounts paid to a third
party to deliver the finished goods or the Companys cost using its own
delivery trucks and drivers. Any freight costs billed to and paid by a
customer are included in revenue.

Self-Insurance

The Company is self-insured for the majority of its workers compensation
costs and health care costs, subject to specific retention levels. The
Companys self-insured workers compensation liability is estimated based on
actual claims that are established by a third party administrator. The actual
claims are then increased by factors that reflect the Companys historical
claim development. The developed claim is the liability that the Company
records in its financial statements. The Companys self-insured health care
liability is estimated based on its actual claim experience and multiplied by a
lag factor. The lag factor represents claims that have been incurred and
should be recorded as a liability, but have not been reported to the company.
Consulting actuaries and administrators assist the Company in determining its
liability for self-insured claims.

Foreign Currency Translation

The financial statements of the Companys non-U.S. subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Assets
and liabilities of the non-U.S. subsidiaries are translated at current rates of
exchange. The resulting translation adjustments are recorded in accumulated
other comprehensive loss. Income and expense items are translated at the
average exchange rate for the year. Gains and losses from
transactions are reported in net loss
or income and were not material in any year.

Goodwill

Goodwill was amortized using the straight-line method over periods ranging
up to 40 years for fiscal years prior to 2002. Effective January 1, 2002, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under
this pronouncement, goodwill is no longer amortized to earnings, but
instead is reviewed in the fourth quarter of each year to determine if
there is an impairment, or more frequently if impairment indicators
exists. The Companys transition and fourth quarter 2002
impairment review did not result in an impairment or charge.

Intangible Assets

Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company periodically evaluates long-lived assets,
including property, plant and equipment and definite lived intangible assets or
a group of assets whenever events or changes in conditions may indicate that
the carrying value may not be recoverable. Factors that management considers
important that could initiate an impairment review include the following:

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| |  |  | significant operating losses;                                                                               
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | significant declines in demand for a specific product whereby an asset is only able to produce that product;
|
| |  |  | assets that are idled;                                                                                      
|
| |  |  | assets that are likely to be divested                                                                       

The impairment review requires management to estimate future undiscounted
cash flows associated with an asset or group of assets and sum the estimated
future cash flows. If the future undiscounted cash flows is less than the
carrying amount of the asset, the Company must record the asset at fair value.
Estimating future cash flows requires management to make judgments regarding
future economic conditions, product demand and pricing. Although the Company
believes its estimates are appropriate, significant differences in the actual
performance of the asset or group of assets may materially affect our asset
values and results of operations.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach
to financial accounting and reporting for income taxes. In accordance with
SFAS No. 109, deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense
(benefit) is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.

Under SFAS No. 109, a valuation allowance is required when it is more
likely than not that some portion of the deferred tax assets will not be
realized. Realization is dependent on generating sufficient future taxable
income.

Income or Loss Per Share

The Company computes basic and diluted earnings or loss per share in
accordance with SFAS No. 128, Earnings Per Share. Basic income or loss per
share excludes dilution and is computed by dividing income or loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted income per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The dilutive effect of stock options
outstanding during 2000 added 9,000 to the weighted average shares outstanding
for purposes of calculating diluted income per share. There was no dilutive
effect of stock options outstanding during 2002 and 2001. Since 2002 and 2001
were net losses, the impact of the dilutive effect of stock options, if any,
were not added to the weighted average shares.

Stock-Based Compensation

On December 31, 2002 the company was required to adopt SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS
148). SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation to provide alternative methods of transition for companies that
voluntarily elect to adopt the fair value recognition and measurement
methodology prescribed by SFAS No. 123.

In addition, regardless of the method a company elects to account for
stock-based compensation arrangements, SFAS No. 148 requires additional
disclosures in the Summary of Significant Accounting Policies footnote of both
interim and annual financial statements regarding the method the company uses
to account for stock-based compensation and the effect of such method on the
Companys reported results.

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees and related interpretations
(APB No. 25) in accounting for its employee stock options. However, pro
forma information regarding net income and earnings per share is required by
SFAS 123, which requires that the information be determined as if the Company
has accounted for its employee stock options granted under the fair value
method of that statement. The fair values for these options were estimated at
the dates of grant using a Black-Scholes option pricing model with the
following weighted average assumptions:

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|                        |  |               |  |               |  |              
|----------------------- |  | ------------- |  | ------------- |  | -------------
|                        |  | 2002          |  | 2001          |  | 2000         
|                        |  |               |  |               |  |              
|Risk-free interest rate |  | 3.39%  4.94% |  | 4.92%  5.36% |  | 5.18%  6.84%
|Expected dividend yield |  | 0%            |  | 1.16%  1.63% |  | 4.01%  7.68%
|Expected option lives   |  | 8-10 years    |  | 8-10 years    |  | 8-10 years   
|Expected volatility     |  | 39%           |  | 41%           |  | 40%          

The total fair values of the options granted during the years ended
December 31, 2002, 2001 and 2000 were computed to be approximately $2.3
million, $470 thousand and $3.7 million, respectively, which would be amortized
over the vesting period of the options. If the Company had accounted for these
plans in accordance with SFAS No. 123, the Companys reported and pro forma net
(loss) income and net (loss) income per share for the years ended December 31,
2002, 2001 and 2000 would have been as follows (in thousands, except per share
data):

|                                        |             |  |      |         |      |  |      |         |   |  |   |       | 
|--------------------------------------- | ----------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ----- | 
|                                        |             |  | 2002 |         | 2001 |  | 2000
|                                        |             |  |      |         |      |  |     
|Net (loss) income:                      |             |  |      |         |      |  |      |         |   |  |   |      
|                                        | As reported |  | $    | (17,920 | )    |  | $    | (14,602 | ) |  | $ | 8,175 | 
|                                        | Pro forma   |  |      | (19,287 | )    |  |      | (15,756 | ) |  |   | 6,628 | 
|Diluted (loss) income per common share: |             |  |      |         |      |  |      |         |   |  |   |      
|                                        | As reported |  | $    | (0.64   | )    |  | $    | (0.52   | ) |  | $ | 0.31  | 
|                                        | Pro forma   |  |      | (0.69   | )    |  |      | (0.57   | ) |  |   | 0.25  | 

Comprehensive Income

Total comprehensive loss or income for the years ended December 31, 2002,
2001 and 2000, was a loss of $40.0 million, a loss of $14.7 million and income
of $8.0 million, respectively. Components of accumulated other comprehensive
loss at December 31, 2002 and 2001 consist of pension liability adjustments of
$22.3 million in 2002 and foreign currency translation adjustments of $587
thousand and $810 thousand, respectively.

New Accounting Pronouncements

The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 Goodwill and Other Intangible Assets, on January 1, 2002. Costs in
excess of the fair value of net assets of businesses acquired are recorded as
goodwill. The statement changed the accounting for goodwill and other
indefinite lived intangible assets by eliminating the requirement to amortize
these assets and requiring an impairment analysis to be performed annually, or
more often as circumstances might require. In accordance with the adoption of
SFAS No. 142, the Company has completed the required transitional impairment
test as of January 1, 2002 and the annual test in the fourth quarter of 2002
and found no impairment of goodwill. On an ongoing basis (absent any impairment
indicators), the Company will perform its impairment tests during the fourth
quarter.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS no. 143). This pronouncement requires entities
to record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. When the liability is initially recorded,
the entity capitalizes the cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, the entity either
settles the obligation for the amount recorded or incurs a gain or loss. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of this pronouncement to have a material
impact on its consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). This
pronouncement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 144 as of January 1, 2002. The adoption of this pronouncement
did not have a material impact on the Companys consolidated financial
statements.

In April 2002, the FASB issued SFAS No. 145 Recision of FASB Statements
No. 4, 44 and 46, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). This pronouncement eliminates the current
requirement that gains and losses on extinguishment of debt must be classified
as extraordinary items in the statement of operations. Instead, the
pronouncement requires that gains and losses on extinguishment of debt be
evaluated against the criteria in APB Opinion 30 to determine whether or not it
should be classified as an extraordinary item. Additionally, the pronouncement
contains other corrections to authoritative accounting literature in SFAS No.
4, 44 and 46. The changes in SFAS No. 145 related to debt extinguishment become
effective in fiscal 2003 but may be early adopted, and the other changes were
effective beginning May 15, 2002. The Company early adopted the

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rules related to extinguishment of debt as of December 31, 2002 and has
reclassified a 2001 early extinguishment loss of $4.3 million to other expense.

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146). This
pronouncement requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon managements commitment
to an exit plan, which was generally before an actual liability had been
incurred. Adoption of this statement is required with the beginning of fiscal
year 2003. The Company does not expect that the adoption of this statement
will have a material effect on the Companys financial position or results of
operations.

In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others (FIN 45) which
requires companies to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. FIN
45 provides specific guidance identifying the characteristics of contracts that
are subject to its guidance in its entirety from those only subject to the
initial recognition and measurement provisions. The recognition and measurement
provisions of FIN 45 are effective on a prospective basis for guarantees issued
or modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for the year ended December 31, 2002 (See Note 5). The Company does
not expect the adoption of the FIN 45 requirements will have a material effect
on its consolidated financial statements.

In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). This statement amends Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation, (SFAS
123) and provides guidance to companies electing to voluntarily change to the
fair value method of accounting for stock-based compensation. In addition, this
statement amends SFAS 123 to require more prominent and more frequent
disclosures in financial statements regarding the effects of stock-based
compensation. The Company applies Accounting Principles Board Opinion No. 25
and related interpretations in accounting for its stock-based compensation
plans and, effective December 15, 2002, adopted the disclosure provisions of
SFAS 148. The adoption of the disclosure provisions of SFAS 148 did not have a
material effect on the Companys financial statement disclosures.

2. Shareholders Equity

Preferred Stock

The Company has authorized 5.0 million shares of $0.10 par value preferred
stock. The preferred stock is issuable from time to time in one or more series
and with such designations and preferences for each series as shall be stated
in the resolutions providing for the designation and issue of each such series
adopted by the board of directors of the Company. The board of directors is
authorized by the Companys articles of incorporation to determine the voting,
dividend, redemption and liquidation preferences pertaining to each such
series. No shares of preferred stock have been issued by the Company.

Common Stock Purchase Plan

The Company has cumulatively purchased 3.2 million shares of its common
stock since January 1996 pursuant to a plan authorized and approved by its
board of directors allowing purchases of up to 4.0 million common shares. The
Companys board of directors has authorized purchases of up to 831 thousand
additional shares. There were no stock purchases in 2002, 2001 or 2000. The
Companys 9 7/8% senior subordinated notes and its senior credit facility
currently preclude it from purchasing its common stock based on operating
results for the last twelve months.

3. Acquisitions

Each of the following acquisitions is being accounted for applying the
provisions of Financial Accounting Standards Board (FASB) Statement No. 141.
As a result, the Company recorded the assets and liabilities of the acquired
companies at their estimated fair value with the excess of the purchase price
over these amounts being recorded as goodwill. Actual
allocations of goodwill may change during the allocation
period, generally one year following the date of acquisition. The financial
statements for the years ended December 31, 2002, 2001 and 2000 reflect the
operating results of the acquired businesses for the periods after their
respective dates of acquisition.

Vivid Graphics

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In September 2002, the Company acquired a provider of digital imaging
services for 34 thousand shares of our common stock valued at approximately
$324 thousand. Goodwill of approximately $170 thousand was recorded in
connection with the acquisition.

Design Tubes

In April 2002, the Company acquired the remaining 51% of the outstanding
stock of Design Tubes Company Limited (Design Tubes), located in Toronto,
Ontario, Canada in consideration for shares of a subsidiary of the Company
exchangeable at the holders option (for no additional consideration) for
approximately 141 thousand shares of the Companys common stock, valued at $1.5
million. The Company originally acquired its minority interest in Design Tubes
in November 1998 and accounted for its 49% ownership using the equity method.
Design Tubes manufactures paperboard tubes and also produces paper tube
manufacturing equipment for companies throughout North America. Goodwill in the
amount of $2.0 million was recorded in connection with the Design Tubes
acquisition.

Smurfit Industrial Packaging Group

On September 30, 2002, the Company acquired certain operating assets
(excluding accounts receivable) of the Smurfit Industrial Packaging Group
(Smurfit), a business unit of Jefferson Smurfit Corporation (U.S.), for
approximately $67.1 million, and assumed $1.7 million of indebtedness
outstanding under certain industrial revenue bonds. The acquisition was funded
with cash on hand. Goodwill of approximately $31.9 million and intangible
assets of approximately $8.7 million were recorded in conjunction with the
Smurfit Industrial Packaging Group acquisition. The intangible assets are
associated with the value of acquired customer relationships and will be
amortized over 15 years.

The Company also entered into operating lease agreements with a third
party to lease machinery and equipment at certain acquired Smurfit locations.
The terms of the agreements are six years. The future minimum rental payments
required under these leases are approximately $1.7 million each year in 2003
through 2007 and $1.3 million in 2008. The Company will recognize operating
lease expense of approximately $2.0 million each year in 2003 through 2007 and
$1.4 million in 2008.

Smurfit Industrial Packaging Group operations included 17 paper tube and
core plants, 3 uncoated recycled paperboard mills and 3 partition manufacturing
plants. These facilities are located in 16 states across the U.S. and in
Canada. The Company believes that these assets enhance the Companys
capabilities in its tube, core and composite container market and position the
Company as a prominent producer in this market. In conjunction with the
acquisition, the Company is evaluating its existing and acquired locations to
determine which locations should be closed or consolidated to achieve economies
of scale and other efficiencies. As of December 31, 2002 the Company
communicated and initiated the closure of four acquired tube plants. The
Company expects to continue the evaluation in 2003.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):

|                                                 |                             |                           |   |        |  |   |        |  |        | 
|------------------------------------------------ | --------------------------- | ------------------------- | - | ------ |  | - | ------ |  | ------ | 
|Cash paid to Jefferson Smurfit Corporation (U.S) |                             |                           |   |        |  | $ | 67,140 | 
|Acquisition expenses                             |                             |                           |   |        |  |   | 2,227  | 
|                                                 |                             |                           |   |        |  |   |        | 
|Total allocable cost                             |                             |                           |   |        |  |   | 69,367 | 
|                                                 |                             |                           |   |        |  |   |        | 
|Assets acquired:                                 |                             |                           |   |        |  |   |        | 
|                                                 | Current assets              |                           | $ | 11,279 |  |   |        |  |       
|                                                 | Intangible assets           |                           |   | 8,672  |  |   |        |  |       
|                                                 | Property, plant & equipment |                           |   | 29,165 |  |   |        |  |       
|                                                 |                             |                           |   |        |  |   |        | 
|                                                 |                             | Total assets purchased    |   |        |  |   |        |  | 49,116 | 
|                                                 |                             |                           |   |        |  |   |        | 
|Liabilities assumed:                             |                             |                           |   |        |  |   |        | 
|                                                 | Current liabilities         |                           |   | 10,029 |  |   |        |  |       
|                                                 | Long-term debt              |                           |   | 1,675  |  |   |        |  |       
|                                                 |                             |                           |   |        |  |   |        | 
|                                                 |                             | Total liabilities assumed |   |        |  |   |        |  | 11,704 | 
|                                                 |                             |                           |   |        |  |   |        | 
|Net assets acquired                              |                             |                           |   |        |  |   | 37,412 | 
|                                                 |                             |                           |   |        |  |   |        | 
|Goodwill                                         |                             |                           |   |        |  | $ | 31,955 | 
|                                                 |                             |                           |   |        |  |   |        | 

The following unaudited pro forma financial data gives effect to the
acquisition of Smurfit Industrial Packaging Group as if it had occurred on the
first day of each period presented. The pro forma financial data is provided
for comparative purposes only and is not

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necessarily indicative of the results which would have occurred if the
Smurfit Industrial Packaging Group acquisition had been effected at that date
(in thousands):

|                    |  |                     |           |      |  |   |           |  
|------------------- |  | ------------------- | --------- | ---- |  | - | --------- | -
|                    |  | For the Years Ended
|                    |  | December 31,       
|                    |  |                    
|                    |  | 2002                |           | 2001
|                    |  |                     |           |     
|Total revenues      |  | $                   | 1,058,332 |      |  | $ | 1,051,442 |  
|Net loss            |  | $                   | (13,079   | )    |  | $ | (13,602   | )
|Net loss per share: |  |                     |           |      |  |   |           |  
|Basic and diluted   |  | $                   | (0.47     | )    |  | $ | (0.49     | )
|                    |  |                     |           |      |  |   |           |  

4. Goodwill and Other Intangible Assets

Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Under this pronouncement the Company no longer
amortizes goodwill, but instead reviews goodwill on at least an annual
basis to determine if there is an impairment.

Net (loss) income and related (loss) income per share for the years ended
December 31, 2001 and 2000 adjusted to exclude goodwill amortization expense
are as follows, net of tax (in thousands, except per share information):

|          |                       |                   |   |                    |         |          |   |                  |       |   |   |       |       |  
|--------- | --------------------- | ----------------- | - | ------------------ | ------- | -------- | - | ---------------- | ----- | - | - | ----- | ----- | -
|          |                       |                   |   |                    |         |          |   | Income Per Share
|          |                       |                   |   | For the Year Ended |         |         
|          |                       |                   |   | December 31, 2001  |         | Basic(A) |   | Diluted(A)      
|          |                       |                   |   |                    |         |          |   |                 
|Net Loss: |                       |                   |   |                    |         |          |   |                  |       |   |   |      
|          | Reported net loss     |                   | $ | (14,602            | )       |          | $ | (0.52            | )     |   | $ | (0.52 | )    
|          | Goodwill amortization |                   |   | 2,996              |         |          |   | 0.11             |       |   |   | 0.11  |      
|          |                       |                   |   |                    |         |          |   |                  |       |   |   |      
|          |                       | Adjusted net loss |   | $                  | (11,606 | )        |   | $                | (0.42 | ) |   | $     | (0.42 | )
|          |                       |                   |   |                    |         |          |   |                  |       |   |   |      

|            |                       |                     |   |                    |        |       |   |                  |      |  |   |      |      | 
|----------- | --------------------- | ------------------- | - | ------------------ | ------ | ----- | - | ---------------- | ---- |  | - | ---- | ---- | 
|            |                       |                     |   |                    |        |       |   | Income Per Share
|            |                       |                     |   | For the Year Ended |        |      
|            |                       |                     |   | December 31, 2000  |        | Basic |   | Diluted         
|            |                       |                     |   |                    |        |       |   |                 
|Net Income: |                       |                     |   |                    |        |       |   |                  |      |  |   |     
|            | Reported net income   |                     | $ | 8,175              |        |       | $ | 0.31             |      |  | $ | 0.31 |     
|            | Goodwill amortization |                     |   | 2,699              |        |       |   | 0.10             |      |  |   | 0.10 |     
|            |                       |                     |   |                    |        |       |   |                  |      |  |   |     
|            |                       | Adjusted net income |   | $                  | 10,874 |       |   | $                | 0.41 |  |   | $    | 0.41 | 
|            |                       |                     |   |                    |        |       |   |                  |      |  |   |     

(A)  Column does not sum due to rounding.

