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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|- | ----------------------------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number 0-20646



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Caraustar Industries, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|North Carolina                                                 |  | 58-1388387                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|3100 Joe Jerkins Blvd., Austell, Georgia |  | 30106     
|(Address of principal executive offices) |  | (Zip Code)



(770) 948-3101

(Registrants telephone number, including area code)



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 ̈



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



Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable date, November 8, 2004.



|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 28,491,348   
|(Class)                      |  | (Outstanding)



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##### Table of Contents

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004



CARAUSTAR INDUSTRIES, INC.



TABLE OF
CONTENTS



|              |  |                                                                                                                              |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                              |  | Page
|PART I       |  | FINANCIAL INFORMATION                                                                                                        |  |     
|              |  |                                                                                                                             
|Item 1.       |  | Condensed Consolidated Financial Statements:                                                                                 |  |     
|              |  |                                                                                                                             
|              |  | Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                                         |  | 3   
|              |  |                                                                                                                             
|              |  | Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2004 and 2003 |  | 4   
|              |  |                                                                                                                             
|              |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2004 and 2003                 |  | 5   
|              |  |                                                                                                                             
|              |  | Notes to Condensed Consolidated Financial Statements                                                                         |  | 6   
|              |  |                                                                                                                             
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 24  
|              |  |                                                                                                                             
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 41  
|              |  |                                                                                                                             
|Item 4.       |  | Controls and Procedures                                                                                                      |  | 41  
|              |  |                                                                                                                             
|PART II      |  | OTHER INFORMATION                                                                                                            |  |     
|              |  |                                                                                                                             
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                             |  | 42  
|              |  |                                                                                                                             
|Signatures    |  |                                                                                                                              |  | 43  
|              | 
|Exhibit Index |  | 44                                                                                                                          



2



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##### Table of Contents

ITEM 1. Condensed Consolidated Financial Statements



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)



|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                              |  | September 30,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|CURRENT ASSETS:                                                                                                                                                               |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                     |  | $                 | 89,195   |   |                  | $ | 85,551   |  
|Receivables, net of allowances for doubtful accounts, returns, and discounts of $4,058 and $5,302 at September 30, 2004 and December 31, 2003,
respectively                   |  |                   | 111,689  |   |                  |   | 93,892   |  
|Inventories                                                                                                                                                                   |  |                   | 88,644   |   |                  |   | 87,608   |  
|Refundable income taxes                                                                                                                                                       |  |                   | 110      |   |                  |   | 250      |  
|Current deferred tax asset                                                                                                                                                    |  |                   | 10,996   |   |                  |   | 7,457    |  
|Other current assets                                                                                                                                                          |  |                   | 12,137   |   |                  |   | 12,461   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                          |  |                   | 312,771  |   |                  |   | 287,219  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Land                                                                                                                                                                          |  |                   | 12,084   |   |                  |   | 12,211   |  
|Buildings and improvements                                                                                                                                                    |  |                   | 141,806  |   |                  |   | 141,022  |  
|Machinery and equipment                                                                                                                                                       |  |                   | 622,901  |   |                  |   | 617,688  |  
|Furniture and fixtures                                                                                                                                                        |  |                   | 15,424   |   |                  |   | 15,225   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                              |  |                   | 792,215  |   |                  |   | 786,146  |  
|Less accumulated depreciation                                                                                                                                                 |  |                   | (390,584 | ) |                  |   | (375,374 | )
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Property, plant and equipment, net                                                                                                                                            |  |                   | 401,631  |   |                  |   | 410,772  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|GOODWILL                                                                                                                                                                      |  |                   | 183,130  |   |                  |   | 183,130  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                                       |  |                   | 60,025   |   |                  |   | 54,623   |  
|OTHER ASSETS                                                                                                                                                                  |  |                   | 26,331   |   |                  |   | 24,801   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                              |  | $                 | 983,888  |   |                  | $ | 960,545  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  |                   |          |   |                  |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Current maturities of debt                                                                                                                                                    |  | $                 | 80       |   |                  | $ | 106      |  
|Accounts payable                                                                                                                                                              |  |                   | 86,039   |   |                  |   | 75,013   |  
|Accrued interest                                                                                                                                                              |  |                   | 20,154   |   |                  |   | 8,832    |  
|Accrued compensation                                                                                                                                                          |  |                   | 12,927   |   |                  |   | 9,800    |  
|Other accrued liabilities                                                                                                                                                     |  |                   | 39,760   |   |                  |   | 31,307   |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                     |  |                   | 158,960  |   |                  |   | 125,058  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|SENIOR CREDIT FACILITY                                                                                                                                                        |  |                   |         |   |                  |   |         |  
|OTHER LONG-TERM DEBT, less current maturities                                                                                                                                 |  |                   | 516,937  |   |                  |   | 531,001  |  
|DEFERRED INCOME TAXES                                                                                                                                                         |  |                   | 58,365   |   |                  |   | 58,920   |  
|PENSION LIABILITY                                                                                                                                                             |  |                   | 25,506   |   |                  |   | 18,632   |  
|DEFERRED COMPENSATION                                                                                                                                                         |  |                   | 1,390    |   |                  |   | 1,522    |  
|OTHER LIABILITIES                                                                                                                                                             |  |                   | 4,084    |   |                  |   | 5,031    |  
|MINORITY INTEREST                                                                                                                                                             |  |                   | 648      |   |                  |   | 504      |  
|COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                                                                       |  |                   |          |   |                  |   |          |  
|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, 28,486,392 and 28,222,205 shares issued and outstanding at September 30, 2004 and
December 31, 2003, respectively |  |                   | 2,849    |   |                  |   | 2,822    |  
|Additional paid-in capital                                                                                                                                                    |  |                   | 187,370  |   |                  |   | 185,031  |  
|Unearned compensation                                                                                                                                                         |  |                   | (358     | ) |                  |   | (1,865   | )
|Retained earnings                                                                                                                                                             |  |                   | 46,905   |   |                  |   | 52,531   |  
|Accumulated other comprehensive (loss) income:                                                                                                                                |  |                   |          |   |                  |   |          |  
|Minimum pension liability adjustment                                                                                                                                          |  |                   | (19,244  | ) |                  |   | (19,244  | )
|Foreign currency translation                                                                                                                                                  |  |                   | 476      |   |                  |   | 602      |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total accumulated other comprehensive loss                                                                                                                                    |  |                   | (18,768  | ) |                  |   | (18,642  | )
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total Shareholders Equity                                                                                                                                                    |  |                   | 217,998  |   |                  |   | 219,877  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                              |  | $                 | 983,888  |   |                  | $ | 960,545  |  
|                                                                                                                                                                              |  |                   |          |   |                  |   |          |  



