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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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Form 10-K/A

(Amendment No. 1)




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|          
|          
|          
|          
|(Mark One) |  |                                                                                             
|          
|          
|          
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|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31,
    2001                                             
|           |  | OR                                                                                          
|          
|          
|          
|          
|[  ]       |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from                       to                                 

Commission file number 0-20646

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/A or any amendment to this
Form 10-K/A.  x

The aggregate market value of voting stock held
by non-affiliates of the registrant as of March 15, 2002,
computed by reference to the closing sale price on such date,
was $280,553,772. 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, 27,855,488
shares of Common Stock, $.10 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrants definitive Proxy Statement
pertaining to the 2002 Annual Meeting of Shareholders (the
Proxy Statement) and filed pursuant to Regulation 14A
is incorporated herein by reference into Part III.









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##### 



EXPLANATORY NOTE

The purpose of this amendment on Form 10-K/A (this
Amendment) to our Annual Report on Form 10-K
for the year ended December 31, 2001 (the 2001
10-K) is to amend and restate the financial statements
included in Item 8  Financial Statements and
Supplemental Data, to include footnote 14, Guarantor
Condensed Consolidated Financial Statements. This footnote
discloses the Financial Information of our subsidiaries that
guarantee our senior and senior subordinated indebtedness. In
order to preserve the nature and character of the disclosures
set forth in the 2001 10-K as originally filed, except as
otherwise expressly stated herein, this amendment does not speak
to, or reflect, events occurring after the original filing of
our 2001 10-K on April 2, 2002.

The Items of our 2001 10-K which are amended and restated herein
are:



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Item 3  Legal Proceedings.                                                                                                                                       
|
| | 2. Item 6  Selected Financial Data.                                                                                                                                 
|
| | 3. Item 7  Managements Discussion and
    Analysis of Financial Condition and Results of Operations.                                                               
|
| | Item 7A  Quantitative and Qualitative Disclosure About Market Risk.                                                                                                 
|
| | 4. Item 8  Financial Statements and
    Supplementary Data.                                                                                                         
|
| | 5. Item 9  Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure.                                                                
|
| | 6. Item 14  Exhibits, Financial Statement
    Schedules and Reports on Form 8-K.                                                                                    
|
| | 7. Signatures.                                                                                                                                                       
|
| | 8. The certifications required by Section 302 of the
    Sarbanes-Oxley Act of 2002 have been added.                                                                 
|
| | 9. The certifications required by Section 906 of the
    Sarbanes-Oxley Act of 2002 have been filed with the SEC
              
    as correspondence to this filing.

All information contained in the 2001 10-K, as amended hereby,
shall be deemed updated or superseded, as applicable, by the
reports (including any amendments to such reports) we have
filed, and will file, with the SEC subsequent to the original
filing of our 2001 10-K. You should read this amendment together
with these subsequent reports, including our Annual Report on
Form 10-K for the year ended December 31, 2002, for
updated disclosures on matters discussed in our 2001 10-K.

INTRODUCTION

Caraustar Industries, Inc. operated its business through 19
subsidiaries across the United States and in Mexico and the
United Kingdom as of March 2002. 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.

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K, including
Managements Discussion and Analysis of Financial
Condition and Results of Operations, may contain 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 below and other factors
discussed elsewhere in this Report and the

1



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##### 





PART I

ITEM 3.     LEGAL PROCEEDINGS

On May 9, 2001, we and Georgia-Pacific Corporation jointly
announced a tentative settlement regarding the litigation over
the terms of the long-term supply contract the parties entered
in April 1996. The pending litigation relating to that contract
has been previously reported in our annual report on
Form 10-K for the year ended December 31, 2000 and in
our previous quarterly reports on Form 10-Q. Under the
terms of the tentative settlement, we and G-P Gypsum
Corporation, a wholly-owned subsidiary of Georgia-Pacific,
entered into a new ten-year agreement under which we would
supply a minimum of 50,000 tons of gypsum facing paper per year
to G-P Gypsum. Implementation of that new agreement, and
settlement of the pending litigation over the 1996 agreement,
was subject to satisfactory completion of a transition period,
during which G-P Gypsum was to evaluate our gypsum facing paper
for compliance with specifications and end-use suitability. The
transition period initially was to expire no later than
August 6, 2001, but ongoing discussions with G-P Gypsum led
the parties to twice extend the outside expiration date of the
transition period, eventually to April 1, 2002. These
extensions were the result of Georgia-Pacifics recent
curtailment of a significant portion of its gypsum wallboard
manufacturing capacity because of adverse market conditions.
This curtailment, along with Georgia-Pacifics stated
reservations about committing to the minimum tonnage requirement
under the new agreement in light of current market conditions,
led the parties to agree to the extension of the transition
period.

On March 26, 2002, we reached a final settlement of the
dispute, by entering into a new five-year paperboard supply
agreement with G-P Gypsum that provides that we will produce and
sell to G-P Gypsum between 0.378 and 0.756 billion square
feet (10 to 20 thousand tons) of paper per year to be used in
G-P Gypsums ToughRock wallboard. This new paperboard
supply agreement supersedes the terms of the tentative
settlement previously announced on May 9, 2001 and the
agreement and transition period described above that had been a
part of that tentative settlement. As a result of the final
settlement, our previously filed suit against Georgia-Pacific in
the General Court of Justice, Superior Court Division of
Mecklenburg County, North Carolina (Case No. 00-CVS-12302),
and Georgia-Pacifics previously reported separate action
filed in the Superior Court of Fulton County, Georgia (Case
No. 2000-CV-27684), were each dismissed with prejudice on
April 1 and 2, 2002, respectively.

We are involved in certain other litigation arising in the
ordinary course of business. In the opinion of management, the
ultimate resolution of these matters (other than the litigation
described above with Georgia-Pacific) will not have a material
adverse effect on our financial condition or results of
operations.

2



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##### 



PART II

ITEM 6.     SELECTED FINANCIAL
DATA

|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------- | ---- |  | ---- | --------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                 |  |                                                 
|                                                                                 |  | Year Ended December 31,(A)                      
|                                                                                 |  |                                                 
|                                                                                 |  | 2001                                             |         | 2000 |  | 1999 |           | 1998 |  | 1997
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |     
|                                                                                 |  |                                                 
|                                                                                 |  | (In thousands, except per share data and ratios)
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Summary of Operations                                                            |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Sales                                                                            |  | $                                                | 913,686 |      |  | $    | 1,014,615 |      |  | $    | 936,928 |   |  | $ | 774,312 |   |  | $ | 696,093 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cost of sales                                                                    |  |                                                  | 680,172 |      |  |      | 759,521   |      |  |      | 683,772 |   |  |   | 536,890 |   |  |   | 483,164 |  
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross profit                                                                     |  |                                                  | 233,514 |      |  |      | 255,094   |      |  |      | 253,156 |   |  |   | 237,422 |   |  |   | 212,929 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Freight costs                                                                    |  |                                                  | 52,806  |      |  |      | 51,184    |      |  |      | 46,839  |   |  |   | 37,454  |   |  |   | 27,955  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Selling, general and administrative expenses                                     |  |                                                  | 146,934 |      |  |      | 145,268   |      |  |      | 125,784 |   |  |   | 105,052 |   |  |   | 88,978  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Restructuring and other costs                                                    |  |                                                  | 7,083   |      |  |      | 16,777    |      |  |      |        |   |  |   |        |   |  |   |        |  
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|Operating income                                                                 |  |                                                  | 26,691  |      |  |      | 41,865    |      |  |      | 80,533  |   |  |   | 94,916  |   |  |   | 95,996  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Other (expense) income:                                                          |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Interest expense                                                                 |  |                                                  | (41,153 | )    |  |      | (34,063   | )    |  |      | (25,456 | ) |  |   | (16,072 | ) |  |   | (14,111 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Interest income                                                                  |  |                                                  | 986     |      |  |      | 412       |      |  |      | 603     |   |  |   | 334     |   |  |   | 312     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Equity in (loss) income of unconsolidated
    affiliates                         |  |                                                  | (2,610  | )    |  |      | 6,533     |      |  |      | 9,224   |   |  |   | 4,308   |   |  |   | 1,665   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Other, net                                                                       |  |                                                  | (1,904  | )    |  |      | (918      | )    |  |      | (459    | ) |  |   | (433    | ) |  |   | (674    | )
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                                                                 |  |                                                  | (44,681 | )    |  |      | (28,036   | )    |  |      | (16,088 | ) |  |   | (11,863 | ) |  |   | (12,808 | )
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|(Loss) income before minority interest, income
    taxes and extraordinary items |  |                                                  | (17,990 | )    |  |      | 13,829    |      |  |      | 64,445  |   |  |   | 83,053  |   |  |   | 83,188  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Minority interest                                                                |  |                                                  | 180     |      |  |      | (169      | )    |  |      | (356    | ) |  |   | (730    | ) |  |   | (1,721  | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Tax (benefit) provision                                                          |  |                                                  | (5,903  | )    |  |      | 5,485     |      |  |      | 23,142  |   |  |   | 30,483  |   |  |   | 30,468  |  
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|(Loss) income from continuing operations before
    extraordinary items          |  |                                                  | (11,907 | )    |  |      | 8,175     |      |  |      | 40,947  |   |  |   | 51,840  |   |  |   | 50,999  |  
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net (loss) income                                                                |  | $                                                | (14,602 | )    |  | $    | 8,175     |      |  | $    | 40,947  |   |  | $ | 51,840  |   |  | $ | 50,999  |  
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|Diluted weighted average shares outstanding                                      |  |                                                  | 27,845  |      |  |      | 26,301    |      |  |      | 25,199  |   |  |   | 25,423  |   |  |   | 25,216  |  
|                                                                                 |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|Per Share Data                                                                   |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Diluted (loss) income from continuing operations
    before extraordinary items  |  | $                                                | (0.42   | )    |  | $    | 0.31      |      |  | $    | 1.62    |   |  | $ | 2.04    |   |  | $ | 2.02    |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Diluted net (loss) income                                                        |  |                                                  | (0.52   | )    |  |      | 0.31      |      |  |      | 1.62    |   |  |   | 2.04    |   |  |   | 2.02    |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cash dividends declared                                                          |  |                                                  | 0.18    |      |  |      | 0.72      |      |  |      | 0.72    |   |  |   | 0.66    |   |  |   | 0.58    |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Market price on December 31.                                                     |  |                                                  | 6.93    |      |  |      | 9.38      |      |  |      | 24.00   |   |  |   | 28.56   |   |  |   | 34.25   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Shares outstanding December 31                                                   |  |                                                  | 27,854  |      |  |      | 26,205    |      |  |      | 25,488  |   |  |   | 24,681  |   |  |   | 25,331  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Total Market Value of Common Stock                                               |  | $                                                | 193,028 |      |  | $    | 245,803   |      |  | $    | 611,712 |   |  | $ | 704,889 |   |  | $ | 867,587 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Balance Sheet Data                                                               |  |                                                  |         |      |  |      |           |      |  |      |         |   |  |   |         |   |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Cash and cash equivalents                                                        |  | $                                                | 64,244  |      |  | $    | 8,900     |      |  | $    | 18,771  |   |  | $ | 2,610   |   |  | $ | 1,391   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Property, plant and equipment, net                                               |  |                                                  | 450,376 |      |  |      | 483,309   |      |  |      | 479,856 |   |  |   | 324,470 |   |  |   | 291,036 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Depreciation and amortization expense                                            |  |                                                  | 63,323  |      |  |      | 60,858    |      |  |      | 52,741  |   |  |   | 38,705  |   |  |   | 33,661  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Capital expenditures                                                             |  |                                                  | 28,059  |      |  |      | 58,306    |      |  |      | 35,696  |   |  |   | 40,716  |   |  |   | 36,275  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Total assets                                                                     |  |                                                  | 960,981 |      |  |      | 934,097   |      |  |      | 879,880 |   |  |   | 620,156 |   |  |   | 551,414 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Current maturities of long-term debt                                             |  |                                                  | 48      |      |  |      | 1,259     |      |  |      | 16,615  |   |  |   | 26,103  |   |  |   | 9       |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Revolving credit loans                                                           |  |                                                  |        |      |  |      | 194,000   |      |  |      | 140,000 |   |  |   | 147,000 |   |  |   | 129,000 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Long-term debt, less current maturities                                          |  |                                                  | 508,691 |      |  |      | 272,813   |      |  |      | 269,739 |   |  |   | 82,881  |   |  |   | 83,129  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Shareholders equity                                                             |  |                                                  | 279,579 |      |  |      | 279,808   |      |  |      | 279,184 |   |  |   | 234,221 |   |  |   | 214,756 |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Total shareholders equity and debt                                              |  | $                                                | 788,318 |      |  | $    | 747,880   |      |  | $    | 705,538 |   |  | $ | 490,205 |   |  | $ | 426,894 |  




|    |  |                                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) |  | Restated to reflect the change in inventory costing method of
    accounting from LIFO to FIFO at one of the Companys
    subsidiaries. See Note 1 in the accompanying financial
    statements for additional information.



|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|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

3



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##### 





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 38% in 2001. The
remaining 62% 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. We
are the only major manufacturer to serve all four end-use
markets. As part of our strategy to maintain optimum levels of
production capacity, we regularly purchase paperboard from other
manufacturers in an effort to minimize the potential impact of
demand declines on our own mill system. Additionally, 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 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 $65 and $104 during 2001 and 2000, 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 assure you 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.

Excluding labor, energy is our most significant manufacturing
cost. Energy is 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. In 2001,
energy costs increased 9.6% to approximately $57 per ton. The
increase was due primarily to increases in natural gas and fuel
oil costs. Until recently, 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. We
continue to evaluate our energy costs and consider ways to
factor energy costs into our pricing. However, we cannot assure
you that our operating margins and results of operations will
not continue to 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, 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. We made no acquisitions in 2001.

We are a holding company that operates our business through 19
subsidiaries, as of December 31, 2002. We also own a 50%
interest in two joint ventures with Temple-Inland, Inc. We have
an additional joint venture with an unrelated entity of which
our investment and share of earnings of this venture is
immaterial. We account for these interests in our joint ventures
under the equity method of accounting.

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

4



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##### 





Revenue Recognition. We recognize revenue in accordance
with SEC Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, (SAB
101). SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (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.

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.

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 reserves 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 over or under stated the
reserve required for excess, obsolete or unsaleable inventory.

Impairment of Goodwill. We periodically evaluate acquired
businesses for potential impairment indicators. 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.

Self-Insurance. We are self-insured for the majority of
our workers compensation costs and group health insurance
costs, subject to specific retention levels. Consulting
actuaries and administrators assist us in determining our
liability for self-insured claims. 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 us estimating our actual
current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our
consolidated balance sheet. We 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

5



---



##### 





Pension and Other Postretirement Benefits. The
determination of our obligation and expense for pension and
other postretirement benefits is dependent on our selection of
certain assumptions used by actuaries in calculating such
amounts. Those assumptions are described in Note 8 to the
consolidated financial statements and include, among others, the
discount rate, expected long-term rate of return on plan assets
and rates of increase in compensation and healthcare costs. In
accordance with generally accepted accounting principles, actual
results that differ from our assumptions are accumulated and
amortized over future periods and therefore, generally affect
our recognized expense, recorded obligation and funding
requirements in future periods. While we believe that our
assumptions are appropriate, significant differences in our
actual experience or significant changes in our assumptions may
materially affect our pension and other postretirement benefit
obligations and our future expense.

Results of Operations 2001  2000

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 Note 11 of 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 | %     
|                                                              |                                                           |                                |                                           |       |       |         |  |        |       |         |  |        |       |        |   |      
|                                                              |                                                           |                                | 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 | %

6



---



##### 



|                             |                                    |                                        |                                    |       |       |         |  |        |      |         |  |       |       |        |   |       |       |       |  
|---------------------------- | ---------------------------------- | -------------------------------------- | ---------------------------------- | ----- | ----- | ------- |  | ------ | ---- | ------- |  | ----- | ----- | ------ | - | ----- | ----- | ----- | -
|                             |                                    |                                        |                                    |       |       |        
|                             |                                    | Years Ended                            |                                    |       |       |        
|                             |                                    | December 31,                           |                                    |       |       |        
|                             |                                    |                                        |                                    |       |       | %      
|                             |                                    | 2000                                   |                                    | 2001  |       | Change  |  | Change
|                             |                                    |                                        |                                    |       |       |         |  |       
|                             | 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, partially attributable to the dispute with
Georgia-Pacific (see Georgia-Pacific Litigation
below), 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 Margin. Gross 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 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

7



---



##### 





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 mill was profitable through
1998, but declining sales resulted in losses of approximately
$2.6 million and $1.5 million in 1999 and 2000,
respectively. We expect the proceeds from the sale of the real
estate to more than offset the pretax charge. The
$4.4 million charge included a $2.2 million noncash
asset impairment write down of fixed assets to estimated net
realizable value, a $1.2 million accrual for severance and
termination benefits for 16 salaried and 59 hourly
employees terminated in connection with this plan and a
$989 thousand accrual for other exit costs. During 2001, we
paid $1.2 million in severance and termination benefits and
$597 thousand in other exit costs. The remaining other exit
costs were paid by December 31, 2002. As of
December 31, 2002, one employee remained to assist in the
closing of the mill.

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 asset impairment write down
of fixed assets to estimated net realizable value, a
$464 thousand accrual for severance and termination
benefits for 5 salaried and 31 hourly employees
terminated in connection with this plan and a $422 thousand
accrual for other exit costs. All exit costs were paid as of
December 31, 2001. As of December 31, 2001, no
employees remained at the plant.

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. We adopted the
plan to close the mill in conjunction with our ongoing efforts
to increase manufacturing efficiency and reduce costs in our
mill system. The $6.9 million charge included a
$5.7 million noncash asset impairment charge to write-down
machinery and equipment 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 by December 31, 2000. As of December 31,
2002, one employee remained to assist in marketing the land and
building. The property is currently held for sale mill closure
did not have a material impact on our operations.

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 mill
experienced a slowdown in gypsum facing paper shipments during
the third quarter of 2000, and the shutdown was precipitated by
the refusal of Georgia-Pacific, formerly our 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, a
$558 thousand accrual for severance and termination
benefits for 19 salaried and 46 hourly employees
terminated in connection with this plan, and a
$968 thousand accrual for other exit costs. During 2001 and
2000, we paid $178 thousand and $380 thousand,
respectively, in severance and termination benefits and $548
thousand and $346 thousand, respectively, in other exit costs.
The remaining other exit costs were paid as of June 30,
2002. As of December 31, 2002, no employees remained at the
mill. We are currently marketing the property. This mill
contributed sales and operating income of $12.4 million and
$1.2 million, respectively, for the nine months ended
September 30, 2000 and $20.5 million and
$2.1 million, respectively, for the year ended
December 31, 1999.

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

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

8



---



##### 





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 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). 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. 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 an extraordinary loss of $4.3 million related
to the early 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).