Changes in the carrying amount of goodwill for the years ended December
31, 2001 and 2002, are as follows:

|                                |                       |   |            |        |           |   |                   |        |           |   |                |        |   |   |         |        |  
|------------------------------- | --------------------- | - | ---------- | ------ | --------- | - | ----------------- | ------ | --------- | - | -------------- | ------ | - | - | ------- | ------ | -
|                                |                       |   |            |        |           |   |                   |        |           |   | Tube, Core and |        |   |   |        
|                                |                       |   |            |        |           |   | Carton and Custom |        | Composite |   |                |        |  
|                                |                       |   | Paperboard |        | Packaging |   | Containers        |        | Total    
|                                |                       |   |            |        |           |   |                   |        |          
|Balance as of January 1, 2001   |                       | $ | 79,825     |        |           | $ | 44,667            |        |           | $ | 26,402         |        |   | $ | 150,894 |       
|                                | Goodwill adjustments  |   |            |       |           |   |                   | 29     |           |   |                |       |   |   |         | 29     |  
|                                | Goodwill amortization |   |            | (2,177 | )         |   |                   | (1,526 | )         |   |                | (755   | ) |   |         | (4,458 | )
|                                |                       |   |            |        |           |   |                   |        |           |   |                |        |   |   |         |       
|Balance as of December 31, 2001 |                       |   | 77,648     |        |           |   | 43,170            |        |           |   | 25,647         |        |   |   | 146,465 |       
|                                | Goodwill acquired     |   |            | 5,040  |           |   |                   | 170    |           |   |                | 28,870 |   |   |         | 34,080 |  
|                                |                       |   |            |        |           |   |                   |        |           |   |                |        |   |   |         |       
|Balance as of December 31, 2002 |                       | $ | 82,688     |        |           | $ | 43,340            |        |           | $ | 54,517         |        |   | $ | 180,545 |       
|                                |                       |   |            |        |           |   |                   |        |           |   |                |        |   |   |         |       

Intangible Assets

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As of December 31, 2002 the Company had an other intangible asset of $8.3
million, net of $290.0 thousand of amortization, which is classified with other
assets. The intangible asset is associated with the acquisition of certain
assets of the Smurfit Industrial Packaging Group and is attributable to the
acquired customer relationships. This intangible asset will be amortized over
15 years. Scheduled amortization of the intangible asset for the next five
years is as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 578   | 
|2004 |  |   | 578   | 
|2005 |  |   | 578   | 
|2006 |  |   | 578   | 
|2007 |  |   | 578   | 
|     |  |   |       | 
|     |  | $ | 2,890 | 
|     |  |   |       | 

5. Equity Interest in Unconsolidated Affiliates

On April 1, 1996, the Company transferred substantially all of the
operating assets and liabilities of its wholly-owned subsidiary, Standard
Gypsum Corporation, a producer of gypsum wallboard, to a newly formed limited
liability Company, Standard Gypsum, L.P. (Standard). Simultaneous with the
formation of Standard, the Company sold a 50% interest in Standard to
Temple-Inland Forest Products Corporation (Temple), an unrelated third party,
for $10.8 million in cash. Standard is operated as a joint venture managed by
Temple. The joint venture owns two gypsum wallboard manufacturing facilities.
One facility is located in McQueeny, Texas and the other is in Cumberland City,
Tennessee. The Company accounts for its interest in Standard under the equity
method of accounting. The Companys equity interest in the earnings or loss of
Standard for the years ended December 31, 2002, 2001 and 2000 was earnings of
$8.2 million, a loss of $946 thousand, and earnings of $7.4 million,
respectively. The Company received distributions based on its equity interest
in Standard of $10.7 million, $1.0 million, and $13.5 million in 2002, 2001 and
2000, respectively.

During 1999, Standard received financing from two industrial revenue bond
issuances by Stewart County, Tennessee, totaling $56.2 million in order to
complete the financing of constructing the Cumberland City, Tennessee facility.
Standard is the obligor under reimbursement agreements pursuant to which
direct-pay letters of credit totaling the $56.2 million have been issued for
its account in support of the outstanding industrial revenue bonds. The
Company has severally and unconditionally guaranteed 50% of Standards
obligations for reimbursement of letter of credit drawings, interest, fees, and
other amounts. Temple has similarly guaranteed 50% of Standards obligations.
At December 31, 2002 and 2001, the Companys portion of this guarantee and the
maximum obligation to pay upon default by either joint venture partner totaled
approximately $28.1 million. The Companys guarantee agreement contains
financial maintenance covenants, as amended throughout 2001 and 2002, and both
the guarantee agreement and the Companys senior credit facility contains a
cross-default to these covenants. See the Subsequent Events, Note 18,
regarding an amendment to this guarantee and our senior credit facility.

Summarized financial information for Standard at December 31, 2002 and
2001 and for the years ended December 31, 2002, 2001 and 2000, respectively, is
as follows (in thousands):

|                    |  |      |        |      |  |   |        |  |  |  |  | 
|------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  |  |  | 
|                    |  | 2002 |        | 2001 |  |   |        | 
|                    |  |      |        |      |  |   |        | 
|Current assets      |  | $    | 13,680 |      |  | $ | 13,237 |  |  | 
|Noncurrent assets   |  |      | 67,098 |      |  |   | 70,763 |  |  |  |  | 
|Current liabilities |  |      | 6,434  |      |  |   | 4,623  |  |  |  |  | 
|Long-term debt      |  |      | 56,220 |      |  |   | 56,217 |  |  |  |  | 
|Net assets          |  |      | 18,124 |      |  |   | 23,160 |  |  |  |  | 

|                  |  |      |        |      |  |      |        |   |  |   |        | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                  |  | 2002 |        | 2001 |  | 2000
|                  |  |      |        |      |  |     
|Sales             |  | $    | 98,558 |      |  | $    | 71,297 |   |  | $ | 96,338 | 
|Gross profit      |  |      | 26,103 |      |  |      | 5,886  |   |  |   | 24,730 | 
|Operating income  |  |      | 18,881 |      |  |      | 292    |   |  |   | 18,176 | 
|Net income (loss) |  |      | 16,364 |      |  |      | (1,892 | ) |  |   | 14,716 | 

During 1999, the Company formed a joint venture with Temple to own and
operate a containerboard mill located in Newport, Indiana. Under the joint
venture agreement, the Company contributed $50.0 million to the joint venture
and Temple contributed the net assets of the mill valued at approximately $98.0
million, and received $50.0 million in notes issued by Premier Boxboard Limited
LLC (PBL). Upon formation, the joint venture, PBL, undertook an $82.0
million project to modify the mill to enable it to produce a new lightweight
gypsum facing paper along with other containerboard grades. PBL is operated as
a joint venture managed by the Company. The modified mill began operations on
June 27, 2000. The Company and Temple each have a 50% interest in the joint

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venture, which is being accounted for under the equity method of
accounting. There were no cash distributions to the joint venture partners in
2002, 2001 or 2000. The Companys equity interest in the net loss of PBL for
2002, 2001 and 2000 was approximately $4.6 million, $1.9 million and $881
thousand, respectively.

PBL is the borrower under a credit facility providing for up to $30.0
million in revolving loans (with a subfacility for up to $1.0 million in
letters of credit). The credit facility was originally entered into in July
1999 and matures in June 2005. The Company has severally and unconditionally
guaranteed 50% of PBLs obligations under the credit facility for principal
(including reimbursement of letter of credit drawings), interest, fees and
other amounts. Temple-Inland has similarly guaranteed 50% of PBLs obligations.
As of December 31, 2002, the outstanding principal amount of borrowings under
the facility was approximately $20.2 million (including a $200 thousand undrawn
letter of credit), one-half of which the Company guarantees (approximately
$10.1 million). See the Subsequent Events, Note 18, regarding an amendment
to this guarantee and our senior credit facility.

A substantial portion of the assets of PBL are pledged as security for
$50.0 million in outstanding principal amount of senior notes under which PBL
is the obligor. These notes are guaranteed by Temple-Inland, but are not
guaranteed by the Company. A default under the PBL credit facility would also
constitute an event of default under these notes. In the event of default under
these notes, the holders would also have recourse to the assets of PBL that are
pledged to secure these notes. Thus, any resulting default under these notes
could result in the assets of PBL being utilized to satisfy creditor claims,
which would have a material adverse effect on the financial condition and
operations of PBL and, accordingly, the Companys interest in PBL. Further, in
such an event of default, these assets would not be available to satisfy
obligations owing to unsecured creditors of PBL, including the lender under the
credit facility, which might make it more likely that the Companys guarantee
of the PBL credit facility would be the primary source of repayment under the
facility in the event PBL cannot pay.

Summarized financial information for PBL at December 31, 2002 and 2001 and
for the years ended December 31, 2002, 2001 and 2000, respectively, is as
follows (in thousands):

|                    |  |      |         |      |  |   |         |  |  |  |  | 
|------------------- |  | ---- | ------- | ---- |  | - | ------- |  |  |  |  | 
|                    |  | 2002 |         | 2001 |  |   |         | 
|                    |  |      |         |      |  |   |         | 
|Current assets      |  | $    | 12,983  |      |  | $ | 10,579  |  |  | 
|Noncurrent assets   |  |      | 149,640 |      |  |   | 160,956 |  |  |  |  | 
|Current liabilities |  |      | 6,302   |      |  |   | 5,879   |  |  |  |  | 
|Long-term debt      |  |      | 70,000  |      |  |   | 70,000  |  |  |  |  | 
|Net assets          |  |      | 86,321  |      |  |   | 95,656  |  |  |  |  | 

|                        |  |      |        |      |  |      |        |   |  |   |        |  
|----------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                        |  | 2002 |        | 2001 |  | 2000
|                        |  |      |        |      |  |     
|Sales                   |  | $    | 74,649 |      |  | $    | 75,171 |   |  | $ | 40,207 |  
|Gross profit            |  |      | 7,923  |      |  |      | 16,463 |   |  |   | 8,553  |  
|Operating (loss) income |  |      | (4,555 | )    |  |      | 1,640  |   |  |   | 682    |  
|Net loss                |  |      | (9,335 | )    |  |      | (3,784 | ) |  |   | (1,761 | )

Additional contingencies relating to the Companys joint ventures that
could affect the Companys ownership and operating structure include buy-sell
triggers which, under certain circumstances, give the Company and its joint
venture partner either the right, or the obligation, to purchase the others
interest or to sell an interest to the other. Under the Standard Gypsum joint
venture, in general, either party may purchase the others interest upon the
occurrence of certain purported unauthorized transfers or involuntary transfer
events (such as bankruptcy). In addition, under the Standard Gypsum joint
venture, either (i) in the event of an unresolved deadlock over a material
matter or (ii) at any time either party may initiate a Russian roulette
buyout procedure by which it names a price at which the other party must agree
either to sell its interest to the initiating party or to purchase the
initiating partys interest. Under the PBL joint venture, in general, mutual
buy-sell rights are triggered upon the occurrence of certain purported
unauthorized or involuntary transfers, but in the event of certain change of
control or deadlock events, the buy-sell rights are structured such that the
Company is always the party entitled, or obligated, as the case may be, to
purchase.

The Company has an additional joint venture with an unrelated entity,
which is accounted for under the equity method of accounting. The Companys
investment and share of earnings of this venture are not material to the
Company.

6. Senior Credit Facility and Long-Term Debt

At December 31, 2002 and 2001, total long-term debt consisted of the
following (in thousands):

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|                                  |  |      |         |      |  |   |         |  
|--------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                  |  | 2002 |         | 2001
|                                  |  |      |         |     
|Senior credit facility            |  | $    |        |      |  | $ |        |  
|9 7/8 % senior subordinated notes |  |      | 295,312 |      |  |   | 277,326 |  
|7 1/4 % senior notes              |  |      | 25,745  |      |  |   | 25,449  |  
|7 3/8 % senior notes              |  |      | 201,848 |      |  |   | 197,716 |  
|Other notes payable               |  |      | 9,880   |      |  |   | 8,248   |  
|                                  |  |      |         |      |  |   |         |  
|Total debt                        |  |      | 532,785 |      |  |   | 508,739 |  
|Less current maturities           |  |      | (70     | )    |  |   | (48     | )
|                                  |  |      |         |      |  |   |         |  
|Total long-term debt              |  | $    | 532,715 |      |  | $ | 508,691 |  
|                                  |  |      |         |      |  |   |         |  

The carrying value of total debt outstanding at December 31, 2002 maturing
during the next five years and thereafter is as follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 70      | 
|2004       |  |   | 75      | 
|2005       |  |   | 80      | 
|2006       |  |   | 85      | 
|2007       |  |   | 95      | 
|Thereafter |  |   | 532,380 | 
|           |  |   |         | 
|Total debt |  | $ | 532,785 | 
|           |  |   |         | 

Senior Credit Facility

On March 29, 2001, the Company obtained a credit facility that provides
for a revolving line of credit in the aggregate principal amount of $75.0
million for a term of three years, including subfacilities of $10.0 million for
swingline loans and $15.0 million for letters of credit, usage of which reduces
availability under the facility. No borrowings were outstanding under the
facility as of December 31, 2002 or 2001 and an aggregate of $10.1 million in
letter of credit obligations were outstanding at December 31, 2002 and 2001.
The Company intends to use the available borrowings of the facility for working
capital, capital expenditures and other general corporate purposes, if
necessary. The Companys obligations under the facility are unconditionally
guaranteed, on a joint and several basis, by all of its existing and
subsequently acquired wholly-owned domestic subsidiaries and are secured by a
first priority security interest in the accounts receivable and inventory of
the Company and all of its existing and subsequently acquired wholly-owned
domestic subsidiaries (see discussion below of amendments to the senior credit
facility).

Borrowings under the facility bear interest at a rate equal to, at the
Companys option, either (1) the base rate (which is equal to the greater of
the prime rate most recently announced by Bank of America, N.A., the
administrative agent under the facility, or the federal funds rate plus
one-half of 1%) or (2) the adjusted Eurodollar Interbank Offered Rate, in each
case plus an applicable margin determined by reference to the Companys
leverage ratio (which is defined under the facility as the ratio of the
Companys total debt to its total capitalization). Based on the Companys
leverage ratio at December 31, 2002, the current margins are 3.0% for
Eurodollar rate loans and 1.50% for base rate loans. Additionally, the undrawn
portion of the facility is subject to a facility fee at an annual rate that is
currently set at 0.55% based on the Companys leverage ratio at December 31,
2002.

The facility contains covenants that restrict, among other things, the
Companys ability and its subsidiaries ability to create liens, merge or
consolidate, dispose of assets, incur indebtedness and guarantees, pay
dividends, repurchase or redeem capital stock and indebtedness, make certain
investments or acquisitions, enter into certain transactions with affiliates,
make capital expenditures or change the nature of the Companys business. The
facility also contains several financial maintenance covenants, including
covenants establishing a maximum leverage ratio (as described above), minimum
tangible net worth and a minimum fixed charge coverage ratio.

The facility contains events of default including, but not limited to,
nonpayment of principal or interest, violation of covenants, incorrectness of
representations and warranties, cross-default to other indebtedness, bankruptcy
and other insolvency events, material judgments, certain ERISA events, actual
or asserted invalidity of loan documentation and certain changes of control of
the Company.

During 2001 and 2002, the Company completed five amendments to its senior
credit facility agreement. The first amendment, dated September 10, 2001,
allows the Company to acquire up to $30.0 million of its senior subordinated
notes so long as no default or event of default exists on the date of the
transaction, or will result from the transaction.

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The second amendment, dated November 30, 2001, provides for the issuance
of letters of credit under the senior credit facility having an original
expiration date more than one year from the date of issuance, if required under
related industrial revenue bond documents and agreed to by the issuing lender.

The third amendment was completed on January 22, 2002 with an effective
date of September 30, 2001. The Company obtained this amendment in order to
avoid the occurrence of an event of default under its senior credit facility
agreement resulting from a violation of the interest coverage ratio covenant
contained in the agreement. This amendment modified the definitions of
Interest Expense, Premier Boxboard Interest Expense and Standard Gypsum
Interest Expense to include interest income and the benefit or expense derived
from interest rate swap agreements or other interest hedge agreements.
Additionally, the amendment lowered the minimum allowable interest coverage
ratio for the fourth quarter of 2001 from 2.5:1.0 to 2.25:1.0, the first
quarter of 2002 from 2.75:1.0 to 2.25:1.0, and for the second quarter of 2002
from 2.75:1.0 to 2.50:1.0.

In connection with the Companys acquisition of the Smurfit Industrial
Packaging Group, the Company entered into a fourth amendment to its senior
credit facility in September 2002. The purpose of this amendment was to obtain
the required lender consent under the senior credit facility for the
consummation of the acquisition (and the incurrence of up to $60.0 million in
subordinated debt financing to refinance borrowings under the credit facility
and restore cash used to fund a portion of the acquisition price), to lower the
minimum allowable tangible net worth for all periods after the effective date
of the amendment, and to increase the maximum permitted leverage ratio covenant
to 70.0% for the fiscal quarters ending December 31, 2002, March 31, 2003 and
June 30, 2003, and 67.5% for the fiscal quarter ending September 30, 2003.
Additionally, the minimum interest coverage ratio covenant was replaced with a
minimum fixed charge coverage ratio covenant beginning with the third quarter
of 2002. These modifications, in addition to increasing the Companys
flexibility to finance the acquisition, were necessary to enable the Company to
avoid violations of the leverage ratio and interest coverage ratio covenants
for the third quarter of 2002 and violations of the leverage ratio covenant in
future periods.

In exchange for these modifications, the Companys lenders required an
increase in the applicable margin component of the interest rates applicable to
borrowings under the facility and the facility fee rate applicable to the
undrawn portion of the facility. The amendment provided for a margin pricing
increase of 0.25% effective November 15, 2002, if the Company had not issued at
least $50.0 million in senior subordinated notes by that date, and an increase
of 0.25% every three months after that date until the first date on which the
Companys balance of cash and cash equivalents is at least $50.0 million and
the Company has no loans outstanding under the facility (subject to a maximum
interest margin of 3.75% for Eurodollar rate loans and 2.50% for base rate
loans). In addition, under the terms of the fourth amendment, the Company was
required to enter into a security agreement under which the Company and its
subsidiary guarantors under the senior credit facility granted a first priority
security interest in their respective accounts receivable and inventory to
secure their obligations under the credit facility and the Companys
obligations under its 50% guarantees of the credit facilities of Standard
Gypsum and Premier Boxboard.

On December 27, 2002, the Company completed a fifth amendment to its
senior credit facility. This amendment modified the calculation of net worth
for purposes of our leverage ratio and tangible net worth financial maintenance
covenants to exclude adjustments to other comprehensive loss related to the
Companys defined benefit pension plan. This amendment also allows the Company
to exclude from these financial maintenance covenant calculations any
restructuring costs recorded in the fourth quarter of 2002 and first quarter of
2003 as long as the aggregate of these restructuring costs does not exceed
$16.0 million, on an after tax basis.

See Subsequent Events, Note 18, regarding amendments to the senior
credit facility.

Senior Subordinated and Senior Notes

On March 22, 2001, the Company obtained commitments and executed an
agreement for the issuance of $285.0 million of
9 7/8% senior subordinated notes due April 1, 2011 and $29.0 million of 7
1/4% senior notes due May 1, 2010. These senior subordinated notes and senior
notes were issued at a discount to yield effective interest rates of 10.5% and
9.4%, respectively. Under the terms of the agreement, the Company received
aggregate proceeds, net of issuance costs, of approximately $291.2 million on
March 29, 2001. These proceeds were used to repay borrowings outstanding under
the Companys former senior credit facility and its 7.74% senior notes. In
connection with the repayment of the 7.74% senior notes, the Company incurred a
prepayment penalty of approximately $3.6 million in 2001. The Company recorded
a loss on extinguishment of debt of $4.3 million, which included the prepayment
penalty and unamortized issuance costs of $705 thousand. The difference between
issue price and principal amount at maturity of the Companys 7 1/4% senior and
9 7/8% senior subordinated notes is accreted each year as interest expense in
its financial statements. These publicly traded senior subordinated and senior notes are
unsecured, but are guaranteed, on a joint and several basis, by all of the
Companys domestic subsidiaries, other than two that is not wholly-owned.

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On June 1, 1999, the Company issued $200.0 million in aggregate principal
amount of its 7 3/8% notes due June 1, 2009. The 7 3/8% notes were issued at a
discount to yield an effective interest rate of 7.473% and pay interest
semiannually. The 7 3/8% notes are unsecured obligations of the Company.

Interest Rate Swap Agreements

During 2001, the Company entered into four interest rate swap agreements
in notional amounts totaling $285.0 million. The agreements, which have payment
and expiration dates that correspond to the terms of the note obligations they
cover, effectively converted $185.0 million of the Companys fixed rate 9 7/8%
senior subordinated notes and $100.0 million of the Companys fixed rate 7 3/8%
senior notes into variable rate obligations. The variable rates are based on
the three-month LIBOR plus a fixed margin.