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



3



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | --------------------------------------- | ------- | - | -------------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  | For the Three Months EndedSeptember 30, |         |   | For the Nine Months EndedSeptember 30, |  
|                                               |  | 2004                                    |         |   | 2003                                   |   |         | 2004 |  |   | 2003    |  
|SALES                                          |  | $                                       | 273,789 |   |                                        | $ | 253,013 |      |  | $ | 799,355 |   |  | $ | 752,758 |  
|COST OF SALES                                  |  |                                         | 233,094 |   |                                        |   | 211,685 |      |  |   | 679,635 |   |  |   | 631,231 |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                   |  |                                         | 40,695  |   |                                        |   | 41,328  |      |  |   | 119,720 |   |  |   | 121,527 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES   |  |                                         | 33,931  |   |                                        |   | 31,845  |      |  |   | 103,098 |   |  |   | 111,548 |  
|RESTRUCTURING AND IMPAIRMENT COSTS             |  |                                         | 4,827   |   |                                        |   | 3,085   |      |  |   | 9,500   |   |  |   | 9,252   |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                         |  |                                         | 1,937   |   |                                        |   | 6,398   |      |  |   | 7,122   |   |  |   | 727     |  
|OTHER (EXPENSE) INCOME:                        |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                               |  |                                         | (10,684 | ) |                                        |   | (11,251 | )    |  |   | (32,287 | ) |  |   | (32,832 | )
|Interest income                                |  |                                         | 597     |   |                                        |   | 286     |      |  |   | 1,286   |   |  |   | 722     |  
|Write-off of deferred debt costs               |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   | (1,812  | )
|Equity in income of unconsolidated affiliates  |  |                                         | 7,746   |   |                                        |   | 3,217   |      |  |   | 16,810  |   |  |   | 4,681   |  
|Other, net                                     |  |                                         | (81     | ) |                                        |   | (93     | )    |  |   | (400    | ) |  |   | 258     |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|                                               |  |                                         | (2,422  | ) |                                        |   | (7,841  | )    |  |   | (14,591 | ) |  |   | (28,983 | )
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|LOSS BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                         | (485    | ) |                                        |   | (1,443  | )    |  |   | (7,469  | ) |  |   | (28,256 | )
|MINORITY INTEREST IN (INCOME) LOSSES           |  |                                         | (32     | ) |                                        |   | 155     |      |  |   | (145    | ) |  |   | 92      |  
|(PROVISION) BENEFIT FOR INCOME TAXES           |  |                                         | (79     | ) |                                        |   | 141     |      |  |   | 1,988   |   |  |   | 10,054  |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|NET LOSS                                       |  | $                                       | (596    | ) |                                        | $ | (1,147  | )    |  | $ | (5,626  | ) |  | $ | (18,110 | )
|OTHER COMPREHENSIVE INCOME (LOSS):             |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Foreign currency translation adjustment        |  |                                         | 175     |   |                                        |   | (52     | )    |  |   | (126    | ) |  |   | 671     |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|COMPREHENSIVE LOSS                             |  | $                                       | (421    | ) |                                        | $ | (1,199  | )    |  | $ | (5,752  | ) |  | $ | (17,439 | )
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|BASIC                                          |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|NET LOSS PER COMMON SHARE                      |  | $                                       | (0.02   | ) |                                        | $ | (0.04   | )    |  | $ | (0.20   | ) |  | $ | (0.65   | )
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares outstanding  |  |                                         | 28,506  |   |                                        |   | 27,990  |      |  |   | 28,449  |   |  |   | 27,937  |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|DILUTED                                        |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|NET LOSS PER COMMON SHARE                      |  | $                                       | (0.02   | ) |                                        | $ | (0.04   | )    |  | $ | (0.20   | ) |  | $ | (0.65   | )
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares outstanding  |  |                                         | 28,506  |   |                                        |   | 27,990  |      |  |   | 28,449  |   |  |   | 27,937  |  
|                                               |  |                                         |         |   |                                        |   |         |      |  |   |         |   |  |   |         |  



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



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



|                                                                    |  |                                        |         |   |      |   |         |  
|------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                    |  | For the Nine Months EndedSeptember 30, |        
|                                                                    |  | 2004                                   |         |   | 2003 |  
|OPERATING ACTIVITIES:                                               |  |                                        |         |   |      |   |         |  
|Net loss                                                            |  | $                                      | (5,626  | ) |      | $ | (18,110 | )
|Depreciation and amortization                                       |  |                                        | 22,558  |   |      |   | 22,130  |  
|Stock-based compensation expense                                    |  |                                        | 1,610   |   |      |   |        |  
|Loss on extinguishment of debt                                      |  |                                        | 301     |   |      |   |        |  
|Write-off of deferred debt costs                                    |  |                                        |        |   |      |   | 1,812   |  
|Loss on disposal of property, plant and equipment, net              |  |                                        | 1,154   |   |      |   | 1,116   |  
|Restructuring costs                                                 |  |                                        | 1,813   |   |      |   | 8,547   |  
|Other noncash adjustments                                           |  |                                        | (2,989  | ) |      |   | (8,751  | )
|Equity in income of unconsolidated affiliates, net of distributions |  |                                        | (5,310  | ) |      |   | (1,031  | )
|Changes in operating assets and liabilities, net of acquisitions    |  |                                        | 15,232  |   |      |   | 37,135  |  
|                                                                    |  |                                        |         |   |      |   |         |  
|Net cash provided by operating activities                           |  |                                        | 28,743  |   |      |   | 42,848  |  
|                                                                    |  |                                        |         |   |      |   |         |  
|INVESTING ACTIVITIES:                                               |  |                                        |         |   |      |   |         |  
|Purchases of property, plant and equipment                          |  |                                        | (15,644 | ) |      |   | (14,707 | )
|Acquisition of businesses, net of cash acquired                     |  |                                        |        |   |      |   | (695    | )
|Proceeds from disposal of property, plant and equipment             |  |                                        | 2,041   |   |      |   | 984     |  
|Investment in unconsolidated affiliates                             |  |                                        | (150    | ) |      |   |        |  
|                                                                    |  |                                        |         |   |      |   |         |  
|Net cash used in investing activities                               |  |                                        | (13,753 | ) |      |   | (14,418 | )
|                                                                    |  |                                        |         |   |      |   |         |  
|FINANCING ACTIVITIES:                                               |  |                                        |         |   |      |   |         |  
|Repayments of short and long-term debt                              |  |                                        | (14,176 | ) |      |   | (17     | )
|Proceeds from swap agreement unwinds                                |  |                                        | 380     |   |      |   | 15,950  |  
|Issuances of stock, net of forfeitures                              |  |                                        | 2,450   |   |      |   |        |  
|Deferred debt costs                                                 |  |                                        |        |   |      |   | (2,201  | )
|                                                                    |  |                                        |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                 |  |                                        | (11,346 | ) |      |   | 13,732  |  
|                                                                    |  |                                        |         |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                           |  |                                        | 3,644   |   |      |   | 42,162  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    |  |                                        | 85,551  |   |      |   | 34,314  |  
|                                                                    |  |                                        |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                          |  | $                                      | 89,195  |   |      | $ | 76,476  |  
|                                                                    |  |                                        |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES:                                           |  |                                        |         |   |      |   |         |  
|Cash payments for interest                                          |  | $                                      | 22,441  |   |      | $ | 20,237  |  
|                                                                    |  |                                        |         |   |      |   |         |  
|Income tax payments (refunds), net                                  |  | $                                      | 1,264   |   |      | $ | (17,157 | )
|                                                                    |  |                                        |         |   |      |   |         |  



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



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004



Note 1. Basis of Presentation



The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly, in all material respects the financial position of the Company as of September 30, 2004, and the
results of operations for the three and nine months ended September 30, 2004 and 2003. The results of operations and cash flows for the three and nine months ended September 30, 2004 and 2003 are not, and should not be construed as necessarily
indicative of the results of the operations or cash flows which may be reported for the remainder of 2004. The Company reclassified certain packaging costs from selling, general and administrative expenses to cost of sales for both the three and
nine-month periods ended September 30, 2004 and 2003. For the three months ended September 30, 2004 and 2003, the Company reclassified $4.5 million and $3.3 million, respectively. For the nine months ended September 30, 2004 and 2003, the Company
reclassified $13.1 million and $12.4 million, respectively. Certain other reclassifications have been made to prior year balances to conform to the 2004 presentation.



The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain footnote disclosures and other information normally included in financial statements prepared in accordance with principles generally
accepted in the United States of America have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The
accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the notes to the financial statements included in the Companys Form 10-K.



Note 2.New Accounting Pronouncements



In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No.
106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP No. 106-2 requires employers that sponsor postretirement benefit plans that provide prescription drug
benefits to retirees to account for the effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the third quarter of 2004. The amounts included in the financial statements related to the
Companys postretirement benefit plans do not reflect the effect of the Act. At present, detailed regulations necessary to implement the Act have not been issued, including those that would specify the manner in which actuarial equivalency must
be determined. The Act is expected to reduce the Companys post-retirement benefit obligations, but the effect is not expected to be material. This is due to the limited amount of medical and prescription drug coverage offered to plan
participants after the age of 65.