Events of September 11, 2001. The horrific terrorist
attacks against the United States and their aftermath did not,
during 2001, and are not currently expected to, have a direct
material effect on our operations. However, to the extent that
those events, other terrorist activities, the U.S. military
response and the resulting uncertainties have adversely
affected, or will continue to adversely affect, the United
States economy in general, sectors on which we depend in
particular, and the U.S. capital markets, our results of
operations, financial condition and stock price have been, and
could continue to be, adversely affected.

Results of Operations 2000  1999

The following tables show 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 Note 11 of the consolidated financial
statements.

|                                                              |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |      |      |      |  
|------------------------------------------------------------- | --------------------------------------------------------- | --------------------- | ----------------------------------------- | ------- | ----- | ------- |  | ------ | ----- | ------- |  | ----- | ---- | ----- | - | ---- | ---- | ---- | -
|                                                              |                                                           |                       |                                           |         |       |        
|                                                              |                                                           | Years Ended           |                                           |         |       |        
|                                                              |                                                           | December 31,          |                                           |         |       |        
|                                                              |                                                           |                       |                                           |         |       | %      
|                                                              |                                                           | 1999                  |                                           | 2000    |       | Change  |  | Change
|                                                              |                                                           |                       |                                           |         |       |         |  |       
|Production source of paperboard tons sold (in
    thousands): |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |     
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | From paperboard mill production                           |                       |                                           | 1,064.9 |       |         |  | 999.1  |       |         |  | (65.8 | )    |       |   | -6.2 | %   
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Outside purchases                                         |                       |                                           | 90.6    |       |         |  | 122.4  |       |         |  | 31.8  |      |       |   | 35.1 | %   
|                                                              |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |     
|                                                              |                                                           |                       | Total paperboard tonnage                  |         |       | 1,155.5 |  |        |       | 1,121.5 |  |       |      | (34.0 | ) |      |      | -2.9 | %
|                                                              |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |     
|Tons sold by market (in thousands):                           |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |     
|                                                              | Tube, core and composite container volume                 |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |      |     
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                           | Paperboard (internal) |                                           |         | 203.2 |         |  |        | 202.9 |         |  |       | (0.3 | )     |   |      | -0.1 | %   
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                                                           | Outside purchases     |                                           |         | 18.9  |         |  |        | 25.9  |         |  |       | 7.0  |       |   |      | 37.0 | %   
|                                                              |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |     
|                                                              | Tube, core and composite container converted
    products |                       |                                           | 222.1   |       |         |  | 228.8  |       |         |  | 6.7   |      |       |   | 3.0  | %   
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Unconverted paperboard                                    |                       |                                           | 41.6    |       |         |  | 37.6   |       |         |  | (4.0  | )    |       |   | -9.6 | %   
|                                                              |                                                           |                       |                                           |         |       |         |  |        |       |         |  |       |      |       |   |     
|                                                              |                                                           |                       | Tube, core and composite container volume |         |       | 263.7   |  |        |       | 266.4   |  |       |      | 2.7   |   |      |      | 1.0  | %

9



---



##### 



|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |      |       |       |  
|---------------------------- | ------------------------------------ | -------------------------------------- | ------------------------------------ | ----- | ----- | ------- |  | ------ | ----- | ------- |  | ----- | ----- | ----- | - | ---- | ----- | ----- | -
|                             |                                      |                                        |                                      |       |       |        
|                             |                                      | Years Ended                            |                                      |       |       |        
|                             |                                      | December 31,                           |                                      |       |       |        
|                             |                                      |                                        |                                      |       |       | %      
|                             |                                      | 1999                                   |                                      | 2000  |       | Change  |  | Change
|                             |                                      |                                        |                                      |       |       |         |  |       
|                             | Folding carton volume                |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |      |      
|                            
|                            
|                            
|                            
|                             |                                      | Paperboard (internal)                  |                                      |       | 65.2  |         |  |        | 67.9  |         |  |       | 2.7   |       |   |      | 4.1   | %    
|                            
|                            
|                            
|                            
|                             |                                      | Outside purchases                      |                                      |       | 58.3  |         |  |        | 86.8  |         |  |       | 28.5  |       |   |      | 48.9  | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             | Folding carton converted products    |                                        |                                      | 123.5 |       |         |  | 154.7  |       |         |  | 31.2  |       |       |   | 25.3 | %    
|                            
|                            
|                            
|                            
|                             | Unconverted paperboard               |                                        |                                      | 286.4 |       |         |  | 270.2  |       |         |  | (16.2 | )     |       |   | -5.7 | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             |                                      |                                        | Folding carton volume                |       |       | 409.9   |  |        |       | 424.9   |  |       |       | 15.0  |   |      |       | 3.7   | %
|                             | Gypsum wallboard facing paper volume |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |      |      
|                            
|                            
|                            
|                            
|                             |                                      | Unconverted paperboard                 |                                      |       | 265.8 |         |  |        | 196.1 |         |  |       | (69.7 | )     |   |      | -26.2 | %    
|                            
|                            
|                            
|                            
|                             |                                      | Outside purchases (for resale)         |                                      |       | 4.5   |         |  |        | 0.5   |         |  |       | (4.0  | )     |   |      | -88.9 | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             |                                      |                                        | Gypsum wallboard facing paper volume |       |       | 270.3   |  |        |       | 196.6   |  |       |       | (73.7 | ) |      |       | -27.3 | %
|                             | Other specialty products volume      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |      |      
|                            
|                            
|                            
|                            
|                             |                                      | Paperboard (internal)                  |                                      |       | 91.6  |         |  |        | 108.7 |         |  |       | 17.1  |       |   |      | 18.7  | %    
|                            
|                            
|                            
|                            
|                             |                                      | Outside purchases                      |                                      |       | 8.9   |         |  |        | 9.2   |         |  |       | 0.3   |       |   |      | 3.4   | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             | Other specialty converted products   |                                        |                                      | 100.5 |       |         |  | 117.9  |       |         |  | 17.4  |       |       |   | 17.3 | %    
|                            
|                            
|                            
|                            
|                             | Unconverted paperboard               |                                        |                                      | 111.1 |       |         |  | 115.7  |       |         |  | 4.6   |       |       |   | 4.1  | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             |                                      |                                        | Other specialty products volume      |       |       | 211.6   |  |        |       | 233.6   |  |       |       | 22.0  |   |      |       | 10.4  | %
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             |                                      |                                        | Total paperboard tonnage             |       |       | 1,155.5 |  |        |       | 1,121.5 |  |       |       | (34.0 | ) |      |       | -2.9  | %
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|Gross paper margins ($/ton): |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                            
|                            
|                            
|                            
|                             | Paperboard mill:                     |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |      |      
|                            
|                            
|                            
|                            
|                             |                                      | Average same-mill net selling price    |                                      | $     | 413   |         |  | $      | 441   |         |  | $     | 28    |       |   |      | 6.8   | %    
|                            
|                            
|                            
|                            
|                             |                                      | Average same-mill recovered fiber cost |                                      |       | 84    |         |  |        | 101   |         |  |       | 17    |       |   |      | 20.2  | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             |                                      |                                        | Paperboard mill gross paper margin   |       | $     | 329     |  |        | $     | 340     |  |       | $     | 11    |   |      |       | 3.3   | %
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             | Tube and core:                       |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |      |      
|                            
|                            
|                            
|                            
|                             |                                      | Average net selling price              |                                      | $     | 730   |         |  | $      | 786   |         |  | $     | 56    |       |   |      | 7.7   | %    
|                            
|                            
|                            
|                            
|                             |                                      | Average paperboard cost                |                                      |       | 390   |         |  |        | 441   |         |  |       | 51    |       |   |      | 13.1  | %    
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     
|                             |                                      |                                        | Tube and core gross paper margin     |       | $     | 340     |  |        | $     | 345     |  |       | $     | 5     |   |      |       | 1.5   | %
|                             |                                      |                                        |                                      |       |       |         |  |        |       |         |  |       |       |       |   |     

Sales. Our consolidated sales for the year ended
December 31, 2000 increased 8.3% to $1,014.6 million
from $936.9 million in 1999. Acquisitions completed during
1999 and 2000 accounted for $104.9 million of sales during
2000. These acquisitions included MilPak, Inc., Arrow Paper
Products Company and Crane Carton Company, LLC, all of which
were completed in 2000. The acquisitions of Carolina Component
Concepts, Inc., International Paper Companys Sprague
boxboard mill, Halifax Paperboard Co., Inc., Tenneco Packaging,
Inc.s folding carton division and Carolina Converting,
Inc. were completed in 1999. 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 1999 and
2000, sales decreased 2.9% during 2000. This decrease was due to
lower volume and sales from the paperboard segment, partially
attributable to the dispute with Georgia-Pacific, and lower
sales from the carton and custom packaging segment, partially
offset by higher sales from the tube, core and composite
container segment.

Total paperboard tonnage for 2000 decreased 2.9% to 1,121.5
thousand tons from 1,155.5 thousand tons in 1999. Excluding
acquisitions completed during 1999 and 2000, total paperboard
tonnage declined 8.6% to 1,056.0 thousand tons. This decrease
was primarily due to lower shipments of unconverted paperboard
to external customers in the gypsum wallboard facing paper and
folding carton markets. This decrease in shipments to gypsum
wallboard facing paper customers was partially attributable to
the dispute with Georgia-Pacific. Excluding acquisitions,
outside purchases increased 10.3% to 99.9 thousand tons. Tons
sold from paperboard mill production decreased 6.2% for 2000 to
999.1 thousand tons, compared with 1,064.9 thousand tons
for 1999, and decreased 10.4% excluding acquisitions. Total
tonnage converted increased 12.5% for 2000 to 501.4 thousand
tons compared to 445.8 thousand tons in 1999, and increased 1.2%
over 1999, excluding acquisitions. Excluding acquisitions
completed during 1999 and 2000, volumes in the folding carton
and other specialty end-use markets decreased 9.3% and increased
4.9%, respectively.

10



---



##### 



Gross Margin. Gross margin for 2000 decreased to 25.1% of
sales from 27.0% in 1999. This margin decrease was due primarily
to lower volume and higher energy costs in the paperboard
segment, combined with lower margins in the carton and custom
packaging and tube, core and composite container segments.
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 higher raw material costs and soft
volume in the plastic core and composite container businesses.

Restructuring and Other Costs. 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. We adopted the plan to close
the mill in conjunction with our ongoing efforts to increase
manufacturing efficiency and reduce costs in our mill system.
The $6.9 million charge included a $5.7 million
noncash asset impairment charge to write-down machinery and
equipment to 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 by
December 31, 2000. As of December 31, 2002, one
employee remained to assist in marketing the land and building.
We are currently marketing the property.

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 mill
closing was the result of a slowdown in gypsum facing paper
shipments during the third quarter of 2000 and a contract
dispute with Georgia-Pacific. The $8.6 million charge
included a $7.0 million noncash asset impairment write-down
of fixed assets to net realizable value, a $558 thousand accrual
for severance and termination benefits for 19 salaried and
46 hourly employees terminated in connection with this
plan, and a $968 thousand accrual for other exit costs. During
2000, we paid $380 thousand in severance and termination
benefits and $346 thousand in other exit costs. We are
currently marketing the land and building. This mill contributed
sales of $12.4 million and operating income of
$1.2 million for the nine months ended September 30,
2000. It contributed sales of $20.5 million and operating
income of $2.1 million for the year ended December 31,
1999.

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

Operating Income. Operating income for 2000 was
$41.9 million, a decrease of $38.7 million, or 48.0%,
from 1999. Operating income for comparable facilities, excluding
restructuring and other costs, declined $23.1 million, or
28.6%. This decline was due primarily to lower volume and higher
energy costs in the paperboard segment, combined with lower
margins in the carton and custom packaging and tube, core and
composite container segments. Selling, general and
administrative expenses increased by $19.5 million, or
15.5%, in 2000 compared to 1999. Acquisitions accounted for
approximately $12.5 million of the increase and information
technology costs accounted for approximately $3.2 million
of the increase.

Other Income (Expense). Interest expense increased 33.8%
to $34.1 million for 2000 from $25.5 million in 1999
due to higher average borrowings under our senior credit
facility and the effect of a full year of interest expense
attributable to our $200.0 million public debt securities
offering in June 1999.

Equity in income from unconsolidated affiliates was
$6.5 million, down $2.7 million, or 29.2%, from 1999
primarily due to lower operating results for Standard Gypsum,
L.P., our gypsum wallboard joint venture with Temple-Inland,
Inc. and start-up costs at Premier Boxboard Limited LLC, our
containerboard mill joint venture with Temple-Inland.

Net Income. Net income decreased 80.0% to
$8.2 million from $40.9 million in 1999. Diluted net
income per common share decreased 81.0% to $0.31 for 2000 from
$1.62 in 1999.

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 $25.5 million less cash from operations
than we did in 2000. Factors that can affect our operating
results are

11



---



##### 





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
 Joint Venture Financings, 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
guarantees of the credit facilities 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 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, 2000 and December 31, 2001, we were
not in compliance with the leverage ratio and interest coverage
ratio, respectively, under both our senior credit facility and
our joint venture guarantees, but in each case were able to
obtain appropriate amendments and waivers with respect to each
instance of non-compliance (and with respect to any technical
cross-default). In 2002 and 2003, we were required to obtain
additional amendments and waivers under both our senior credit
facility and our joint venture guarantees. See Subsequent
Events. Absent further material deterioration of the U.S.
economy as a whole or the specific sectors on which our business
depends (see 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 below), we
believe that it is unlikely that we will breach our covenants
under our debt agreements or joint venture guarantees during the
balance of 2003. However, we cannot assure you 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 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 guarantees, our liquidity and financial condition
would be materially and adversely affected.

Borrowings. At December 31, 2001 and 2000, 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 |         | 2000
|                                 |  |      |         |     
|Senior credit facility           |  | $    |        |      |  | $ | 194,000 | 
|                                
|                                
|                                
|                                
|9 7/8% senior subordinated notes |  |      | 277,326 |      |  |   |        | 
|                                
|                                
|                                
|                                
|7 1/4% senior notes              |  |      | 25,449  |      |  |   |        | 
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |      | 197,716 |      |  |   | 198,791 | 
|                                
|                                
|                                
|                                
|7.74% senior notes               |  |      |        |      |  |   | 66,200  | 
|                                
|                                
|                                
|                                
|Other notes payable              |  |      | 8,248   |      |  |   | 9,081   | 
|                                 |  |      |         |      |  |   |         | 
|Total debt                       |  | $    | 508,739 |      |  | $ | 468,072 | 
|                                 |  |      |         |      |  |   |         | 

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 an extraordinary loss of
$2.7 million which includes the prepayment penalty and
unamortized issuance costs of

12



---



##### 





Our credit facility 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, 2001, versus $194.0 million outstanding
on our former senior credit facility on December 31, 2000;
however, an aggregate of $9.8 million in letter of credit
obligations were outstanding on December 31, 2001. We
intend to use the facility for working capital, capital
expenditures and other general corporate purposes. Although the
facility is unsecured, our obligations under the facility are
unconditionally guaranteed, on a joint and several basis, by all
of our existing and subsequently acquired wholly-owned domestic
subsidiaries.

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, 2001, the current margins are 2.0% for
Eurodollar rate loans and 0.75% 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 0.5%
based on our leverage ratio at December 31, 2001.

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 (as described above), minimum tangible net worth and a
minimum interest 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 the third and fourth quarters of 2001 and the first
quarter of 2002, we completed three 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.

See Subsequent Events below, which details the
third, fourth, fifth and sixth amendments to the senior credit
facility.

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.

As noted above, on March 29, 2001, we repaid in full all
outstanding balances under our former senior credit facility and
7.74% senior notes. Our former senior credit facility was a
$400.0 million, five-year senior credit facility with a
scheduled maturity date in July 2002. Interest under the
facility was computed using our

13



---



##### 





Our 7.74% senior notes, which we originally issued on
October 1, 1992 to an insurance company in an aggregate
principal amount of $82.75 million, bore interest at a rate
of 7.74% per annum, payable semiannually in April and October of
each year. In connection with the repayment of our 7.74% senior
notes, we incurred a prepayment penalty of approximately
$3.6 million. As of December 31, 2000, we were not in
compliance with certain covenants under our 7.74% senior notes
that the lenders waived through the first quarter of 2001.

We have certain obligations and commitments to make future
payments under contracts, such as debt and lease agreements. See
Notes 5 and 6 of Notes to Consolidated Financial
Statements which details these future obligations and
commitments.

Interest Rate Swaps. 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. These swap agreements decreased interest expense by
$3.8 million in 2001. 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 the three-month LIBOR at
December 31, 2001, our swaps would reduce our interest
expense by approximately $9.9 million in 2002 compared with
$3.8 million in 2001, as mentioned above. If the
three-month LIBOR increased 100 basis points, our savings on
interest expense would be reduced by approximately
$2.85 million.

The following table identifies the debt instrument hedged, the
notional amount, the fixed spread and the three-month LIBOR at
December 31, 2001 for each of our interest rate swaps. The
December 31, 2001 three-month LIBOR is presented for
informational purposes only and does not represent our actual
effective rates in place at December 31, 2001.

|                                 |  |          |         |        |  |              |       |               |  |  |       |   |  |  |       |  
|-------------------------------- |  | -------- | ------- | ------ |  | ------------ | ----- | ------------- |  |  | ----- | - |  |  | ----- | -
|                                 |  | Notional |         |        |  | LIBOR at     |       |              
|                                 |  | Amount   |         | Fixed  |  | December 31, |       | Total        
|Debt Instrument                  |  | (000s)  |         | Spread |  | 2001         |       | Variable Rate
|                                 |  |          |         |        |  |              |       |              
|9 7/8% senior subordinated notes |  | $        | 185,000 |        |  |              | 4.400 | %             |  |  | 1.881 | % |  |  | 6.281 | %
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 50,000  |        |  |              | 2.365 |               |  |  | 1.881 |   |  |  | 4.246 |  
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 25,000  |        |  |              | 1.445 |               |  |  | 1.881 |   |  |  | 3.326 |  
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 25,000  |        |  |              | 1.775 |               |  |  | 1.881 |   |  |  | 3.656 |  

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 margin 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 life of the notes and will
partially offset the increase in interest expense. We executed
these transactions in order to take advantage of current market
conditions.

See Subsequent Events below, which describes
additional interest rate swap transactions.

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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. As described below, we have
guaranteed certain obligations of these joint ventures. A
default under these guarantees also constitutes a default under
the credit facilities of these joint ventures and our senior
credit facility. The guarantees also contain independent
financial maintenance covenants that are identical to the
covenants under our senior credit facility. Accordingly, 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.
At December 31, 2000 and December 31, 2001, we were
not in compliance with the leverage ratio and interest coverage
ratio, respectively, under these guarantees, but in each case
were able to obtain appropriate amendments and waivers with
respect to this non-compliance and with respect to any technical
cross-defaults.

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 have severally and unconditionally guaranteed
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 similarly
guaranteed 50% of Standard Gypsums obligations. As of
December 31, 2001, the outstanding letters of credit
totaled approximately $56.2 million, of which one-half
(approximately $28.1 million) is guaranteed by us.