In October 2001, the Company unwound its $185.0 million interest rate swap
agreement related to the 9 7/8% senior subordinated notes and received $9.1
million from the bank counter-party. Simultaneously, the Company executed a new
swap agreement with a fixed spread that was 85 basis points higher than the
original swap agreement. The new swap agreement was the same notional amount,
had the same terms and covered the same notes as the original agreement. The
$9.1 million gain, which was classified as a component of debt, will be
accreted to interest expense over the life of the notes and will partially
offset the increase in interest expense. The $9.1 million gain lowered the
effective interest rate of the 9 7/8% senior subordinated notes from 10.5% to
10.0%.

In August 2002, the Company unwound its $185.0 million interest rate swap
agreement related to the 9 7/8% senior subordinated notes and received $5.5
million from the bank counter-party. Simultaneously, the Company executed a new
swap agreement with a fixed spread that was 17 basis points higher than the
original swap agreement. The new swap agreement is the same notional amount,
has the same terms and covers the same notes as the original agreement. In
September 2002, the Company repaid the $5.5 million and entered into a new swap
agreement that lowered the fixed spread by 7.5 basis points from the August
2002 swap.

In November 2002, the Company unwound $50.0 million of its $185.0 million
interest rate swap agreement related to the 9 7/8% senior subordinated notes,
and received approximately $2.8 million from the bank counter-party.
Simultaneously, the Company unwound $50.0 million of one of its interest rate
swap agreements related to the 7 3/8% senior notes, and received approximately
$3.4 million. The $6.2 million gain, which was classified as a component of
debt, will be accreted to interest expense over the life of the notes and will
partially offset the increase in interest expense. The $2.8 million gain
lowered the effective interest rate of the 9 7/8% senior subordinated notes
from 10.0% to 9.8%. The $3.4 million gain lowered the effective interest rate
of the 7 3/8% senior subordinated notes from 7.5% to 7.2%.

The following table identifies the debt instrument hedged, the notional
amount, the fixed spread and the three-month LIBOR at December 31, 2002 for
each of the Companys interest rate swaps. The December 31, 2002 three-month
LIBOR is presented for informational purposes only and does not represent the
Companys actual effective rates in place at December 31, 2002.

|                                 |  |          |         |        |  |              |       |               |  |  |       |   |  |  |       |  
|-------------------------------- |  | -------- | ------- | ------ |  | ------------ | ----- | ------------- |  |  | ----- | - |  |  | ----- | -
|                                 |  | Notional |         |        |  |              |       | LIBOR at      |  |  |       |  
|                                 |  | Amount   |         | Fixed  |  | December 31, |       | Total        
|Debt Instrument                  |  | (000's)  |         | Spread |  | 2002         |       | Variable Rate
|                                 |  |          |         |        |  |              |       |              
|9 7/8% senior subordinated notes |  | $        | 135,000 |        |  |              | 4.495 | %             |  |  | 1.383 | % |  |  | 5.878 | %
|7 3/8% senior notes              |  |          | 25,000  |        |  |              | 1.445 |               |  |  | 1.383 |   |  |  | 2.828 |  
|7 3/8% senior notes              |  |          | 25,000  |        |  |              | 1.775 |               |  |  | 1.383 |   |  |  | 3.158 |  

See Subsequent Events, note 18, regarding the Companys January 2003
unwind of $85.0 million of the $135.0 million interest rate swap related to the
9 7/8% senior subordinated notes.

Under the provisions of SFAS No. 133, the Company has designated and
accounted for its interest rate swap agreements as fair value hedges. The
Company has assumed no ineffectiveness with regard to these agreements as they
qualify for the short-cut method of accounting for fair value hedges of debt
obligations, as prescribed by SFAS No. 133. The December 31, 2002 aggregate
fair value of the swaps was $15.2 million and is classified as a component of
other long-term assets and long-term debt. The December 31, 2001 aggregate
fair value of the swaps was $7.4 million and is classified as a component of
other long-term liabilities and long-term debt.

7. Commitments and Contingencies

Leases

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The Company leases certain buildings, machinery, and transportation
equipment under operating lease agreements expiring at various dates through
2022. Certain rental payments for transportation equipment are based on a fixed
rate plus an additional contingent amount for mileage. Rental expense on
operating leases for the years ended December 31, 2002, 2001 and 2000 is as
follows (in thousands):

|                   |  |      |        |      |  |      |        |  |  |   |        | 
|------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                   |  | 2002 |        | 2001 |  | 2000
|                   |  |      |        |      |  |     
|Minimum rentals    |  | $    | 16,993 |      |  | $    | 14,312 |  |  | $ | 13,026 | 
|Contingent rentals |  |      | 322    |      |  |      | 507    |  |  |   | 347    | 
|                   |  |      |        |      |  |      |        |  |  |   |        | 
|Total              |  | $    | 17,315 |      |  | $    | 14,819 |  |  | $ | 13,373 | 
|                   |  |      |        |      |  |      |        |  |  |   |        | 

The following is a schedule of future minimum rental payments required
under leases that have initial or remaining noncancelable lease terms in excess
of one year as of December 31, 2002 (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 16,502 | 
|2004       |  |   | 13,671 | 
|2005       |  |   | 9,827  | 
|2006       |  |   | 7,942  | 
|2007       |  |   | 5,616  | 
|Thereafter |  |   | 14,913 | 
|           |  |   |        | 
|Total      |  | $ | 68,471 | 
|           |  |   |        | 

Litigation

The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Companys
financial condition, results of operations or cash flows.

8.     (Loss) Income Per Share

The following is a reconciliation of the numerators and denominators of
the basic and diluted (loss) income per share computations for net (loss)
income (in thousands, except per share information):

|                                                     |  |                     |         |      |  |      |         |   |  |   |        | 
|---------------------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | 
|                                                     |  | For the Years Ended
|                                                     |  | December 31,       
|                                                     |  |                    
|                                                     |  | 2002                |         | 2001 |  | 2000
|                                                     |  |                     |         |      |  |     
|Calculation of Basic (Loss) Income Per Share:        |  |                     |         |      |  |      |         |   |  |   |        | 
|Net (loss) income                                    |  | $                   | (17,920 | )    |  | $    | (14,602 | ) |  | $ | 8,175  | 
|Weighted average number of common shares outstanding |  |                     | 27,871  |      |  |      | 27,845  |   |  |   | 26,292 | 
|                                                     |  |                     |         |      |  |      |         |   |  |   |        | 
|Basic (loss) income per share                        |  | $                   | (0.64   | )    |  | $    | (0.52   | ) |  | $ | 0.31   | 
|                                                     |  |                     |         |      |  |      |         |   |  |   |        | 
|Calculation of Diluted (Loss) Income Per Share:      |  |                     |         |      |  |      |         |   |  |   |        | 
|Net (loss) income                                    |  | $                   | (17,920 | )    |  | $    | (14,602 | ) |  | $ | 8,175  | 
|Weighted average number of shares outstanding        |  |                     | 27,871  |      |  |      | 27,845  |   |  |   | 26,301 | 
|                                                     |  |                     |         |      |  |      |         |   |  |   |        | 
|Diluted (loss) income per share                      |  | $                   | (0.64   | )    |  | $    | (0.52   | ) |  | $ | 0.31   | 
|                                                     |  |                     |         |      |  |      |         |   |  |   |        | 

Approximately 1.7 million and 1.8 million common stock equivalents are
excluded from the diluted weighted average shares outstanding for the years
ended December 31, 2002 and 2001, respectively. These common stock equivalents
are excluded because they are antidilutive.

9. Stock Option and Deferred Compensation Plans

Director Equity Plan

During 1996, the Companys board of directors and shareholders approved a
director equity plan. Under the plan, directors who are not employees or former
employees of the Company (Eligible Directors) are paid a portion of their
fees in the Companys common stock. Additionally, each Eligible Director is
granted an option to purchase 1,000 shares of the Companys common stock at

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an option price equal to the fair market value at the date of grant. These
options are immediately exercisable and expire ten years following the grant. A
maximum of 100 thousand shares of common stock may be granted under this plan.
During 2002, 2001 and 2000, 9,000, 8,000 and 4,000 shares, respectively, of
common stock and options to purchase 6,000 shares of common stock were issued
under this plan in each year.

Incentive Stock Option and Bonus Plans

During 1992, the Companys board of directors and shareholders approved a
qualified incentive stock option and bonus plan (the 1993 Plan), which became
effective January 1, 1993 and terminated December 31, 1997. Under the
provisions of the 1993 Plan, selected members of management received one share
of common stock (bonus share) for each two shares purchased at market value.
In addition, the 1993 Plan provided for the issuance of options at prices not
less than market value at the date of grant. The options and bonus shares
awarded under the 1993 Plan are subject to four-year and five-year respective
vesting periods. The options expire after eight years. The Companys board of
directors authorized 1.4 million common shares for grant under the 1993 Plan.
Compensation expense of approximately $62 thousand, $186 thousand and $246
thousand related to bonus shares was recorded in 2002, 2001 and 2000,
respectively.

During 1998, the Companys board of directors and shareholders approved a
qualified incentive stock option and bonus plan (the 1998 Plan), which became
effective March 10, 1998. Under the provisions of the 1998 Plan, selected
members of management may receive the right to acquire one share of restricted
stock contingent upon the direct purchase of two shares of unrestricted common
stock at market value. In addition, the 1998 Plan provides for the issuance of
both traditional and performance stock options at market price and 120% of
market price, respectively. Restricted stock and options awarded under the 1998
Plan are subject to five-year vesting periods and the options expire after ten
years. The Companys board of directors authorized 3.8 million common shares
for grant under the 1998 Plan. During 2002, 2001 and 2000, the Company issued
588 thousand, 108 thousand and 785 thousand options, respectively, under the
1998 Plan. During 2002, 2001 and 2000, the Company issued 2,000, 1,000 and
11,000 shares, respectively, of restricted stock. The Company recorded
approximately $78 thousand, $82 thousand and $105 thousand of compensation
expense related to the issuance of restricted stock during 2002, 2001 and 2000,
respectively.

The following is a summary of stock option activity for the years ended
December 31, 2002, 2001 and 2000:

|                                 |                   |  |           |           |                |   |                  |       | 
|-------------------------------- | ----------------- |  | --------- | --------- | -------------- | - | ---------------- | ----- | 
|                                 |                   |  |           |           |                |   | Weighted Average
|                                 |                   |  | Shares    |           | Exercise Price
|                                 |                   |  |           |           |               
|Outstanding at December 31, 1999 |                   |  | 1,223,145 |           |                | $ | 24.95            |      
|                                 | Granted           |  |           | 790,621   |                |   |                  | 17.06 | 
|                                 | Forfeited         |  |           | (46,853   | )              |   |                  | 26.26 | 
|                                 | Exercised         |  |           | (90,420   | )              |   |                  | 4.76  | 
|                                 |                   |  |           |           |                |   |                  |      
|Outstanding at December 31, 2000 |                   |  | 1,876,493 |           |                |   | 22.57            |      
|                                 | Granted           |  |           | 114,323   |                |   |                  | 10.00 | 
|                                 | Forfeited         |  |           | (196,575  | )              |   |                  | 21.39 | 
|                                 | Exercised         |  |           |          |                |   |                  |      | 
|                                 |                   |  |           |           |                |   |                  |      
|Outstanding at December 31, 2001 |                   |  | 1,794,241 |           |                |   | 21.89            |      
|                                 | Granted           |  |           | 588,150   |                |   |                  | 7.49  | 
|                                 | Forfeited         |  |           | (187,364  | )              |   |                  | 20.84 | 
|                                 | Exercised         |  |           | (3,239    | )              |   |                  | 9.36  | 
|                                 |                   |  |           |           |                |   |                  |      
|Outstanding at December 31, 2002 |                   |  | 2,191,788 |           |                | $ | 18.14            |      
|                                 |                   |  |           |           |                |   |                  |      
|Options exercisable at:          |                   |  |           |           |                |   |                  |      
|                                 | December 31, 2002 |  |           | 1,076,420 |                |   | $                | 22.66 | 
|                                 | December 31, 2001 |  |           | 989,897   |                |   |                  | 22.22 | 
|                                 | December 31, 2000 |  |           | 833,579   |                |   |                  | 20.96 | 

The following table is a summary of information about the Companys stock
options outstanding at December 31, 2002:

|                        |                |      |                |                |                  |                |                  |      |              |                |                  |       |                |  |  |           |  |  |   |       | 
|----------------------- | -------------- | ---- | -------------- | -------------- | ---------------- | -------------- | ---------------- | ---- | ------------ | -------------- | ---------------- | ----- | -------------- |  |  | --------- |  |  | - | ----- | 
|                        |                |      | Outstanding at |                |                  |                |                  |      |              |                |                  |       | Exercisable at |  |  |           | 
|                        |                |      | December 31,   |                | Weighted Average |                | Weighted Average |      | December 31, |                | Weighted Average
|Range of Exercise Price |                | 2002 |                | Remaining Life |                  | Exercise Price |                  | 2002 |              | Exercise Price
|                        |                |      |                |                |                  |                |                  |      |              |               
|                        |                |      |                |                |                  |                | (In Years)       |      |              |                |                  |       |                |  |  |           |  |  |  
|                        | $7.05  $16.88 |      |                | 872,418        |                  |                |                  | 8.8  |              |                | $                | 8.29  |                |  |  | 198,908   |  |  | $ | 9.73  | 
|                        | 17.75  23.75  |      |                | 692,866        |                  |                |                  | 5.3  |              |                |                  | 19.54 |                |  |  | 398,538   |  |  |   | 19.53 | 
|                        | 24.44  29.75  |      |                | 231,696        |                  |                |                  | 5.8  |              |                |                  | 25.84 |                |  |  | 149,118   |  |  |   | 25.86 | 
|                        | 30.13  40.80  |      |                | 394,808        |                  |                |                  | 4.3  |              |                |                  | 32.92 |                |  |  | 329,856   |  |  |   | 32.79 | 
|                        |                |      |                |                |                  |                |                  |      |              |                |                  |       |                |  |  |           |  |  |   |      
|                        | $7.05  $40.80 |      |                | 2,191,788      |                  |                |                  | 6.6  |              |                | $                | 18.14 |                |  |  | 1,076,420 |  |  | $ | 22.66 | 

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Deferred Compensation Plans

The Parent Company and certain of its subsidiaries have deferred
compensation plans for several of their present and former officers and key
employees. These plans provide for retirement, involuntary termination, and
death benefits. The involuntary termination and retirement benefits are accrued
over the period of active employment from the execution dates of the plans to
the normal retirement dates (age 65) of the employees covered. Deferred
compensation expense applicable to the plans was approximately $223 thousand,
$226 thousand and $227 thousand for the years ended December 31, 2002, 2001 and
2000, respectively. Accruals of approximately $1.5 million and $1.7 million
related to these plans are included in deferred compensation in the
accompanying balance sheets at December 31, 2002 and 2001, respectively.

10. Pension Plan and Other Postretirement Benefits

Pension Plan and Supplemental Executive Retirement Plan

Substantially all of the Companys employees participate in a
noncontributory defined benefit pension plan (the Pension Plan). The Pension
Plan calls for benefits to be paid to all eligible employees at retirement
based primarily on years of service with the Company and compensation rates in
effect near retirement. The Pension Plans assets consist of shares held in
collective investment funds and group annuity contracts. The Companys policy
is to fund benefits attributed to employees service to date as well as service
expected to be earned in the future. Contributions to the Pension Plan totaled
approximately $7.1 million, $8.3 million and $5.1 million in 2002, 2001 and
2000, respectively.

During 1996, the Company adopted a supplemental executive retirement plan
(SERP), which provides benefits to participants based on average
compensation. The SERP covers certain executives of the Company commencing upon
retirement. The SERP is unfunded at December 31, 2002.

Pension expense for the Pension Plan and the SERP includes the following
components for the years ended December 31, 2002, 2001 and 2000 (in thousands):

|                                              |  |      |         |      |  |      |        |   |  |   |        |  
|--------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                              |  | 2002 |         | 2001 |  | 2000
|                                              |  |      |         |      |  |     
|Service cost of benefits earned               |  | $    | 4,179   |      |  | $    | 4,016  |   |  | $ | 3,628  |  
|Interest cost on projected benefit obligation |  |      | 5,070   |      |  |      | 4,632  |   |  |   | 4,422  |  
|Actual loss on plan assets                    |  |      | 11,340  |      |  |      | 310    |   |  |   | 844    |  
|Net amortization and deferral                 |  |      | (15,789 | )    |  |      | (5,234 | ) |  |   | (5,781 | )
|                                              |  |      |         |      |  |      |        |   |  |   |        |  
|Net pension expense                           |  | $    | 4,800   |      |  | $    | 3,724  |   |  | $ | 3,113  |  
|                                              |  |      |         |      |  |      |        |   |  |   |        |  

The table below represents a reconciliation of the funded status of the
SERP and the Pension Plan to (accrued) prepaid pension cost as of December 31,
2002 and 2001 (in thousands):

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|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |        |  
|----------------------------------------------------------------------------- | ------------------------------------------------- | -------------------------- | ------ | ----- | ---- | ------------ | ------ | ----- | ---- | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | -
|                                                                              |                                                   |                            |        | SERP  |      | Pension Plan
|                                                                              |                                                   |                            |        |       |      |             
|                                                                              |                                                   |                            |        | 2002  |      | 2001         |        | 2002  |      | 2001
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |     
|Change in benefit obligation:                                                 |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |       
|                                                                              | Projected benefit obligation at end of prior year |                            | $      | 3,790 |      |              | $      | 3,450 |      |      | $       | 63,657 |         |   | $      | 59,236 |       
|                                                                              |                                                   | Service cost               |        |       | 148  |              |        |       | 138  |      |         |        | 4,031   |   |        |        | 3,878  |  
|                                                                              |                                                   | Interest cost              |        |       | 271  |              |        |       | 254  |      |         |        | 4,799   |   |        |        | 4,378  |  
|                                                                              |                                                   | Actuarial loss (gain)      |        |       | 650  |              |        |       | (209 | )    |         |        | 8,708   |   |        |        | (351   | )
|                                                                              |                                                   | Plan amendments            |        |       | (123 | )            |        |       | 157  |      |         |        | 583     |   |        |        | 91     |  
|                                                                              |                                                   | Benefits paid              |        |       |     |              |        |       |     |      |         |        | (3,937  | ) |        |        | (3,575 | )
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |       
|                                                                              | Projected benefit obligation at end of year       |                            |        | 4,736 |      |              |        | 3,790 |      |      |         | 77,841 |         |   |        | 63,657 |       
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |       
|Change in plan assets:                                                        |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |       
|                                                                              | Fair value of plan assets at end of prior year    |                            |        |      |      |              |        |      |      |      |         | 60,495 |         |   |        | 56,068 |       
|                                                                              |                                                   | Actual loss on plan assets |        |       |     |              |        |       |     |      |         |        | (11,340 | ) |        |        | (311   | )
|                                                                              |                                                   | Employer contributions     |        |       |     |              |        |       |     |      |         |        | 7,068   |   |        |        | 8,313  |  
|                                                                              |                                                   | Benefits paid              |        |       |     |              |        |       |     |      |         |        | (3,938  | ) |        |        | (3,575 | )
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |       
|                                                                              | Fair value of plan assets at end of year          |                            |        |      |      |              |        |      |      |      |         | 52,285 |         |   |        | 60,495 |       
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |       
|Funded status of the plans                                                    |                                                   |                            | (4,736 | )     |      |              | (3,790 | )     |      |      | (25,556 | )      |         |   | (3,162 | )     
|Unrecognized transition obligation                                            |                                                   |                            | 1,024  |       |      |              | 1,138  |       |      |      |        |        |         |   |       |       
|Unrecognized prior service cost                                               |                                                   |                            | 18     |       |      |              | 143    |       |      |      | 1,270   |        |         |   | 913    |       
|Unrecognized net loss                                                         |                                                   |                            | 989    |       |      |              | 339    |       |      |      | 39,970  |        |         |   | 15,130 |       
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |       
|(Accrued) prepaid pension cost before additional
minimum liability adjustment |                                                   | $                          | (2,705 | )     |      | $            | (2,170 | )     |      | $    | 15,684  |        |         | $ | 12,881 |       
|                                                                              |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |        |       
|Other
comprehensive loss:                                                     |                                                   |                            |        |       |      |              |        |       |      |      |         |        |         |   |        |       
|(Increase) decrease in additional minimum liability                           |                                                   | $                          | (22    | )     |      | $            | 455    |       |      | $    | (37,178 | )      |         | $ |       |       
|Increase (decrease) in intangible asset                                       |                                                   |                            | 22     |       |      |              | (455   | )     |      |      | 1,270   |        |         |   |       |       
|Other comprehensive loss                                                      |                                                   | $                          |       |       |      | $            |       |       |      | $    | 35,908  |        |         | $ |       |       

In accordance with SFAS No. 87, the Company has recorded an additional
minimum pension liability related to its Pension Plan and SERP plan
representing the excess of unfunded accumulated benefit obligations over
previously recorded pension liabilities. The Company recorded an additional
minimum liability of $37.2 million at December 31, 2002. The December 31, 2002
additional minimum liability was offset by an intangible asset of $1.3 million
to the extent of unrecognized prior service cost. The remaining minimum
liability of $35.9 million was recorded as a component of other comprehensive
loss, net of the tax benefit. The cumulative additional minimum liability for
the SERP totaled $653 thousand and $675 thousand at December 31, 2002 and 2001,
respectively, and has been offset by intangible assets to the extent of
previously unrecognized prior service costs and unrecognized transition
obligation.