Note 3.Accounting for Stock-Based Compensation



The Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its employee stock options. Interim pro forma information regarding net income
(loss) and earnings (loss) per share is required by Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, which requires that the information be
determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair values for these options were estimated as of the grant dates using the Black-Scholes option pricing model with the
following weighted average assumptions:



|                        |  |            |   |  |            |  
|----------------------- |  | ---------- | - |  | ---------- | -
|                        |  | 2004       |   |  | 2003       |  
|Risk-free interest rate |  | 3.88%4.31 | % |  | 3.54%4.22 | %
|Expected dividend yield |  | 0          | % |  | 0          | %
|Expected option lives   |  | 8 years    |   |  | 8-10 years |  
|Expected volatility     |  | 40         | % |  | 39         | %



The total fair value
of the options granted during the year ended December 31, 2003 was computed to be approximately $1.0 million. The Company granted 23,440 options with an approximate value of $183 thousand during the nine-month period ended September 30, 2004. If the
Company had accounted for these plans in accordance with SFAS No. 123 Accounting for Stock-Based Compensation and included the amortization expense related to options vesting each year, the Companys reported and pro forma net loss
and net loss per share for the three and nine-month periods ended September 30, 2004 and 2003 would have been as follows (in thousands, except per share data):



|                                                                                                 |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                 |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                                                                                 |  | 2004                            |       |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Net loss:                                                                                        |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|As reported                                                                                      |  | $                               | (596  | ) |                                | $ | (1,147 | )    |  | $ | (5,626 | ) |  | $ | (18,110 | )
|Stock based compensation expense determined pursuant to SFAS No. 123, net of related tax effects |  |                                 | (159  | ) |                                |   | (136   | )    |  |   | (959   | ) |  |   | (1,313  | )
|                                                                                                 |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Pro forma                                                                                        |  | $                               | (755  | ) |                                | $ | (1,283 | )    |  | $ | (6,585 | ) |  | $ | (19,423 | )
|                                                                                                 |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Diluted loss per common share:                                                                   |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|As reported                                                                                      |  | $                               | (0.02 | ) |                                | $ | (0.04  | )    |  | $ | (0.20  | ) |  | $ | (0.65   | )
|Pro forma                                                                                        |  |                                 | (0.03 | ) |                                |   | (0.05  | )    |  |   | (0.23  | ) |  |   | (0.70   | )



6



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##### Table of Contents

Note 4.Inventory



Inventories are carried at the lower of cost or market. The costs included in inventory include raw materials (recovered
fiber for paperboard products and paperboard for converted products), direct and indirect labor and employee benefits, energy and fuel, depreciation, chemicals, general manufacturing overhead and various other costs of manufacturing. General and
administrative costs are not included in inventory costs.



Market, with respect to all inventories, is replacement cost or net realizable value. The Company reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. The Company
estimates reserves for inventory obsolescence and shrinkage based on managements judgment of future realization. These reviews require management to assess customer and market demand. All inventories are valued using the first-in, first-out
method.



Inventories at September 30, 2004 and December 31,
2003, were as follows (in thousands):



|                                   |  |                   |        |                  |   |       
|---------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                   |  | September 30,2004 |        | December 31,2003
|Raw materials and supplies         |  | $                 | 40,302 |                  | $ | 37,294
|Finished goods and work in process |  |                   | 48,342 |                  |   | 50,314
|                                   |  |                   |        |                  |   |       
|Total inventory                    |  | $                 | 88,644 |                  | $ | 87,608
|                                   |  |                   |        |                  |   |       



Note 5.Senior Credit Facility and Other Long-Term Debt



At
September 30, 2004 and December 31, 2003, total long-term debt consisted of the following (in thousands):



|                                                      |  |                   |         |   |                  |   |         |  
|----------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                      |  | September 30,2004 |         |   | December 31,2003 |  
|Senior credit facility                                |  | $                 |        |   |                  | $ |        |  
|97/8% senior subordinated notes                       |  |                   | 275,000 |   |                  |   | 285,000 |  
|73/8% senior notes                                    |  |                   | 189,750 |   |                  |   | 193,250 |  
|71/4% senior notes                                    |  |                   | 29,000  |   |                  |   | 29,000  |  
|Other notes payable                                   |  |                   | 9,735   |   |                  |   | 9,895   |  
|Mark-to-market value of interest rate swap agreements |  |                   | (19     | ) |                  |   | (1,145  | )
|Realized interest rate swap gains (1)                 |  |                   | 13,551  |   |                  |   | 15,107  |  
|                                                      |  |                   |         |   |                  |   |         |  
|Total debt                                            |  |                   | 517,017 |   |                  |   | 531,107 |  
|Less current maturities                               |  |                   | (80     | ) |                  |   | (106    | )
|                                                      |  |                   |         |   |                  |   |         |  
|Total long-term debt                                  |  | $                 | 516,937 |   |                  | $ | 531,001 |  
|                                                      |  |                   |         |   |                  |   |         |  

---

|(1) | Net of original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes. As described below under Interest Rate Swap
Agreements, realized gains resulting from unwinding interest rate swap agreements are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

Senior Credit Facility



The Companys senior credit facility provides for a revolving line of credit of $75.0 million and is secured primarily
by a first priority security interest in the Companys accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and
inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of September 30, 2004, no borrowings were outstanding under the facility; however, an aggregate of
$38.9 million in letter of credit obligations were outstanding. Availability under the facility at September 30, 2004, was limited to $26.1 million after taking into consideration outstanding letter of credit obligations and minimum borrowing
availability requirements.



Borrowings under the facility bear
interest at a rate equal to, at the Companys option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility, plus a margin of 0.50% or (2) the adjusted
Eurodollar Interbank Offered Rate plus a margin of 2.50%. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for
Eurodollar-based loans.



The facility contains covenants that
restrict, among other things, the Companys ability and its subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and
indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of the Companys business. The facility also contains a
fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts
receivable and inventory (less reserves and aggregate credit outstanding) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstanding) in excess of $37.5 million. The fixed charge ratio covenant did
not require measurement at September 30, 2004.



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.



The Company was in compliance with the covenants under its senior credit facility as of September 30, 2004 except for certain defaults with respect to the
Companys sale of assets for approximately $182 thousand and its repurchase of $10.0 million of its 97/8%
senior subordinated notes, for which the Company has obtained an amendment from its lenders that waived these defaults.



For information regarding the Companys former senior credit facility, which was in place during the first half of 2003 and was replaced June 24,
2003, see the Form 10-K for the year ended December 31, 2003.



Senior and
Senior Subordinated Notes



On June 1, 1999, the
Company issued $200.0 million in aggregate principal amount of 73/8% senior notes due June 1, 2009. The 73/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest
semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 73/8% senior notes is 6.4%. The 73/8% senior notes are unsecured
obligations of the Company. The Company has purchased an aggregate of $10.3 million of these notes in the open market, including $3.5 million purchased in February 2004.



On March 29, 2001, the Company issued $285.0 million of 97/8% senior subordinated notes due April 1, 2011 and $29.0 million of 71/4% senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to yield effective interest rates of 10.5% and
9.4%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 97/8% senior subordinated notes is 9.2%. These publicly traded senior subordinated and senior notes are unsecured, but are guaranteed, on a joint and several basis, by all of the
Companys domestic subsidiaries, other than one that is not wholly-owned. In August 2004, the Company purchased $10.0 million of these notes in the open market.



See Note 14 Subsequent Events regarding the purchase of an additional $10.0 million of the Companys 97/8% senior subordinated notes in the open market and the amendment to the Companys senior credit facility.



8



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##### Table of Contents

Interest Rate Swap Agreements



In January 2003, the Company effectively unwound $85.0 million of its $135.0 million interest rate swap agreement related to
the 97/8% 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 $4.3 million gain, which was classified as a component of debt, will be accreted to interest expense over the remaining
life of the notes and will partially offset the increase in interest expense. The $4.3 million gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis points.



In May 2003, the Company unwound the remaining $50.0 million of its interest rate swap agreement related to the 97/8% senior subordinated notes, and received approximately $4.6 million from the bank counter-party. Simultaneously,
the Company unwound its remaining $50.0 million interest rate swap agreement related to the 73/8% senior notes,
and received approximately $7.1 million. The $11.7 million gain, which was classified as a component of debt, will be accreted to interest expense over the remaining life of the notes and will partially offset the increase in interest expense. The
$4.6 million gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30
basis points. The $7.1 million gain lowered the effective interest rate of the 73/8% senior notes by
approximately 80 basis points.



In
July 2003, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which had payment and expiration dates that corresponded to the terms of the note obligations it covered, effectively
converted $50.0 million of the Companys fixed rate 97/8% senior subordinated notes into variable rate
obligations. The variable rates were based on six-month LIBOR plus a fixed margin.