Premier Boxboard is the borrower under a credit facility
providing for up to $40.0 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. 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, 2001, the
outstanding principal amount of borrowings under the facility
(including outstanding letters of credit) was approximately
$20.2 million, of which one-half (approximately
$10.1 million) is guaranteed by us. 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. Additionally, 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 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

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We generally consider our relationship with Temple-Inland to be
good with respect to both of our joint ventures and did not
experience any material liquidity events resulting from either
additional capital contributions or buy-sell contingencies with
respect to our joint ventures during 2002. We cannot assure you,
however, that these assumptions will prove accurate or that such
liquidity events will not arise.

Cash from Operations. Cash generated from operations was
$56.9 million for the year ended December 31, 2001,
compared with $82.5 million in 2000. The decrease in 2001
compared to the same period in 2000 was due primarily to lower
net income and a decrease in distributions from our joint
ventures, partially offset by the receipt of a
$10.0 million federal tax refund in 2001.

Capital Expenditures. Capital expenditures were
$28.1 million in 2001 versus $58.3 million in 2000.
Aggregate capital expenditures of approximately
$22.5 million were made during 2002.

Acquisitions. In February 2000, we acquired all of the
outstanding stock of MilPak, Inc. in exchange for
248,132 shares of our common stock valued at
$4.7 million and $4.7 million in cash. MilPak operates
a facility located in Pine Brook, New Jersey that provides
blister packaging, cartoning and labeling, and other contract
packaging services.

In September 2000, we acquired all of the outstanding stock of
Arrow Paper Products Company in exchange for 342,743 shares
of our common stock valued at $5.1 million. Arrow is
located in Saginaw, Michigan and operates two tube and core
converting facilities that serve customers in the automotive,
film, housewares and other specialty tube and core markets.

In October 2000, we acquired 100% of the membership interests in
Crane Carton Company, LLC in exchange for 1,659,790 shares
of our common stock valued at $19.0 million plus
$5.8 million of assumed debt, including industrial
development bonds in the aggregate amount of $3.5 million.
We issued 16,595 of the shares in 2000 and the balance in 2001.
Crane operates a single folding carton manufacturing facility
located in suburban Chicago, Illinois.

During the second quarter of 1999, we formed a joint venture
with Temple-Inland, Inc. to own and operate Temple-Inlands
Newport, Indiana containerboard mill. The joint venture, Premier
Boxboard Limited LLC, undertook a 14-month, $82.0 million
project to modify the mill to enable it to produce a new,
lightweight gypsum facing paper along with other containerboard
grades. The mill began operations as modified at the beginning
of the third quarter of 2000. Under the joint venture agreement,
we contributed $50.0 million to the joint venture during
the second quarter of 2000, and Temple-Inland contributed the
net assets of the mill and received $50.0 million in notes
issued by Premier Boxboard. Each partner has a 50% interest in
the joint venture, and we account for our interest in this joint
venture under the equity method. Our subsidiary, PBL Inc.,
manages the day-to-day operations of Premier Boxboard, pursuant
to a management agreement with Temple-Inland.

In April 1999, we purchased International Paper Companys
Sprague boxboard mill located in Versailles, Connecticut. This
acquisition has had a significant impact on our earnings in 2000
and 2001. Sprague incurred operating losses of
$17.2 million and $7.2 million in 2000 and 2001,
respectively, including the reversal of reserves related to
unfavorable supply contracts. The losses were attributable to a
combination of unfavorable fixed price contracts, low capacity
utilization, high energy costs and higher fiber costs that we
were unable to pass through to our customers. Our primary
objectives at Sprague have been to improve quality, reduce costs
and increase sales volume. We have made significant progress in
quality and cost and are beginning to realize the benefits.
Based on improvements we have made since the acquisition, we now
believe Sprague is competitive in terms of cost and quality, and
we expect Spragues financial performance to improve with
increases in sales volume.

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See Subsequent Events below for a discussion of
additional acquisitions.

Dividends. We paid cash dividends of $8.9 million in
2001 versus $18.5 million in 2000. In February 2001, we
reduced our first quarter dividend from $0.18 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. As described
below under Subsequent Events, we have temporarily
suspended future payments of quarterly dividends, beginning in
the first quarter of 2002. 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.
Although our former debt agreements contained no specific
limitations on the payment of dividends, our current debt
agreements contain certain limitations on the payment of future
dividends and since March 2002 have precluded us from paying
cash dividends.

Share Repurchases. We did not purchase any shares of our
common stock during 1999, 2000 or 2001 under our common stock
purchase plan. We have cumulatively purchased 3,169,000 shares
since January 1996. Our board of directors has authorized
purchases of up to 831,000 additional shares. However, our
9 7/8% senior subordinated notes and our senior credit
facility limit our ability to purchase our common stock.

Inflation

Raw material price changes have had, and continue to have, a
material effect on our operations. Energy prices had a material
effect on our operations in 2000 and 2001. 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 2002, we completed a third amendment to our senior
credit facility that 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 the second quarter of 2002 from 2.75:1.0 to
2.50:1.0.

Also in January 2002, we entered into agreements with the PBL
and Standard Gypsum lenders that correspond to the amendments
made in the third amendment to the senior credit facility, as
described above, in order to avoid events of default under those
guarantees resulting from a violation of the interest ratio
coverage covenants.

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.

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 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 was the same
notional amount, had 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 September 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.

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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.

In September 2002, in connection with the acquisition of the
Smurfit Industrial Packaging Group, we entered into a fourth
amendment to our senior credit facility. 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 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% guarantees of the credit facilities of
Standard Gypsum and Premier Boxboard.

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%.

In December 2002, we completed a fifth amendment to our 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 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.

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

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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%.

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, 2002 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 repay 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.

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.

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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 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 full amount of this letter of credit in
the event the letter of credit remains outstanding on that date.
The letter of credit is renewable annually and my be drawn in
the event of a default under the Standard Gypsum credit
facility. However, in the event we are in default under our
senior credit facility or have insufficient availability under
the facility, we may not be able to obtain an extension or
renewal of this letter of credit, which could result in an event
of default under our Standard Gypsum credit facility. Further,
if we are not able to refinance our existing senior credit
facility prior to April 1, 2005, we may not be able to
obtain an alternate letter of credit in favor of the Standard
Gypsum lenders, which could result in an event of default under
our Standard Gypsum credit facility.

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 additions, 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. The reduction of the commitments under this
credit facility eliminates availability for borrowings unless we
are able to reduce outstandings under the facility. 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
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.

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 mills.

Georgia-Pacific Litigation

On May 9, 2001, we and Georgia-Pacific Corporation jointly
announced a tentative settlement regarding the litigation over
the terms of the long-term supply contract the parties entered
in April 1996. The pending

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On March 26, 2002, we reached a final settlement of the
dispute, by entering into a new five-year paperboard supply
agreement with G-P Gypsum that provides that we will produce and
sell to G-P Gypsum between 0.378 and 0.756 billion square
feet (10 to 20 thousand tons) of paper per year to be used in
G-P Gypsums ToughRock wallboard. This new paperboard
supply agreement supersedes the terms of the tentative
settlement previously announced on May 9, 2001 and the
agreement and transition period described above that had been a
part of that tentative settlement. As a result of the final
settlement, our previously filed suit against Georgia-Pacific in
the General Court of Justice, Superior Court Division of
Mecklenburg County, North Carolina (Case No. 00-CVS-12302),
and Georgia-Pacifics previously reported separate action
filed in the Superior Court of Fulton County, Georgia (Case
No. 2000-CV-27684), were each dismissed with prejudice on
April 1 and 2, 2002, respectively.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS
No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It also requires that
an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities  Deferral of the Effective
Date of FASB Statement 133. This pronouncement deferred
the effective date of SFAS No. 133 until the fiscal year
ending December 31, 2001. In June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities (an Amendment of FASB
No. 133). This pronouncement amends the accounting
and reporting standards of SFAS No. 133 for certain
derivative instruments and hedging activities. We adopted SFAS
No. 133, as amended, on January 1, 2001. This
pronouncement did not have a material impact on our consolidated
financial statements upon adoption.

In June 2001, the FASB issued SFAS No. 141, Business
Combinations (SFAS No. 141) and SFAS
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 141 supercedes
Accounting Principles Board (APB) Opinion
No. 16 Business Combinations and SFAS
No. 38, Accounting for Preacquisition Contingencies
for Purchased Enterprises. SFAS No. 141 prescribes
the accounting principles for business combinations and requires
that all business combinations be accounted for using the
purchase method of accounting. This pronouncement is effective
for all business combinations after June 30, 2001.

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, goodwill will no longer be amortized
to earnings, but instead will be reviewed periodically (at least
annually) for impairment. As of December 31, 2001, we had
$146.5 million of recorded net goodwill, which will be
subject to this new standard. During fiscal year 2001, we
recorded $3.0 million of goodwill amortization expense, net
of taxes. We

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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 adoption of this pronouncement did not
have 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.

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.

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
assure you 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 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 increased steadily
throughout 2000 and in the first quarter 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. In 2001,
energy costs increased by 9.6% to $57 per ton. This was due
primarily to increases in natural gas and fuel oil costs. Until
recently, 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 in
2000 and 2001. We continue to evaluate our energy costs and
consider ways to factor energy costs into our pricing. However,
we cannot assure you that our operating margins and results of
operations will not continue to be adversely affected by rising
energy costs.

22



---



##### 



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 and softness in the housing markets. 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.

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, 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
$17.2 million and $7.2 million in 2000 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 assure you that our acquired
businesses will achieve the same levels of revenue, profit or
productivity as our existing locations or otherwise perform as
we expect.

23



---



##### 



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 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.

Without additional capital, 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. Although we expect to use borrowed funds to pursue
these opportunities, we must continue to comply with financial
and other covenants in order to do so. 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. Existing
weaknesses in the U.S. capital markets have been, and may
continue to be, aggravated by the September 11, 2001
terrorist attacks and their aftermath. 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.

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, we have
guaranteed indebtedness of 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;                                                                                                                                                                    
|
| |  | 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;

24



---



##### 





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; and                                            
|
| |  | adversely affect the value of our common stock.                                                                                                     

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 several
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 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
assure you 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.

The conviction of our former independent auditors, Arthur
Andersen LLP, on federal obstruction of justice charges may
adversely affect Arthur Andersen LLPs ability to satisfy
any claims arising from the provision of auditing services to
us, impede our access to the capital markets and increase our
costs of complying with accounting regulations.

Arthur Andersen LLP, which audited our financial statements for
the years ended December 31, 1999, 2000 and 2001, was
convicted in June 2002 on federal obstruction of justice charges
arising from the governments investigation of Enron
Corporation and since has ceased practicing before the SEC. The
SEC has stated that, for the time being, it will continue
accepting financial statements audited by Arthur Andersen LLP
provided that we comply with the applicable rules and orders
issued by the SEC in March 2002 for this purpose. It is possible
that events arising out of the conviction may adversely affect
the ability of Arthur Andersen LLP to satisfy any claims arising
from its provision of auditing services to us, including claims
that

25



---



##### 





In order for us to conduct a registered securities offering, in
the event we seek to access the public capital markets, SEC
rules will require us to include or incorporate by reference in
any prospectus three years of audited financial statements.
These rules would require us to present audited financial
statements for one or more fiscal years audited by Arthur
Andersen LLP and obtain their consent and representations until
our audited financial statements for the fiscal year ending
December 31, 2004 become available in the first quarter of
2005. We expect that we would not be able to obtain the
necessary consent and representations from Arthur Andersen LLP.
The audit partner and substantially all of the audit team who
audited our financial statements are no longer with Arthur
Andersen LLP, and that firm would likely not agree to issue a
consent or make any representations in their absence. The SEC
recently has provided regulatory relief designed to allow
companies to dispense with the requirement to file a consent of
Arthur Andersen LLP in certain circumstances. Although we
currently believe we would meet the requirements to obtain this
relief, if the SEC eliminates or modifies this relief or if we
otherwise fail to qualify for it, we may not be able to satisfy
the SEC requirements for a registration statement or for our
periodic reports. Even if the SEC continues to accept financial
statements previously audited by Arthur Andersen LLP, but
without their current consent and representations, those
financial statements would not provide us and any underwriters
and purchasers of our securities with the same level of
protection under the securities laws as would otherwise be the
case.

In any of the situations described above, our access to the
capital markets, or our ability to timely comply with periodic
reporting requirements, would be impaired unless Deloitte &
Touche LLP, our current independent accounting firm, or another
independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. In
addition, any delay or inability to access the public capital
markets, or to comply with periodic reporting requirements,
caused by these circumstances could have a material adverse
effect on our business, profitability and growth prospects. In
addition, some investors may choose not to hold or invest in
securities of a company whose financial statements were audited
by Arthur Andersen LLP. As a result, among other things, the
price or marketability of our securities could be impaired.



|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2001, we had outstanding borrowings of
approximately $514.0 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, 2001, 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. Interest is
computed using our choice of either (a) the greater of the
prime rate or the federal funds rate plus one-half of 1 percent
or (b) the adjusted Eurodollar Interbank Offered Rate, in
each case plus an applicable margin determined by reference to
our leverage ratio. Additionally, the undrawn portion of the
facility is subject to a facility fee at an annual rate that is
also based on our leverage ratio. No borrowings were outstanding
under the facility as of December 31, 2001, although
approximately $9.8 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.

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. We adopted
SFAS 133, Accounting for

26



---



##### 





The table below provides information about the Companys
derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including
interest rate swaps and debt obligations. For debt obligations,
the table presents principal cash flows and related effective
interest rates by expected maturity dates. For interest rate
swaps, the table presents notional amounts and weighted average
interest rates by expected (contractual) maturity dates.
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, 2001.

|                                    |                         |                            |   |      |  |      |   |      |  |            |   |       |  |  |   |   |  |   |         |       |   |   |         |       |  
|----------------------------------- | ----------------------- | -------------------------- | - | ---- |  | ---- | - | ---- |  | ---------- | - | ----- |  |  | - | - |  | - | ------- | ----- | - | - | ------- | ----- | -
|                                    |                         |                           
|                                    |                         | Contractual Maturity Dates
|                                    |                         |                           
|                                    |                         | 2002                       |   | 2003 |  | 2004 |   | 2005 |  | 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)              |                         |                            |  |      |  |      |  |      |  |            |  |       |  |  |  |   |  | $ | 200,000 |       |   | $ | 200,000 |      
|                                   
|                                   
|                                   
|                                   
|                                    | Average interest rate   |                            |   |     |  |      |   |     |  |            |   |      |  |  |   |  |  |   |         | 7.47  | % |   |         | 7.47  | %
|                                   
|                                   
|                                   
|                                   
|Interest Rate Derivatives           |                         |                            |   |      |  |      |   |      |  |            |   |       |  |  |   |   |  |   |         |       |   |   |         |      
|                                   
|                                   
|                                   
|                                   
|Fixed to Variable(1)                |                         |                            |  |      |  |      |  |      |  |            |  |       |  |  |  |   |  | $ | 285,000 |       |   | $ | 285,000 |      
|                                   
|                                   
|                                   
|                                   
|                                    | Average pay rate        |                            |   |     |  |      |   |     |  |            |   |      |  |  |   |  |  |   |         | 8.998 | % |   |         | 8.998 | %
|                                   
|                                   
|                                   
|                                   
|                                    | Average receive rate(2) |                            |   |     |  |      |   |     |  |            |   |      |  |  |   |  |  |   |         | 5.862 | % |   |         | 5.862 | %



---



|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | See Note 5 to the consolidated financial statements.                                    
|(2) | The average receive rate represents the actual rates in effect
    at December 31, 2001.

27



---



##### 



ITEM 8:     FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA

CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |          |         | 
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------- | -------- | ------- | - | ------- | -------- | ------- | 
|                                                                                                    |                                                                                                                                                                         |                                   
|                                                                                                    |                                                                                                                                                                         | December 31,                      
|                                                                                                    |                                                                                                                                                                         |                                   
|                                                                                                    |                                                                                                                                                                         | 2001                               |         | 2000    
|                                                                                                    |                                                                                                                                                                         |                                    |         |         
|                                                                                                    |                                                                                                                                                                         |                                   
|                                                                                                    |                                                                                                                                                                         | (In thousands, except             
|                                                                                                    |                                                                                                                                                                         | share data)                       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|ASSETS                                                                                             
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|CURRENT ASSETS:                                                                                     |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Cash and cash equivalents                                                                                                                                               |                                    | $       | 64,244   |         |   | $       | 8,900    |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Receivables, net of allowances for doubtful
    accounts, returns, and discounts of $4,250 and $3,332 in 2001
    and 2000, respectively                                |                                    |         | 86,297   |         |   |         | 93,145   |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Inventories                                                                                                                                                             |                                    |         | 101,823  |         |   |         | 111,560  |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Refundable income taxes                                                                                                                                                 |                                    |         | 17,949   |         |   |         | 3,913    |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Prepaid pension                                                                                                                                                         |                                    |         | 10,036   |         |   |         |         |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Other current assets                                                                                                                                                    |                                    |         | 6,420    |         |   |         | 9,438    |        
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         | Total current assets               |         |          | 286,769 |   |         |          | 226,956 | 
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|PROPERTY, PLANT AND EQUIPMENT:                                                                      |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Land                                                                                                                                                                    |                                    |         | 12,620   |         |   |         | 12,663   |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Buildings and improvements                                                                                                                                              |                                    |         | 135,727  |         |   |         | 127,816  |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Machinery and equipment                                                                                                                                                 |                                    |         | 625,691  |         |   |         | 620,418  |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Furniture and fixtures                                                                                                                                                  |                                    |         | 14,326   |         |   |         | 12,164   |        
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         |                                    | 788,364 |          |         |   | 773,061 |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Less accumulated depreciation                                                                                                                                           |                                    |         | (337,988 | )       |   |         | (289,752 | )      
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         | Property, plant and equipment, net |         |          | 450,376 |   |         |          | 483,309 | 
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|GOODWILL, net of accumulated amortization of
    $20,481 and $16,023 in 2001 and 2000, respectively |                                                                                                                                                                         |                                    | 146,465 |          |         |   | 150,894 |         
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                             |                                                                                                                                                                         |                                    | 62,285  |          |         |   | 65,895  |         
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|OTHER ASSETS                                                                                        |                                                                                                                                                                         |                                    | 15,086  |          |         |   | 7,043   |         
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         | $                                  | 960,981 |          |         | $ | 934,097 |         
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|CURRENT LIABILITIES:                                                                                |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Current maturities of debt                                                                                                                                              |                                    | $       | 48       |         |   | $       | 1,259    |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Accounts payable                                                                                                                                                        |                                    |         | 52,133   |         |   |         | 63,752   |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Accrued liabilities                                                                                                                                                     |                                    |         | 37,749   |         |   |         | 56,531   |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Dividends payable                                                                                                                                                       |                                    |         | 833      |         |   |         | 4,702    |        
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         | Total current liabilities          |         |          | 90,763  |   |         |          | 126,244 | 
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|SENIOR CREDIT FACILITY                                                                              |                                                                                                                                                                         |                                    |        |          |         |   | 194,000 |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|OTHER LONG-TERM DEBT, less current maturities                                                       |                                                                                                                                                                         |                                    | 508,691 |          |         |   | 272,813 |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|DEFERRED INCOME TAXES                                                                               |                                                                                                                                                                         |                                    | 66,760  |          |         |   | 50,949  |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|DEFERRED COMPENSATION                                                                               |                                                                                                                                                                         |                                    | 1,741   |          |         |   | 2,315   |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|OTHER LIABILITIES                                                                                   |                                                                                                                                                                         |                                    | 12,512  |          |         |   | 6,853   |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|MINORITY INTEREST                                                                                   |                                                                                                                                                                         |                                    | 935     |          |         |   | 1,115   |         
|COMMITMENTS AND CONTINGENCIES (Note 6)                                                              |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|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, 27,853,897 and 26,204,567 shares issued and
    outstanding at December 31, 2001 and 2000, respectively |                                    |         | 2,785    |         |   |         | 2,620    |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Additional paid-in capital                                                                                                                                              |                                    |         | 180,116  |         |   |         | 160,824  |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Retained earnings                                                                                                                                                       |                                    |         | 97,488   |         |   |         | 117,117  |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Accumulated other comprehensive loss                                                                                                                                    |                                    |         | (810     | )       |   |         | (753     | )      
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         |                                    | 279,579 |          |         |   | 279,808 |         
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         
|                                                                                                    |                                                                                                                                                                         | $                                  | 960,981 |          |         | $ | 934,097 |         
|                                                                                                    |                                                                                                                                                                         |                                    |         |          |         |   |         |         

The accompanying notes are an integral part of these
consolidated balance sheets.