The determination of
the Companys pension expense and benefit obligation is dependent
on its selection of certain assumptions used by actuaries in
calculating such amounts. Those assumptions include, among others,
the weighted average discount rate, the weighted average expected
rate of return on plan assets and the weighted average rate of
compensation increase. Following is a summary of the significant
assumptions used to determine net periodic pension expense and the
projected benefit obligations:

|                                                        |  |              |      |      |  |  |      |  
|------------------------------------------------------- |  | ------------ | ---- | ---- |  |  | ---- | -
|                                                        |  | December 31,
|                                                        |  |             
|                                                        |  | 2002         |      | 2001
|                                                        |  |              |      |     
|Weighted average discount rate                          |  |              | 6.75 | %    |  |  | 7.50 | %
|Weighted average expected rate
of return on plan assets |  |              | 9.00 | %    |  |  | 9.50 | %
|Weighted average rate of compensation increase          |  |              | 3.00 | %    |  |  | 3.00 | %

In developing the
weighted average discount rate, the Company evaluated input from its
actuaries, including reviewing the rating and maturity of long-term
bonds that receive one of the two highest ratings given by a
recognized rating agency. The discount rate, determined on this
basis, was lowered from 7.50% at December 31, 2001 to 6.75% at
December 31, 2002. A .25% change in the discount rate would
result in a change in the additional minimum pension liability of
approximately $2.2 million. Based on analysis of the rating and
maturity of the long-term bonds and the input from the Companys
actuaries, the Company believes that a discount rate of 6.75% is
reasonable.  Future actual pension expense and benefit obligation
will depend on future investment performance, changes in future
discount rates and various other factors related to populations
participating in the Companys pension plans.

In developing the Companys expected
long-term rate of return, the Company evaluated such criteria as
return expectation by asset class and long-term inflation
assumptions. The Companys expected long-term rate of return is
based on an asset allocation assumption of 80% equity and 20% fixed
income. The Company regularly reviews its asset allocation and
periodically rebalances its investments to its targeted allocation
when considered appropriate. As a result of this analysis, the
Company lowered the expected rate of return from 9.5% at
December 31, 2001 to 9.0% at December 31, 2002. The actual
value of the Pension Plan assets decreased from approximately
$60.5 million to approximately $52.3 million as a result of
the recent market downturn, however, the Company continues to believe
that 9.0% is a reasonable long-term rate of return. The Company will
continue to evaluate its actuarial assumptions, including its
expected rate of return, at least annually, and will adjust as
necessary.

Other Postretirement Benefits

The Company provides postretirement medical benefits at certain of its
subsidiaries. The Company accounts for these postretirement medical benefits in
accordance with SFAS No. 106, Employers Accounting for Postretirement
Benefits Other than Pensions.

Net periodic postretirement benefit cost for the years ended December 31,
2002, 2001 and 2000 included the following components (in thousands):

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|                                                               |  |      |     |      |  |      |     |  |  |   |     | 
|-------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                               |  | 2002 |     | 2001 |  | 2000
|                                                               |  |      |     |      |  |     
|Service cost of benefits earned                                |  | $    | 89  |      |  | $    | 103 |  |  | $ | 108 | 
|Interest cost on accumulated postretirement benefit
obligation |  |      | 459 |      |  |      | 404 |  |  |   | 389 | 
|                                                               |  |      |     |      |  |      |     |  |  |   |     | 
|Net periodic postretirement benefit cost                       |  | $    | 548 |      |  | $    | 507 |  |  | $ | 497 | 
|                                                               |  |      |     |      |  |      |     |  |  |   |     | 

Postretirement benefits totaling $695 thousand, $650 thousand and $683
thousand were paid during 2002, 2001 and 2000, respectively.

The accrued postretirement benefit cost as of December 31, 2002 and 2001
consists of the following (in thousands):

|                              |                                                   |                |        |       |      |      |        |       |       |  
|----------------------------- | ------------------------------------------------- | -------------- | ------ | ----- | ---- | ---- | ------ | ----- | ----- | -
|                              |                                                   |                |        | 2002  |      | 2001
|                              |                                                   |                |        |       |      |     
|Change in benefit obligation: |                                                   |                |        |       |      |      |        |      
|                              | Projected benefit obligation at end of prior year |                | $      | 6,248 |      |      | $      | 5,234 |      
|                              |                                                   | Service cost   |        |       | 89   |      |        |       | 103   |  
|                              |                                                   | Interest cost  |        |       | 459  |      |        |       | 404   |  
|                              |                                                   | Actuarial loss |        |       | 779  |      |        |       | 1,017 |  
|                              |                                                   | Acquisition    |        |       |     |      |        |       | 140   |  
|                              |                                                   | Benefits paid  |        |       | (695 | )    |        |       | (650  | )
|                              |                                                   |                |        |       |      |      |        |      
|                              | Projected benefit obligation at end of year       |                | $      | 6,880 |      |      | $      | 6,248 |      
|                              |                                                   |                |        |       |      |      |        |       |      
|Funded status                 |                                                   | $              | (6,880 | )     |      | $    | (6,248 | )    
|Unrecognized net loss         |                                                   |                | 2,688  |       |      |      | 1,954  |      
|                              |                                                   |                |        |       |      |      |        |      
|Net amount recognized         |                                                   | $              | (4,192 | )     |      | $    | (4,294 | )    
|                              |                                                   |                |        |       |      |      |        |       |      

The accumulated postretirement benefit obligations at December 31, 2002
and 2001 were determined using a weighted average discount rate of 6.75% and
7.5%, respectively. The rate of increase in the costs of covered health care
benefits is assumed to be 8.5% in 2002, decreasing 0.5% each year to 4.5% by
the year 2010. Increasing the assumed health care costs trend rate by one
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 2002 by approximately $811 thousand and would
increase net periodic postretirement benefit cost by approximately $71 thousand
for the year ended December 31, 2002.

11. Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the use of the liability method
of accounting for deferred income taxes.

The (benefit) provision for income taxes for the years ended December 31,
2002, 2001 and 2000 consisted of the following (in thousands):

|         |         |   |         |         |      |   |         |         |   |   |       |       | 
|-------- | ------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ----- | ----- | 
|         |         |   | 2002    |         | 2001 |   | 2000   
|         |         |   |         |         |      |   |        
|Current: |         |   |         |         |      |   |         |         |   |   |       |      
|         | Federal |   | $       | (17,624 | )    |   | $       | (24,418 | ) |   | $     | 2,650 | 
|         | State   |   |         | 780     |      |   |         | 1,094   |   |   |       | 3,056 | 
|         |         |   |         |         |      |   |         |         |   |   |       |      
|         |         |   | (16,844 | )       |      |   | (23,324 | )       |   |   | 5,706 |      
|Deferred |         |   | 7,221   |         |      |   | 15,811  |         |   |   | (221  | )    
|         |         |   |         |         |      |   |         |         |   |   |       |      
|         |         | $ | (9,623  | )       |      | $ | (7,513  | )       |   | $ | 5,485 |      
|         |         |   |         |         |      |   |         |         |   |   |       |       | 

The principal differences between the federal statutory tax rate and the
provision for income taxes for the years ended December 31, 2002, 2001 and 2000
are as follows:

|                                        |  |      |       |      |  |      |       |    |  |  |      |  
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ---- | -
|                                        |  | 2002 |       | 2001 |  | 2000
|                                        |  |      |       |      |  |     
|Federal statutory tax rate              |  |      | (35.0 | )%   |  |      | (35.0 | )% |  |  | 35.0 | %
|State taxes, net of federal tax benefit |  |      | (2.9  | )    |  |      | (2.4  | )  |  |  | 2.4  |  
|Other                                   |  |      | 3.3   |      |  |      | 4.3   |    |  |  | 2.8  |  
|                                        |  |      |       |      |  |      |       |    |  |  |      |  
|Effective tax rate                      |  |      | (34.6 | )%   |  |      | (33.1 | )% |  |  | 40.2 | %
|                                        |  |      |       |      |  |      |       |    |  |  |      |  

Significant components of the Companys deferred income tax assets and
liabilities as of December 31, 2002 and 2001 are summarized as follows (in
thousands):

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|                                 |                                            |                                       |         |         |         |      |         |         |         |  
|-------------------------------- | ------------------------------------------ | ------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | -
|                                 |                                            |                                       |         | 2002    |         | 2001
|                                 |                                            |                                       |         |         |         |     
|Deferred income tax assets:      |                                            |                                       |         |         |         |      |         |        
|                                 | Deferred employee benefits                 |                                       | $       | 169     |         |      | $       | 1,078   |        
|                                 | Postretirement benefits other than pension |                                       |         | 659     |         |      |         | 810     |        
|                                 | Postemployment benefits                    |                                       |         | 9,181   |         |      |         |        |        
|                                 | Accounts receivable                        |                                       |         | 1,180   |         |      |         | 554     |        
|                                 | Insurance                                  |                                       |         | 1,545   |         |      |         | 1,259   |        
|                                 | Tax loss carryforwards and credits         |                                       |         | 13,792  |         |      |         | 11,934  |        
|                                 | Inventories                                |                                       |         | 2,377   |         |      |         | 2,261   |        
|                                 | Other                                      |                                       |         | 3,254   |         |      |         | 3,348   |        
|                                 |                                            |                                       |         |         |         |      |         |        
|                                 |                                            | Total deferred income tax assets      |         |         | 32,157  |      |         |         | 21,244  |  
|                                 |                                            |                                       |         |         |         |      |         |        
|Deferred income tax liabilities: |                                            |                                       |         |         |         |      |         |        
|                                 | Depreciation and amortization              |                                       |         | (78,171 | )       |      |         | (69,018 | )      
|                                 | Asset revaluation                          |                                       |         | (3,846  | )       |      |         | (3,846  | )      
|                                 | Postemployment benefits                    |                                       |         |        |         |      |         | (5,060  | )      
|                                 | Losses on contractual sales commitments    |                                       |         | (4,446  | )       |      |         | (4,244  | )      
|                                 | Other                                      |                                       |         | (781    | )       |      |         | (42     | )      
|                                 |                                            |                                       |         |         |         |      |         |        
|                                 |                                            | Total deferred income tax liabilities |         |         | (87,244 | )    |         |         | (82,210 | )
|                                 |                                            |                                       |         |         |         |      |         |        
|Valuation allowance              |                                            |                                       | (5,543  | )       |         |      | (5,794  | )      
|                                 |                                            |                                       |         |         |         |      |         |        
|                                 |                                            | $                                     | (60,630 | )       |         | $    | (66,760 | )      
|                                 |                                            |                                       |         |         |         |      |         |         |        

At December 31, 2002, the Company has state net operating losses of $11.0
million which will expire in varying amounts between 2005 and 2022. The Company
has a valuation allowance of $3.3 million at December 31, 2002 for estimated
future impairment related to the state net operating losses. The Company also
has state tax credit carryforwards of approximately $2.8 million which will
expire in varying amounts between 2004 and 2017. The Company recorded a
valuation allowance of $2.3 million and $2.4 million at December 31, 2002 and
2001, respectively for estimated future impairment related to the state tax
credit carryforwards.

12. Quarterly Financial Data (Unaudited)

The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share data):

|      |                                        |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|----- | -------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|      |                                        |  | First   |         | Second  |  | Third   |         | Fourth 
|      |                                        |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|      |                                        |  |         |         |         |  |         |         |        
|2002: |                                        |  |         |         |         |  |         |         |         |  |   |         |   |  |   |        
|      | Sales                                  |  | $       | 222,163 |         |  | $       | 233,220 |         |  | $ | 240,016 |   |  | $ | 254,527 |  
|      | Gross profit(1)                        |  |         | 56,429  |         |  |         | 58,950  |         |  |   | 52,682  |   |  |   | 57,820  |  
|      | Net income (loss)                      |  |         | 499     |         |  |         | (581    | )       |  |   | (4,489  | ) |  |   | (13,349 | )
|      | Diluted income (loss) per common share |  | $       | 0.02    |         |  | $       | (0.02   | )       |  | $ | (0.16   | ) |  | $ | (0.48   | )
|2001: |                                        |  |         |         |         |  |         |         |         |  |   |         |   |  |   |        
|      | Sales                                  |  | $       | 233,088 |         |  | $       | 229,759 |         |  | $ | 234,851 |   |  | $ | 215,988 |  
|      | Gross profit                           |  |         | 54,681  |         |  |         | 64,144  |         |  |   | 62,044  |   |  |   | 52,645  |  
|      | Net (loss) income                      |  |         | (10,826 | )       |  |         | 376     |         |  |   | 955     |   |  |   | (5,107  | )
|      | Diluted (loss) income per common share |  | $       | (0.39   | )       |  | $       | 0.01    |         |  | $ | 0.03    |   |  | $ | (0.18   | )



| | (1) |  | Quarterly results, as reported in previously filed Form
10-Qs, are adjusted to reflect the reclassification of losses on
fixed asset disposals from other expense to cost of sales. The
amounts reclassified were $254 thousand, $68 thousand and $12
thousand for the first, second and third quarters, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13. Guarantor Condensed Consolidating Financial Statements

These condensed consolidating financial statements reflect Caraustar
Industries, Inc. and its Subsidiary Guarantors, which consist of all of the
Companys wholly-owned subsidiaries other than foreign subsidiaries and two
domestic subsidiaries that are not wholly-owned. These nonguarantor
subsidiaries are herein referred to as Nonguarantor Subsidiaries. Separate
financial statements of the Subsidiary Guarantors are not presented because the
subsidiary guarantees are joint and several and full and unconditional and the
Company believes that the condensed consolidating financial statements
presented are more meaningful in understanding the financial position of the
Subsidiary Guarantors.

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CONDENSED CONSOLIDATING BALANCE SHEET

|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |          |  
|--------------------------------------- | ------------------------------------ | ----------------------------------- | ------- | ----------------------- | ------- | ------------ | ------- | ------------ | -------- | ------------ | ------ | ------------ | ------- | - | -------- | -------- | ---- | - | ------- | ------- | -------- | -
|                                        |                                      |                                     |         | As of December 31, 2002
|                                        |                                      |                                     |         |                        
|                                        |                                      |                                     |         |                         |         |              |         | Guarantor    |          | Nonguarantor |        |              |         |   |          |          |      |  
|                                        |                                      |                                     |         | Parent                  |         | Subsidiaries |         | Subsidiaries |          | Eliminations |        | Consolidated
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |             
|                                        |                                      |                                     |         | (in thousands)         
|ASSETS                                 
|CURRENT ASSETS:                         |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |        
|                                        | Cash and cash equivalents            |                                     | $       | 33,544                  |         |              | $       |             |          |              | $      | 770          |         |   | $        |         |      |   | $       | 34,314  |         
|                                        | Intercompany funding                 |                                     |         | 80,940                  |         |              |         | (71,516      | )        |              |        | (9,424       | )       |   |          |         |      |   |         |        |         
|                                        | Receivables, net of allowances       |                                     |         | 514                     |         |              |         | 99,977       |          |              |        | 5,658        |         |   |          |         |      |   |         | 106,149 |         
|                                        | Intercompany accounts receivable     |                                     |         |                        |         |              |         | 459          |          |              |        | 135          |         |   |          | (594     | )    |   |         |        |         
|                                        | Inventories                          |                                     |         |                        |         |              |         | 102,698      |          |              |        | 4,946        |         |   |          |         |      |   |         | 107,644 |         
|                                        | Refundable income taxes              |                                     |         | 14,578                  |         |              |         | 149          |          |              |        | 199          |         |   |          |         |      |   |         | 14,926  |         
|                                        | Other current assets                 |                                     |         | 1,934                   |         |              |         | 5,497        |          |              |        | 1,067        |         |   |          |         |      |   |         | 8,498   |         
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | Total current assets                |         |                         | 131,510 |              |         |              | 137,264  |              |        |              | 3,351   |   |          |          | (594 | ) |         |         | 271,531  |  
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|PROPERTY, PLANT, AND EQUIPMENT          |                                      |                                     | 11,660  |                         |         |              | 782,734 |              |          |              | 29,265 |              |         |   |         |          |      |   | 823,659 |        
|                                        |                                      | Less accumulated depreciation       |         |                         | (6,220  | )            |         |              | (357,259 | )            |        |              | (16,785 | ) |          |          |     |   |         |         | (380,264 | )
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | Property, plant, and equipment, net |         |                         | 5,440   |              |         |              | 425,475  |              |        |              | 12,480  |   |          |          |     |   |         |         | 443,395  |  
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |                                      |                                     | 594,464 |                         |         |              | 129,849 |              |          |              |       |              |         |   | (724,313 | )        |      |   |        |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|GOODWILL, net                           |                                      |                                     |        |                         |         |              | 177,578 |              |          |              | 2,967  |              |         |   |         |          |      |   | 180,545 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |                                      |                                     | 52,130  |                         |         |              | 700     |              |          |              |       |              |         |   |         |          |      |   | 52,830  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|OTHER ASSETS                            |                                      |                                     | 27,479  |                         |         |              | 9,294   |              |          |              | 140    |              |         |   |         |          |      |   | 36,913  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | $                                   | 811,023 |                         |         | $            | 880,160 |              |          | $            | 18,938 |              |         | $ | (724,907 | )        |      | $ | 985,214 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY   
|CURRENT LIABILITIES:                    |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |        
|                                        | Current maturities of debt           |                                     | $       | 70                      |         |              | $       |             |          |              | $      |             |         |   | $        |         |      |   | $       | 70      |         
|                                        | Accounts payable                     |                                     |         | 20,162                  |         |              |         | 36,320       |          |              |        | 3,545        |         |   |          |         |      |   |         | 60,027  |         
|                                        | Accrued liabilities                  |                                     |         | 12,184                  |         |              |         | 43,336       |          |              |        | 2,936        |         |   |          |         |      |   |         | 58,456  |         
|                                        | Intercompany accounts payable        |                                     |         |                        |         |              |         | 135          |          |              |        | 459          |         |   |          | (594     | )    |   |         |        |         
|                                        | Accrued pension                      |                                     |         | 11,279                  |         |              |         |             |          |              |        |             |         |   |          |         |      |   |         | 11,279  |         
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | Total current liabilities           |         |                         | 43,695  |              |         |              | 79,791   |              |        |              | 6,940   |   |          |          | (594 | ) |         |         | 129,832  |  
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|SENIOR CREDIT FACILITY                  |                                      |                                     |        |                         |         |              |        |              |          |              |       |              |         |   |         |          |      |   |        |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|LONG-TERM DEBT, less current maturities |                                      |                                     | 524,515 |                         |         |              | 8,200   |              |          |              |       |              |         |   |         |          |      |   | 532,715 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|DEFERRED INCOME TAXES                   |                                      |                                     | 46,994  |                         |         |              | 12,243  |              |          |              | 1,393  |              |         |   |         |          |      |   | 60,630  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|PENSION LIABILITY                       |                                      |                                     | 13,572  |                         |         |              |        |              |          |              |       |              |         |   |         |          |      |   | 13,572  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|DEFERRED COMPENSATION                   |                                      |                                     | 1,447   |                         |         |              | 53      |              |          |              |       |              |         |   |         |          |      |   | 1,500   |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|OTHER LIABILITIES                       |                                      |                                     |        |                         |         |              | 4,584   |              |          |              |       |              |         |   |         |          |      |   | 4,584   |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|MINORITY INTEREST                       |                                      |                                     |        |                         |         |              |        |              |          |              |       |              |         |   | 700      |          |      |   | 700     |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|SHAREHOLDERS EQUITY                    |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |        
|                                        | Common stock                         |                                     |         | 2,730                   |         |              |         | 897          |          |              |        | 523          |         |   |          | (1,359   | )    |   |         | 2,791   |         
|                                        | Additional paid-in capital           |                                     |         | 207,891                 |         |              |         | 600,379      |          |              |        | 7,922        |         |   |          | (633,968 | )    |   |         | 182,224 |         
|                                        | Retained (deficit) earnings          |                                     |         | (7,508                  | )       |              |         | 174,013      |          |              |        | 2,747        |         |   |          | (89,686  | )    |   |         | 79,566  |         
|                                        | Accumulated other comprehensive loss |                                     |         | (22,313                 | )       |              |         |             |          |              |        | (587         | )       |   |          |         |      |   |         | (22,900 | )       
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      |                                     | 180,800 |                         |         |              | 775,289 |              |          |              | 10,605 |              |         |   | (725,013 | )        |      |   | 241,681 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | $                                   | 811,023 |                         |         | $            | 880,160 |              |          | $            | 18,938 |              |         | $ | (724,907 | )        |      | $ | 985,214 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         