In December 2003, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note
obligations it covers, effectively converted $50.0 million of the Companys fixed rate 97/8% senior
subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.



In March 2004, the Company unwound the July 2003 $50.0 million interest rate swap agreement related to the 97/8% senior subordinated notes and received approximately $380 thousand from the bank counter-party. The $380 thousand gain, which is classified as a
component of debt, will be accreted to interest expense over the remaining life of the notes and will partially offset the increase in interest expense.



In April 2004, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and
expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0 million of the Companys fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.



See Note 14 Subsequent Events regarding the Companys unwinding of its December 2003 and April 2004 swap agreements.



Under the provisions of SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended, the Company has designated and accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no ineffectiveness with regard to these agreements as they
qualified for the short-cut method of accounting for fair value hedges of debt obligations, as prescribed by SFAS No. 133. The September 30, 2004 aggregate estimated liability of the swaps was $19 thousand and is classified as a component of other
long-term liabilities, with a corresponding adjustment to long-term debt in the accompanying balance sheet. The December 31, 2003 aggregate estimated liability related to the swaps was $1.1 million and is classified as a component of other long-term
liabilities, with a corresponding adjustment to long-term debt in the accompanying balance sheet.



Note 6.Segment Information



The Company operates principally in three business segments organized by products. The paperboard segment consists of facilities that manufacture 100%
recycled uncoated and clay-coated paperboard and facilities that collect recycled paper and broker recycled paper and other paper rolls. The tube, core, and composite container segment is principally made up of facilities that produce spiral and
convolute-wound tubes, cores, and composite cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes and facilities that provide contract manufacturing and contract
packaging services. Intersegment sales are recorded at prices which approximate market prices.



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



9



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##### Table of Contents

The following table presents certain business segment information for the periods indicated (in
thousands):



|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                               |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|Sales (external customers):                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                     |  | $                               | 95,014  |   |                                | $ | 81,485  |      |  | $ | 276,320 |   |  | $ | 245,074 |  
|Tube, core, and composite container            |  |                                 | 99,872  |   |                                |   | 96,583  |      |  |   | 293,234 |   |  |   | 287,122 |  
|Carton and custom packaging                    |  |                                 | 78,903  |   |                                |   | 74,945  |      |  |   | 229,801 |   |  |   | 220,562 |  
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total                                          |  | $                               | 273,789 |   |                                | $ | 253,013 |      |  | $ | 799,355 |   |  | $ | 752,758 |  
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Sales (intersegment):                          |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                     |  | $                               | 49,528  |   |                                | $ | 49,067  |      |  | $ | 139,965 |   |  | $ | 137,226 |  
|Tube, core, and composite container            |  |                                 | 1,686   |   |                                |   | 1,325   |      |  |   | 4,075   |   |  |   | 3,892   |  
|Carton and custom packaging                    |  |                                 | 278     |   |                                |   | 206     |      |  |   | 814     |   |  |   | 772     |  
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total                                          |  | $                               | 51,492  |   |                                | $ | 50,598  |      |  | $ | 144,854 |   |  | $ | 141,890 |  
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) from operations:                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Paperboard (A)                                 |  | $                               | 8,912   |   |                                | $ | 10,666  |      |  | $ | 20,963  |   |  | $ | 17,261  |  
|Tube, core, and composite container (B)        |  |                                 | 1,765   |   |                                |   | 2,712   |      |  |   | 9,591   |   |  |   | 7,652   |  
|Carton and custom packaging (C)                |  |                                 | (2,648  | ) |                                |   | (1,687  | )    |  |   | (6,711  | ) |  |   | (7,961  | )
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                               |  |                                 | 8,029   |   |                                |   | 11,691  |      |  |   | 23,843  |   |  |   | 16,952  |  
|Corporate expense (D)                          |  |                                 | (6,092  | ) |                                |   | (5,293  | )    |  |   | (16,721 | ) |  |   | (16,225 | )
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                         |  |                                 | 1,937   |   |                                |   | 6,398   |      |  |   | 7,122   |   |  |   | 727     |  
|Interest expense                               |  |                                 | (10,684 | ) |                                |   | (11,251 | )    |  |   | (32,287 | ) |  |   | (32,832 | )
|Interest income                                |  |                                 | 597     |   |                                |   | 286     |      |  |   | 1,286   |   |  |   | 722     |  
|Write-off of deferred debt costs               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   | (1,812  | )
|Equity in income of unconsolidated affiliates  |  |                                 | 7,746   |   |                                |   | 3,217   |      |  |   | 16,810  |   |  |   | 4,681   |  
|Other, net                                     |  |                                 | (81     | ) |                                |   | (93     | )    |  |   | (400    | ) |  |   | 258     |  
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss before minority interest and income taxes |  | $                               | (485    | ) |                                | $ | (1,443  | )    |  | $ | (7,469  | ) |  | $ | (28,256 | )
|                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

---

|(A) | The three-month periods ended September 30, 2004 and 2003 results include a charge to operations of $916 thousand and a credit of $187 thousand, respectively, for restructuring and
impairment costs. The nine-month periods ended September 30, 2004 and 2003 results include charges to operations of $2.7 million and $4.4 million, respectively, for restructuring and impairment costs. These costs relate to closing and consolidating
operations within the paperboard segment (see Note 8).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | The three and nine-month periods ended September 30, 2004 results include charges to operations of $375 thousand for restructuring and impairment costs (see Note 8).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | The three-month periods ended September 30, 2004 and 2003 results include charges to operations of $3.3 million and $3.3 million, respectively for restructuring and impairment
costs. The nine-month periods ended September 30, 2004 and 2003 results include charges to operations of $4.6 million and $4.8 million, respectively, for restructuring and impairment costs. These costs relate to closing and consolidating operations
within the carton and custom packaging segment (see Note 8).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | The three and nine-month periods ended September 30, 2004 results include charges to operations of $259 thousand and $1.9 million, respectively, for centralizing the accounting and
finance operations (see Note 8).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note
7.Goodwill and Other Intangible Asset



Goodwill



The Company accounts for goodwill and other
intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Under this pronouncement the Company performs an impairment test at least annually. The Companys most recent impairment test was performed during the
fourth quarter of 2003 and did not result in an impairment charge. There were no changes in goodwill during the nine months ended September 30, 2004.



Intangible Asset



As of September 30, 2004 and December 31, 2003, the Company had an intangible asset of $7.4 million, net of $1.3 million of accumulated amortization, and
$7.8 million, net of $858 thousand of accumulated amortization, respectively, which is classified as other assets. Amortization expense for the nine months ended September 30, 2004 and 2003 was $426 thousand. The intangible asset is associated with
the acquisition of certain assets of the Smurfit Industrial Packaging Group, a business unit of



10



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##### Table of Contents

Smurfit-Stone Container Corporation, which was completed in 2002, and is attributable to the acquired customer
relationships. This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2005            |  | $ | 568  
|2006            |  |   | 568  
|2007            |  |   | 568  
|2008            |  |   | 568  
|2009            |  |   | 568  
|                |  |   |      
|Five year total |  | $ | 2,840
|                |  |   |      



Note 8.Restructuring and Impairment Costs



In March 2003, the
Company announced the permanent closure of its Buffalo Paperboard mill located in Lockport, New York. The Company recorded a charge of approximately $4.3 million in connection with this closure. The $4.3 million charge included a $3.1 million
impairment charge for assets, a $670 thousand accrual for severance and other termination benefits, and a $607 thousand accrual for other exit costs. At December 31, 2003, a $3 thousand liability remained for other exit costs. During the first nine
months of 2004, the remaining accrued other exit costs were paid and an additional $22 thousand was paid and expensed for other exit costs. The exit plan for Buffalo was completed in May 2004, when the Company sold the property.