28



---



##### 



CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |         |      |         | 
|------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | ---------------- | ------- | ----- | ------- | --------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | 
|                                                                                |                                                          |                                      
|                                                                                |                                                          | For the Years Ended December 31,     
|                                                                                |                                                          |                                      
|                                                                                |                                                          | 2001                                  |                  | 2000    |       | 1999   
|                                                                                |                                                          |                                       |                  |         |       |        
|                                                                                |                                                          |                                      
|                                                                                |                                                          | (In thousands, except per share data)
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|SALES                                                                           |                                                          | $                                     | 913,686          |         |       | $       | 1,014,615 |         |      | $       | 936,928 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|COST OF SALES                                                                   |                                                          |                                       | 680,172          |         |       |         | 759,521   |         |      |         | 683,772 |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|                                                                                |                                                          |                                       | Gross profit     |         |       | 233,514 |           |         |      | 255,094 |         |         |      | 253,156 | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|FREIGHT COSTS                                                                   |                                                          |                                       | 52,806           |         |       |         | 51,184    |         |      |         | 46,839  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                    |                                                          |                                       | 146,934          |         |       |         | 145,268   |         |      |         | 125,784 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|RESTRUCTURING AND OTHER COSTS (Note 12)                                         |                                                          |                                       | 7,083            |         |       |         | 16,777    |         |      |         |        |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|                                                                                |                                                          |                                       | Operating income |         |       | 26,691  |           |         |      | 41,865  |         |         |      | 80,533  | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|OTHER (EXPENSE) INCOME:                                                         |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense                                         |                                       |                  | (41,153 | )     |         |           | (34,063 | )    |         |         | (25,456 | )   
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest income                                          |                                       |                  | 986     |       |         |           | 412     |      |         |         | 603     |     
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Equity in (loss) income of unconsolidated
    affiliates |                                       |                  | (2,610  | )     |         |           | 6,533   |      |         |         | 9,224   |     
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Other, net                                               |                                       |                  | (1,904  | )     |         |           | (918    | )    |         |         | (459    | )   
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|                                                                                |                                                          |                                       | (44,681          | )       |       |         | (28,036   | )       |      |         | (16,088 | )      
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|(LOSS) INCOME BEFORE MINORITY INTEREST,
    INCOME TAXES AND EXTRAORDINARY LOSS |                                                          |                                       | (17,990          | )       |       |         | 13,829    |         |      |         | 64,445  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|MINORITY INTEREST IN LOSSES (INCOME)                                            |                                                          |                                       | 180              |         |       |         | (169      | )       |      |         | (356    | )      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|(BENEFIT) PROVISION FOR INCOME TAXES                                            |                                                          |                                       | (5,903           | )       |       |         | 5,485     |         |      |         | 23,142  |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|(LOSS) INCOME BEFORE EXTRAORDINARY LOSS                                         |                                                          |                                       | (11,907          | )       |       |         | 8,175     |         |      |         | 40,947  |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
    DEBT, NET OF TAX BENEFIT    |                                                          |                                       | (2,695           | )       |       |         |          |         |      |         |        |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|NET (LOSS) INCOME                                                               |                                                          | $                                     | (14,602          | )       |       | $       | 8,175     |         |      | $       | 40,947  |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|BASIC                                                                           |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|(LOSS) INCOME PER COMMON SHARE BEFORE
    EXTRAORDINARY LOSS                    |                                                          | $                                     | (0.42            | )       |       | $       | 0.31      |         |      | $       | 1.63    |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|EXTRAORDINARY LOSS PER COMMON SHARE                                             |                                                          |                                       | (0.10            | )       |       |         | 0.00      |         |      |         | 0.00    |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|(LOSS) INCOME PER COMMON SHARE                                                  |                                                          | $                                     | (0.52            | )       |       | $       | 0.31      |         |      | $       | 1.63    |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                                   |                                                          |                                       | 27,845           |         |       |         | 26,292    |         |      |         | 25,078  |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|DILUTED                                                                         |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|(LOSS) INCOME PER COMMON SHARE BEFORE                                           |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                |                                                          | EXTRAORDINARY LOSS                    |                  | $       | (0.42 | )       |           | $       | 0.31 |         |         | $       | 1.62 |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|EXTRAORDINARY LOSS PER COMMON SHARE                                             |                                                          |                                       | (0.10            | )       |       |         |          |         |      |         |        |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|(LOSS) INCOME PER COMMON SHARE                                                  |                                                          | $                                     | (0.52            | )       |       | $       | 0.31      |         |      | $       | 1.62    |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        
|DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
    OUTSTANDING                       |                                                          |                                       | 27,845           |         |       |         | 26,301    |         |      |         | 25,199  |        
|                                                                                |                                                          |                                       |                  |         |       |         |           |         |      |         |         |        

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

29



---



##### 



CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the Years Ended December 31, 2001, 2000 and 1999


(In thousands, except share data)


|                           |                                                                                |              |            |            |   |          |       |               |   |             |         |        |  |   |         |         |   |   |        |       |   |   |         |         |  
|-------------------------- | ------------------------------------------------------------------------------ | ------------ | ---------- | ---------- | - | -------- | ----- | ------------- | - | ----------- | ------- | ------ |  | - | ------- | ------- | - | - | ------ | ----- | - | - | ------- | ------- | -
|                           |                                                                                |              |            |            |   |          |       |               |   | Accumulated |         |       
|                           |                                                                                |              |            |            |   |          |       | Other         |   |            
|                           |                                                                                | Common Stock |            | Additional |   |          |       | Comprehensive |   |            
|                           |                                                                                |              |            | Paid-In    |   | Retained |       | (Loss)        |   |            
|                           |                                                                                | Shares       |            | Amount     |   | Capital  |       | Earnings      |   | Income      |         | Total 
|                           |                                                                                |              |            |            |   |          |       |               |   |             |         |       
|BALANCE, December 31, 1998 |                                                                                |              | 24,681,358 |            |   | $        | 2,468 |               |   | $           | 130,240 |        |  | $ | 104,838 |         |   | $ | (3,325 | )     |   | $ | 234,221 |        
|                          
|                          
|                          
|                          
|                           | Net income                                                                     |              |            |           |   |          |       |              |   |             |         |       |  |   |         | 40,947  |   |   |        |      |   |   |         | 40,947  |  
|                          
|                          
|                          
|                          
|                           | Issuance of common stock for acquisitions                                      |              |            | 739,565    |   |          |       | 74            |   |             |         | 17,889 |  |   |         |        |   |   |        |      |   |   |         | 17,963  |  
|                          
|                          
|                          
|                          
|                           | Issuance of common stock under nonqualified stock
    option plan              |              |            | 19,000     |   |          |       | 2             |   |             |         | 252    |  |   |         |        |   |   |        |      |   |   |         | 254     |  
|                          
|                          
|                          
|                          
|                           | Issuance of common stock under 1993 stock
    purchase plan                    |              |            | 21,828     |   |          |       | 3             |   |             |         | 679    |  |   |         |        |   |   |        |      |   |   |         | 682     |  
|                          
|                          
|                          
|                          
|                           | Issuance of common stock under 1998 stock
    purchase plan                    |              |            | 20,371     |   |          |       | 2             |   |             |         | 302    |  |   |         |        |   |   |        |      |   |   |         | 304     |  
|                          
|                          
|                          
|                          
|                           | Issuance of common stock under director equity
    plan                        |              |            | 2,930      |   |          |       |              |   |             |         | 77     |  |   |         |        |   |   |        |      |   |   |         | 77      |  
|                          
|                          
|                          
|                          
|                           | Pension liability adjustment                                                   |              |            |           |   |          |       |              |   |             |         |       |  |   |         |        |   |   |        | 2,877 |   |   |         | 2,877   |  
|                          
|                          
|                          
|                          
|                           | Foreign currency translation adjustment                                        |              |            |           |   |          |       |              |   |             |         |       |  |   |         |        |   |   |        | (86   | ) |   |         | (86     | )
|                          
|                          
|                          
|                          
|                           | Dividends declared of $.72 per share                                           |              |            | 3,228      |   |          |       |              |   |             |         | 70     |  |   |         | (18,125 | ) |   |        |      |   |   |         | (18,055 | )
|                           |                                                                                |              |            |            |   |          |       |               |   |             |         |        |  |   |         |         |   |   |        |       |   |   |         |        
|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 |        
|                           |                                                                                |              |            |            |   |          |       |               |   |             |         |        |  |   |         |         |   |   |        |       |   |   |         |        

The accompanying notes are an integral part of these
consolidated statements of shareholders equity.

30



---



##### 



CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |          |        |         |          |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ------ | ------- | ------- | -------- | ------ | ------- | -------- | -------- | ------ | ------- | -------- | -
|                                                         |                                                                                              |                                                                                
|                                                         |                                                                                              | For the Years Ended December 31,                                               
|                                                         |                                                                                              |                                                                                
|                                                         |                                                                                              | 2001                                                                            |                                                                       | 2000                                      |        | 1999   
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |        
|                                                         |                                                                                              |                                                                                
|                                                         |                                                                                              | (In thousands)                                                                 
|                                                        
|                                                        
|                                                        
|                                                        
|OPERATING ACTIVITIES:                                    |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net (loss) income                                                                            |                                                                                 | $                                                                     | (14,602                                   | )      |         | $       | 8,175    |        |         | $        | 40,947   |       
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         | Adjustments to reconcile net (loss) income to net
    cash provided by operating activities: |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |          |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Extraordinary loss from early extinguishment of
    debt                        |                                                                       |                                           | 4,305  |         |         |          |       |         |          |          |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Depreciation and amortization                                                   |                                                                       |                                           | 64,340 |         |         |          | 60,858 |         |          |          | 52,741 |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Disposal of property, plant and equipment, net                                  |                                                                       |                                           | 470    |         |         |          |       |         |          |          |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Equity in income or loss of unconsolidated
    affiliates, net of distributions |                                                                       |                                           | 3,610  |         |         |          | 6,967  |         |          |          | (8,224 | )      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Deferred income taxes                                                           |                                                                       |                                           | 15,811 |         |         |          | (239   | )       |          |          | 9,072  |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Provision for deferred compensation                                             |                                                                       |                                           | 226    |         |         |          | 227    |         |          |          | 292    |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Minority interest                                                               |                                                                       |                                           | (180   | )       |         |          | 169    |         |          |          | 356    |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              | Restructuring costs                                                             |                                                                       |                                           | 3,987  |         |         |          | 12,734 |         |          |          |       |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              |                                                                                 | Changes in operating assets and liabilities, net
    of acquisitions: |                                           |        |         |         |          |        |         |          |          |        |         |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              |                                                                                 | Receivables                                                           |                                           |        | 6,848   |         |          |        | 19,508  |          |          |        | (11,665 | )       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              |                                                                                 | Inventories                                                           |                                           |        | 9,737   |         |          |        | (10,518 | )        |          |        | 3,027   |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              |                                                                                 | Other current assets                                                  |                                           |        | (8,951  | )       |          |        | (1,485  | )        |          |        | 2,303   |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              |                                                                                 | Accounts payable and accrued liabilities                              |                                           |        | (14,770 | )       |          |        | (12,089 | )        |          |        | 3,696   |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                              |                                                                                 | Income taxes                                                          |                                           |        | (13,628 | )       |          |        | (1,854  | )        |          |        | (743    | )       
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         |                                                                                              |                                                                                 |                                                                       | Total adjustments                         |        |         | 71,805  |          |        |         | 74,278   |          |        |         | 50,855   |  
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         |                                                                                              |                                                                                 |                                                                       | Net cash provided by operating activities |        |         | 57,203  |          |        |         | 82,453   |          |        |         | 91,802   |  
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|INVESTING ACTIVITIES:                                    |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchases of property, plant and equipment                                                   |                                                                                 |                                                                       | (28,059                                   | )      |         |         | (58,306  | )      |         |          | (35,696  | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Acquisition of businesses, net of cash acquired                                              |                                                                                 |                                                                       | (34                                       | )      |         |         | (4,306   | )      |         |          | (177,881 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from disposal of property, plant and
    equipment                                  |                                                                                 |                                                                       | 267                                       |        |         |         |         |        |         |          |         |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Investment in unconsolidated affiliates                                                      |                                                                                 |                                                                       |                                          |        |         |         | (50,709  | )      |         |          | (80      | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash acquired in stock acquisition                                                           |                                                                                 |                                                                       |                                          |        |         |         | 1,100    |        |         |          | 499      |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other                                                                                        |                                                                                 |                                                                       | 436                                       |        |         |         | 2,986    |        |         |          | (416     | )     
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         |                                                                                              |                                                                                 |                                                                       | Net cash used in investing activities     |        |         | (27,390 | )        |        |         | (109,235 | )        |        |         | (213,574 | )
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|FINANCING ACTIVITIES:                                    |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from note issuance                                                                  |                                                                                 |                                                                       | 291,200                                   |        |         |         |         |        |         |          | 196,733  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from senior credit facility                                                         |                                                                                 |                                                                       | 18,000                                    |        |         |         | 192,000  |        |         |          | 158,000  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayments of senior credit facility                                                         |                                                                                 |                                                                       | (212,000                                  | )      |         |         | (138,000 | )      |         |          | (165,000 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayments of other long and short-term debt                                                 |                                                                                 |                                                                       | (67,110                                   | )      |         |         | (18,196  | )      |         |          | (33,750  | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Swap agreement unwind proceeds                                                               |                                                                                 |                                                                       | 9,093                                     |        |         |         |         |        |         |          |         |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | 7.74% senior notes prepayment penalty                                                        |                                                                                 |                                                                       | (3,565                                    | )      |         |         |         |        |         |          |         |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Dividends paid                                                                               |                                                                                 |                                                                       | (8,870                                    | )      |         |         | (18,531  | )      |         |          | (17,995  | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from issuances of stock                                                             |                                                                                 |                                                                       |                                          |        |         |         | 460      |        |         |          | 761      |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other                                                                                        |                                                                                 |                                                                       | (1,217                                    | )      |         |         | (822     | )      |         |          | (816     | )     
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         |                                                                                              |                                                                                 |                                                                       | Net cash provided by financing activities |        |         | 25,531  |          |        |         | 16,911   |          |        |         | 137,933  |  
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                                              |                                                                                 | 55,344                                                                |                                           |        |         | (9,871  | )        |        |         | 16,161   |         
|                                                        
|                                                        
|                                                        
|                                                        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR           |                                                                                              |                                                                                 | 8,900                                                                 |                                           |        |         | 18,771  |          |        |         | 2,610    |         
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|CASH AND CASH EQUIVALENTS AT END OF YEAR                 |                                                                                              | $                                                                               | 64,244                                                                |                                           |        | $       | 8,900   |          |        | $       | 18,771   |         
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|SUPPLEMENTAL DISCLOSURES:                                |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash payments for interest                                                                   |                                                                                 | $                                                                     | 35,352                                    |        |         | $       | 35,136   |        |         | $        | 25,480   |       
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         | Cash payments for income taxes                                                               |                                                                                 | $                                                                     | 1,967                                     |        |         | $       | 9,575    |        |         | $        | 16,849   |       
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         
|                                                         | Stock issued for acquisitions                                                                |                                                                                 | $                                                                     | 18,799                                    |        |         | $       | 10,723   |        |         | $        | 17,963   |       
|                                                         |                                                                                              |                                                                                 |                                                                       |                                           |        |         |         |          |        |         |          |         

31



---



##### 



CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001, 2000 and 1999


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.

Principles of 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

During the second quarter of 2001, the Company completed a
restructuring within the carton and custom packaging segment
whereby certain subsidiaries were merged into an existing
subsidiary in that segment. The restructuring was completed to
simplify reporting and facilitate the management of segment
operations. In connection with this restructuring, the Company
changed, effective June 30, 2001, its inventory costing
method of accounting for one of the merged subsidiaries from
LIFO to FIFO in order to conform with the methodologies of the
surviving subsidiary and all other Company-owned subsidiaries.
The accompanying financial statements have been restated for
this change. The effect of the change was to increase net assets
as of June 30, 2001 and December 31, 2000 by $794,000
and $758,000, respectively. The effect on net income for the
years ended December 31, 2001, 2000 and 1999, was $36,000,
$33,000 and ($122,000), respectively.

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. As
described above, all inventories are valued using the first-in,
first-out method.

Inventories at December 31, 2001 and 2000 were as follows
(in thousands):

|                                   |  |      |         |      |  |   |         | 
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                   |  | 2001 |         | 2000
|                                   |  |      |         |     
|Raw materials and supplies         |  | $    | 40,357  |      |  | $ | 44,240  | 
|                                  
|                                  
|                                  
|                                  
|Finished goods and work in process |  |      | 61,466  |      |  |   | 67,320  | 
|                                   |  |      |         |      |  |   |         | 
|Total inventory                    |  | $    | 101,823 |      |  | $ | 111,560 | 
|                                   |  |      |         |      |  |   |         | 

Property, Plant and Equipment

Property, plant and equipment are stated at cost. When assets
are retired or otherwise disposed of, the related costs and
accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income. Expenditures for
repairs and maintenance not considered to substantially lengthen
the asset lives or increase capacity or efficiency are charged
to expense as incurred.