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CONDENSED CONSOLIDATING BALANCE SHEET

|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |          |  
|--------------------------------------- | ------------------------------------ | ----------------------------------- | ------- | ----------------------- | ------- | ------------ | ------- | ------------ | -------- | ------------ | ------ | ------------ | ------- | - | -------- | -------- | ---- | - | ------- | ------- | -------- | -
|                                        |                                      |                                     |         | As of December 31, 2001
|                                        |                                      |                                     |         |                        
|                                        |                                      |                                     |         |                         |         |              |         | Guarantor    |          | Nonguarantor |        |              |         |   |          |          |      |  
|                                        |                                      |                                     |         | Parent                  |         | Subsidiaries |         | Subsidiaries |          | Eliminations |        | Consolidated
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |             
|                                        |                                      |                                     |         | (in thousands)         
|ASSETS                                 
|CURRENT ASSETS:                         |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |        
|                                        | Cash and cash equivalents            |                                     | $       | 63,277                  |         |              | $       | 432          |          |              | $      | 535          |         |   | $        |         |      |   | $       | 64,244  |         
|                                        | Intercompany funding                 |                                     |         | 139,496                 |         |              |         | (132,948     | )        |              |        | (6,548       | )       |   |          |         |      |   |         |        |         
|                                        | Receivables, net of allowances       |                                     |         | 1,817                   |         |              |         | 81,669       |          |              |        | 2,811        |         |   |          |         |      |   |         | 86,297  |         
|                                        | Intercompany accounts receivable     |                                     |         |                        |         |              |         | 270          |          |              |        | 288          |         |   |          | (558     | )    |   |         |        |         
|                                        | Inventories                          |                                     |         |                        |         |              |         | 98,063       |          |              |        | 3,760        |         |   |          |         |      |   |         | 101,823 |         
|                                        | Refundable income taxes              |                                     |         | 17,689                  |         |              |         | 140          |          |              |        | 120          |         |   |          |         |      |   |         | 17,949  |         
|                                        | Prepaid pension                      |                                     |         | 10,036                  |         |              |         |             |          |              |        |             |         |   |          |         |      |   |         | 10,036  |         
|                                        | Other current assets                 |                                     |         | 2,132                   |         |              |         | 3,648        |          |              |        | 640          |         |   |          |         |      |   |         | 6,420   |         
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | Total current assets                |         |                         | 234,447 |              |         |              | 51,274   |              |        |              | 1,606   |   |          |          | (558 | ) |         |         | 286,769  |  
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|PROPERTY, PLANT, AND EQUIPMENT          |                                      |                                     | 9,830   |                         |         |              | 753,133 |              |          |              | 25,401 |              |         |   |         |          |      |   | 788,364 |        
|                                        |                                      | Less accumulated depreciation       |         |                         | (4,523  | )            |         |              | (318,010 | )            |        |              | (15,455 | ) |          |          |     |   |         |         | (337,988 | )
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | Property, plant, and equipment, net |         |                         | 5,307   |              |         |              | 435,123  |              |        |              | 9,946   |   |          |          |     |   |         |         | 450,376  |  
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |                                      |                                     | 522,958 |                         |         |              | 126,774 |              |          |              |       |              |         |   | (649,732 | )        |      |   |        |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|GOODWILL, net                           |                                      |                                     |        |                         |         |              | 145,515 |              |          |              | 950    |              |         |   |         |          |      |   | 146,465 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |                                      |                                     | 60,134  |                         |         |              | 2,151   |              |          |              |       |              |         |   |         |          |      |   | 62,285  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|OTHER ASSETS                            |                                      |                                     | 12,289  |                         |         |              | 2,754   |              |          |              | 43     |              |         |   |         |          |      |   | 15,086  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | $                                   | 835,135 |                         |         | $            | 763,591 |              |          | $            | 12,545 |              |         | $ | (650,290 | )        |      | $ | 960,981 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY   
|CURRENT LIABILITIES:                    |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |        
|                                        | Current maturities of debt           |                                     | $       |                        |         |              | $       | 48           |          |              | $      |             |         |   | $        |         |      |   | $       | 48      |         
|                                        | Accounts payable                     |                                     |         | 16,861                  |         |              |         | 32,866       |          |              |        | 2,406        |         |   |          |         |      |   |         | 52,133  |         
|                                        | Accrued liabilities                  |                                     |         | 8,371                   |         |              |         | 28,596       |          |              |        | 782          |         |   |          |         |      |   |         | 37,749  |         
|                                        | Intercompany accounts payable        |                                     |         |                        |         |              |         | 288          |          |              |        | 270          |         |   |          | (558     | )    |   |         |        |         
|                                        | Dividends payable                    |                                     |         | 833                     |         |              |         |             |          |              |        |             |         |   |          |         |      |   |         | 833     |         
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | Total current liabilities           |         |                         | 26,065  |              |         |              | 61,798   |              |        |              | 3,458   |   |          |          | (558 | ) |         |         | 90,763   |  
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|SENIOR CREDIT FACILITY                  |                                      |                                     |        |                         |         |              |        |              |          |              |       |              |         |   |         |          |      |   |        |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|LONG-TERM DEBT, less current maturities |                                      |                                     | 500,491 |                         |         |              | 8,200   |              |          |              |       |              |         |   |         |          |      |   | 508,691 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|DEFERRED INCOME TAXES                   |                                      |                                     | 53,366  |                         |         |              | 12,244  |              |          |              | 1,150  |              |         |   |         |          |      |   | 66,760  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|DEFERRED COMPENSATION                   |                                      |                                     | 1,687   |                         |         |              | 54      |              |          |              |       |              |         |   |         |          |      |   | 1,741   |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|OTHER LIABILITIES                       |                                      |                                     | 8,475   |                         |         |              | 4,037   |              |          |              |       |              |         |   |         |          |      |   | 12,512  |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|MINORITY INTEREST                       |                                      |                                     |        |                         |         |              |        |              |          |              |       |              |         |   | 935      |          |      |   | 935     |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|SHAREHOLDERS EQUITY                    |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |        
|                                        | Common stock                         |                                     |         | 2,738                   |         |              |         | 883          |          |              |        | 142          |         |   |          | (978     | )    |   |         | 2,785   |         
|                                        | Additional paid-in capital           |                                     |         | 207,241                 |         |              |         | 598,597      |          |              |        | 5,227        |         |   |          | (630,949 | )    |   |         | 180,116 |         
|                                        | Retained earnings (deficit)          |                                     |         | 35,072                  |         |              |         | 77,778       |          |              |        | 3,378        |         |   |          | (18,740  | )    |   |         | 97,488  |         
|                                        | Accumulated other comprehensive loss |                                     |         |                        |         |              |         |             |          |              |        | (810         | )       |   |          |         |      |   |         | (810    | )       
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      |                                     | 245,051 |                         |         |              | 677,258 |              |          |              | 7,937  |              |         |   | (650,667 | )        |      |   | 279,579 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         
|                                        |                                      | $                                   | 835,135 |                         |         | $            | 763,591 |              |          | $            | 12,545 |              |         | $ | (650,290 | )        |      | $ | 960,981 |        
|                                        |                                      |                                     |         |                         |         |              |         |              |          |              |        |              |         |   |          |          |      |   |         |         |         

54



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |         | 
|-------------------------------------------------------- | ----------------------- | - | ------------------------------------ | ------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ------ | - | - | -------- | - |  | - | ------- | ------- | 
|                                                         |                         |   | For the Year Ended December 31, 2002
|                                                         |                         |   |                                     
|                                                         |                         |   |                                      |         |              |   | Guarantor    |         | Nonguarantor |   |              |        |   |   |          |   | 
|                                                         |                         |   | Parent                               |         | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |             
|                                                         |                         |   | (in thousands)                      
|SALES                                                    |                         | $ |                                     |         |              | $ | 1,104,507    |         |              | $ | 26,289       |        |   | $ | (180,870 | ) |  | $ | 949,926 |        
|COST OF SALES                                            |                         |   |                                     |         |              |   | 883,751      |         |              |   | 21,164       |        |   |   | (180,870 | ) |  |   | 724,045 |        
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                         | Gross profit            |   |                                      |        |              |   |              | 220,756 |              |   |              | 5,125  |   |   |          |  |  |   |         | 225,881 | 
|FREIGHT COSTS                                            |                         |   |                                     |         |              |   | 55,962       |         |              |   | 1,095        |        |   |   |         |   |  |   | 57,057  |        
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES             |                         |   | 19,192                               |         |              |   | 125,557      |         |              |   | 5,382        |        |   |   |         |   |  |   | 150,131 |        
|RESTRUCTURING COSTS                                      |                         |   |                                     |         |              |   | 12,713       |         |              |   |             |        |   |   |         |   |  |   | 12,713  |        
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                         | Operating (loss) income |   |                                      | (19,192 | )            |   |              | 26,524  |              |   |              | (1,352 | ) |   |          |  |  |   |         | 5,980   | 
|OTHER (EXPENSE) INCOME:                                  |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|Interest expense                                         |                         |   | (37,772                              | )       |              |   | (326         | )       |              |   | (401         | )      |   |   | 384      |   |  |   | (38,115 | )      
|Interest income                                          |                         |   | 2,024                                |         |              |   | 7            |         |              |   | 5            |        |   |   | (384     | ) |  |   | 1,652   |        
|Gain on extinguishment of debt                           |                         |   | 87                                   |         |              |   |             |         |              |   |             |        |   |   |         |   |  |   | 87      |        
|Equity in income (loss) of unconsolidated affiliates     |                         |   | 2,652                                |         |              |   | (164         | )       |              |   |             |        |   |   |         |   |  |   | 2,488   |        
|Other, net                                               |                         |   |                                     |         |              |   | 258          |         |              |   | (128         | )      |   |   |          |   |  |   | 130     |        
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                         |                         |   | (33,009                              | )       |              |   | (225         | )       |              |   | (524         | )      |   |   |         |   |  |   | (33,758 | )      
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES |                         |   | (52,201                              | )       |              |   | 26,299       |         |              |   | (1,876       | )      |   |   |         |   |  |   | (27,778 | )      
|MINORITY INTEREST IN LOSSES                              |                         |   |                                     |         |              |   |             |         |              |   |             |        |   |   | 235      |   |  |   | 235     |        
|BENEFIT FOR INCOME TAXES                                 |                         |   | (9,623                               | )       |              |   |             |         |              |   |             |        |   |   |         |   |  |   | (9,623  | )      
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|NET (LOSS) INCOME                                        |                         | $ | (42,578                              | )       |              | $ | 26,299       |         |              | $ | (1,876       | )      |   | $ | 235      |   |  | $ | (17,920 | )      
|                                                         |                         |   |                                      |         |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        

55



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |         | 
|-------------------------------------------------------- | ----------------------- | - | ------------------------------------ | ------ | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ------ | - | - | -------- | - |  | - | ------- | ------- | 
|                                                         |                         |   | For the Year Ended December 31, 2001
|                                                         |                         |   |                                     
|                                                         |                         |   |                                      |        |              |   | Guarantor    |         | Nonguarantor |   |              |        |   |   |          |   | 
|                                                         |                         |   | Parent                               |        | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |             
|                                                         |                         |   | (in thousands)                      
|SALES                                                    |                         | $ |                                     |        |              | $ | 1,044,442    |         |              | $ | 22,453       |        |   | $ | (153,209 | ) |  | $ | 913,686 |        
|COST OF SALES                                            |                         |   | (7,308                               | )      |              |   | 823,058      |         |              |   | 17,631       |        |   |   | (153,209 | ) |  |   | 680,172 |        
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                         | Gross profit            |   |                                      | 7,308  |              |   |              | 221,384 |              |   |              | 4,822  |   |   |          |  |  |   |         | 233,514 | 
|FREIGHT COSTS                                            |                         |   |                                     |        |              |   | 51,968       |         |              |   | 838          |        |   |   |         |   |  |   | 52,806  |        
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES             |                         |   | 14,386                               |        |              |   | 126,910      |         |              |   | 5,638        |        |   |   |         |   |  |   | 146,934 |        
|RESTRUCTURING COSTS                                      |                         |   |                                     |        |              |   | 7,083        |         |              |   |             |        |   |   |         |   |  |   | 7,083   |        
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                         | Operating (loss) income |   |                                      | (7,078 | )            |   |              | 35,423  |              |   |              | (1,654 | ) |   |          |  |  |   |         | 26,691  | 
|OTHER (EXPENSE) INCOME:                                  |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|Interest expense                                         |                         |   | (40,773                              | )      |              |   | (857         | )       |              |   | (370         | )      |   |   | 847      |   |  |   | (41,153 | )      
|Interest income                                          |                         |   | 1,773                                |        |              |   | 42           |         |              |   | 18           |        |   |   | (847     | ) |  |   | 986     |        
|Loss on extinguishment of debt                           |                         |   | (4,305                               | )      |              |   |             |         |              |   |             |        |   |   |         |   |  |   | (4,305  | )      
|Equity in loss of unconsolidated affiliates              |                         |   | (2,525                               | )      |              |   | (85          | )       |              |   |             |        |   |   |         |   |  |   | (2,610  | )      
|Other, net                                               |                         |   |                                     |        |              |   | (1,836       | )       |              |   | (68          | )      |   |   |         |   |  |   | (1,904  | )      
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                         |                         |   | (45,830                              | )      |              |   | (2,736       | )       |              |   | (420         | )      |   |   |         |   |  |   | (48,986 | )      
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES |                         |   | (52,908                              | )      |              |   | 32,687       |         |              |   | (2,074       | )      |   |   |         |   |  |   | (22,295 | )      
|MINORITY INTEREST IN LOSSES                              |                         |   |                                     |        |              |   |             |         |              |   |             |        |   |   | 180      |   |  |   | 180     |        
|BENEFIT FOR INCOME TAXES                                 |                         |   | (7,513                               | )      |              |   |             |         |              |   |             |        |   |   |         |   |  |   | (7,513  | )      
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|NET (LOSS) INCOME                                        |                         | $ | (45,395                              | )      |              | $ | 32,687       |         |              | $ | (2,074       | )      |   | $ | 180      |   |  | $ | (14,602 | )      
|                                                         |                         |   |                                      |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        

56



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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |         |  
|---------------------------------------------------- | -------------------------------------------------------- | - | ------------------------------------ | ------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ---- | - | - | - | - |  | - | ------- | ------- | -
|                                                     |                                                          |   | For the Year Ended December 31, 2002
|                                                     |                                                          |   |                                     
|                                                     |                                                          |   |                                      |         |              |   | Guarantor    |         | Nonguarantor |   |              |      |   |   |   |   | 
|                                                     |                                                          |   | Parent                               |         | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |             
|                                                     |                                                          |   | (in thousands)                      
|Net cash (used in) provided by operating activities  |                                                          | $ | (24,519                              | )       |              | $ | 86,505       |         |              | $ | 1,214        |      |   | $ |  |   |  | $ | 63,200  |        
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|Investing activities:                                |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|                                                     | Purchases of property, plant and equipment               |   |                                      | (1,687  | )            |   |              | (20,177 | )            |   |              | (678 | ) |   |   |  |  |   |         | (22,542 | )
|                                                     | Acquisitions of businesses, net of cash acquired         |   |                                      |        |              |   |              | (69,432 | )            |   |              | (115 | ) |   |   |  |  |   |         | (69,547 | )
|                                                     | Proceeds from disposal of property, plant, and
equipment |   |                                      |        |              |   |              | 2,145   |              |   |              |     |   |   |   |  |  |   |         | 2,145   |  
|                                                     | Investment in unconsolidated affiliates                  |   |                                      |        |              |   |              | (200    | )            |   |              |     |   |   |   |  |  |   |         | (200    | )
|                                                     | Other                                                    |   |                                      | (819    | )            |   |              | 775     |              |   |              | (186 | ) |   |   |  |  |   |         | (230    | )
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|Net cash used in investing activities                |                                                          |   | (2,506                               | )       |              |   | (86,889      | )       |              |   | (979         | )    |   |   |  |   |  |   | (90,374 | )      
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|Financing activities:                                |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|                                                     | Proceeds from senior credit facility                     |   |                                      | 38,000  |              |   |              |        |              |   |              |     |   |   |   |  |  |   |         | 38,000  |  
|                                                     | Repayments of senior credit facility                     |   |                                      | (38,000 | )            |   |              |        |              |   |              |     |   |   |   |  |  |   |         | (38,000 | )
|                                                     | Repayments
of other long and short-term debt             |   |                                      | (6,645  | )            |   |              | (48     | )            |   |              |     |   |   |   |  |  |   |         | (6,693  | )
|                                                     | Swap agreement unwind proceeds                           |   |                                      | 6,163   |              |   |              |        |              |   |              |     |   |   |   |  |  |   |         | 6,163   |  
|                                                     | Dividends paid                                           |   |                                      | (833    | )            |   |              |        |              |   |              |     |   |   |   |  |  |   |         | (833    | )
|                                                     | Proceeds from issuances of stock                         |   |                                      | 135     |              |   |              |        |              |   |              |     |   |   |   |  |  |   |         | 135     |  
|                                                     | Other                                                    |   |                                      | (1,528  | )            |   |              |        |              |   |              |     |   |   |   |  |  |   |         | (1,528  | )
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|Net cash used in financing activities                |                                                          |   | (2,708                               | )       |              |   | (48          | )       |              |   |             |      |   |   |  |   |  |   | (2,756  | )      
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|Net (decrease) increase in cash and cash equivalents |                                                          |   | (29,733                              | )       |              |   | (432         | )       |              |   | 235          |      |   |   |  |   |  |   | (29,930 | )      
|Cash and cash equivalents at beginning of period     |                                                          |   | 63,277                               |         |              |   | 432          |         |              |   | 535          |      |   |   |  |   |  |   | 64,244  |        
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        
|Cash and cash equivalents at end of period           |                                                          | $ | 33,544                               |         |              | $ |             |         |              | $ | 770          |      |   | $ |  |   |  | $ | 34,314  |        
|                                                     |                                                          |   |                                      |         |              |   |              |         |              |   |              |      |   |   |   |   |  |   |         |        