In June 2003, the Company initiated a plan to permanently close its Ashland,
Ohio carton facility. The Company downsized this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the Company decided to close the facility. During 2003, the Company recorded a charge of approximately
$6.7 million, which included a $4.1 million impairment charge for assets, a $1.2 million accrual for severance and other termination benefits and an accrual of $1.4 million for other exit costs. At December 31, 2003, an accrual of $302 thousand for
severance and other termination benefits remained and an accrual of $43 thousand remained for other exit costs. During the nine months ended September 30, 2004, the Company recorded an additional $429 thousand impairment charge for assets and an
additional $2.7 million in severance and other termination benefit costs and $1.0 million for other exit costs. During the nine months ended September 30, 2004, the Company paid $221 thousand related to severance and other termination benefits, paid
$1.0 million for other exit costs and reversed accruals of $81 thousand and $43 thousand for severance and other termination benefits and other exit costs, respectively, leaving an accrual of $2.7 million for severance and other termination benefits
and no accrual for other exit costs. Substantially all of the Ashland carton sales were transferred to the Companys other carton manufacturing facilities. As of September 30, 2004, the exit plan was substantially complete except for the sale
of property, which the Company is currently marketing.



In
January 2004, the Company announced the permanent closure of the Cedartown paperboard mill located in Cedartown, Georgia. The Company recorded a charge of approximately $1.0 million in connection with this closure. The initial $1.0 million charge
included a $500 thousand impairment charge for assets, a $188 thousand charge for severance and other termination benefits and a $339 thousand charge for other exit costs. During the nine months ended September 30, 2004, the Company recorded an
additional $267 thousand related to other exit costs. All of these costs were paid during the nine-month period ending September 30, 2004 and no accrual remained as of September 30, 2004. As of September 30, 2004, there were no employees remaining
at the mill. Substantially all of Cedartowns paperboard production was transferred to the Companys other paperboard mills. As of September 30, 2004, the exit plan for Cedartown was complete except for the sale of the property, which the
Company is currently marketing.



In January 2004, the Company
initiated a plan to centralize the accounting and finance operations to the Companys headquarters located in Austell, Georgia. This action was initiated to enhance the accounting control environment and reduce costs. During the nine months
ended September 30, 2004, the Company recorded a charge of approximately $1.6 million for other exit costs related to consulting fees and relocation expenses and $283 thousand for severance and other termination benefits in connection with this
plan. Severance and other termination benefit costs of $74 thousand were paid and all other exit costs were paid during the period. An accrued liability of $209 thousand remained related to severance and other termination benefits as of September
30, 2004. The Company expects to incur an additional $50 thousand in restructuring charges in the fourth quarter of 2004 and will complete this centralization plan during the fourth quarter of 2004.



In June 2004, the Company announced the permanent closure of its Charlotte,
North Carolina carton facility. During the nine months ended September 30, 2004, the Company recorded $517 thousand related to severance and other termination benefits and $86 thousand related to other exit costs. During the nine months ended
September 30, 2004, the Company paid $80 thousand related to severance and other termination benefits and $86 thousand for other exit costs, leaving an accrual of $437 thousand for severance and other termination benefits. Substantially all of
Charlotte Cartons production will be transferred to the Companys other carton facilities.



11



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##### Table of Contents

In June 2004, the Company announced the permanent closure of its Georgetown, Kentucky plastics plant.
During the nine months ended September 30, 2004, the Company recorded $130 thousand related to severance and other termination benefits and $20 thousand related to other exit costs. During the nine months ended September 30, 2004, the Company paid
$20 thousand for other exit costs, leaving an accrual of $130 thousand for severance and other termination benefits. Substantially all of Georgetowns production will be transferred to the Companys other plastics manufacturing facility in
Union, South Carolina.



In August 2004, the Company announced
the permanent closure of its puzzle manufacturing operations component of its specialty converting plant in Mooresville, North Carolina. During the three months ended September 30, 2004, the Company recorded $166 thousand related to severance and
other termination benefits and $527 thousand related to other exit costs, none of which were paid during the quarter.



During 2001 and 2002, the Company initiated restructuring activities to consolidate its Carolina Converting Inc. operation with its Carolina Components
operation, to close the Chicago paperboard mill, to close the Halifax recycling facility, to close the Halifax paperboard mill and to close the Jacksonville, Florida tube plant. At December 31, 2003, a $4.2 million accrual remained for other exit
costs related to these activities. During the nine months ended September 30, 2004, the Company incurred an additional $884 thousand charge for impairment of assets and an additional $43 thousand for other exit costs related to these restructuring
activities. The Company paid $1.6 million in other exit costs during this period, leaving an accrual of $2.7 million at September 30, 2004. All of these restructuring activities are substantially complete except for selling the real estate or
fulfilling the Companys obligation under a real estate lease.



The following is a summary of restructuring and impairment costs and the restructuring liability from December 31, 2003 to September 30, 2004 (in thousands):



|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|------------------------------------- |  | ----------------------- | ----- | ------------------------------------------- | - | ----- | ---------------- |  | - | --------------------------- | - |  | ------------------------------------------------ | ------ | - |  | - | -----
|                                      |  | Asset Impairment Charge |       | Severance andOtherTerminationBenefits Costs |   |       | Other Exit Costs |  |   | RestructuringLiabilityTotal |   |  | TotalRestructuringCosts andImpairment Charges(1)
|Liability balance, December 31, 2003  |  |                         |       |                                             | $ | 302   |                  |  | $ | 4,230                       |   |  | $                                                | 4,532  |   |  |   |      
|First quarter 2004 costs              |  | $                       | 1,175 |                                             |   | 188   |                  |  |   | 1,679                       |   |  |                                                  | 1,867  |   |  | $ | 3,042
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|Expenditures                          |  |                         |       |                                             |   | (330  | )                |  |   | (2,255                      | ) |  |                                                  | (2,585 | ) |  |   |      
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|Liability balance, March 31, 2004     |  |                         |       |                                             |   | 160   |                  |  |   | 3,654                       |   |  |                                                  | 3,814  |   |  |   |      
|Second quarter 2004 costs             |  | $                       |      |                                             |   | 213   |                  |  |   | 1,418                       |   |  |                                                  | 1,631  |   |  | $ | 1,631
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|Expenditures                          |  |                         |       |                                             |   | (145  | )                |  |   | (1,685                      | ) |  |                                                  | (1,830 | ) |  |   |      
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|Liability balance, June 30, 2004      |  |                         |       |                                             |   | 228   |                  |  |   | 3,387                       |   |  |                                                  | 3,615  |   |  |   |      
|Third quarter 2004 costs              |  | $                       | 638   |                                             |   | 3,454 |                  |  |   | 735                         |   |  |                                                  | 4,189  |   |  | $ | 4,827
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|Expenditures                          |  |                         |       |                                             |   | (89   | )                |  |   | (941                        | ) |  |                                                  | (1,030 | ) |  |   |      
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      
|Liability balance, September 30, 2004 |  |                         |       |                                             | $ | 3,593 |                  |  | $ | 3,181                       |   |  | $                                                | 6,774  |   |  |   |      
|                                      |  |                         |       |                                             |   |       |                  |  |   |                             |   |  |                                                  |        |   |  |   |      

---

|(1) | Asset impairment charge, severance and other termination
benefit costs and other exit costs are aggregated and reported as restructuring and impairment costs on the statement of operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For restructuring plans initiated during 2003 and 2004, the paperboard segment recorded $2.0 million of restructuring and impairment costs during the nine
months ended September 30, 2004. The paperboard segment has recorded $7.0 million cumulatively related to these plans and expects to record an estimated additional $500 thousand in restructuring and impairment costs to complete the plans. The carton
and custom packaging segment recorded $4.6 million of restructuring and impairment costs during the nine months ended September 30, 2004. The carton and custom packaging segment has recorded $11.4 million cumulatively related to these plans and
expects to record an estimated additional $500 thousand in restructuring and impairment costs to complete the plans. The industrial and consumer group segment recorded $375 thousand of restructuring and impairment costs during the nine months ended
September 30, 2004. The industrial and consumer group segment has recorded $375 thousand cumulatively related to these plans and expects to record an estimated additional $200 thousand in restructuring and impairment costs to complete the plans.



12



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Note 9. 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. Based on current estimates, no contributions will be required for the year ended December 31, 2004.



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 September 30, 2004.