32



---



##### 



For financial reporting purposes, 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    |  |  | 3-20 years  | 
|                          
|                          
|                          
|                          
|Furniture and fixtures     |  |  | 5-10 years  | 

Use of Estimates

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; 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.

Revenue Recognition

The Companys revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements,
(SAB 101) issued by the Securities and Exchange
Commission. 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.

Self-Insurance

The Company is self-insured for the majority of its
workers compensation costs and group health insurance
costs, subject to specific retention levels. Consulting
actuaries and administrators assist the Company in determining
its liability for self-insured claims, and such liabilities are
not discounted.

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. Net
assets of the non-U.S. subsidiaries are translated at current
rates of exchange. Income and expense items are translated at
the average exchange rate for the year. The resulting
translation adjustments are recorded in accumulated other
comprehensive loss. Certain other translation adjustments and
transaction gains and losses continue to be reported in net
income and were not material in any year.

Goodwill

Goodwill is amortized using the straight-line method over
periods ranging up to 40 years. The Company has
periodically evaluated goodwill for impairment. In completing
this evaluation, the Company estimated the future undiscounted
cash flows of the businesses to which goodwill related in order
to determine whether the carrying amount of goodwill had been
impaired.

Effective January 1, 2002, the Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets.
Under this pronouncement, goodwill will no longer be amortized
to earnings, but instead will be reviewed periodically (at least
annually) for impairment.

33



---



##### 



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 or loss 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 and 1999 added 9,000 and
121,000, respectively, to the weighted average shares
outstanding for purposes of calculating diluted income per
share. There was no dilutive effect of stock options outstanding
during 2001.

Comprehensive Income

Total comprehensive loss or income, consisting of net loss or
income plus other nonowner changes in equity for the years ended
December 31, 2001, 2000 and 1999, was a loss of $14,659,000
and income of $7,956,000 and $43,738,000, respectively.
Accumulated other comprehensive loss at December 31, 2001
and 2000 consisted of foreign currency translation adjustments
of $810,000 and $753,000, respectively.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS
No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It also requires that
an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities  Deferral of the Effective
Date of FASB Statement 133. This pronouncement deferred
the effective date of SFAS No. 133 until the fiscal year
ending December 31, 2001. In June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities (an Amendment of FASB
No. 133). This pronouncement amended the accounting
and reporting standards of SFAS No. 133 for certain
derivative instruments and hedging activities. The Company
adopted SFAS No. 133, as amended, on January 1, 2001.
This pronouncement did not have a material impact on the
Companys consolidated financial statements upon adoption.

In June 2001, the FASB issued SFAS No. 141, Business
Combinations (SFAS No. 141) and SFAS
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 141 supercedes
Accounting Principles Board (APB) Opinion
No. 16 Business Combinations and SFAS
No. 38, Accounting for Preacquisition Contingencies
for Purchased Enterprises. SFAS No. 141 prescribes
the accounting principles for business combinations and requires
that all business combinations be accounted for using the
purchase method of accounting. This pronouncement is effective
for all business combinations after June 30, 2001.

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, goodwill will no longer be amortized
to earnings, but instead will be reviewed periodically (at least
annually) for impairment. As of December 31, 2001, the
Company had $146,465,000 of recorded net goodwill, which will be
subject to this new pronouncement. During fiscal year 2001, the
Company recorded $2,996,000 of goodwill amortization expense,
net of taxes. The Company adopted this pronouncement effective
January 1, 2002 and the adoption did not have a material
impact on the Companys consolidated financial statements.
The Company is currently evaluating this pronouncement using an
external advisor and will determine the impact on its
consolidated financial statements in accordance with the timing
provisions under this pronouncement.

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

34



---



##### 





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.

2. Shareholders Equity

Preferred Stock

The Company has authorized 5,000,000 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 3,169,000 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 4,000,000 common shares. The Companys board of
directors has authorized purchases of up to 831,000 additional
shares. There were no stock purchases in 2001, 2000 or 1999. The
Companys 9 7/8% senior subordinated notes and its
senior credit facility limit its ability to repurchase its
common stock.

3. Acquisitions

Each of the following acquisitions were accounted for under the
purchase method of accounting, applying the provisions of
Accounting Principles Board (APB) Opinion
No. 16. 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
recorded as goodwill. The financial statements for the years
ended December 31, 2001, 2000 and 1999 reflect the
operations of the acquired businesses for the periods after
their respective dates of acquisition.

In February 2000, the Company acquired all of the outstanding
stock of MilPak, Inc. in exchange for cash of $4,700,000 and
248,132 shares of the Companys common stock valued at
$4,700,000. MilPak operates a facility located in Pine Brook,
New Jersey, that provides blister packaging, cartoning and
labeling and other contract packaging services. Goodwill of
approximately $6,100,000 was recorded in connection with the
acquisition.

In September 2000, the Company acquired all of the outstanding
stock of Arrow Paper Products Company in exchange for 342,743
shares of the Companys common stock valued at $5,100,000.
Arrow is located in Saginaw, Michigan and operates two tube and
core converting facilities that serve customers in the
automotive, film, housewares and other specialty tube and core
markets. Goodwill of approximately $4,100,000 was recorded in
connection with the acquisition.

In October 2000, the Company acquired 100 percent of the
membership interests in Crane Carton Company, LLC in exchange
for 1,659,790 shares of the Companys common stock valued
at $19,000,000 plus $5,800,000 of assumed debt. The Company
issued 16,595 of the shares in 2000 and the balance in 2001.
Crane operates a single folding carton manufacturing facility
located in suburban Chicago, Illinois. Goodwill of approximately
$4,700,000 was recorded in connection with the acquisition.

35



---



##### 



The following unaudited pro forma financial information assumes
that the above acquisitions occurred on January 1, 2000.
These results have been prepared for comparative purposes only
and do not purport to be indicative of what would have resulted
had the acquisitions occurred on January 1, 2000 or the
results that may occur in the future (in thousands, except per
share data):

|                                       |  |      |         |      |  |   |           | 
|-------------------------------------- |  | ---- | ------- | ---- |  | - | --------- | 
|                                       |  | 2001 |         | 2000
|                                       |  |      |         |     
|Sales                                  |  | $    | 913,686 |      |  | $ | 1,049,927 | 
|                                      
|                                      
|                                      
|                                      
|Net (loss) income                      |  |      | (14,602 | )    |  |   | 8,911     | 
|                                      
|                                      
|                                      
|                                      
|Diluted (loss) income per common share |  |      | (0.52   | )    |  |   | 0.33      | 

4. 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 percent
interest in Standard to Temple-Inland Forest Products
Corporation (Temple), an unrelated third party, for
$10,800,000 in cash. Standard is operated as a joint venture
managed by Temple. The Company accounts for its interest in
Standard under the equity method of accounting. The
Companys equity interest in the (loss)/earnings of
Standard for the years ended December 31, 2001, 2000 and
1999 was ($946,000), $7,358,000 and $9,064,000, respectively.
The Company received distributions based on its equity interest
in Standard of $1,000,000, $13,500,000 and $1,000,000 in 2001,
2000 and 1999, respectively.

During April 1998, Standard entered into a loan agreement with a
financial institution for a credit facility in an amount not to
exceed $61,000,000. Proceeds of the new credit facility were
used to fund the construction of a green field gypsum wallboard
plant in Cumberland City, Tennessee, which began operation in
the fourth quarter of 1999. During 1999, Standard received
financing from two industrial revenue bond issuances by Stewart
County, Tennessee, totaling $56,200,000. The proceeds of the
bond issuances were used to repay the borrowings under the
credit facility and fund the remaining construction of the
plant. In addition, the Company guarantees one-half of
Standards credit facility. At December 31, 2001 and
2000, the Companys portion of this guaranteed debt totaled
approximately $28,100,000. The Companys guarantee of the
Standard credit facility contains financial maintenance
covenants, as amended in the first quarter of 2001, and both the
Standard credit facility and the Companys senior credit
facility contain a cross-default to these covenants. In January
2002, the Company obtained an amendment under the guarantee to
lower the minimum allowable interest coverage ratio for the
fourth quarter of 2001 through the second quarter of 2002 in
order to avoid an event of default resulting from a violation of
the interest coverage ratio covenant. After giving effect to
this amendment, the Company was in compliance with all financial
maintenance covenants under the guarantee at December 31,
2001 and Standard was in compliance with all covenants under its
credit facility.

Summarized financial information for Standard at
December 31, 2001 and 2000 and for the years ended
December 31, 2001, 2000 and 1999, respectively, is as
follows (in thousands):

|                       |  |      |        |      |  |   |        | 
|---------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                       |  | 2001 |        | 2000
|                       |  |      |        |     
|Current assets         |  | $    | 13,237 |      |  | $ | 14,753 | 
|                      
|                      
|                      
|                      
|Noncurrent assets      |  |      | 70,763 |      |  |   | 74,655 | 
|                      
|                      
|                      
|                      
|Current liabilities    |  |      | 4,623  |      |  |   | 6,148  | 
|                      
|                      
|                      
|                      
|Noncurrent liabilities |  |      | 56,217 |      |  |   | 56,208 | 

|                  |  |      |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                  |  | 2001 |        | 2000 |  | 1999
|                  |  |      |        |      |  |     
|Sales             |  | $    | 71,297 |      |  | $    | 96,338 |  |  | $ | 58,973 | 
|                 
|                 
|                 
|                 
|Gross profit      |  |      | 18,665 |      |  |      | 36,630 |  |  |   | 28,405 | 
|                 
|                 
|                 
|                 
|Operating income  |  |      | 292    |      |  |      | 18,176 |  |  |   | 19,337 | 
|                 
|                 
|                 
|                 
|Net (loss) income |  |      | (1,892 | )    |  |      | 14,716 |  |  |   | 18,128 | 

36



---



##### 



During 1999, the Company formed a joint venture with Temple to
own and operate a containerboard mill located in Newport,
Indiana. Upon formation, the joint venture, Premier Boxboard
Limited LLC (PBL), undertook an $82,000,000 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 percent interest in the
joint venture, which is being accounted for under the equity
method of accounting. There were no distributions in 2001 and
2000. Expenses related to the joint venture were not material in
1999. The Companys equity interest in the net loss of PBL
for 2001 and 2000 was approximately $1,892,000 and $881,000,
respectively.

Under the joint venture agreement, the Company contributed
$50,000,000 to the joint venture during the second quarter of
2000 and Temple contributed the net assets of the mill valued at
approximately $98,000,000, and received $50,000,000 in notes
issued by PBL. In addition, the Company has guaranteed one-half
of a revolving line of credit obtained by PBL. At
December 31, 2001 and 2000, the Companys portion of
this guaranteed debt totaled approximately $10,100,000 and
$15,000,000, respectively. The Companys guarantee of
PBLs revolving line of credit contains financial
maintenance covenants, as amended in the first quarter of 2001,
and both PBLs revolving line of credit and the
Companys senior credit facility contain a cross-default to
these covenants. In January 2002, the Company obtained an
amendment under the guarantee to lower the minimum allowable
interest coverage ratio for the fourth quarter of 2001 through
the second quarter of 2002 in order to avoid an event of default
resulting from a violation of the interest coverage ratio
covenant. After giving effect to this amendment, the Company was
in compliance with all financial maintenance covenants under the
guarantee at December 31, 2001 and PBL was in compliance
with all covenants under its line of credit.

See the Subsequent Events footnote for additional
amendments related to the Companys joint venture debt
agreements and the senior credit facility.

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

|                       |  |      |         |      |  |   |         |  
|---------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                       |  | 2001 |         | 2000
|                       |  |      |         |     
|Current assets         |  | $    | 10,579  |      |  | $ | 11,124  |  
|                      
|                      
|                      
|                      
|Noncurrent assets      |  |      | 160,956 |      |  |   | 174,676 |  
|                      
|                      
|                      
|                      
|Current liabilities    |  |      | 5,879   |      |  |   | 6,360   |  
|                      
|                      
|                      
|                      
|Noncurrent liabilities |  |      | 70,000  |      |  |   | 80,000  |  
|                      
|                      
|                      
|                      
|Sales                  |  |      | 75,171  |      |  |   | 40,207  |  
|                      
|                      
|                      
|                      
|Gross profit           |  |      | 16,463  |      |  |   | 8,553   |  
|                      
|                      
|                      
|                      
|Operating income       |  |      | 1,640   |      |  |   | 682     |  
|                      
|                      
|                      
|                      
|Net loss               |  |      | (3,784  | )    |  |   | (1,761  | )

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.

37



---



##### 



5. Senior Credit Facility and Other Long Term Debt

At December 31, 2001 and 2000, total long-term debt
consisted of the following (in thousands):

|                                        |  |      |         |      |  |   |         |  
|--------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                        |  | 2001 |         | 2000
|                                        |  |      |         |     
|Senior credit facility                  |  | $    |        |      |  | $ | 194,000 |  
|                                       
|                                       
|                                       
|                                       
|9 7/8 percent senior subordinated notes |  |      | 277,326 |      |  |   |        |  
|                                       
|                                       
|                                       
|                                       
|7 1/4 percent senior notes              |  |      | 25,449  |      |  |   |        |  
|                                       
|                                       
|                                       
|                                       
|7 3/8 percent senior notes              |  |      | 197,716 |      |  |   | 198,791 |  
|                                       
|                                       
|                                       
|                                       
|7.74 percent senior notes               |  |      |        |      |  |   | 66,200  |  
|                                       
|                                       
|                                       
|                                       
|Other notes payable                     |  |      | 8,248   |      |  |   | 9,081   |  
|                                        |  |      |         |      |  |   |         |  
|Total debt                              |  |      | 508,739 |      |  |   | 468,072 |  
|                                       
|                                       
|                                       
|                                       
|Less current maturities                 |  |      | (48     | )    |  |   | (1,259  | )
|                                        |  |      |         |      |  |   |         |  
|Total long-term debt                    |  | $    | 508,691 |      |  | $ | 466,813 |  
|                                        |  |      |         |      |  |   |         |  

The amounts of total debt outstanding at December 31, 2001
maturing during the next five years and thereafter are as
follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|          
|          
|          
|          
|2002       |  | $ | 48      | 
|          
|          
|          
|          
|2003       |  |   |        | 
|          
|          
|          
|          
|2004       |  |   |        | 
|          
|          
|          
|          
|2005       |  |   |        | 
|          
|          
|          
|          
|2006       |  |   |        | 
|          
|          
|          
|          
|Thereafter |  |   | 508,691 | 
|           |  |   |         | 
|Total debt |  | $ | 508,739 | 
|           |  |   |         | 

The Company had a $400,000,000 five-year bank senior credit
facility (former senior credit facility) as of
December 31, 2000. Interest under the former senior credit
facility was computed using the Companys choice of
(a) the Eurodollar rate plus a margin or (b) the
higher of (i) the federal funds rate plus a margin or
(ii) the banks prime lending rate. As of
December 31, 2000, borrowings of $194,000,000 were
outstanding under the former senior credit facility at a
weighted average interest rate of 7.27 percent. As of
December 31, 2000, the Company was not in compliance with
certain covenants under the former senior credit facility that
the lenders waived through the first quarter of 2001.

On March 29, 2001, the Company obtained a new credit
facility that provides for a revolving line of credit in the
aggregate principal amount of $75,000,000 for a term of three
years, including subfacilities of $10,000,000 for swingline
loans and $15,000,000 for letters of credit, usage of which
reduces availability under the facility. No borrowings were
outstanding under the facility as of December 31, 2001,
although an aggregate of $9,849,000 in letter of credit
obligations were outstanding. The Company intends to use the
facility for working capital, capital expenditures and other
general corporate purposes. Although the facility is unsecured,
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.

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 percent) 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, 2001, the
current margins are 2.0 percent for Eurodollar rate loans
and 0.75 percent 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 0.5 percent based
on the Companys leverage ratio at December 31, 2001.

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,

38



---



##### 





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 the third and fourth quarters of 2001 and the first
quarter of 2002, the Company completed three amendments to its
senior credit facility agreement. The first amendment, dated
September 10, 2001, allows the Company to acquire up to
$30,000,000 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.

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.

See the Subsequent Events note, which details the
third, fourth and fifth and sixth amendments to the senior
credit facility.

On March 22, 2001, the Company obtained commitments and
executed an agreement for the issuance of $285,000,000 of
9 7/8 percent senior subordinated notes due
April 1, 2011 and $29,000,000 of 7 1/4 percent
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 percent and
9.4 percent, respectively. Under the terms of the
agreement, the Company received aggregate proceeds, net of
issuance costs, of approximately $291,200,000 on March 29,
2001. These proceeds were used to repay borrowings outstanding
under the Companys former senior credit facility and its
7.74 percent senior notes. As of December 31, 2000,
the Company was not in compliance with certain covenants under
its former senior credit facility and its 7.74 percent
senior notes that the lenders waived through the first quarter
of 2001. In connection with the repayment of the
7.74 percent senior notes, the Company incurred a
prepayment penalty of approximately $3,600,000. The Company
recorded an extraordinary loss of $2,695,000 which includes the
prepayment penalty and unamortized issuance costs of $705,000,
net of tax benefit of $1,610,000. The difference between issue
price and principal amount at maturity of the Companys
7 1/4 percent senior and 9 7/8 percent
senior subordinated notes will be accreted each year as interest
expense in its financial statements. These notes are unsecured,
but are guaranteed, on a joint and several basis, by all of the
Companys domestic subsidiaries, other than one that is not
wholly-owned.

On June 1, 1999, the Company issued $200,000,000 in
aggregate principal amount of its 7 3/8 percent notes
due June 1, 2009. The 7 3/8 percent notes were
issued at a discount to yield an effective interest rate of
7.473 percent and pay interest semiannually. The
7 3/8 percent notes are unsecured obligations of the
Company.

During the second and third quarters of 2001, the Company
entered into four interest rate swap agreements in notional
amounts totaling $285,000,000. The agreements, which have
payment and expiration dates that correspond to the terms of the
note obligations they cover, effectively converted $185,000,000
of the Companys fixed rate 9 7/8 percent senior
subordinated notes and $100,000,000 of the Companys fixed
rate 7 3/8 percent senior notes into variable rate
obligations. The variable rates are based on the three-month
LIBOR plus a fixed margin.

The following table identifies the debt instrument hedged, the
notional amount, the fixed spread and the three-month LIBOR at
December 31, 2001 for each of the Companys interest
rate swaps. The December 31,

39



---



##### 





|                                 |  |          |         |        |  |              |       |               |  |  |       |   |  |  |       |  
|-------------------------------- |  | -------- | ------- | ------ |  | ------------ | ----- | ------------- |  |  | ----- | - |  |  | ----- | -
|                                 |  | Notional |         |        |  | LIBOR at     |       |              
|                                 |  | Amount   |         | Fixed  |  | December 31, |       | Total        
|Debt Instrument                  |  | (000s)  |         | Spread |  | 2001         |       | Variable Rate
|                                 |  |          |         |        |  |              |       |              
|9 7/8% senior subordinated notes |  | $        | 185,000 |        |  |              | 4.400 | %             |  |  | 1.881 | % |  |  | 6.281 | %
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 50,000  |        |  |              | 2.365 |               |  |  | 1.881 |   |  |  | 4.246 |  
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 25,000  |        |  |              | 1.445 |               |  |  | 1.881 |   |  |  | 3.326 |  
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 25,000  |        |  |              | 1.775 |               |  |  | 1.881 |   |  |  | 3.656 |  

In October 2001, the Company unwound its $185,000,000 interest
rate swap agreement related to the 9 7/8 percent
senior subordinated notes and received $9,093,000 from the bank
counter-party. Simultaneously, the Company executed a new swap
agreement with a fixed margin 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 $9,093,000 gain will be
accreted to interest expense over the life of the notes and will
partially offset the increase in interest expense. The Company
executed these transactions in order to take advantage of
current market conditions.