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |          |  
|---------------------------------------------------- | ------------------------------------------------------------- | - | ------------------------------------ | -------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ------ | - | - | - | - |  | - | ------- | -------- | -
|                                                     |                                                               |   | For the Year Ended December 31, 2001
|                                                     |                                                               |   |                                     
|                                                     |                                                               |   |                                      |          |              |   | Guarantor    |         | Nonguarantor |   |              |        |   |   |   |   | 
|                                                     |                                                               |   | Parent                               |          | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |             
|                                                     |                                                               |   | (in thousands)                      
|Net cash provided by operating activities            |                                                               | $ | 30,807                               |          |              | $ | 26,011       |         |              | $ | 385          |        |   | $ |  |   |  | $ | 57,203  |         
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|Investing activities:                                |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|                                                     | Purchases of property, plant and equipment                    |   |                                      | (1,471   | )            |   |              | (25,399 | )            |   |              | (1,189 | ) |   |   |  |  |   |         | (28,059  | )
|                                                     | Acquisitions of businesses, net of cash acquired              |   |                                      |         |              |   |              | (34     | )            |   |              |       |   |   |   |  |  |   |         | (34      | )
|                                                     | Proceeds
from disposal of property, plant, and equipment, net |   |                                      |         |              |   |              | 267     |              |   |              |       |   |   |   |  |  |   |         | 267      |  
|                                                     | Other                                                         |   |                                      | 74       |              |   |              | 49      |              |   |              | 313    |   |   |   |  |  |   |         | 436      |  
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|Net cash used in investing activities                |                                                               |   | (1,397                               | )        |              |   | (25,117      | )       |              |   | (876         | )      |   |   |  |   |  |   | (27,390 | )       
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|Financing activities:                                |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|                                                     | Proceeds from note issuance                                   |   |                                      | 291,200  |              |   |              |        |              |   |              |       |   |   |   |  |  |   |         | 291,200  |  
|                                                     | Proceeds from senior credit facility                          |   |                                      | 18,000   |              |   |              |        |              |   |              |       |   |   |   |  |  |   |         | 18,000   |  
|                                                     | Repayments of senior credit facility                          |   |                                      | (212,000 | )            |   |              |        |              |   |              |       |   |   |   |  |  |   |         | (212,000 | )
|                                                     | Repayments of other long and short term debt                 |   |                                      | (66,277  | )            |   |              | (833    | )            |   |              |       |   |   |   |  |  |   |         | (67,110  | )
|                                                     | Swap agreement unwind proceeds                                |   |                                      | 9,093    |              |   |              |        |              |   |              |       |   |   |   |  |  |   |         | 9,093    |  
|                                                     | 7.74% senior notes prepayment penalty                         |   |                                      | (3,565   | )            |   |              |        |              |   |              |       |   |   |   |  |  |   |         | (3,565   | )
|                                                     | Dividends paid                                                |   |                                      | (8,870   | )            |   |              |        |              |   |              |       |   |   |   |  |  |   |         | (8,870   | )
|                                                     | Other                                                         |   |                                      | (1,052   | )            |   |              | (165    | )            |   |              |       |   |   |   |  |  |   |         | (1,217   | )
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|Net cash provided by (used in) financing activities  |                                                               |   | 26,529                               |          |              |   | (998         | )       |              |   |             |        |   |   |  |   |  |   | 25,531  |         
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|Net increase (decrease) in cash and cash equivalents |                                                               |   | 55,939                               |          |              |   | (104         | )       |              |   | (491         | )      |   |   |  |   |  |   | 55,344  |         
|Cash and cash equivalents at beginning of period     |                                                               |   | 7,338                                |          |              |   | 536          |         |              |   | 1,026        |        |   |   |  |   |  |   | 8,900   |         
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         
|Cash and cash equivalents at end of period           |                                                               | $ | 63,277                               |          |              | $ | 432          |         |              | $ | 535          |        |   | $ |  |   |  | $ | 64,244  |         
|                                                     |                                                               |   |                                      |          |              |   |              |         |              |   |              |        |   |   |   |   |  |   |         |         

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14. Segment Information

The Company operates principally in three business segments organized by
products. The paperboard segment consists of facilities that manufacture 100%
recycled uncoated and clay-coated paperboard and facilities that collect
recycled paper and broker recycled paper and other paper rolls. The tube, core,
and composite container segment is principally made up of facilities that
produce spiral and convolute-wound tubes, cores, and cans. The carton and
custom packaging segment consists of facilities that produce printed and
unprinted folding carton and set-up boxes and facilities that provide contract
manufacturing and contract packaging services. Intersegment sales are recorded
at prices which approximate market prices. Sales to external customers located
in foreign countries accounted for approximately 6.6%, 7.3% and 6.4% of the
Companys sales for 2002, 2001 and 2000, respectively.

Operating income includes all costs and expenses directly related to the
segment involved. Corporate expenses include corporate, general, administrative
and unallocated information systems expenses.

Identifiable assets are accumulated by facility within each business
segment. Corporate assets consist primarily of cash and cash equivalents;
refundable income taxes; property, plant and equipment; and investments in
unconsolidated affiliates.

The following table presents certain business segment information for the
years ended December 31, 2002, 2001 and 2000 (in thousands):

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|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |           | 
|--------------------------------------------------------------------------------- | ----------------------------------- | ----------------- | ------- | ------- | --------- | ---- | ------- | ------- | --------- | - | ------- | ------- | --------- | 
|                                                                                  |                                     |                   |         | 2002    |           | 2001 |         | 2000   
|                                                                                  |                                     |                   |         |         |           |      |         |        
|Sales (aggregate):                                                                |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard                          |                   | $       | 489,775 |           |      | $       | 462,326 |           |   | $       | 566,060 |          
|                                                                                  | Tube, core, and composite container |                   |         | 292,716 |           |      |         | 265,985 |           |   |         | 281,613 |          
|                                                                                  | Carton and custom packaging         |                   |         | 321,386 |           |      |         | 325,743 |           |   |         | 309,118 |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Total             |         | $       | 1,103,877 |      |         | $       | 1,054,054 |   |         | $       | 1,156,791 | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          
|Less sales (intersegment):                                                        |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard                          |                   | $       | 148,766 |           |      | $       | 135,854 |           |   | $       | 136,796 |          
|                                                                                  | Tube, core, and composite container |                   |         | 4,344   |           |      |         | 3,921   |           |   |         | 4,389   |          
|                                                                                  | Carton and custom packaging         |                   |         | 841     |           |      |         | 593     |           |   |         | 991     |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Total             |         | $       | 153,951   |      |         | $       | 140,368   |   |         | $       | 142,176   | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          
|Sales (external customers):                                                       |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard                          |                   | $       | 341,009 |           |      | $       | 326,472 |           |   | $       | 429,264 |          
|                                                                                  | Tube, core, and composite container |                   |         | 288,372 |           |      |         | 262,064 |           |   |         | 277,224 |          
|                                                                                  | Carton and custom packaging         |                   |         | 320,545 |           |      |         | 325,150 |           |   |         | 308,127 |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Total             |         | $       | 949,926   |      |         | $       | 913,686   |   |         | $       | 1,014,615 | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          
|Operating income:                                                                 |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard (A)                      |                   | $       | 12,415  |           |      | $       | 31,418  |           |   | $       | 28,477  |          
|                                                                                  | Tube, core, and composite container |                   |         | 11,579  |           |      |         | 7,051   |           |   |         | 18,483  |          
|                                                                                  | Carton and custom packaging (B)     |                   |         | 1,123   |           |      |         | 2,706   |           |   |         | 8,673   |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     |                   | 25,117  |         |           |      | 41,175  |         |           |   | 55,633  |        
|Corporate expense (C)                                                             |                                     |                   | (19,137 | )       |           |      | (14,484 | )       |           |   | (13,768 | )      
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|Operating income                                                                  |                                     |                   | 5,980   |         |           |      | 26,691  |         |           |   | 41,865  |        
|Interest expense                                                                  |                                     |                   | (38,115 | )       |           |      | (41,153 | )       |           |   | (34,063 | )      
|Interest income                                                                   |                                     |                   | 1,652   |         |           |      | 986     |         |           |   | 412     |        
|Gain (loss) on extinguishment of debt                                             |                                     |                   | 87      |         |           |      | (4,305  | )       |           |   |        |        
|Equity in income (loss) of unconsolidated affiliates                              |                                     |                   | 2,488   |         |           |      | (2,610  | )       |           |   | 6,533   |        
|Other, net                                                                        |                                     |                   | 130     |         |           |      | (1,904  | )       |           |   | (918    | )      
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|(Loss) income before income taxes and minority interest                           |                                     |                   | (27,778 | )       |           |      | (22,295 | )       |           |   | 13,829  |        
|Minority interest in losses (income)                                              |                                     |                   | 235     |         |           |      | 180     |         |           |   | (169    | )      
|(Benefit) provision for income taxes                                              |                                     |                   | (9,623  | )       |           |      | (7,513  | )       |           |   | 5,485   |        
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Net (loss) income |         | $       | (17,920   | )    |         | $       | (14,602   | ) |         | $       | 8,175     | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          
|Identifiable assets:                                                              |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard                          |                   | $       | 410,534 |           |      | $       | 400,035 |           |   | $       | 429,646 |          
|                                                                                  | Tube, core, and composite container |                   |         | 202,441 |           |      |         | 134,462 |           |   |         | 134,069 |          
|                                                                                  | Carton and custom packaging         |                   |         | 236,796 |           |      |         | 252,207 |           |   |         | 275,408 |          
|                                                                                  | Corporate                           |                   |         | 135,443 |           |      |         | 174,277 |           |   |         | 94,974  |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Total             |         | $       | 985,214   |      |         | $       | 960,981   |   |         | $       | 934,097   | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          
|Depreciation and amortization:                                                    |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard                          |                   | $       | 29,272  |           |      | $       | 35,916  |           |   | $       | 36,623  |          
|                                                                                  | Tube, core, and composite container |                   |         | 6,723   |           |      |         | 7,537   |           |   |         | 7,196   |          
|                                                                                  | Carton and custom packaging         |                   |         | 13,456  |           |      |         | 16,827  |           |   |         | 15,531  |          
|                                                                                  | Corporate                           |                   |         | 4,795   |           |      |         | 4,060   |           |   |         | 1,508   |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Total             |         | $       | 54,246    |      |         | $       | 64,340    |   |         | $       | 60,858    | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          
|Purchases of property, plant and equipment, excluding
acquisitions of businesses: |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  | Paperboard                          |                   | $       | 13,992  |           |      | $       | 15,334  |           |   | $       | 28,953  |          
|                                                                                  | Tube, core, and composite container |                   |         | 2,347   |           |      |         | 6,536   |           |   |         | 12,274  |          
|                                                                                  | Carton and custom packaging         |                   |         | 4,516   |           |      |         | 4,718   |           |   |         | 15,495  |          
|                                                                                  | Corporate                           |                   |         | 1,687   |           |      |         | 1,471   |           |   |         | 1,584   |          
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |        
|                                                                                  |                                     | Total             |         | $       | 22,542    |      |         | $       | 28,059    |   |         | $       | 58,306    | 
|                                                                                  |                                     |                   |         |         |           |      |         |         |           |   |         |         |          



---

|(A) |  | Results for 2002 include a charge to operations of $985 thousand related
to the revised estimate of fixed asset disposals at the Camden and Chicago
paperboard mills. Results for 2002 also include a charge to operations of
$9.4 million for restructuring costs related to the closing of the Halifax
Paper Board Co. in Roanoke Rapids, North Carolina ($3.4 million) and the
consolidation of Carolina Converting, Inc. in Fayetteville, North Carolina
into Carolina Component Concepts in Mooresville, North Carolina ($6.0
million). Results for 2001 include a charge to operations of $4.4 million
for restructuring costs related to the closing of the Chicago, Illinois
paperboard mill. Results for 2001 also include a $7.1 million reduction in
reserves related to expiring
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | unfavorable supply contracts at the Sprague paperboard mill. Results for 2000
include charges to operations of $6.9 million and $8.6 million for
restructuring costs related to the closing of the Baltimore, Maryland and
Camden, New Jersey paperboard mills, respectively. These were related to the
paperboard segment and are reflected in the segments operating income. (Note
15)                                                                                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | Results for 2002 include a charge to operations of $2.4 million for
restructuring costs related to the restructuring of the Ashland Carton
Plant. Results for 2001 include a charge to operations of $2.6 million
related to the consolidation of the operations of the Salt Lake City, Utah
carton plant into the Denver, Colorado carton plant. These were related to
the carton and custom packaging segment and are reflected in the segments
operating income. (Note 15)
|   
|(C) |  | Results for 2000 include a nonrecurring charge of $1.3 million related to
the settlement of a dispute over abandoned property.                                                                                                                                                                                                                                                                                                                                                

15. Restructuring and Other Costs

2002 Restructuring Costs

In June 2002 the Company recorded a $985 thousand noncash, pretax
restructuring charge related to the permanent closure of the Companys Camden
and Chicago paperboard mills, which were shut down in 2000 and 2001,
respectively. The $985 thousand charge represents a revised estimate of fixed
asset disposals at these mills. The Chicago mill recorded a $1.5 million
additional provision while the Camden mill overestimated the fixed asset
write-off and recorded a credit of $500 thousand.

In December 2002, the Company initiated a plan to permanently close its Halifax
paperboard mill located in Roanoke Rapids, North Carolina. This mill was idled
in June 2001 and the Company planned to restart it when industry demand
improved. The Company made the 2002 decision to permanently close and
dismantle the mill based on the current and foreseeable conditions of
paperboard demand. In connection with this plan, the Company recorded a pretax
charge to operations of approximately $3.4 million. The $3.4 million charge
included a $3.0 million noncash write-down of assets to estimated net
realizable value and a $370 thousand accrual for other exit costs. As of
December 31, 2002, 2 salaried employees remained at the mill to administer
benefits and manage the dismantling of the mill and marketing the real estate.
No accrual for severance costs was recorded because the plan was not
communicated to the employees until the first quarter of 2003. The remaining
other exit costs are expected to be paid by December 31, 2003. The Company is
currently marketing the property.

In December 2002, the Company initiated a plan to consolidate its Carolina
Converting, Inc. facility in Fayetteville, North Carolina into its Carolina
Component Concepts facility located in Mooresville, North Carolina and recorded
a pretax charge to operations of approximately $6.0 million. The decision to
consolidate these facilities was initiated by the loss of a significant
customer, combined with a significant decline in demand in other specialty
converted products. The $6.0 million charge included a $2.4 million noncash
impairment charge for assets and a $3.6 million accrual for other exit costs. A
substantial portion of the other exit costs is related to a real estate lease
for which no future economic benefit will be derived. No accrual for severance
costs was recorded because the plan was not communicated to the employees until
the first quarter of 2003. The Carolina Converting, Inc. facility will cease
operations in the first quarter of 2003. The other exit costs will be paid
through the end of 2006, the end of the real estate lease. The Company will
complete the exit plan upon fulfilling its obligations under the real estate
lease which will end December 2006.

Also in December 2002, the Company initiated a plan to restructure its
carton plant in Ashland, Ohio to serve a smaller, more focused carton market
and recorded a pretax charge to operations of approximately $2.4 million. The
$2.4 million charge included a noncash impairment charge of $1.2 million for
assets, a $494 thousand accrual for severance and termination benefits for 18
hourly and 8 salaried employees terminated in connection with this plan, as
well as a $688 thousand accrual for other exit costs. The remaining other exit
costs are expected to be paid by December 31, 2003.

2001 Restructuring Costs

In January 2001, the Company initiated a plan to close its paperboard mill
located in Chicago, Illinois and recorded a pretax charge to operations of
approximately $4.4 million. The $4.4 million charge included a $2.2 million
noncash asset impairment write-down of fixed assets to estimated net realizable
value and a $1.2 million accrual for severance and termination benefits for 16
salaried and 59 hourly employees terminated in connection with this plan as
well as a $989 thousand accrual for other exit costs. The remaining other exit
costs are expected to be paid by December 31, 2003. As of December 31, 2002,
one employee remained to assist in the closing of the mill. The Company has
completed the exit plan with the exception of the sale of the property. The
property is being actively

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marketed for sale at a price that is reasonable in relation to its fair
value. The mill closure did not have a material impact on the Companys
operating performance.

In March 2001, the Company initiated a plan to consolidate the operations
of the Salt Lake City, Utah carton plant into the Denver, Colorado carton plant
and recorded a pretax charge to operations of approximately $2.6 million. The
$2.6 million charge included a $1.8 million noncash asset impairment write-down
of fixed assets to estimated net realizable value and a $464 thousand accrual
for severance and termination benefits for 5 salaried and 31 hourly employees
terminated in connection with this plan as well as a $422 thousand accrual for
other exit costs. All exit costs were paid as of December 31, 2001, and the
exit plan was completed.

2000 Restructuring and Other Costs

In February 2000, the Company initiated a plan to close its paperboard
mill located in Baltimore, Maryland and recorded a pretax charge to operations
of approximately $6.9 million. The plan to close the mill was adopted in
conjunction with the Companys ongoing efforts to increase manufacturing
efficiency and reduce costs in its mill system. The $6.9 million charge
included a $5.7 million noncash asset impairment write-down of fixed assets to
estimated net realizable value. The charge also included a $604 thousand
accrual for severance and termination benefits for 21 salaried and 83 hourly
employees terminated in connection with this plan and a $613 thousand accrual
for other exit costs. All exit costs were paid as of December 31, 2000. As of
December 31, 2002, one employee remained to assist in marketing the land and
building. The Company has completed the exit plan with the exception of the
sale of the property. The property is being actively marketed for sale at a
price that is reasonable in relation to its fair value. The mill closure did
not have a material impact on the Companys operations.

In September 2000, the Company initiated a plan to close its paperboard
mill located in Camden, New Jersey and recorded a pretax charge to operations
of approximately $8.6 million. The mill experienced a slowdown in gypsum facing
paper shipments during the third quarter of 2000, and the shut down was
precipitated by the refusal of the Companys largest gypsum facing paper
customer to continue purchasing facing paper under a long-term supply
agreement. The $8.6 million charge included a $7.0 million noncash asset
impairment write-down of fixed assets to estimated net realizable value and a
$558 thousand accrual for severance and termination benefits for 19 salaried
and 46 hourly employees terminated in connection with this plan as well as a
$968 thousand accrual for other exit costs. All exit costs were paid as of June
30, 2002. As of December 31, 2002, no employees remained at the mill. The
Company has completed the exit plan with the exception of the sale of the
property. The property is being actively marketed for sale at a price that is
reasonable in relation to its fair value. The mill closure did not have a
material impact on the Companys operating performance.

In December 2000, the Company recognized a charge of $1.3 million related
to the settlement of a dispute over abandoned property.

The following is a summary of restructuring and other costs and the
restructuring liability for the years ended December 31, 2002, 2001 and 2000:

|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        |  | 
|------------------------------------ | ------------ | - | ---------- |  | ----------- | - | ------------- | ------ | ------------- | - | -------------- | ------ | - | - | ----- | ------ | ------------------- | - | ------ |  | 
|                                     |              |   |            |  |             |   | Severance and |        |               |   |                |        |   |   |       |        |                     |   |       
|                                     |              |   |            |  |             |   | Other         |        |               |   |                |        |   |   |       |        | Total Restructuring
|                                     |              |   | Asset      |  | Termination |   | Other Exit    |        | Restructuring |   | and Impairment
|                                     |              |   | Impairment |  | Benefits    |   | Costs         |        | Liability     |   | Charge        
|                                     |              |   |            |  |             |   |               |        |               |   |               
|2000 charges                         |              | $ | 12,734     |  |             | $ | 1,162         |        |               | $ | 2,881          |        |   | $ | 4,043 |        |                     | $ | 16,777 | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|                                     | Expenditures |   |            |  |             |   |               | (984   | )             |   |                | (2,259 | ) |   |       | (3,243 | )                   |   |        |  | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|Liability balance, December 31, 2000 |              |   |            |  |             | $ | 178           |        |               | $ | 622            |        |   | $ | 800   |        |                     |   |        | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|2001 charges                         |              | $ | 3,987      |  |             | $ | 1,685         |        |               | $ | 1,411          |        |   | $ | 3,096 |        |                     | $ | 7,083  | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|                                     | Expenditures |   |            |  |             |   |               | (1,863 | )             |   |                | (1,567 | ) |   |       | (3,430 | )                   |   |        |  | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|Liability balance, December 31, 2001 |              |   |            |  |             | $ |              |        |               | $ | 466            |        |   | $ | 466   |        |                     |   |        | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|2002 charges                         |              | $ | 7,591      |  |             | $ | 494           |        |               | $ | 4,628          |        |   | $ | 5,122 |        |                     | $ | 12,713 | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|                                     | Expenditures |   |            |  |             |   |               |       |               |   |                | (289   | ) |   |       | (289   | )                   |   |        |  | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 
|Liability balance, December 31, 2002 |              |   |            |  |             | $ | 494           |        |               | $ | 4,805          |        |   | $ | 5,299 |        |                     |   |        | 
|                                     |              |   |            |  |             |   |               |        |               |   |                |        |   |   |       |        |                     |   |        | 

16. Disclosures About Fair Value of Financial Instruments

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The following table sets forth the fair values and carrying amounts of the
Companys significant financial instruments where the carrying amount differs
from the fair value. The carrying amount of cash and cash equivalents,
short-term debt and long-term variable-rate debt approximates fair value. The
fair value of long-term debt is based on quoted market prices (in thousands).

|                                  |  |       |         |           |  |   |         | 
|--------------------------------- |  | ----- | ------- | --------- |  | - | ------- | 
|                                  |  | Fair  |         | Carrying 
|                                  |  | Value |         | Amount(1)
|                                  |  |       |         |          
|9 7/8 % senior subordinated notes |  | $     | 294,975 |           |  | $ | 286,333 | 
|7 1/4 % senior notes              |  |       | 28,420  |           |  |   | 25,745  | 
|7 3/8 % senior notes              |  |       | 191,318 |           |  |   | 195,674 | 
|                                  |  |       |         |           |  |   |         | 
|                                  |  | $     | 514,713 |           |  | $ | 507,752 | 
|                                  |  |       |         |           |  |   |         | 



---

|(1) |  | The carrying amount excludes the $15.1 million adjustment for the fair
value of the interest rate swap agreements discussed in Note 6.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

17. Related Party

The Companys Chairman of the Board of Directors is a shareholder in the
firm of Robinson, Bradshaw & Hinson, P.A., the Companys principal outside
legal counsel which performed services for the company during the last two
years. The amount of fees paid were $1.1 million and $1.9 million for the
years ended December 31, 2002 and 2001.