Pension expense for the Pension Plan and the SERP includes the following components for the three months and nine months ended September 30, 2004 and 2003
(in thousands):



|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                     |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                     |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Service cost of benefits earned                      |  | $                               | 1,483  |   |                                | $ | 1,317  |      |  | $ | 4,450  |   |  | $ | 3,950   |  
|Interest cost on projected benefit obligation        |  |                                 | 1,509  |   |                                |   | 1,400  |      |  |   | 4,526  |   |  |   | 4,200   |  
|Estimated 2004 and actual 2003 return on plan assets |  |                                 | (1,595 | ) |                                |   | (3,399 | )    |  |   | (4,785 | ) |  |   | (10,196 | )
|Net amortization and deferral                        |  |                                 | 881    |   |                                |   | 3,180  |      |  |   | 2,644  |   |  |   | 9,539   |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net pension expense                                  |  | $                               | 2,278  |   |                                | $ | 2,498  |      |  | $ | 6,835  |   |  | $ | 7,493   |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  



In September 2004, the Company
announced the suspension of any further pension benefits for certain employees covered by the defined benefit pension plan. The suspension will be effective as of December 31, 2004 and will freeze accrued pension benefits for employees not subject
to a collective bargaining agreement and employees that do not qualify for continued benefits based on years of service and age requirements. Based on current estimates, the impact of the curtailment on the Companys pension liability and 2004
pension expense is not material.



Other Postretirement Benefits



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



Net periodic postretirement benefit cost for the three months and nine
months ended September 30, 2004 and 2003 included the following components (in thousands):



|                                                               |  |                                 |     |      |                                |     |      |  |      |     |  |   |      |  
|-------------------------------------------------------------- |  | ------------------------------- | --- | ---- | ------------------------------ | --- | ---- |  | ---- | --- |  | - | ---- | -
|                                                               |  | Three Months EndedSeptember 30, |     |      | Nine Months EndedSeptember 30, |    
|                                                               |  | 2004                            |     | 2003 |                                |     | 2004 |  | 2003 |    
|Service cost of benefits earned                                |  | $                               | 5   |      | $                              | 20  |      |  | $    | 14  |  | $ | 60   |  
|Interest cost on accumulated postretirement benefit obligation |  |                                 | 83  |      |                                | 101 |      |  |      | 248 |  |   | 304  |  
|Amortization                                                   |  |                                 | 70  |      |                                | (73 | )    |  |      | 211 |  |   | (218 | )
|                                                               |  |                                 |     |      |                                |     |      |  |      |     |  |   |      |  
|Net periodic postretirement benefit cost                       |  | $                               | 158 |      | $                              | 48  |      |  | $    | 473 |  | $ | 146  |  
|                                                               |  |                                 |     |      |                                |     |      |  |      |     |  |   |      |  



Note 10.Loss Per Share



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



|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                               |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Net loss                                                       |  | $                               | (596   | ) |                                | $ | (1,147 | )    |  | $ | (5,626 | ) |  | $ | (18,110 | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Weighted average number of common shares outstanding - basic   |  |                                 | 28,506 |   |                                |   | 27,990 |      |  |   | 28,449 |   |  |   | 27,937  |  
|Common share equivalents                                       |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Weighted average number of common shares outstanding - diluted |  |                                 | 28,506 |   |                                |   | 27,990 |      |  |   | 28,449 |   |  |   | 27,937  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Loss per share - basic                                         |  | $                               | (0.02  | ) |                                | $ | (0.04  | )    |  | $ | (0.20  | ) |  | $ | (0.65   | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Loss per share - diluted                                       |  | $                               | (0.02  | ) |                                | $ | (0.04  | )    |  | $ | (0.20  | ) |  | $ | (0.65   | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  



13



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##### Table of Contents

Since all periods presented were net losses, the impact of the dilutive effect of stock options, if any,
was not added to the weighted average shares. The number of options not included in the computation of diluted weighted average shares, because they were antidilutive, for the nine months ended September 30, 2004 and 2003 were 1,650,437 and
2,244,267, respectively.



Note 11.Equity Interest in
Unconsolidated Affiliate



The Company owns 50%
of Standard Gypsum, L.P. (Standard). Standard is a joint venture, accounted for under the equity method, that operates two gypsum wallboard manufacturing facilities. One facility is located in McQueeney, Texas and the other is in
Cumberland City, Tennessee. The joint venture is managed by Temple-Inland Forest Products Corporation, which is the owner of the remaining 50% interest in the joint venture. Because of the significance of Standards operating results to the
Company for the year ended December 31, 2003 and the three-month and nine-month periods ending September 30, 2004, Standards summarized balance sheet and income statement are presented below (in thousands):



|                      |  |                    |        |                   |   |       
|--------------------- |  | ------------------ | ------ | ----------------- | - | ------
|                      |  | September 30,*2004 |        | December 31,*2003
|Current assets        |  | $                  | 31,002 |                   | $ | 15,834
|Noncurrent assets     |  |                    | 62,246 |                   |   | 64,189
|Current liabilities   |  |                    | 10,508 |                   |   | 7,394 
|Long-term debt        |  |                    | 56,200 |                   |   | 56,200
|Long-term liabilities |  |                    |       |                   |   | 7     
|Net assets            |  |                    | 26,540 |                   |   | 16,422



|                       |  |                                 |        |                                |   |        |  |      |         |  |   |       
|---------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | ------
|                       |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                       |  | 2004                            |        | 2003                           |   | 2004   |  | 2003
|Sales                  |  | $                               | 45,584 |                                | $ | 29,705 |  | $    | 123,018 |  | $ | 81,255
|Gross profit           |  |                                 | 14,385 |                                |   | 5,206  |  |      | 35,581  |  |   | 12,189
|Income from operations |  |                                 | 13,144 |                                |   | 4,335  |  |      | 32,148  |  |   | 9,774 
|Net income             |  | $                               | 12,472 |                                | $ | 3,796  |  | $    | 30,514  |  | $ | 8,040 

---

|* | The actual dates of Standards financial reports is October 2, 2004 and January 3, 2004, respectively, for the periods ending September 30, 2004 and December 31, 2003.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Standards net income does not include a provision for income taxes. The equity income is included in taxable income (losses) by the joint venture owners.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



Note 12.Guarantor Condensed Consolidating
Financial Statements



These condensed
consolidating financial statements reflect Caraustar Industries, Inc. and its Subsidiary Guarantors, which consist of all of the Companys wholly-owned subsidiaries other than foreign subsidiaries and one domestic subsidiary that is 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.