See the Subsequent Events footnote regarding
additional interest rate swap transactions.

The Company has assumed no ineffectiveness with respect to its
four interest rate swap agreements, as it believes that the
conditions for such an assumption are met under the guidelines
of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities. The fair value of the swap agreements of
approximately $7,418,000 as of December 31, 2001 has been
reflected in other long-term liabilities and long-term debt in
the accompanying balance sheet.

6. Commitments and Contingencies

Leases

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, 2001,
2000 and 1999 is as follows (in thousands):

|                   |  |      |        |      |  |      |        |  |  |   |        | 
|------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                   |  | 2001 |        | 2000 |  | 1999
|                   |  |      |        |      |  |     
|Minimum rentals    |  | $    | 14,312 |      |  | $    | 13,026 |  |  | $ | 11,698 | 
|                  
|                  
|                  
|                  
|Contingent rentals |  |      | 507    |      |  |      | 347    |  |  |   | 377    | 
|                   |  |      |        |      |  |      |        |  |  |   |        | 
|Total              |  | $    | 14,819 |      |  | $    | 13,373 |  |  | $ | 12,075 | 
|                   |  |      |        |      |  |      |        |  |  |   |        | 

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, 2001 (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|          
|          
|          
|          
|2002       |  | $ | 13,410 | 
|          
|          
|          
|          
|2003       |  |   | 9,827  | 
|          
|          
|          
|          
|2004       |  |   | 7,207  | 
|          
|          
|          
|          
|2005       |  |   | 4,792  | 
|          
|          
|          
|          
|2006       |  |   | 4,046  | 
|          
|          
|          
|          
|Thereafter |  |   | 12,642 | 
|           |  |   |        | 
|Total      |  | $ | 51,924 | 
|           |  |   |        | 

40



---



##### 



Litigation

On May 9, 2001, the Company and a significant customer
jointly announced a tentative settlement regarding the
litigation over the terms of the long-term supply contract the
parties entered in April 1996. The pending litigation relating
to that contract has been previously reported in the
Companys annual report on Form 10-K for the year
ended December 31, 2000 and in the previous quarterly
reports on Form 10-Q. Under the terms of the tentative
settlement, the Company and a wholly-owned subsidiary of the
customer have entered into a new ten-year agreement under which
the Company would supply a minimum of 50,000 tons of gypsum
facing paper per year to the customer. Implementation of the new
agreement, and settlement of the pending litigation over the
1996 agreement, is subject to satisfactory completion of a
transition period. The transition period initially was to expire
no later than August 6, 2001. As described below, however,
the parties have twice agreed to extend the outside termination
date of the transition period, most recently to April 1,
2002. During the transition period, the Company is supplying the
customer with such facing paper as it requests to enable it to
evaluate the papers compliance with its specifications for
quality and end-use suitability. Once the customer is satisfied
with the paper, it is to notify the Company that the transition
period has ended, and at that time the term of the new
agreement, including the annual minimum quantity requirement
described above, is to commence. If and when the new agreement
commences, the parties will dismiss all pending litigation
relating to the 1996 agreement. Under the terms of the tentative
settlement, either party may terminate its obligations under the
new agreement during the transition period without cause and
without liability to the other party.

During the second quarter of 2001, ongoing discussions with the
customer led to a mutual agreement to extend the outside
expiration date of the transition period initially to
December 31, 2001. The extension was the result of the
customers recent curtailment of a significant portion of
its gypsum wallboard manufacturing capacity because of adverse
market conditions. This curtailment, along with the
customers stated reservations about committing to the
minimum tonnage requirement under the new agreement in light of
current market conditions, led the parties to agree to the
extension of the transition period. Continued

On March 26, 2002, the Company reached a final settlement with
Georgia-Pacific Corporation concerning the dispute regarding the
terms of the long-term supply agreement that had been the
subject of our previously reported litigation with
Georgia-Pacific. The Company and G-P Gypsum, a wholly-owned
subsidiary of Georgia-Pacific, have resolved the dispute by
entering into a new five-year paperboard supply agreement that
provides that the Company will produce and sell to G-P Gypsum
between 0.378 and 0.756 billion square feet (10 to 20
thousand tons) of paper per year to be used in G-P Gypsums
ToughRock wallboard. This new paperboard supply agreement
supersedes the terms of the tentative settlement previously
announced on May 9, 2001 and the agreement and transition
period that had been a part of that tentative settlement. As a
result of the final settlement, the Companys previously
filed suit against Georgia-Pacific in the General Court of
Justice, Superior Court Division of Mecklenburg County, North
Carolina (Case No. 00-CVS-12302), and
Georgia-Pacifics previously reported separate action filed
in the Superior Court of Fulton County, Georgia (Case
No. 2000-CV-27684), were each dismissed with prejudice on
April 1 and 2, 2002, respectively.

The Company is involved in certain other 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 or results of operations.

7. Stock Option and Deferred Compensation Plans



| |                     
| | --------------------
| | Director Equity Plan

During 1996, the Companys board of directors 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 annually granted an option to purchase 1,000 shares
of the Companys common stock at 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 100,000 shares of common stock may be
granted under this plan. During 2001, 2000 and 1999, 8,339, 4,171

41



---



##### 







| |                                       
| | --------------------------------------
| | Incentive Stock Option and Bonus Plans

During 1992, the Companys board of directors 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 and the options expire after eight years. The
Companys board of directors authorized 1,400,000 common
shares for grant under the 1993 Plan. Compensation expense of
approximately $186,000, $246,000 and $336,000 related to bonus
shares was recorded in 2001, 2000 and 1999, respectively.

During 1998, the Companys board of directors 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 percent
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 3,800,000 common
shares for grant under the 1998 Plan. During 2001, 2000 and
1999, the Company issued 108,323, 784,621 and 363,728 options,
respectively, under the 1998 Plan. During 2001, 2000 and 1999,
the Company issued 759, 10,699 and 9,374 shares, respectively,
of restricted stock. The Company recorded approximately $82,000,
$105,000 and $20,000 of compensation expense related to the
issuance of restricted stock during 2001, 2000 and 1999,
respectively.

A summary of stock option activity for the years ended
December 31, 2001, 2000 and 1999 is as follows:

|                                 |                   |        |           |                  |   |   |       |       | 
|-------------------------------- | ----------------- | ------ | --------- | ---------------- | - | - | ----- | ----- | 
|                                 |                   |        |           | Weighted Average
|                                 |                   | Shares |           | Exercise Price  
|                                 |                   |        |           |                 
|Outstanding at December 31, 1998 |                   |        | 921,623   |                  |   | $ | 23.57 |      
|                                
|                                
|                                
|                                
|                                 | Granted           |        |           | 369,728          |   |   |       | 27.18 | 
|                                
|                                
|                                
|                                
|                                 | Forfeited         |        |           | (22,450          | ) |   |       | 31.20 | 
|                                
|                                
|                                
|                                
|                                 | Exercised         |        |           | (45,756          | ) |   |       | 11.98 | 
|                                 |                   |        |           |                  |   |   |       |      
|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 |      
|                                 |                   |        |           |                  |   |   |       |      
|Options exercisable at:          |                   |        |           |                  |   |   |       |      
|                                
|                                
|                                
|                                
|                                 | December 31, 2001 |        |           | 989,897          |   |   | $     | 22.22 | 
|                                
|                                
|                                
|                                
|                                 | December 31, 2000 |        |           | 833,579          |   |   |       | 20.96 | 
|                                
|                                
|                                
|                                
|                                 | December 31, 1999 |        |           | 566,867          |   |   |       | 19.55 | 

42



---



##### 



Summary information about the Companys stock options
outstanding at December 31, 2001 is as follows:

|                        |                 |                |  |                  |           |                  |  |                |     |                  |  |   |       |  |  |  |         |  |  |   |       | 
|----------------------- | --------------- | -------------- |  | ---------------- | --------- | ---------------- |  | -------------- | --- | ---------------- |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|                        |                 | Outstanding at |  |                  |           |                  |  | Exercisable at |     |                 
|                        |                 | December 31,   |  | Weighted Average |           | Weighted Average |  | December 31,   |     | Weighted Average
|Range of Exercise Price |                 | 2001           |  | Remaining Life   |           | Exercise Price   |  | 2001           |     | Exercise Price  
|                        |                 |                |  |                  |           |                  |  |                |     |                 
|                        |                 |                |  | (In Years)       |           |                  |  |                |     |                 
|                        | $ 7.34  $16.88 |                |  |                  | 368,646   |                  |  |                | 7.5 |                  |  | $ | 10.88 |  |  |  | 248,401 |  |  | $ | 11.13 | 
|                        | 17.75   23.75  |                |  |                  | 739,835   |                  |  |                | 6.3 |                  |  |   | 19.54 |  |  |  | 317,711 |  |  |   | 19.52 | 
|                        | 24.44   29.75  |                |  |                  | 249,299   |                  |  |                | 6.8 |                  |  |   | 25.83 |  |  |  | 114,420 |  |  |   | 25.88 | 
|                        | 30.13   40.80  |                |  |                  | 436,461   |                  |  |                | 5.3 |                  |  |   | 32.94 |  |  |  | 309,365 |  |  |   | 32.53 | 
|                        |                 |                |  |                  |           |                  |  |                |     |                  |  |   |       |  |  |  |         |  |  |   |       | 
|                        | $ 7.34  $40.80 |                |  |                  | 1,794,241 |                  |  |                | 6.4 |                  |  | $ | 21.89 |  |  |  | 989,897 |  |  | $ | 22.22 | 

As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company accounts for the
director equity plan and the incentive stock option and bonus
plans under APB Opinion No. 25; however, the Company has
computed for pro forma disclosure purposes the value of all
options granted during 2001, 2000 and 1999 using the
Black-Scholes option pricing model as prescribed by SFAS
No. 123 using the following weighted average assumptions
for grants in 2001, 2000 and 1999:

|                        |  |      |               |      |  |      |               |  |  |  |               | 
|----------------------- |  | ---- | ------------- | ---- |  | ---- | ------------- |  |  |  | ------------- | 
|                        |  | 2001 |               | 2000 |  | 1999
|                        |  |      |               |      |  |     
|Risk-free interest rate |  |      | 4.92%  5.36% |      |  |      | 5.18%  6.84% |  |  |  | 5.09%  6.18% | 
|                       
|                       
|                       
|                       
|Expected dividend yield |  |      | 1.16%  1.63% |      |  |      | 4.01%  7.68% |  |  |  | 2.72%  2.92% | 
|                       
|                       
|                       
|                       
|Expected option lives   |  |      | 8-10 years    |      |  |      | 8-10 years    |  |  |  | 8-10 years    | 
|                       
|                       
|                       
|                       
|Expected volatility     |  |      | 41%           |      |  |      | 40%           |  |  |  | 30%           | 

The total values of the options granted during the years ended
December 31, 2001, 2000 and 1999 were computed to be
approximately $470,000, $3,681,000 and $2,600,000, 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, 2001, 2000 and 1999 would have
been as follows (in thousands, except per share data):

|                                        |             |      |   |         |   |      |   |       |  |  |   |        | 
|--------------------------------------- | ----------- | ---- | - | ------- | - | ---- | - | ----- |  |  | - | ------ | 
|                                        |             | 2001 |   | 2000    |   | 1999
|                                        |             |      |   |         |   |     
|Net (loss) income:                      |             |      |   |         |   |      |   |       |  |  |   |       
|                                       
|                                       
|                                       
|                                       
|                                        | As reported |      | $ | (14,602 | ) |      | $ | 8,175 |  |  | $ | 40,947 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Pro forma   |      |   | (15,756 | ) |      |   | 6,628 |  |  |   | 39,853 | 
|                                       
|                                       
|                                       
|                                       
|Diluted (loss) income per common share: |             |      |   |         |   |      |   |       |  |  |   |       
|                                       
|                                       
|                                       
|                                       
|                                        | As reported |      | $ | (0.52   | ) |      | $ | 0.31  |  |  | $ | 1.62   | 
|                                       
|                                       
|                                       
|                                       
|                                        | Pro forma   |      |   | (0.57   | ) |      |   | 0.25  |  |  |   | 1.58   | 



| |                            
| | ---------------------------
| | 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 $226,000, $227,000 and $292,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
Accruals of approximately $1,687,000 and $2,096,000 related to
these plans are included in deferred compensation in the
accompanying balance sheets at December 31, 2001 and 2000,
respectively.

43



---



##### 



8. 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 $8,313,000, $5,116,000 and
$5,526,000 in 2001, 2000 and 1999, respectively.

Effective December 31, 1998, the Company adopted SFAS
No. 132, Employers Disclosures About Pensions
and Other Postretirement Benefits. The provisions of SFAS
No. 132 revise employers disclosures about pension
and other postretirement benefit plans. SFAS No. 132 does
not change the measurement or recognition of these plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits.

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, 2001.

Pension expense for the Pension Plan and the SERP includes the
following components for the years ended December 31, 2001,
2000 and 1999 (in thousands):

|                                              |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                              |  | 2001 |        | 2000 |  | 1999
|                                              |  |      |        |      |  |     
|Service cost of benefits earned               |  | $    | 4,016  |      |  | $    | 3,628  |   |  | $ | 3,236  |  
|                                             
|                                             
|                                             
|                                             
|Interest cost on projected benefit obligation |  |      | 4,632  |      |  |      | 4,422  |   |  |   | 3,649  |  
|                                             
|                                             
|                                             
|                                             
|Actual loss (gain) on plan assets             |  |      | 310    |      |  |      | 844    |   |  |   | (8,485 | )
|                                             
|                                             
|                                             
|                                             
|Net amortization and deferral                 |  |      | (5,234 | )    |  |      | (5,781 | ) |  |   | 5,219  |  
|                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Net pension expense                           |  | $    | 3,724  |      |  | $    | 3,113  |   |  | $ | 3,619  |  
|                                              |  |      |        |      |  |      |        |   |  |   |        |  

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, 2001 and 2000 (in
thousands):

|                                   |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |        |        |  
|---------------------------------- | ------------------------------------------------- | ---------------------------- | ------ | ------------ | ---- | ---- | ------ | ----- | --- |  | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                   |                                                   |                              |        |             
|                                   |                                                   | SERP                         |        | Pension Plan
|                                   |                                                   |                              |        |             
|                                   |                                                   | 2001                         |        | 2000         |      | 2001 |        | 2000 
|                                   |                                                   |                              |        |              |      |      |        |      
|Change in benefit obligation:      |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |       
|                                  
|                                  
|                                  
|                                  
|                                   | Projected benefit obligation at end of prior year |                              | $      | 3,450        |      |      | $      | 2,814 |     |  | $      | 59,236 |        |   | $      | 52,354 |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Service cost                 |        |              | 138  |      |        |       | 133 |  |        |        | 3,878  |   |        |        | 3,495  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Interest cost                |        |              | 254  |      |        |       | 236 |  |        |        | 4,378  |   |        |        | 4,187  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Actuarial (gain) loss        |        |              | (209 | )    |        |       | 267 |  |        |        | (351   | ) |        |        | 2,510  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Plan amendments              |        |              | 157  |      |        |       |    |  |        |        | 91     |   |        |        |       |  
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Benefits paid                |        |              |     |      |        |       |    |  |        |        | (3,575 | ) |        |        | (3,310 | )
|                                   |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |       
|                                   | Projected benefit obligation at end of year       |                              |        | 3,790        |      |      |        | 3,450 |     |  |        | 63,657 |        |   |        | 59,236 |       
|                                   |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |       
|Change in plan assets:             |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |       
|                                  
|                                  
|                                  
|                                  
|                                   | Fair value of plan assets at end of prior year    |                              |        |             |      |      |        |      |     |  |        | 56,068 |        |   |        | 55,106 |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Actual return on plan assets |        |              |     |      |        |       |    |  |        |        | (311   | ) |        |        | (844   | )
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Employer contributions       |        |              |     |      |        |       |    |  |        |        | 8,313  |   |        |        | 5,116  |  
|                                  
|                                  
|                                  
|                                  
|                                   |                                                   | Benefits paid                |        |              |     |      |        |       |    |  |        |        | (3,575 | ) |        |        | (3,310 | )
|                                   |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |       
|                                   | Fair value of plan assets at end of year          |                              |        |             |      |      |        |      |     |  |        | 60,495 |        |   |        | 56,068 |       
|                                   |                                                   |                              |        |              |      |      |        |       |     |  |        |        |        |   |        |       
|Funded status of the plans         |                                                   |                              | (3,790 | )            |      |      | (3,450 | )     |     |  | (3,162 | )      |        |   | (3,168 | )     
|                                  
|                                  
|                                  
|                                  
|Unrecognized transition obligation |                                                   |                              | 1,138  |              |      |      | 1,252  |       |     |  |       |        |        |   |       |       
|                                  
|                                  
|                                  
|                                  
|Unrecognized prior service cost    |                                                   |                              | 143    |              |      |      |       |       |     |  | 913    |        |        |   | 913    |       

44



---



##### 



|                                                                               |                                                                 |      |        |              |   |      |        |      |   |   |        |   |  |   |        |   | 
|------------------------------------------------------------------------------ | --------------------------------------------------------------- | ---- | ------ | ------------ | - | ---- | ------ | ---- | - | - | ------ | - |  | - | ------ | - | 
|                                                                               |                                                                 |      |        |             
|                                                                               |                                                                 | SERP |        | Pension Plan
|                                                                               |                                                                 |      |        |             
|                                                                               |                                                                 | 2001 |        | 2000         |   | 2001 |        | 2000
|                                                                               |                                                                 |      |        |              |   |      |        |     
|Unrecognized net loss                                                          |                                                                 | $    | 339    |              |   | $    | 549    |      |   | $ | 15,130 |   |  | $ | 10,026 |  
|                                                                               |                                                                 |      |        |              |   |      |        |      |   |   |        |   |  |   |        |  
|(Accrued) prepaid pension cost before minimum
    pension liability adjustment |                                                                 | $    | (2,170 | )            |   | $    | (1,649 | )    |   | $ | 12,881 |   |  | $ | 7,771  |  
|                                                                               |                                                                 |      |        |              |   |      |        |      |   |   |        |   |  |   |        |  
|Other comprehensive income:                                                    |                                                                 |      |        |              |   |      |        |      |   |   |        |   |  |   |        |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | (Decrease) increase in intangible asset                         |      | $      | (455         | ) |      | $      | 55   |   |   | $      |  |  |   | $      |  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Decrease (increase) in additional minimum
    pension liability |      |        | 455          |   |      |        | (55  | ) |   |        |  |  |   |        |  | 
|                                                                               |                                                                 |      |        |              |   |      |        |      |   |   |        |   |  |   |        |  
|Other comprehensive income                                                     |                                                                 | $    |       |              |   | $    |       |      |   | $ |       |   |  | $ |       |  
|                                                                               |                                                                 |      |        |              |   |      |        |      |   |   |        |   |  |   |        |  

In accordance with SFAS No. 87, the Company has recorded an
additional minimum pension liability related to its SERP plan
representing the excess of unfunded accumulated benefit
obligations over previously recorded pension liabilities. The
cumulative additional liability totaled $675,000 and $1,130,000
at December 31, 2001 and 2000, respectively, and has been
offset by intangible assets to the extent of previously
unrecognized prior service costs.