18. Subsequent Events

In January 2003, the Company effectively unwound $85.0 million of its
$135.0 million interest rate swap agreement related to the 9 7/8% senior
subordinated notes by assigning the Companys rights and obligations under the
swap to one of the Companys lenders under the senior credit facility. In exchange, the Company received approximately
$4.3 million. The Company will accrete this gain into
interest expense over the remaining term of the notes, which will partially
offset the increase in interest expense. The gain will lower the effective
interest rate of the 9 7/8% senior subordinated notes from 9.8% to 9.5%.

Also in January 2003, the Company completed the purchase of its venture
partners 50% of equity of Caraustar Northwest, LLC, located in Tacoma, WA, for
approximately $700 thousand. The Tacoma facility, which manufactures tubes,
cores and edge protectors and performs custom slitting for customers on the
West coast, will become a part of the Industrial & Consumer Products Group.

In February 2003, the Company announced the indefinite idling of one of
two coated recycled paperboard machines at its Rittman, Ohio paperboard mill.
Recently completed upgrades in the Companys mill system will facilitate the
transfer of production from the idled machine to the Companys other mills,
including Rittmans other machine. The Rittman workforce will be indefinitely
reduced by 80 hourly employees, and the Company will recognize a related
expense of approximately $1.2 million.

On March 28, 2003,
the Company completed a sixth amendment to its senior credit facility. This
amendment increased the Company's  maximum permitted leverage ratio to 70.0% for
the fiscal quarters ending September 30, 2003 and December 31, 2003
and 67.5% for each succeeding fiscal quarter, lowered the Company's minimum
fixed charge coverage ratio from 1.50:1.0 for all fiscal quarters to
0.95:1.0 for the fiscal quarter ending March 31, 2003, 0.85:1.0 for
the fiscal quarters ending June 30, 2003 and September 30,
2003 and 1.05:1.0 for the fiscal quarter ending December 31, 2003, lowered the Company's minimum
tangible net worth covenant for all periods on and after the
effective date of the amendment, and lowered the Company's maximum permitted
capital expenditures to $30.0 million per fiscal year. For purposes
of calculating compliance with the leverage ratio and net worth
covenants, this amendment also establishes a maximum of $30.0 million
for aggregate adjustments to other comprehensive loss related to the Company's
defined benefit pension plan. This amendment also increases to $43.0
million our subfacility for the issuance of letters of credit under
the facility, in order to permit the Company to obtain a letter of credit to
replace its Standard Gypsum joint venture guarantee as described
below. Finally, this amendment terminated the quarterly pricing
increase established under the fourth amendment to the facility
entered into in September 2002 and fixed our maximum interest margins
at 3.25% for LIBOR loans and 2.00% for base rate loans. The financial
covenant modifications were necessary to enable the Company to avoid possible
violations of its leverage ratio covenant for the third and fourth
quarters of 2003, our fixed charge coverage ratio covenant for all
quarters during 2003 and its net worth covenant for the second quarter of
2003.

In exchange for these
modifications, the Company's lenders required it to permanently reduce the
aggregate commitments under the facility from $75.0 million to $47.0
million, to shorten the maturity of the facility from March 29, 2005
to April 1, 2004, and to pay a monthly fee beginning on July 1, 2003
equal to 1.0% of the aggregate commitments under the facility. The Company's
lenders also required the establishment of a borrowing base that
restricts availability under the facility based on monthly
computations of eligible accounts receivable and inventory, reduced
by the Company's net hedging obligations owed to lenders under the facility and
by the amount of the Company's guarantee obligations under its joint venture
guarantees that are not secured or replaced by letters of credit.
Additionally, the Company will not be permitted to borrow or request the
issuance of letters of credit under the facility unless the Company
has less
than $10.0 million in freely available cash and cash equivalents on
its consolidated balance sheet both before and immediately after
giving effect to the application of the proceeds of such borrowing.
The amendment also requires the Company to prepay outstanding loans under the
facility and/or cash collateralize outstanding letters of credit with
the net cash proceeds from any issuance of debt or equity or, to the
extent not reinvested in similar assets, from any sale of assets or
insurance or condemnation award. The
amendment further requires the Company to provide consolidated financial
statements and joint venture financial statements to the lenders on a
monthly basis. Finally, the amendment prohibits the Company from incurring
capital leases or other indebtedness, making acquisitions or other
investments, or prepaying other indebtedness unless the Company's fixed charge
coverage ratio for the most recently reported fiscal quarter exceeds
1.50:1.0 (calculated on a pro forma basis with regard to
acquisitions), and completely eliminates the Company's ability to pay dividends
or repurchase shares of our stock.

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In connection with
this amendment, the Company was also required to amend its security
agreement to provide for a springing lien on its machinery and
equipment that will become effective on July 1, 2003.

Prior to this
amendment to the Companys senior credit facility, its Standard
Gypsum joint venture guarantee contained financial maintenance
covenants that were identical to those contained in its senior credit
facility. However, the lenders to Standard Gypsum were unwilling to
agree to the modifications that the Company made under the amendment
to the senior credit facility. In order to avoid an event of default
under that guarantee, the Company obtained a letter of credit under
its senior credit facility in the face amount of $28.4 million. This
letter of credit, which expires on January 15, 2004, is issued in favor of the Standard Gypsum lenders
and replaces the Companys guarantee obligations. In exchange
for this letter of credit, the Standard Gypsum lenders terminated the
Companys guarantee agreement and released its security
interests in the Companys accounts receivable and inventory.
The Company must also pay a fee on October 28, 2003 in the amount of
2% of the full amount of this letter of credit in the event the
letter of credit remains outstanding on that date. The letter of
credit may be drawn in the event of a
default under the Standard Gypsum credit facility.

Concurrently with the
amendments to the Companys senior credit facility and the
issuance of the letter of credit to the Standard Gypsum lenders as
described above, the Company entered into an amendment of its Premier
Boxboard guarantee that made changes to the financial covenants
corresponding to those made in the sixth amendment to the
Companys senior credit facility. In exchange for this
amendment, the Premier Boxboard lenders required that the maturity of
the Premier Boxboard credit facility be shortened from June 26, 2005
to January 5, 2004 and that the aggregate commitments under the
facility be reduced to equal the amount of outstanding loans and
letters of credit of $20.3 million. Any reductions of outstanding
loans under the facility may not be reborrowed and will permanently
reduce the commitments, thereby effectively requiring the Company to
fund Premier Boxboard's operations from its internal cash flow and from
any cash contributions that the Company and its joint venture partner
are permitted to make. In addition, the Company will be required to
pay a fee to the Premier Boxboard lenders of $100,000 on July 1, 2003
and on the first day of each month thereafter until the facility is
terminated and all outstandings under the facility are fully paid.

In March 2003, the Company announced the permanent closure of its Buffalo
Paperboard mill located in Lockport, New York. The Company expects to record a
restructuring charge of approximately $5.0 million in connection with this
closure. The Buffalo mill had an annual production capacity of approximately
72 thousand tons. In 2002, the mill operated at approximately 50% of capacity
and recorded approximately $9.0 million in trade sales. Buffalo sales will be
transferred to the Companys other paperboard mills.

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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Caraustar Industries, Inc.
Austell, Georgia

We have audited the accompanying consolidated balance sheets of Caraustar
Industries, Inc. and subsidiaries as of December 31, 2002 and
2001, and the
related consolidated statements of operations, shareholders equity, and cash
flows for the years then ended. Our audits also included the
consolidated financial
statement schedule for the years ended December 31, 2002 and
2001 listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the 2002 and 2001 financial statements and
financial statement schedule based on our audits. We did not audit the 2002 financial statements of
Standard Gypsum LP, the Companys investment in which is accounted for by use
of the equity method. The Companys equity of $9,605,000 in Standard Gypsums
net assets at December 31, 2002 and in $8,182,000 in that companys net income
for the year then ended are included in the accompanying consolidated financial
statements. The financial statements of Standard Gypsum were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such company is based solely on the report
of such other auditors. The financial statements and financial
statement schedule of the Company as of December 31, 2000 and for the year then
ended, before the revisions described in Note 4 to the consolidated financial
statements, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule in their reports dated
February 5, 2002.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, such
consolidated 2002 and 2001 financial statements present fairly, in all material respects, the
financial position of Caraustar Industries, Inc. and subsidiaries as of
December 31, 2002 and 2001 and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such 2002 and 2001 financial statement schedules, when
considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects the
information set forth therein.

As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standards No. 142 (SFAS 142)
Goodwill and Other Intangible Assets, which was adopted by the Company as of
January 1, 2002.

As discussed above, the consolidated financial statements and financial
statement schedule of the Company as of December 31, 2000 and for the year then
ended were audited by other auditors who have ceased operations. As described
in Note 4 to the consolidated financial statements, the Company changed its
method of accounting for goodwill and other intangible assets and adopted the
provisions of SFAS 142 as of January 1, 2002. These consolidated financial
statements have been revised to include the transitional disclosures
required by SFAS 142. Our audit procedures with respect to the 2000
disclosures in Note 4 included (i) agreeing the previously
reported net income to the previously issued financial statements and
the adjustments to reported net income representing amortization
expense (including any related tax effects) recognized in those
periods related to goodwill to the Company's underlying records
obtained from management, and (ii) testing the mathematical
accuracy of the reconciliation of adjusted net income to reported net
income, and the related earnings-per-share amounts.

In our opinion, such
disclosures are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2000 consolidated financial statements
and financial statement schedule
of the Company other than with respect to such disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the 2000
consolidated financial statements taken as a whole.

/s/ Deloitte & Touche LLP

Atlanta, Georgia
February 3, 2003
(March 28, 2003 as to Note 18)

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The following reports of Arthur Andersen LLP
(Andersen) are copies (which have not been manually
signed) of the
reports previously issued by Andersen on February 5, 2002. The
reports of
Andersen are included in this annual report on Form 10-K pursuant to rule
2-02(e) of regulation S-X. The Company has not been able to obtain reissued
reports from Andersen. Andersen has not consented to the inclusion of its
reports in this annual report on Form 10-K. Because Andersen has not consented
to the inclusion of its reports in this annual report, it may be difficult to
seek remedies against Andersen, and the ability to seek relief against Andersen
may be impaired. See Note to Exhibit 23.01 in the Exhibit Index
following the signature page.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Caraustar Industries, Inc.:

We have audited the accompanying consolidated balance sheet of CARAUSTAR
INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as of December
31, 2001 and 2000 and the related consolidated statements of income,
shareholders equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Caraustar Industries, Inc.
and subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with generally accepted accounting principles
in the United States.

Arthur Andersen LLP

Atlanta, Georgia
February 5, 2002

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To Caraustar Industries, Inc.:

We have audited, in
accordance with auditing standards generally accepted in the United
States, the consolidated financial statements of CARAUSTAR
INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as
of December 31, 2001 and 2000 and for each of the three years in
the period ended December 31, 2001 included in this
Form 10-K and have issued our report thereon dated
February 5, 2002. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 14a.(2) is the responsibility of the
Companys management, presented for purposes of complying with the
Securities and Exchange Commission rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

---

Atlanta, Georgia
February 5, 2002

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On April 8, 2002, the Company filed a current report on Form 8-K to report
certain information with respect to the changes in its independent public
accounts Deloitte & Touche LLP. Otherwise, the Company has had no change in,
or disagreements on accounting or financial disclosure matters with, its
independent public accountants to report under this Item 9.




PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information contained under the caption Election of Directors in the
Proxy Statement is incorporated herein by reference in response to this Item
10. The information in response to this Item 10 regarding the executive
officers of the Company is contained in Item 1, Part I hereof under the caption
Executive Officers.

ITEM 11. EXECUTIVE COMPENSATION

Information contained under the caption Executive Compensation in the
Proxy Statement, except the item captioned Compensation Committee Report is
incorporated herein by reference in response to this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information contained under the captions Equity Compensation Plan
Information and Share Ownership in the Proxy Statement is incorporated by
reference herein in response to this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Russell M. Robinson, II, Chairman of the Companys Board of Directors, is
a shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Companys
principal outside legal counsel, which performed services for the Company
during the last fiscal year and during the current fiscal year. Certain members
of such firm beneficially owned approximately 116,000 of the Companys common
shares as of March 14, 2003.




PART IV

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this annual report on Form 10-K,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (disclosure controls), and our internal controls and
procedures for financial reporting (internal controls). Disclosure controls
mean those controls and other procedures that are designed for the purpose of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, such as this annual report, is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. Internal controls are procedures designed for the
purpose of providing reasonable assurance that our transactions are properly
authorized, our assets are safeguarded against unauthorized or improper use and
our transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with generally accepted
accounting principles. This evaluation was performed under the supervision and
with the participation of management including our Chief Executive Officer and
Chief Financial Officer.

Immediately following the signature pages of this annual report are
certifications of our Chief Executive Officer and Chief Financial Officer,
which are required to be furnished by SEC rules adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. The information discussed in this section of
our annual report relates to the evaluations of disclosure controls and
internal controls referenced in these certifications and should be read in
conjunction with these certifications.

Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls or our internal controls
will prevent or detect all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the reality of resource constraints;
accordingly the benefits of controls must be considered relative to their
costs.

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##### Table of Contents



Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and possible
misstatements due to fraud or error, if any, within our company have been
detected. Among the inherent limitations in controls are the potential for
erroneous judgments and decisions or simple errors or mistakes in the chain of
recording, processing, summarizing or reporting information. Additionally,
controls can be circumvented by the intentional acts of individuals or multiple
persons acting in concert, or by management override. The design of any system
of controls also is based in part on assumptions about the likelihood of future
events, and we can give no assurance that our controls as designed will succeed
in achieving their stated goals under all potential future conditions; over
time, controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.

In conjunction with
its 2002 audit of our financial statements, our independent accountants, Deloitte & Touche LLP,
identified certain items they described as reportable conditions, relating
primarily to the decentralized nature of our Company and the inconsistent
application of certain written policies. The Company
is implementing improvements to its policies and has engaged PricewaterhouseCoopers LLP to do an extensive evaluation of the
Companys internal controls, both to prepare our Company to comply with the new
annual internal controls certification that will be required as of December 31,
2003 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC
rulemaking, as well as to assist the Company in conforming to certain best
practices recommendations with respect to internal controls generally.

In accordance with SEC requirements, our Chief Executive Officer and Chief
Financial Officer note that, since the date of their above-referenced
evaluation, otherwise than as discussed above, there have been no significant
changes in our internal controls or in other factors that could significantly
affect our internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Based on the evaluation discussed above, our Chief Executive Officer and
Chief Financial Officer have concluded that, subject to the disclosures and
limitations noted above, our disclosure controls are effective to timely alert
management, including the Chief Executive Officer and Chief Financial Officer,
to material information relating to Caraustar and its consolidated
subsidiaries, required to be included in the Companys reports filed under the
Securities Exchange Act of 1934.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a.     Documents filed as part of the Report



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | (1) The following financial statements of the Company and Report of
Independent Auditors Report are included in Part II, Item 8 above.

|                                                                                           |  | 
|------------------------------------------------------------------------------------------ |  | 
|Consolidated Financial Statements:                                                         |  | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                               |  | 
|Consolidated Statements of Operations for the years ended December
31, 2002, 2001 and 2000 |  | 

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|                                                                                                     |  | 
|---------------------------------------------------------------------------------------------------- |  | 
|Consolidated Statements of Shareholders Equity for the years ended
December 31, 2002, 2001 and 2000 |  | 
|Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001 and 2000           |  | 
|Notes to Consolidated Financial Statements                                                           |  | 
|Report of Independent
Auditors Report                                                               |  | 

| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Independent
Auditors Report of Deloitte and Touch LLP for the consolidated
financial statements and consolidated financial statement schedule as
of December 31, 2001 and 2002 and for the two years then ended
and the Report of Independent Public Accountants of Arthur Andersen
LLP as of  December 31, 2001 and 2000 and for the three years
then ended.

Schedule II  Valuation and Qualifying Accounts and Reserves



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or the required
information is included elsewhere in the financial statements.



| |              
| | -------------
| | (3) Exhibits:



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | The Exhibits to this report on Form 10-K are listed in the accompanying
Exhibit Index.

b.     Reports on Form 8-K.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We filed one current report on Form 8-K, which we amended by filing a
subsequent current report on Form 8-K/A, and furnished Regulation FD
disclosure in four other current reports during the quarter ending December
31, 2002.                                                                                                                                                                                                
|
| | The first report, filed on October 9, 2002, furnished information
regarding the hiring of Ronald J. Domanico as Vice President and Chief
Financial Officer.                                                                                                                                                                                                                                                                     
|
| | The second report, filed on October 15, 2002 announced the acquisition
of certain assets of the Industrial Packaging Group of Jefferson Smurfit
Corporation (U.S.), a wholly owned subsidiary of Smurfit-Stone Container
Corporation.                                                                                                                                                                                           
|
| | The third report, filed on October 29, 2002, furnished the contents of
our press release announcing our financial results for the third quarter of
2002.                                                                                                                                                                                                                                                                        
|
| | The fourth report, dated November 14, 2002, furnished the Certifications
of Thomas V. Brown, its President and Chief Executive Officer, and Ronald J.
Domanico, its Vice President and Chief Financial Officer, with respect to the
Companys Quarterly Report on Form 10-Q for the period ended September 30,
2002                                                                                                             
|
| | The fifth report, filed November 19, 2002, furnished excerpts from a
management presentation under Item 9 of Form 8-K.                                                                                                                                                                                                                                                                                                          
|
| | The final report, filed December 16, 2002, amended the Form 8-K filed on
October 15, 2002, which announced the acquisition of certain assets of the
Industrial Packaging Group of Jefferson Smurfit Corporation (U.S.). This
amended report included the financial statements of the Industrial
Packaging Group of Jefferson Smurfit (U.S.) as of
and for the year ended December 31, 2001 as required by Item 7(a) of Form
8-K.