14



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|--------------------------------------------------- |  | ------------------------ | ------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                    |  | As of September 30, 2004 |        
|                                                    |  | Parent                   |         |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                              |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT ASSETS:                                     |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                           |  | $                        | 88,582  |   |                       | $ | 116      |                          |  | $ | 497          |   |  | $            |         |   |  | $ | 89,195   |  
|Intercompany funding                                |  |                          | (39,358 | ) |                       |   | 52,199   |                          |  |   | (12,841      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                      |  |                          |        |   |                       |   | 106,744  |                          |  |   | 4,945        |   |  |              |         |   |  |   | 111,689  |  
|Intercompany accounts receivable                    |  |                          |        |   |                       |   | 156      |                          |  |   | 198          |   |  |              | (354     | ) |  |   |         |  
|Inventories                                         |  |                          |        |   |                       |   | 85,337   |                          |  |   | 3,307        |   |  |              |         |   |  |   | 88,644   |  
|Refundable income taxes                             |  |                          | 110     |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 110      |  
|Current deferred tax asset                          |  |                          | 10,996  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 10,996   |  
|Other current assets                                |  |                          | 5,137   |   |                       |   | 4,921    |                          |  |   | 2,079        |   |  |              |         |   |  |   | 12,137   |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                                |  |                          | 65,467  |   |                       |   | 249,473  |                          |  |   | (1,815       | ) |  |              | (354     | ) |  |   | 312,771  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                       |  |                          | 13,430  |   |                       |   | 754,946  |                          |  |   | 23,839       |   |  |              |         |   |  |   | 792,215  |  
|Less accumulated depreciation                       |  |                          | (8,807  | ) |                       |   | (370,953 | )                        |  |   | (10,824      | ) |  |              |         |   |  |   | (390,584 | )
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net                  |  |                          | 4,623   |   |                       |   | 383,993  |                          |  |   | 13,015       |   |  |              |         |   |  |   | 401,631  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES             |  |                          | 572,865 |   |                       |   | 131,670  |                          |  |   |             |   |  |              | (704,535 | ) |  |   |         |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                            |  |                          |        |   |                       |   | 179,628  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 183,130  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES             |  |                          | 60,025  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 60,025   |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                        |  |                          | 17,360  |   |                       |   | 8,809    |                          |  |   | 162          |   |  |              |         |   |  |   | 26,331   |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                    |  | $                        | 720,340 |   |                       | $ | 953,573  |                          |  | $ | 14,864       |   |  | $            | (704,889 | ) |  | $ | 983,888  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT LIABILITIES:                                |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                          |  | $                        | 80      |   |                       | $ |         |                          |  | $ |             |   |  | $            |         |   |  | $ | 80       |  
|Accounts payable                                    |  |                          | 20,007  |   |                       |   | 62,849   |                          |  |   | 3,183        |   |  |              |         |   |  |   | 86,039   |  
|Intercompany accounts payable                       |  |                          |        |   |                       |   | 198      |                          |  |   | 156          |   |  |              | (354     | ) |  |   |         |  
|Accrued interest                                    |  |                          | 20,020  |   |                       |   | 134      |                          |  |   |             |   |  |              |         |   |  |   | 20,154   |  
|Accrued compensation                                |  |                          | 1,683   |   |                       |   | 11,040   |                          |  |   | 204          |   |  |              |         |   |  |   | 12,927   |  
|Other accrued liabilities                           |  |                          | 4,091   |   |                       |   | 33,702   |                          |  |   | 1,967        |   |  |              |         |   |  |   | 39,760   |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                           |  |                          | 45,881  |   |                       |   | 107,923  |                          |  |   | 5,510        |   |  |              | (354     | ) |  |   | 158,960  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SENIOR CREDIT FACILITY                              |  |                          |        |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   |         |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LONG-TERM DEBT, less current maturities       |  |                          | 508,737 |   |                       |   | 8,200    |                          |  |   |             |   |  |              |         |   |  |   | 516,937  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                               |  |                          | 44,667  |   |                       |   | 12,242   |                          |  |   | 1,456        |   |  |              |         |   |  |   | 58,365   |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                                   |  |                          | 25,506  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 25,506   |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED COMPENSATION                               |  |                          | 1,335   |   |                       |   | 55       |                          |  |   |             |   |  |              |         |   |  |   | 1,390    |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                                   |  |                          | 19      |   |                       |   | 3,865    |                          |  |   | 200          |   |  |              |         |   |  |   | 4,084    |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|MINORITY INTEREST                                   |  |                          |        |   |                       |   |         |                          |  |   |             |   |  |              | 648      |   |  |   | 648      |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                               |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                        |  |                          | 2,735   |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,849    |  
|Additional paid-in capital                          |  |                          | 192,522 |   |                       |   | 671,229  |                          |  |   | 9,167        |   |  |              | (685,548 | ) |  |   | 187,370  |  
|Unearned compensation                               |  |                          | (358    | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (358     | )
|Retained (deficit) earnings                         |  |                          | (81,460 | ) |                       |   | 149,287  |                          |  |   | (2,468       | ) |  |              | (18,454  | ) |  |   | 46,905   |  
|Accumulated other comprehensive (loss) income:      |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Minimum pension liability adjustment                |  |                          | (19,244 | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (19,244  | )
|Foreign currency translation                        |  |                          |        |   |                       |   |         |                          |  |   | 476          |   |  |              |         |   |  |   | 476      |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total accumulated other comprehensive (loss) income |  |                          | (19,244 | ) |                       |   |         |                          |  |   | 476          |   |  |              |         |   |  |   | (18,768  | )
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total shareholders equity                          |  |                          | 94,195  |   |                       |   | 821,288  |                          |  |   | 7,698        |   |  |              | (705,183 | ) |  |   | 217,998  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                    |  | $                        | 720,340 |   |                       | $ | 953,573  |                          |  | $ | 14,864       |   |  | $            | (704,889 | ) |  | $ | 983,888  |  
|                                                    |  |                          |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