Net pension expense and projected benefit obligations are
calculated using assumptions of weighted average discount rates,
future compensation levels, and expected long-term rates of
return on assets. The weighted average discount rate used to
measure the projected benefit obligation at December 31,
2001 and 2000 is 7.5 percent and 7.75 percent,
respectively, including adjustments for specific attributes of
the Companys pension plan (e.g. duration of payments) made
in consultation with the Companys actuaries. The rate of
increase in future compensation levels is 3.0 percent at
December 31, 2001 and 2000, and the expected long-term rate
of return on assets is 9.5 percent.

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. 132.

Net periodic postretirement benefit cost for the years ended
December 31, 2001, 2000 and 1999 included the following
components (in thousands):

|                                                                   |  |      |     |      |  |      |     |  |  |   |     | 
|------------------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                   |  | 2001 |     | 2000 |  | 1999
|                                                                   |  |      |     |      |  |     
|Service cost of benefits earned                                    |  | $    | 103 |      |  | $    | 108 |  |  | $ | 107 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest cost on accumulated postretirement
    benefit obligation |  |      | 404 |      |  |      | 389 |  |  |   | 306 | 
|                                                                   |  |      |     |      |  |      |     |  |  |   |     | 
|Net periodic postretirement benefit cost                           |  | $    | 507 |      |  | $    | 497 |  |  | $ | 413 | 
|                                                                   |  |      |     |      |  |      |     |  |  |   |     | 

Postretirement benefits totaling $650,000, $683,000 and $550,000
were paid during 2001, 2000 and 1999, respectively.

45



---



##### 



The accrued postretirement benefit cost as of December 31,
2001 and 2000 consists of the following (in thousands):

|                              |                                                   |                |        |       |       |   |        |       |      |  
|----------------------------- | ------------------------------------------------- | -------------- | ------ | ----- | ----- | - | ------ | ----- | ---- | -
|                              |                                                   | 2001           |        | 2000 
|                              |                                                   |                |        |      
|Change in benefit obligation: |                                                   |                |        |       |       |   |        |      
|                             
|                             
|                             
|                             
|                              | Projected benefit obligation at end of prior year |                | $      | 5,234 |       |   | $      | 4,656 |     
|                             
|                             
|                             
|                             
|                              |                                                   | Service cost   |        |       | 103   |   |        |       | 108  |  
|                             
|                             
|                             
|                             
|                              |                                                   | Interest cost  |        |       | 404   |   |        |       | 389  |  
|                             
|                             
|                             
|                             
|                              |                                                   | Actuarial loss |        |       | 1,017 |   |        |       | 189  |  
|                             
|                             
|                             
|                             
|                              |                                                   | Acquisition    |        |       | 140   |   |        |       | 575  |  
|                             
|                             
|                             
|                             
|                              |                                                   | Benefits paid  |        |       | (650  | ) |        |       | (683 | )
|                              |                                                   |                |        |       |       |   |        |      
|                              | Projected benefit obligation at end of year       |                | $      | 6,248 |       |   | $      | 5,234 |     
|                              |                                                   |                |        |       |       |   |        |      
|Funded status                 |                                                   | $              | (6,248 | )     |       | $ | (5,234 | )    
|                             
|                             
|                             
|                             
|Unrecognized net loss         |                                                   |                | 1,954  |       |       |   | 966    |      
|                              |                                                   |                |        |       |       |   |        |      
|Net amount recognized         |                                                   | $              | (4,294 | )     |       | $ | (4,268 | )    
|                              |                                                   |                |        |       |       |   |        |      

The accumulated postretirement benefit obligations at
December 31, 2001 and 2000 were determined using a weighted
average discount rate of 7.5 percent and 7.75 percent,
respectively. The rate of increase in the costs of covered
health care benefits is assumed to be 9.0 percent in 2001,
decreasing 0.5 percent each year to 4.5 percent 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, 2001 by approximately
$692,000 and would increase net periodic postretirement benefit
cost by approximately $61,000 for the year ended
December 31, 2001.

9. 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 provision for income taxes for the years ended
December 31, 2001, 2000 and 1999 consisted of the following
(in thousands):

|         |         |      |         |         |   |      |       |       |  |   |        |        | 
|-------- | ------- | ---- | ------- | ------- | - | ---- | ----- | ----- |  | - | ------ | ------ | 
|         |         | 2001 |         | 2000    |   | 1999
|         |         |      |         |         |   |     
|Current: |         |      |         |         |   |      |       |       |  |   |        |       
|        
|        
|        
|        
|         | Federal |      | $       | (22,913 | ) |      | $     | 2,650 |  |   | $      | 11,063 | 
|        
|        
|        
|        
|         | State   |      |         | 1,199   |   |      |       | 3,056 |  |   |        | 3,081  | 
|         |         |      |         |         |   |      |       |       |  |   |        |       
|         |         |      | (21,714 | )       |   |      | 5,706 |       |  |   | 14,144 |       
|        
|        
|        
|        
|Deferred |         |      | 15,811  |         |   |      | (221  | )     |  |   | 8,998  |       
|         |         |      |         |         |   |      |       |       |  |   |        |       
|         |         | $    | (5,903  | )       |   | $    | 5,485 |       |  | $ | 23,142 |       
|         |         |      |         |         |   |      |       |       |  |   |        |       

The principal differences between the federal statutory tax rate
and the provision for income taxes for the years ended
December 31, 2001, 2000 and 1999 are as follows:

|                                        |  |      |       |      |  |      |      |   |  |  |      |  
|--------------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                        |  | 2001 |       | 2000 |  | 1999
|                                        |  |      |       |      |  |     
|Federal statutory tax rate              |  |      | (35.0 | )%   |  |      | 35.0 | % |  |  | 35.0 | %
|                                       
|                                       
|                                       
|                                       
|State taxes, net of federal tax benefit |  |      | (2.4  | )    |  |      | 2.4  |   |  |  | 2.7  |  
|                                       
|                                       
|                                       
|                                       
|Other                                   |  |      | 4.3   |      |  |      | 2.8  |   |  |  | (1.6 | )
|                                        |  |      |       |      |  |      |      |   |  |  |      |  
|Effective tax rate                      |  |      | (33.1 | )%   |  |      | 40.2 | % |  |  | 36.1 | %
|                                        |  |      |       |      |  |      |      |   |  |  |      |  

46



---



##### 



Significant components of the Companys deferred income tax
assets and liabilities as of December 31, 2001 and 2000 are
summarized as follows (in thousands):

|                                 |                                            |                                       |         |         |         |   |         |         |         |  
|-------------------------------- | ------------------------------------------ | ------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                 |                                            | 2001                                  |         | 2000   
|                                 |                                            |                                       |         |        
|Deferred income tax assets:      |                                            |                                       |         |         |         |   |         |        
|                                
|                                
|                                
|                                
|                                 | Deferred employee benefits                 |                                       | $       | 1,078   |         |   | $       | 1,258   |        
|                                
|                                
|                                
|                                
|                                 | Postretirement benefits other than pension |                                       |         | 810     |         |   |         | 879     |        
|                                
|                                
|                                
|                                
|                                 | Accounts receivable                        |                                       |         | 554     |         |   |         | 602     |        
|                                
|                                
|                                
|                                
|                                 | Insurance                                  |                                       |         | 1,259   |         |   |         | 2,121   |        
|                                
|                                
|                                
|                                
|                                 | Tax loss carryforwards and credits         |                                       |         | 11,934  |         |   |         | 15,484  |        
|                                
|                                
|                                
|                                
|                                 | Inventories                                |                                       |         | 2,261   |         |   |         | 1,498   |        
|                                
|                                
|                                
|                                
|                                 | Other                                      |                                       |         | 3,348   |         |   |         | 3,006   |        
|                                 |                                            |                                       |         |         |         |   |         |        
|                                 |                                            | Total deferred income tax assets      |         |         | 21,244  |   |         |         | 24,848  |  
|                                 |                                            |                                       |         |         |         |   |         |        
|Deferred income tax liabilities: |                                            |                                       |         |         |         |   |         |        
|                                
|                                
|                                
|                                
|                                 | Depreciation and amortization              |                                       |         | (69,018 | )       |   |         | (63,866 | )      
|                                
|                                
|                                
|                                
|                                 | Asset revaluation                          |                                       |         | (3,846  | )       |   |         | (3,846  | )      
|                                
|                                
|                                
|                                
|                                 | Postemployment benefits                    |                                       |         | (5,060  | )       |   |         | (2,190  | )      
|                                
|                                
|                                
|                                
|                                 | Losses on contractual sales commitments    |                                       |         | (4,244  | )       |   |         | (1,578  | )      
|                                
|                                
|                                
|                                
|                                 | Other                                      |                                       |         | (42     | )       |   |         | (9      | )      
|                                 |                                            |                                       |         |         |         |   |         |        
|                                 |                                            | Total deferred income tax liabilities |         |         | (82,210 | ) |         |         | (71,489 | )
|                                 |                                            |                                       |         |         |         |   |         |        
|Valuation allowance              |                                            |                                       | (5,794  | )       |         |   | (4,308  | )      
|                                 |                                            |                                       |         |         |         |   |         |        
|                                 |                                            | $                                     | (66,760 | )       |         | $ | (50,949 | )      
|                                 |                                            |                                       |         |         |         |   |         |        

At December 31, 2001, the Company has state net operating
losses of $9,339,000 which will expire in varying amounts
between 2004 and 2021. The Company has a valuation allowance of
$3,356,000 at December 31, 2001 for estimated future
impairment related to the state net operating losses. The
Company also has state tax credit carryforwards of approximately
$2,595,000 which will expire in varying amounts between 2004 and
2016. The Company recorded a valuation allowance of $2,438,000
at December 31, 2001 for estimated future impairment
related to the state tax credit carryforwards. During 2001 the
Company recorded a $1,486,000 valuation allowance which was
recorded as a component of deferred tax expense.

10. 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
|      |                                        |         |         |         |   |         |         |        
|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 |         | $       | (0.38   | ) |         | $       | 0.01    |  |   | $       | 0.03    |   |   | $       | (0.18   | )
|     
|     
|     
|     
|2000: |                                        |         |         |         |   |         |         |         |  |   |         |         |   |   |         |        
|     
|     
|     
|     
|      | Sales                                  |         | $       | 260,850 |   |         | $       | 268,631 |  |   | $       | 249,592 |   |   | $       | 235,542 |  
|     
|     
|     
|     
|      | Gross profit                           |         |         | 66,464  |   |         |         | 70,378  |  |   |         | 60,713  |   |   |         | 57,539  |  
|     
|     
|     
|     
|      | Net income (loss)                      |         |         | 2,161   |   |         |         | 9,486   |  |   |         | (2,542  | ) |   |         | (930    | )
|     
|     
|     
|     
|      | Diluted income (loss) per common share |         | $       | 0.07    |   |         | $       | 0.37    |  |   | $       | (0.10   | ) |   | $       | (0.03   | )

11. Segment Information

The Company operates principally in three business segments
organized by products. The paperboard segment consists of
facilities that manufacture 100 percent recycled uncoated and
clay-coated paperboard and

47



---



##### 





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, 2001, 2000 and
1999 (in thousands):

|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |         |           | 
|---------------------------------------------------------------------------- | ----------------------------------- | ----------------- | ------- | ------- | --------- | ---- | ------- | ------- | --------- |  | ------- | ------- | --------- | 
|                                                                             |                                     | 2001              |         | 2000    |           | 1999
|                                                                             |                                     |                   |         |         |           |     
|Sales (aggregate):                                                           |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Paperboard                          |                   | $       | 462,326 |           |      | $       | 566,060 |           |  | $       | 536,612 |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Tube, core, and composite container |                   |         | 265,985 |           |      |         | 281,613 |           |  |         | 269,112 |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Carton and custom packaging         |                   |         | 325,743 |           |      |         | 309,118 |           |  |         | 256,037 |          
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                             |                                     | Total             |         | $       | 1,054,054 |      |         | $       | 1,156,791 |  |         | $       | 1,061,761 | 
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|Less sales (intersegment):                                                   |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Paperboard                          |                   | $       | 135,854 |           |      | $       | 136,796 |           |  | $       | 120,465 |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Tube, core, and composite container |                   |         | 3,921   |           |      |         | 4,389   |           |  |         | 3,877   |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Carton and custom packaging         |                   |         | 593     |           |      |         | 991     |           |  |         | 491     |          
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                             |                                     | Total             |         | $       | 140,368   |      |         | $       | 142,176   |  |         | $       | 124,833   | 
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|Sales (external customers):                                                  |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Paperboard                          |                   | $       | 326,472 |           |      | $       | 429,264 |           |  | $       | 416,147 |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Tube, core, and composite container |                   |         | 262,064 |           |      |         | 277,224 |           |  |         | 265,235 |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Carton and custom packaging         |                   |         | 325,150 |           |      |         | 308,127 |           |  |         | 255,546 |          
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                             |                                     | Total             |         | $       | 913,686   |      |         | $       | 1,014,615 |  |         | $       | 936,928   | 
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|Operating income:                                                            |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Paperboard (A)                      |                   | $       | 31,418  |           |      | $       | 28,477  |           |  | $       | 58,686  |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Tube, core, and composite container |                   |         | 7,051   |           |      |         | 18,483  |           |  |         | 20,715  |          
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Carton and custom packaging (B)     |                   |         | 2,706   |           |      |         | 8,673   |           |  |         | 13,010  |          
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                             |                                     |                   | 41,175  |         |           |      | 55,633  |         |           |  | 92,411  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Corporate expense (C)                                                        |                                     |                   | (14,484 | )       |           |      | (13,768 | )       |           |  | (11,878 | )      
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|Operating income                                                             |                                     |                   | 26,691  |         |           |      | 41,865  |         |           |  | 80,533  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest expense                                                             |                                     |                   | (41,153 | )       |           |      | (34,063 | )       |           |  | (25,456 | )      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest income                                                              |                                     |                   | 986     |         |           |      | 412     |         |           |  | 603     |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Equity in (loss) income of unconsolidated
    affiliates                     |                                     |                   | (2,610  | )       |           |      | 6,533   |         |           |  | 9,224   |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other, net                                                                   |                                     |                   | (1,904  | )       |           |      | (918    | )       |           |  | (459    | )      
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|(Loss) income before income taxes and minority
    interest                  |                                     |                   | (17,990 | )       |           |      | 13,829  |         |           |  | 64,445  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Minority interest                                                            |                                     |                   | 180     |         |           |      | (169    | )       |           |  | (356    | )      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|(Benefit) provision for income taxes                                         |                                     |                   | (5,903  | )       |           |      | 5,485   |         |           |  | 23,142  |        
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Extraordinary loss from early extinguishment of
    debt, net of tax benefit |                                     |                   | (2,695  | )       |           |      |        |         |           |  |        |        
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        
|                                                                             |                                     | Net (loss) income |         | $       | (14,602   | )    |         | $       | 8,175     |  |         | $       | 40,947    | 
|                                                                             |                                     |                   |         |         |           |      |         |         |           |  |         |        

48



---



##### 



|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |         |         | 
|--------------------------------------------------------------- | ----------------------------------- | ----- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                |                                     | 2001  |   | 2000    |         | 1999
|                                                                |                                     |       |   |         |         |     
|Identifiable assets:                                            |                                     |       |   |         |         |      |   |         |         |  |   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Paperboard                          |       | $ | 400,035 |         |      | $ | 429,646 |         |  | $ | 456,343 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Tube, core, and composite container |       |   | 134,462 |         |      |   | 134,069 |         |  |   | 126,994 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Carton and custom packaging         |       |   | 252,207 |         |      |   | 275,408 |         |  |   | 242,925 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Corporate                           |       |   | 174,277 |         |      |   | 94,974  |         |  |   | 53,618  |        
|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |        
|                                                                |                                     | Total |   | $       | 960,981 |      |   | $       | 934,097 |  |   | $       | 879,880 | 
|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |        
|Depreciation and amortization:                                  |                                     |       |   |         |         |      |   |         |         |  |   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Paperboard                          |       | $ | 35,916  |         |      | $ | 36,623  |         |  | $ | 31,410  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Tube, core, and composite container |       |   | 7,537   |         |      |   | 7,196   |         |  |   | 7,580   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Carton and custom packaging         |       |   | 16,827  |         |      |   | 15,531  |         |  |   | 12,657  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Corporate                           |       |   | 4,060   |         |      |   | 1,508   |         |  |   | 1,094   |        
|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |        
|                                                                |                                     | Total |   | $       | 64,340  |      |   | $       | 60,858  |  |   | $       | 52,741  | 
|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |        
|Capital expenditures, excluding acquisitions of
    businesses: |                                     |       |   |         |         |      |   |         |         |  |   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Paperboard                          |       | $ | 15,334  |         |      | $ | 28,953  |         |  | $ | 23,745  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Tube, core, and composite container |       |   | 6,536   |         |      |   | 12,274  |         |  |   | 4,550   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Carton and custom packaging         |       |   | 4,718   |         |      |   | 15,495  |         |  |   | 5,305   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Corporate                           |       |   | 1,471   |         |      |   | 1,584   |         |  |   | 2,096   |        
|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |        
|                                                                |                                     | Total |   | $       | 28,059  |      |   | $       | 58,306  |  |   | $       | 35,696  | 
|                                                                |                                     |       |   |         |         |      |   |         |         |  |   |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Results for 2001 include a charge to operations of $4,447,000
    for restructuring costs related to the closing of the Chicago,
    Illinois paperboard mill. Results for 2001 also include a
    $7,100,000 reduction in reserves relating to expiring
    unfavorable supply contracts at the Sprague paperboard mill.
    Results for 2000 include charges to operations of $6,913,000 and
    $8,564,000 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 12)
|   
|(B) | Results for 2001 include a charge to operations of $2,636,000
    related to the consolidation of the operations of the Salt Lake
    City, Utah carton plant into the Denver, Colorado carton plant.
    This charge was related to the carton and custom packaging
    segment and is reflected in the segments operating income.
    (Note 12)                                                                                                                                                                                                                                                                                                                    
|   
|(C) | Results for 2000 include a nonrecurring charge of $1,300,000
    related to the settlement of a dispute over abandoned property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

12. Restructuring and Other Costs

In February 2000, the Company initiated a plan to close its
paperboard mill located in Baltimore, Maryland and recorded a
charge to operations of approximately $6,913,000. 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 $6,913,000
charge included a $5,696,000 noncash asset impairment charge to
write-down machinery and equipment to estimated net realizable
value. The charge also included a $604,000 accrual for severance
and termination benefits for 21 salaried and 83 hourly employees
terminated in connection with this plan and a $613,000 accrual
for other exit costs. All exit costs were paid as of
December 31, 2000. One employee remains to assist in
marketing the land and building.