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SCHEDULE II

CARAUSTAR INDUSTRIES, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2000, 2001 and 2002
(In Thousands)

|                                                                         |  |            |       |            |  |             |        |             |  |            |        |   |  |   |       | 
|------------------------------------------------------------------------ |  | ---------- | ----- | ---------- |  | ----------- | ------ | ----------- |  | ---------- | ------ | - |  | - | ----- | 
|                                                                         |  | Balance at |       | Charged to |  |             |        |             |  |            |        |  
|                                                                         |  | Beginning  |       | Costs and  |  |             |        |             |  | Balance at
|                                                                         |  | of Year    |       | Expenses   |  | Deductions* |        | End of Year
|                                                                         |  |            |       |            |  |             |        |            
|2000: Allowances for doubtful accounts receivable,
returns and discounts |  | $          | 2,418 |            |  | $           | 10,723 |             |  | $          | (9,809 | ) |  | $ | 3,332 | 
|2001: Allowances for doubtful accounts receivable,
returns and discounts |  | $          | 3,332 |            |  | $           | 9,091  |             |  | $          | (8,173 | ) |  | $ | 4,250 | 
|2002: Allowances for doubtful accounts receivable,
returns and discounts |  | $          | 4,250 |            |  | $           | 10,082 |             |  | $          | (8,946 | ) |  | $ | 5,386 | 



---

|* |  | Principally charges for which reserves were provided, net of recoveries.
|- |  | ------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

| |  |                            |  |                                                              
| |  | -------------------------- |  | -------------------------------------------------------------
| |  | CARAUSTAR INDUSTRIES, INC.
| |  |                            |  |                                                              
| |  | By:                        |  | /s/ Ronald J. Domanico                                       
| |  |                            |  |                                                              
| |  |                            |  | Ronald J. Domanico
Vice President and Chief
Financial Officer
| |  |                            |  |                                                              
| |  | Date: March 28, 2003       |  |                                                              

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated on.

|                                                                                                      |  | 
|----------------------------------------------------------------------------------------------------- |  | 
|Signature                                                                                             |  | 
|                                                                                                      |  | 
|                                                                                                     
|/s/ Thomas V. Brown                                                                                   |  | 
|Thomas V. Brown, President and Chief Executive Officer
(Principal Executive Officer); Director        |  | 
|                                                                                                      |  | 
|/s/ Michael J. Keough                                                                                 |  | 
|Michael J. Keough, Vice President and Chief Operating Officer
(Principal Operating Officer); Director |  | 
|                                                                                                      |  | 
|/s/ Ronald J. Domanico                                                                                |  | 
|Ronald J. Domanico, Vice President and Chief Financial Officer
(Principal Financial Officer)          |  | 
|                                                                                                      |  | 
|/s/ William A. Nix, III                                                                               |  | 
|William A. Nix, III, Vice President, Treasurer and Controller
(Principal Accounting Officer)          |  | 
|                                                                                                      |  | 
|/s/ Russell M. Robinson, II                                                                           |  | 
|Russell M. Robinson, II, Chairman of the Board                                                        |  | 
|                                                                                                      |  | 
|/s/ Ralph M. Holt, Jr.                                                                                |  | 
|Ralph M. Holt, Jr., Director                                                                          |  | 
|                                                                                                      |  | 
|/s/ James E. Rogers                                                                                   |  | 
|James E. Rogers, Director                                                                             |  | 

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CERTIFICATIONS

I, Thomas V. Brown, President and Chief Executive Officer, certify that:

1.     I have reviewed this annual report on Form 10-K of Caraustar;

2.     Based on my knowledge, this annual 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 annual
report;

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

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

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

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

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

5.     Caraustars other certifying officer and I have disclosed, based on our
most recent evaluation, to Caraustars auditors and the audit committee of
Caraustar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 Caraustars ability to record, process, summarize
and report financial data and have identified for Caraustar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 Caraustars internal controls; and

6.     Caraustars other certifying officer and I have indicated in this annual
report whether or not 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/ Thomas V. Brown                                 
|      |  |                |  |     |  |                                                     
|      |  |                |  |     |  | Thomas V. BrownPresident and Chief
Executive Officer
|      |  |                |  |     |  |                                                     
|Date: |  | March 28, 2003 |  |     |  |                                                     

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CERTIFICATIONS

I, Ronald J. Domanico, Vice President and Chief Financial Officer, certify
that:

1.     I have reviewed this annual report on Form 10-K of Caraustar;

2.     Based on my knowledge, this annual 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 annual
report;

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

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

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

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

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

5.     Caraustars other certifying officer and I have disclosed, based on our
most recent evaluation, to Caraustars auditors and the audit committee of
Caraustar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 Caraustars ability to record, process, summarize
and report financial data and have identified for Caraustar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 Caraustars internal controls; and

6.     Caraustars other certifying officer and I have indicated in this annual
report whether or not 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/ Ronald J.
Domanico                                      
|                     |  |     |  |                                                             
|                     |  |     |  | Ronald J. DomanicoVice President and Chief
Financial Officer
|                     |  |     |  |                                                             
|Date: March 28, 2003 |  |     |  |                                                             

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EXHIBIT INDEX

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|No.     |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3.01    |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference 
Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                                
|3.02    |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit 3.02
to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                                             
|4.01    |  |  |  | Specimen Common Stock Certificate (Incorporated by reference  Exhibit 4.01 to
Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                                                                                                                                            
|4.02    |  |  |  | Articles 3 and 4 of the Companys Amended and Restated Articles of Incorporation (included
in Exhibit 3.01)                                                                                                                                                                                                                                                                                                                                                                                                           
|4.03    |  |  |  | Article II of the Companys Third Amended and Restated Bylaws (included in Exhibit 3.02)                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.04    |  |  |  | Amended and Restated Rights Agreement, dated as of May 24, 1999, between Caraustar
Industries, Inc. and The Bank of New York as Rights Agent (Incorporated by reference
Exhibit 10.1 to current report on Form 8-K dated June 1, 1999 [SEC File No. 020646])                                                                                                                                                                                                                                                          
|4.05    |  |  |  | Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New
York, as Trustee, regarding The Companys 7 3/8% Notes due 2009 (Incorporated by reference
 Exhibit 4.05 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No.
0-20646])                                                                                                                                                                                                                              
|4.06    |  |  |  | First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc.
and The Bank of New York, as Trustee (Incorporated by reference  Exhibit 4.06 to report on
Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])                                                                                                                                                                                                                                                          
|4.07    |  |  |  | Second Supplemental Indenture, dated as of March 29, 2001, between the Company, the
Subsidiary Guarantors and The Bank of New York, as Trustee, regarding the Companys 7 3/8%
Notes due 2009 (Incorporated by reference  Exhibit 4.07 to report on Form 10-K for the
year ended December 31, 2000 [SEC File No. 0-20646])                                                                                                                                                                                           
|10.01   |  |  |  | Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of
New York, as Trustee, regarding the Companys 7 1/4% Senior Notes due 2010 (Incorporated by
reference  Exhibit 10.01 to report on Form 10-K for the year ended December 31, 2000 [SEC
File No. 0-20646])                                                                                                                                                                                                                  
|10.02   |  |  |  | Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of
New York, as Trustee, regarding the Companys 9 7/8% Senior Subordinated Notes due 2011
(Incorporated by reference  Exhibit 10.02 to report on Form 10-K for the year ended
December 31, 2000 [SEC File No. 0-20646])                                                                                                                                                                                                     
|10.03   |  |  |  | Credit Agreement, dated as of March 29, 2001, among the Company, certain subsidiaries of
the Company, various lenders, Bank of America, N.A., as Administrative Agent, Banc of
America Securities LLC and Deutsche Banc Alex. Brown Inc. as Joint Lead Arrangers and Joint
Book Managers and Credit Suisse, First Boston and Credit Lyonnais New York Branch as
Co-Documentation Agents (Incorporated by reference  Exhibit 10.03 to report on Form 10-K
for the year ended December 31, 2000 [SEC File No. 0-20646])
|10.04   |  |  |  | Amendment No. 1 to Credit Agreement, dated as of September 10, 2001, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by Reference  Exhibit 10.04 to report on Form 10-Q for the quarter ended
September 30, 2001 [SEC File No. 0-20646]                                                                                                               
|10.05   |  |  |  | Amendment No. 2 to Credit Agreement, dated as of November 30, 2001, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by reference  Exhibit 10.05 to report on Form 10-K for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                                   
|10.06   |  |  |  | Amendment No. 3 to Credit Agreement, dated as of January 22, 2002, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by reference  Exhibit 10.06 to report on Form 10-K for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                                    
|10.07   |  |  |  | Amendment No. 4 to Credit Agreement, dated as of September 23, 2002, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by reference  Exhibit 10.07 to report on Form 10-Q for the nine months ended
September 30, 2002 [SEC File No. 0-20646])                                                                                                          

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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|No.     |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.08   |  |  |  | Amendment No. 5 to Credit Agreement, dated as of December 27, 2002, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as
Administrative Agent (Incorporated by reference 
Exhibit 10.08 to report on Form 10-K/A for the year ended
December 31, 2001 [SEC File No. 0-20646])
|10.09   |  |  |  | Amendment No. 6
to Credit Agreement, dated as of March 28, 2003, by and among the Company,
as borrower, certain subsidiaries of the Company identified as guarantors listed therein,
the banks listed therein, and Bank of America, N.A., as
Administrative Agent (Incorporated by reference 
Exhibit 10.9 to report on Form 10-K/A for the year ended
December 31, 2001 [SEC File No. 0-20646])    
|10.10   |  |  |  | Security Agreement, dated as of September 23, 2002, among the Company, certain subsidiaries
of the Company identified as guarantors listed therein, and Bank of America, N.A., as
Collateral Agent (Incorporated by reference  Exhibit 10.08 to report on Form 10-Q for the
nine months ended September 30, 2002 [SEC File No. 0-20646})                                                            
|10.11   |  |  |  | First Amendment to
Security Agreement, dated as of March 28, 2003, among the
Company, certain subsidiaries of the Company identified as guarantors
listed therein, and Bank of America, N.A., as Collateral Agent
(Incorporated by reference  Exhibit 10.11 to report on
Form 10-K/A for the year ended December 31, 2001
[SEC File No. 0-20646])                                                   
|10.12*  |  |  |  | Employment Agreement, dated December 31, 1990, between the Company and Thomas V. Brown
(Incorporated by reference  Exhibit 10.06 to Registration Statement on Form S-1 [SEC File
No. 33-50582])                                                                                                                                                                                                     
|10.13*  |  |  |  | Deferred Compensation Plan, together with copies of existing individual deferred
compensation agreements (Incorporated by reference  Exhibit 10.08 to Registration
Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                   
|10.14*  |  |  |  | 1987 Executive Stock Option Plan (Incorporated by reference  Exhibit 10.09 to Registration
Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                           
|10.15*  |  |  |  | 1993 Key Employees Share Ownership Plan (Incorporated by reference  Exhibit 10.10 to
Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                   
|10.16*  |  |  |  | Incentive Bonus Plan of the Company (Incorporated by reference  Exhibit 10.10 to Annual
Report for 1993 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                        
|10.17*  |  |  |  | 1996 Director Equity Plan of the Company (Incorporated by reference  Exhibit 10.12 to
report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No. 0-20646])                                                                                                                                                                                                                              
|10.18*  |  |  |  | Amendment No. 1 to the Companys 1996 Director Equity Plan, dated July 16, 1998
(Incorporated by reference  Exhibit 10.2 to Current Report on Form 8-K dated June 1, 1999
[SEC File No. 0-20646])                                                                                                                                                                                                   
|10.19*  |  |  |  | Second Amended and Restated 1998 Key Employee Incentive Compensation Plan (Incorporated by
reference  Exhibit 10.13 to report on Form 10-Q for the quarter ended March 31, 2001 [SEC
File No. 0-20646])                                                                                                                                                                                             
|10.20   |  |  |  | Asset Purchase Agreement between Caraustar Industries, Inc., Sprague Paperboard, Inc. and
International Paper Company, dated as of March 4, 1999 (Incorporated by reference  Exhibit
10.17 to report on Form 10-Q for the quarter ended March 31, 1999 [SEC File No. 0-20646])                                                                                                                      
|10.21   |  |  |  | Guaranty Agreement, dated as of July 30, 1999, as amended of the Company in favor of
SunTrust Bank Atlanta (Incorporated by reference  Exhibit 10.19 to report on Form 10-K for
the year ended December 31, 2001 [SEC File No. 0-20646])                                                                                                                                                            
|10.22   |  |  |  | Fifth Amendment to Guaranty Agreement, dated as of September 20, 2002, of the Company in
favor of SunTrust Bank Atlanta (Incorporated by reference 
Exhibit 10.19 to report on Form 10-Q for the quarter ended
September 30, 2002 [SEC File No. 0-20646])                                                                                                                                           
|10.23   |  |  |  | Seventh Amendment to
Guaranty Agreement, dated as of March 28, 2003, of the Company
in favor of SunTrust Bank (Incorporated by reference 
Exhibit 10.23 to report on Form 10-K/A for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                                                                       
|10.24   |  |  |  | Third amendment to
Amended and Restated Revolving Credit Agreement, dated as of
March 28, 2003, between Premier Boxboard Limited LLC and
SunTrust Bank (Incorporated by reference 
Exhibit 10.24 to report on Form 10-K/A for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                              
|10.25   |  |  |  | Second Amended and Restated Parent Guaranty, dated as of August 1, 1999, as amended, of the
Company in favor of Toronto-Dominion (Texas), Inc., as Administrative Agent (Incorporated
by reference  Exhibit 10.20 to report on Form 10-K for the year ended December 31, 2001
[SEC File
No. 0-20646])                                                                                               
|10.26   |  |  |  | Revised Fifth Amendment to Parent Guaranty, dated as of September 23, 2002, of the Company
in favor of Toronto-Dominion (Texas), Inc., as Administrative Agent
(Incorporated by reference  Exhibit 10.21 to report on
Form 10-Q for the quarter ended September 30, 2002
[SEC File No. 0-20646])                                                                                                    
|10.27   |  |  |  | First Agreement
Regarding Amendments to Loan Documents, dated as of March 28,
2003, among Standard Gypsum L.L.C., Temple-Inland, Inc.,
Temple-Inland Forest Products Corporation, the Company and Toronto
Dominion (Texas), Inc., as Administrative Agent (Incorporated by reference 
Exhibit 10.27 to report on Form 10-K/A for the year ended
December 31, 2001 [SEC File No. 0-20646])           
|10.28   |  |  |  | Irrevocable Standby
Letter of Credit, dated March 28, 2003, in favor of Toronto
Dominion (Texas), Inc. upon application of the Company (Incorporated by reference 
Exhibit 10.28 to report on Form 10-K/A for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                                              
|10.29   |  |  |  | Partnership Agreement of Standard Gypsum L.P. (Incorporated by reference  Exhibit 10.21 to
report on Form 10-K for the year ended December 31, 2001 [SEC File No. 0-20646])                                                                                                                                                                                                                         
|10.30   |  |  |  | Operating Agreement of Premier Boxboard Limited LLC (Incorporated by reference  Exhibit
10.22 to report on Form 10-K for the year ended December 31, 2001 [SEC File No. 0-20646])                                                                                                                                                                                                                   
|10.31   |  |   |  | Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container
Corporation, dated as of July 22, 2002 (Incorporated by reference  Exhibit 2 to Current
Report on Form 8-K dated October 15, 2002)                                                                                                                                                                          
|10.32   |  |  |  | First Amendment to Asset Purchase Agreement between Caraustar Industries, Inc. and
Smurfit-Stone Container Corporation, dated as of September 9, 2002 (Incorporated by
reference  Exhibit 10.25 to Report on Form 10-Q dated September 30, 2002 [SEC File No.
0-20646])                                                                                                                             
|10.33*  |  |  |  | Employment Agreement, dated February 13, 2002, between the Company and Michael J. Keough
(Incorporated by reference  Exhibit 10.26 to Report on Form 10-Q dated September 30, 2002
[SEC File No. 0-20646])                                                                                                                                                                                          

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|         |  |   |  |                                                                                                                                                                                                                                                                                                                           
|-------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |   |  |                                                                                                                                                                                                                                                                                                                           
|No.      |  |   |  | Description                                                                                                                                                                                                                                                                                                               
|         |  |   |  |                                                                                                                                                                                                                                                                                                                           
|10.34*   |  |  |  | Employment Agreement, dated October 1, 2002, between the Company and Ronald J. Domanico
(Incorporated by reference  Exhibit 10.27 to Report on Form 10-Q dated September 30, 2002
[SEC File No. 0-20646])                                                                                                                
|10.35*   |  |  |  | Resignation Agreement, dated October 8, 2002, between the Company and Henry L. Thrash, III
(Incorporated by reference  Exhibit 10.28 to Report on Form 10-Q dated September 30, 2002
[SEC File No. 0-20646])                                                                                                             
|10.36    |  |  |  | Master Lease Agreement, with Riders Nos. 1 through 3 and Equipment Schedules Nos. 1 through
4, dated September 30, 2002, between Caraustar Industries, Inc. and Banc of America Leasing
& Capital, LLC (Incorporated by reference  Exhibit 10.29 to Report on Form 10-Q dated
September 30, 2002 [SEC File No. 0-20646]) 
|10.37#*  |  |  |  | Change in Control Severance Agreement, dated October 1, 2002, between the Company and
Ronald J. Domanico (Incorporated by reference  Exhibit 10.30 to Report on Form 10-Q dated
September 30, 2002 [SEC File No. 0-20646])                                                                                               
|12.01   |  |  |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                         
|21.01   |  |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                            
|23.01    |  |  |  | Consent of Arthur Andersen LLP (omitted Pursuant to Rule 437a)**                                                                                                                                                                                                                                                          
|23.02   |  |  |  | Consent of Deloitte and Touche LLP                                                                                                                                                                                                                                                                                        
|23.03   |  |  |  | Consent of Ernst & Young LLP (with respect to financial statements of Smurfit Industrial
Packaging Group (a business unit of Jefferson Smurfit Corporation (U.S.)) as of and for the
years ended December 31, 2001)                                                                                                       
|23.04   |  |  |  | Consent of Ernst &
Young LLP (with respect to financial statements of Standard Gypsum LP
as of and for the year ended December 28, 2002)                                                                                                                                                                                  
|99.01*** |  |  |  | Certification of CEO  pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002                                                                                                                                                                                           
|99.02*** |  |  |  | Certification of CFO  pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002                                                                                                                                                                                           
|99.03    |  |  |  | Entire contents of Items 2 and 7 of Form 8-K/A filed December 16, 2002 (financial
statements and related information with respect to Smurfit Industrial Packaging Group (a
business unit of Jefferson Smurfit Corporation (U.S.)). (Incorporated by reference  Form
8-K/A filed December 16, 2002 [SEC File No. 0-20646])
|99.04   |  |  |  | Financial statements
of Standard Gypsum LP as of and for the year ended December 28, 2002                                                                                                                                                                                                                                 



---

|    |  |  Filed herewith                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|*   |  | Management contract or compensatory plan required to be filed under
Item 14(c) of Form 10-K and Item 601 of Regulation S-K of the Securities
and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|#   |  | This Exhibit is substantially identical to Change in Control Severance
Agreements for the following individuals: Thomas V. Brown, Michael J.
Keough, James L. Walden, Jimmy A. Russell, H. Lee Thrash, III, John R. Foster and William A. Nix, III, except the agreement is
dated March 1, 2002, for these individuals                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|**  |  | Because the Company has not been able to obtain, after reasonable
efforts, the written consent of Arthur Andersen LLP to the inclusion of
their reports dated February 5, 2002 in this 10-K (copies of which have
been reproduced in this 10-K) and to the incorporation by reference of
such reports into the Companys previously filed registration statements, the Company has dispensed with the filing of their consent
in reliance on Rule 437a under the Securities Act. Because Arthur
Andersen LLP has not consented to the inclusion of their report in this
Report on Form 10-K or in such registration statements, you may not be
able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act, or under other rules or theories of liability under
federal or state securities laws, based on any untrue statement of a
material fact contained in the Companys financial statements audited by
Arthur Andersen LLP or any omission to state a material fact required to
be stated in those financial statements. Additional information regarding
the risks associated with the Companys former engagement of Arthur
Andersen LLP as its independent auditors is contained in this Report under
 Risk FactorsThe conviction of our former independent auditors, Arthur
Andersen, LLP on federal obstruction of justice charges may adversely
after Arthur Andersen LLPs ability to satisfy any claims arising from the
provision of auditing service to us and may impede our access to the
capital markets and in the Companys periodic reports filed with the
Securities and Exchange Commission.
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|*** |  | Pursuant to interim guidance provided in SEC Release No. 33-8212, this
certification accompanies, but shall not be deemed filed as part of, this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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