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 $8,564,000. 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 $8,564,000 charge included a
$7,038,000 noncash asset impairment write down of fixed assets
to estimated net realizable value and a $558,000 accrual for
severance

49



---



##### 





The following is a summary of restructuring activity from plan
adoption to December 31, 2001:

|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |           | 
|------------------------------- | ------- | ---------- | --------- | ------------- |  | ---------- | -------- | ------- |  | - | -------- | ------- |  | - | --------- | --------- | 
|                                |         |            |           | Severance and |  |            |          |        
|                                |         |            |           | Other         |  |            |          |        
|                                |         | Asset      |           | Termination   |  | Other Exit |          |        
|                                |         | Impairment |           | Benefits      |  | Costs      |          | Total  
|                                |         |            |           |               |  |            |          |        
|2000 provision                  |         | $          | 7,038,000 |               |  | $          | 558,000  |         |  | $ | 968,000  |         |  | $ | 8,564,000 |          
|                               
|                               
|                               
|                               
|                                | Noncash |            |           | 7,038,000     |  |            |          |        |  |   |          |        |  |   |           | 7,038,000 | 
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          
|                                | Cash    |            |           |              |  |            |          | 558,000 |  |   |          | 968,000 |  |   |           | 1,526,000 | 
|                               
|                               
|                               
|                               
|2000 cash activity              |         |            |          |               |  |            | (380,000 | )       |  |   | (346,000 | )       |  |   | (726,000  | )        
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          
|Balance as of December 31, 2000 |         |            |          |               |  |            | 178,000  |         |  |   | 622,000  |         |  |   | 800,000   |          
|                               
|                               
|                               
|                               
|2001 cash activity              |         |            |          |               |  |            | (178,000 | )       |  |   | (548,000 | )       |  |   | (726,000  | )        
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          
|Balance as of December 31, 2001 |         | $          |          |               |  | $          |         |         |  | $ | 74,000   |         |  | $ | 74,000    |          
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          

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 $4,447,000. The
mill was profitable through 1998, but declining sales resulted
in losses of approximately $2,600,000 and $1,500,000 in 1999 and
2000, respectively. The $4,447,000 charge included a $2,237,000
noncash asset impairment write down of fixed assets to estimated
net realizable value and a $1,221,000 accrual for severance and
termination benefits for 16 salaried and 59 hourly
employees terminated in connection with this plan as well as a
$989,000 accrual for other exit costs. The remaining other exit
costs were paid by December 31, 2002. As of
December 31, 2002, one employee remains to assist in the
closing of the mill. The Company is currently marketing the
property.

The following is a summary of restructuring activity from plan
adoption to December 31, 2001:

|                                |         |            |           |               |  |            |            |           |  |   |          |         |  |   |            |           | 
|------------------------------- | ------- | ---------- | --------- | ------------- |  | ---------- | ---------- | --------- |  | - | -------- | ------- |  | - | ---------- | --------- | 
|                                |         |            |           | Severance and |  |            |            |          
|                                |         |            |           | Other         |  |            |            |          
|                                |         | Asset      |           | Termination   |  | Other Exit |            |          
|                                |         | Impairment |           | Benefits      |  | Costs      |            | Total    
|                                |         |            |           |               |  |            |            |          
|2001 provision                  |         | $          | 2,237,000 |               |  | $          | 1,221,000  |           |  | $ | 989,000  |         |  | $ | 4,447,000  |          
|                               
|                               
|                               
|                               
|                                | Noncash |            |           | 2,237,000     |  |            |            |          |  |   |          |        |  |   |            | 2,237,000 | 
|                                |         |            |           |               |  |            |            |           |  |   |          |         |  |   |            |          
|                                | Cash    |            |           |              |  |            |            | 1,221,000 |  |   |          | 989,000 |  |   |            | 2,210,000 | 
|                               
|                               
|                               
|                               
|2001 cash activity              |         |            |          |               |  |            | (1,221,000 | )         |  |   | (597,000 | )       |  |   | (1,818,000 | )        
|                                |         |            |           |               |  |            |            |           |  |   |          |         |  |   |            |          
|Balance as of December 31, 2001 |         | $          |          |               |  | $          |           |           |  | $ | 392,000  |         |  | $ | 392,000    |          
|                                |         |            |           |               |  |            |            |           |  |   |          |         |  |   |            |          

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 $2,636,000. The $2,636,000 charge
included a $1,750,000 noncash asset impairment write down of
fixed assets to estimated net realizable value and a $464,000
accrual for severance and termination benefits for
5 salaried and 31 hourly employees terminated in
connection with this plan as well as a $422,000 accrual for
other exit costs. All exit costs were paid as of
December 31, 2001 and no employees remained at the plant.

50



---



##### 



The following is a summary of restructuring activity from plan
adoption to December 31, 2001:

|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |           | 
|------------------------------- | ------- | ---------- | --------- | ------------- |  | ---------- | -------- | ------- |  | - | -------- | ------- |  | - | --------- | --------- | 
|                                |         |            |           | Severance and |  |            |          |        
|                                |         |            |           | Other         |  |            |          |        
|                                |         | Asset      |           | Termination   |  | Other Exit |          |        
|                                |         | Impairment |           | Benefits      |  | Costs      |          | Total  
|                                |         |            |           |               |  |            |          |        
|2001 provision                  |         | $          | 1,750,000 |               |  | $          | 464,000  |         |  | $ | 422,000  |         |  | $ | 2,636,000 |          
|                               
|                               
|                               
|                               
|                                | Noncash |            |           | 1,750,000     |  |            |          |        |  |   |          |        |  |   |           | 1,750,000 | 
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          
|                                | Cash    |            |           |              |  |            |          | 464,000 |  |   |          | 422,000 |  |   |           | 886,000   | 
|                               
|                               
|                               
|                               
|2001 cash activity              |         |            |          |               |  |            | (464,000 | )       |  |   | (422,000 | )       |  |   | (886,000  | )        
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          
|Balance as of December 31, 2001 |         | $          |          |               |  | $          |         |         |  | $ |         |         |  | $ |          |          
|                                |         |            |           |               |  |            |          |         |  |   |          |         |  |   |           |          

In December 2000, the Company recognized nonrecurring costs of
$1,300,000 related to the settlement of a dispute over abandoned
property.

See the Subsequent Events footnote regarding
additional restructuring costs.

13. Disclosures About Fair Value of Financial
Instruments

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.

|                                        |  |       |         |           |  |   |         | 
|--------------------------------------- |  | ----- | ------- | --------- |  | - | ------- | 
|                                        |  | Fair  |         | Carrying 
|                                        |  | Value |         | Amount(1)
|                                        |  |       |         |          
|9 7/8 percent senior subordinated notes |  | $     | 299,250 |           |  | $ | 283,563 | 
|                                       
|                                       
|                                       
|                                       
|7 1/4 percent senior notes              |  |       | 28,130  |           |  |   | 25,449  | 
|                                       
|                                       
|                                       
|                                       
|7 3/8 percent senior notes              |  |       | 196,000 |           |  |   | 198,897 | 
|                                        |  |       |         |           |  |   |         | 
|                                        |  | $     | 523,380 |           |  | $ | 507,909 | 
|                                        |  |       |         |           |  |   |         | 



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The carrying amount excludes the $7,418,000 adjustment for the
    fair value of the interest rate swap agreements discussed in
    Note 5.

51



---



##### 



14. Guarantor Condensed Consolidating Financial
Statements

These condensed consolidating financial statements reflect
Caraustar Industries Inc. and 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.

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 |        
|                                         |                                      |                                     |                           |              |        |              |         |              |          |              |        |        |         |       |          |          |   |      |         |        

52



---



##### 



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     |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Equity in loss of unconsolidated affiliates                                     |                         |                                      | (2,525  | )            |   |              | (85       | )            |  |              |       |        |   |   |         |   |  |   | (2,610  | )      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Other, net                                                                      |                         |                                      |        |              |   |              | (1,836    | )            |  |              | (68    | )      |   |   |         |   |  |   | (1,904  | )      
|                                                                                |                         |                                      |         |              |   |              |           |              |  |              |        |        |   |   |          |   |  |   |         |        
|                                                                                |                         |                                      | (41,525 | )            |   |              | (2,736    | )            |  |              | (420   | )      |   |   |         |   |  |   | (44,681 | )      
|                                                                                |                         |                                      |         |              |   |              |           |              |  |              |        |        |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY INTEREST,
    INCOME TAXES AND EXTRAORDINARY LOSS |                         |                                      | (48,603 | )            |   |              | 32,687    |              |  |              | (2,074 | )      |   |   |         |   |  |   | (17,990 | )      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|MINORITY INTEREST IN LOSSES                                                     |                         |                                      |        |              |   |              |          |              |  |              |       |        |   |   | 180      |   |  |   | 180     |        
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|BENEFIT FOR INCOME TAXES                                                        |                         |                                      | (5,903  | )            |   |              |          |              |  |              |       |        |   |   |         |   |  |   | (5,903  | )      
|                                                                                |                         |                                      |         |              |   |              |           |              |  |              |        |        |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE EXTRAORDINARY LOSS                                         |                         |                                      | (42,700 | )            |   |              | 32,687    |              |  |              | (2,074 | )      |   |   | 180      |   |  |   | (11,907 | )      
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
    DEBT, NET OF TAX            |                         |                                      | (2,695  | )            |   |              |          |              |  |              |       |        |   |   |         |   |  |   | (2,695  | )      
|                                                                                |                         |                                      |         |              |   |              |           |              |  |              |        |        |   |   |          |   |  |   |         |        
|NET (LOSS) INCOME                                                               |                         | $                                    | (45,395 | )            |   | $            | 32,687    |              |  | $            | (2,074 | )      |   | $ | 180      |   |  | $ | (14,602 | )      
|                                                                                |                         |                                      |         |              |   |              |           |              |  |              |        |        |   |   |          |   |  |   |         |        

53



---



##### 



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 change 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   |  
|                                                                 |  |                                      |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  

15. Subsequent Events

In January 2002, the Company completed a third amendment to its
senior credit facility that 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 the second quarter of 2002 from
2.75:1.0 to 2.50:1.0.

Also in January 2002, the Company entered into agreements with
the PBL and Standard Gypsum lenders that correspond to the
amendments made in the third amendment to the senior credit
facility described above, in order to avoid events of default
under those guarantees resulting from a violation of the
interest ratio coverage covenants.

54



---



##### 



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 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.

On September 30, 2002, the Company 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 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 asset is associated with the
value of acquired customer relationships and will be amortized
over 15 years.

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.

In September 2002, 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. 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.

55



---



##### 



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 agreement, 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 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%.

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. The 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.

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 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.

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 an accrual for a
$2.4 million noncash write down of assets to estimated net
realizable value and a $3.6 million accrual for other exit
costs.

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 an accrual for a $1.2 million noncash write down
of assets to estimated net realizable value, 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.

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%.

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

56



---



##### 





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, 2002 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 it 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 its stock.

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 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 is renewable
annually and 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

57



---



##### 





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 mills.

58



---



##### 



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of





We have audited the accompanying consolidated balance sheet of
Caraustar Industries, Inc. and subsidiaries as of
December 31, 2001, and the related consolidated statement
of operations, shareholders equity, and cash flows for the
year then ended. Our audit also included the consolidated
financial statement schedule for the year ended
December 31, 2001 listed in the Index at Item 14.
These financial statements and financial statement schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on the 2001 financial
statements and financial statement schedule based on our audit.
The financial statements and financial statement schedule of the
Company as of December 31, 2000, and for each of the two
years then ended were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on
those financial statements and stated that such 2000 and 1999
financial statement schedules, when considered in relation to
the 2000 and 1999 basic financial statements taken as a whole,
presented fairly, in all material respects, the information set
forth therein, in their reports dated February 5, 2002.

We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards requires 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 audit provides a reasonable
basis for our opinion.

In our opinion, such consolidated 2001 financial statements
present fairly, in all material respects, the financial position
of Caraustar Industries, Inc. and subsidiaries as of
December 31, 2001 and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such 2001 financial statement
schedule, 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.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia





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/A 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/A. 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

59



---



##### 





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



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



60



---



##### 





|         |                                                                                         
|-------- | ----------------------------------------------------------------------------------------
|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 accountants from Arthur Andersen LLP to
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 IV



|          |                                                                     
|--------- | --------------------------------------------------------------------
|ITEM  14. | 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
    Independent Auditors Report are included in Part II,
    Item 8 above.

Consolidated Financial Statements:



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Consolidated Balance Sheets as of December 31, 2001 and 2000                                            
|
| | Consolidated Statements of Operations for the years ended
    December 31, 2001, 2000 and 1999          
|
| | Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2001, 2000 and 1999
|
| | Consolidated Statements of Cash Flows for the years ended
    December 31, 2001, 2000 and 1999          

Notes to Consolidated Financial Statements

Independent Auditors Report



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) Independent Auditors Reports of Deloitte &
    Touche LLP for the consolidated financials statements and
    consolidated financial statement schedule as of
    December 31, 2001 and for the year then ended and the
    Report of Independent Public Accountants of Arthur Andersen LLP
    as of December 31, 2001 and 2000 and 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 two current reports on Form 8-K and furnished
    Regulation FD disclosure in one current report during the
    quarter ending December 31, 2001. The first report, filed
    on October 10, 2001, incorporated by reference the contents
    of our press release announcing our expected financial results
    for the period ended September 30, 2001.
|
| | The second report, dated November 7, 2001, furnished
    excerpts from a management presentation under Item 9 of
    Form 8-K.                                                                                                                                                                                                                                    
|
| | The third report, filed on December 20, 2001, incorporated by
    reference the contents of our press release announcing our
    expected financial results for the fourth quarter of 2001.                                                                                                                                                                       

61



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##### 



SCHEDULE II

CARAUSTAR INDUSTRIES, INC.



VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


For the Years Ended December 31, 1999, 2000 and 2001


(In Thousands)


|      |  |                                                                        |  |            |       |            |  |             |        |             |  |   |        |   |  |   |       | 
|----- |  | ---------------------------------------------------------------------- |  | ---------- | ----- | ---------- |  | ----------- | ------ | ----------- |  | - | ------ | - |  | - | ----- | 
|      |  |                                                                        |  | Balance at |       | Charged to |  |             |        |            
|      |  |                                                                        |  | Beginning  |       | Costs and  |  |             |        | Balance at 
|      |  |                                                                        |  | of Year    |       | Expenses   |  | Deductions* |        | End of Year
|      |  |                                                                        |  |            |       |            |  |             |        |            
|1999: |  | Allowances for doubtful accounts receivable,
    returns and discounts |  | $          | 1,069 |            |  | $           | 4,866  |             |  | $ | (3,517 | ) |  | $ | 2,418 | 
|     
|     
|     
|     
|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 | 






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

62



---



##### 



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. BROWNThomas V. Brown, President and Chief
    Executive Officer
    (Principal Executive Officer); Director          |  |  |  | 
|/s/ MICHAEL J. KEOUGHMichael J. Keough, Vice President and Chief
    Operating Officer
    (Principal Operating Officer); Director |  |  |  | 
|/s/ RONALD J. DOMANICORonald J. Domanico, Vice President and
    Chief Financial Officer
    (Principal Financial Officer)         |  |  |  | 
|/s/ WILLIAM A. NIX, IIIWilliam A. Nix, III, Vice President,
    Treasurer and Controller
    (Principal Accounting Officer)        |  |  |  | 
|/s/ RUSSELL M. ROBINSON, IIRussell M. Robinson, II, Chairman of the
    Board                                                      |  |  |  | 
|/s/ RALPH M. HOLT, JR.Ralph M. Holt, Jr., Director                                                                                 |  |  |  | 
|/s/ JAMES E. ROGERSJames E. Rogers, Director                                                                                       |  |  |  | 

63



---



##### 



CERTIFICATION

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

1. I have reviewed this annual report on Form 10-K/A 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. Brown                      
| | President and Chief Executive Officer

Date: March 28, 2003

64



---



##### 



CERTIFICATION

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

1. I have reviewed this annual report on Form 10-K/A 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. Domanico     
| | Vice President and     
| | Chief Financial Officer

Date: March 28, 2003

65



---



##### 



EXHIBIT INDEX

|        |       |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | ----- |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |            
|No.     |       |  |  | Description
|        |       |  |  |            
|        | 3.01  |  |  |            |  | Amended and Restated Articles of Incorporation of
    the Company (Incorporated by
    reference  Exhibit 3.01 to report on
    Form 10-K for the year ended December 31, 1992
    [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                               
|        | 3.02  |  |  |            |  | Third Amended and Restated Bylaws of the Company
    (Incorporated by reference  Exhibit 3.02 to
    report on Form 10-K for the year ended December 31, 2001
    [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. 0-20646])                                                                                                                                                                                                                                                                             
|        | 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])                                                                                                                      

66



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##### 



|        |        |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | ------ |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |            
|No.     |        |  |  | Description
|        |        |  |  |            
|        | 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])
|        | 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                                                                                                                                                    
|        | 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                                                                                                                                                       
|        | 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                                                                                                                                                                                                           
|        | 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])                                                                                                                                                                                                                

67



---



##### 



|        |        |  |  |             |  |                                                                                                                                                                                                                                                                                                                           
|------- | ------ |  |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |            
|No.     |        |  |  | Description
|        |        |  |  |            
|        | 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 dated 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                                                                                                                                                                                                         
|        | 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                                                                                                                                                            
|        | 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 dated 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.                                                
|        | 10.28 |  |  |            |  | Irrevocable Standby Letter of Credit, dated
    March 28, 2003, in favor of Toronto Dominion (Texas), Inc.
    upon application of the Company                                                                                                                                                                            
|        | 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])                                                                                               

68



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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, as of
    March 2003                                                                                                                                                                                                                                                                                         
|        | 23.01   |   |  |            |  | Consent of Arthur Andersen LLP (omitted Pursuant
    to Rule 437a)**                                                                                                                                                                                                                                                                         
|        | 23.02  |   |  |            |  | Consent of Deloitte and Touche LLP                                                                                                                                                                                                                                                                                                           
|        | 99.01** | * |  |            |  | Certification of CEO                                                                                                                                                                                                                                                                                                                         
|        | 99.02** | * |  |            |  | Certification of CFO                                                                                                                                                                                                                                                                                                                         



---



|  |                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 any
    of 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
    reports 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.

|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*** | 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/A.

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