15



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|--------------------------------------------------- |  | ----------------------- | ------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                    |  | As of December 31, 2003 |        
|                                                    |  | Parent                  |         |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                              |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT ASSETS:                                     |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                           |  | $                       | 84,303  |   |                       | $ |         |                          |  | $ | 1,248        |   |  | $            |         |   |  | $ | 85,551   |  
|Intercompany funding                                |  |                         | 1,628   |   |                       |   | 9,149    |                          |  |   | (10,777      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                      |  |                         |        |   |                       |   | 88,937   |                          |  |   | 4,955        |   |  |              |         |   |  |   | 93,892   |  
|Intercompany accounts receivable                    |  |                         |        |   |                       |   | 77       |                          |  |   | 212          |   |  |              | (289     | ) |  |   |         |  
|Inventories                                         |  |                         |        |   |                       |   | 83,941   |                          |  |   | 3,667        |   |  |              |         |   |  |   | 87,608   |  
|Refundable income taxes                             |  |                         | 250     |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 250      |  
|Current deferred tax asset                          |  |                         | 7,457   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 7,457    |  
|Other current assets                                |  |                         | 3,942   |   |                       |   | 8,034    |                          |  |   | 485          |   |  |              |         |   |  |   | 12,461   |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                                |  |                         | 97,580  |   |                       |   | 190,138  |                          |  |   | (210         | ) |  |              | (289     | ) |  |   | 287,219  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                       |  |                         | 12,101  |   |                       |   | 752,601  |                          |  |   | 21,444       |   |  |              |         |   |  |   | 786,146  |  
|Less accumulated depreciation                       |  |                         | (7,601  | ) |                       |   | (358,851 | )                        |  |   | (8,922       | ) |  |              |         |   |  |   | (375,374 | )
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net                  |  |                         | 4,500   |   |                       |   | 393,750  |                          |  |   | 12,522       |   |  |              |         |   |  |   | 410,772  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES             |  |                         | 572,865 |   |                       |   | 131,162  |                          |  |   |             |   |  |              | (704,027 | ) |  |   |         |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                            |  |                         |        |   |                       |   | 179,628  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 183,130  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES             |  |                         | 54,623  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 54,623   |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                        |  |                         | 14,429  |   |                       |   | 10,332   |                          |  |   | 40           |   |  |              |         |   |  |   | 24,801   |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                    |  | $                       | 743,997 |   |                       | $ | 905,010  |                          |  | $ | 15,854       |   |  | $            | (704,316 | ) |  | $ | 960,545  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT LIABILITIES:                                |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                          |  | $                       | 75      |   |                       | $ | 31       |                          |  | $ |             |   |  | $            |         |   |  | $ | 106      |  
|Accounts payable                                    |  |                         | 15,820  |   |                       |   | 54,890   |                          |  |   | 4,303        |   |  |              |         |   |  |   | 75,013   |  
|Intercompany accounts payable                       |  |                         |        |   |                       |   | 212      |                          |  |   | 77           |   |  |              | (289     | ) |  |   |         |  
|Accrued interest                                    |  |                         | 8,758   |   |                       |   | 74       |                          |  |   |             |   |  |              |         |   |  |   | 8,832    |  
|Accrued compensation                                |  |                         | 738     |   |                       |   | 8,870    |                          |  |   | 192          |   |  |              |         |   |  |   | 9,800    |  
|Other accrued liabilities                           |  |                         | 10,551  |   |                       |   | 19,756   |                          |  |   | 1,000        |   |  |              |         |   |  |   | 31,307   |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                           |  |                         | 35,942  |   |                       |   | 83,833   |                          |  |   | 5,572        |   |  |              | (289     | ) |  |   | 125,058  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SENIOR CREDIT FACILITY                              |  |                         |        |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   |         |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LONG-TERM DEBT, less current maturities       |  |                         | 522,747 |   |                       |   | 8,254    |                          |  |   |             |   |  |              |         |   |  |   | 531,001  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                               |  |                         | 45,229  |   |                       |   | 12,242   |                          |  |   | 1,449        |   |  |              |         |   |  |   | 58,920   |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                                   |  |                         | 18,632  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 18,632   |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED COMPENSATION                               |  |                         | 1,469   |   |                       |   | 53       |                          |  |   |             |   |  |              |         |   |  |   | 1,522    |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                                   |  |                         | 1,222   |   |                       |   | 3,809    |                          |  |   |             |   |  |              |         |   |  |   | 5,031    |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|MINORITY INTEREST                                   |  |                         |        |   |                       |   |         |                          |  |   |             |   |  |              | 504      |   |  |   | 504      |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                               |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                        |  |                         | 2,708   |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,822    |  
|Additional paid-in capital                          |  |                         | 189,676 |   |                       |   | 671,229  |                          |  |   | 9,167        |   |  |              | (685,041 | ) |  |   | 185,031  |  
|Unearned compensation                               |  |                         | (1,865  | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (1,865   | )
|Retained (deficit) earnings                         |  |                         | (52,519 | ) |                       |   | 124,818  |                          |  |   | (1,459       | ) |  |              | (18,309  | ) |  |   | 52,531   |  
|Accumulated other comprehensive (loss) income:      |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Minimum pension liability adjustment                |  |                         | (19,244 | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (19,244  | )
|Foreign currency translation                        |  |                         |        |   |                       |   |         |                          |  |   | 602          |   |  |              |         |   |  |   | 602      |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total accumulated other comprehensive (loss) income |  |                         | (19,244 | ) |                       |   |         |                          |  |   | 602          |   |  |              |         |   |  |   | (18,642  | )
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total shareholders equity                          |  |                         | 118,756 |   |                       |   | 796,819  |                          |  |   | 8,833        |   |  |              | (704,531 | ) |  |   | 219,877  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                    |  | $                       | 743,997 |   |                       | $ | 905,010  |                          |  | $ | 15,854       |   |  | $            | (704,316 | ) |  | $ | 960,545  |  
|                                                    |  |                         |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                        |  | For the Three Months Ended September 30, 2004 |        
|                                                        |  | Parent                                        |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                   |  | $                                             |        |   |                       | $ | 336,079 |                          |  | $ | 9,258        |   |  | $            | (71,548 | ) |  | $ | 273,789 |  
|COST OF SALES                                           |  |                                               |        |   |                       |   | 295,485 |                          |  |   | 9,157        |   |  |              | (71,548 | ) |  |   | 233,094 |  
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                            |  |                                               |        |   |                       |   | 40,594  |                          |  |   | 101          |   |  |              |        |   |  |   | 40,695  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                               | 5,843   |   |                       |   | 27,699  |                          |  |   | 389          |   |  |              |        |   |  |   | 33,931  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                               | 259     |   |                       |   | 4,568   |                          |  |   |             |   |  |              |        |   |  |   | 4,827   |  
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                           |  |                                               | (6,102  | ) |                       |   | 8,327   |                          |  |   | (288         | ) |  |              |        |   |  |   | 1,937   |  
|OTHER (EXPENSE) INCOME:                                 |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                        |  |                                               | (10,604 | ) |                       |   | (79     | )                        |  |   | (116         | ) |  |              | 115     |   |  |   | (10,684 | )
|Interest income                                         |  |                                               | 712     |   |                       |   |        |                          |  |   |             |   |  |              | (115    | ) |  |   | 597     |  
|Equity in income of unconsolidated affiliates           |  |                                               | 7,746   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 7,746   |  
|Other, net                                              |  |                                               | (172    | ) |                       |   | (37     | )                        |  |   | 128          |   |  |              |        |   |  |   | (81     | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                        |  |                                               | (2,318  | ) |                       |   | (116    | )                        |  |   | 12           |   |  |              |        |   |  |   | (2,422  | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                               | (8,420  | ) |                       |   | 8,211   |                          |  |   | (276         | ) |  |              |        |   |  |   | (485    | )
|MINORITY INTEREST IN INCOME                             |  |                                               |        |   |                       |   |        |                          |  |   |             |   |  |              | (32     | ) |  |   | (32     | )
|PROVISION FOR INCOME TAXES                              |  |                                               | (79     | ) |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | (79     | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                       |  | $                                             | (8,499  | ) |                       | $ | 8,211   |                          |  | $ | (276         | ) |  | $            | (32     | ) |  | $ | (596    | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                        |  | For the Three Months Ended September 30, 2003 |        
|                                                        |  | Parent                                        |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                   |  | $                                             |        |   |                       | $ | 299,316 |                          |  | $ | 8,637        |   |  | $            | (54,940 | ) |  | $ | 253,013 |  
|COST OF SALES                                           |  |                                               |        |   |                       |   | 257,156 |                          |  |   | 9,469        |   |  |              | (54,940 | ) |  |   | 211,685 |  
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                            |  |                                               |        |   |                       |   | 42,160  |                          |  |   | (832         | ) |  |              |        |   |  |   | 41,328  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                               | 5,434   |   |                       |   | 26,470  |                          |  |   | (59          | ) |  |              |        |   |  |   | 31,845  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                               |        |   |                       |   | 3,085   |                          |  |   |             |   |  |              |        |   |  |   | 3,085   |  
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                           |  |                                               | (5,434  | ) |                       |   | 12,605  |                          |  |   | (773         | ) |  |              |        |   |  |   | 6,398   |  
|OTHER (EXPENSE) INCOME:                                 |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                        |  |                                               | (11,175 | ) |                       |   | (74     | )                        |  |   | (105         | ) |  |              | 103     |   |  |   | (11,251 | )
|Interest income                                         |  |                                               | 389     |   |                       |   |        |                          |  |   |             |   |  |              | (103    | ) |  |   | 286     |  
|Equity in income of unconsolidated affiliates           |  |                                               | 3,217   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 3,217   |  
|Other, net                                              |  |                                               |        |   |                       |   | 55      |                          |  |   | (148         | ) |  |              |        |   |  |   | (93     | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                        |  |                                               | (7,569  | ) |                       |   | (19     | )                        |  |   | (253         | ) |  |              |        |   |  |   | (7,841  | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                               | (13,003 | ) |                       |   | 12,586  |                          |  |   | (1,026       | ) |  |              |        |   |  |   | (1,443  | )
|MINORITY INTEREST IN LOSSES                             |  |                                               |        |   |                       |   |        |                          |  |   |             |   |  |              | 155     |   |  |   | 155     |  
|BENEFIT FOR INCOME TAXES                                |  |                                               | 124     |   |                       |   |        |                          |  |   | 17           |   |  |              |        |   |  |   | 141     |  
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                       |  | $                                             | (12,879 | ) |                       | $ | 12,586  |                          |  | $ | (1,009       | ) |  | $            | 155     |   |  | $ | (1,147  | )
|                                                        |  |                                               |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                        |  | For the Nine Months Ended September 30, 2004 |        
|                                                        |  | Parent                                       |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                   |  | $                                            |        |   |                       | $ | 977,233 |                          |  | $ | 28,715       |   |  | $            | (206,593 | ) |  | $ | 799,355 |  
|COST OF SALES                                           |  |                                              |        |   |                       |   | 860,006 |                          |  |   | 26,222       |   |  |              | (206,593 | ) |  |   | 679,635 |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Gross profit                                            |  |                                              |        |   |                       |   | 117,227 |                          |  |   | 2,493        |   |  |              |         |   |  |   | 119,720 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                              | 14,877  |   |                       |   | 85,000  |                          |  |   | 3,221        |   |  |              |         |   |  |   | 103,098 |  
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                              | 1,850   |   |                       |   | 7,650   |                          |  |   |             |   |  |              |         |   |  |   | 9,500   |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                           |  |                                              | (16,727 | ) |                       |   | 24,577  |                          |  |   | (728         | ) |  |              |         |   |  |   | 7,122   |  
|OTHER (EXPENSE) INCOME:                                 |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                        |  |                                              | (32,045 | ) |                       |   | (239    | )                        |  |   | (318         | ) |  |              | 315      |   |  |   | (32,287 | )
|Interest income                                         |  |                                              | 1,601   |   |                       |   |        |                          |  |   |             |   |  |              | (315     | ) |  |   | 1,286   |  
|Equity in income of unconsolidated affiliates           |  |                                              | 16,810  |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 16,810  |  
|Other, net                                              |  |                                              | (568    | ) |                       |   | 131     |                          |  |   | 37           |   |  |              |         |   |  |   | (400    | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                        |  |                                              | (14,202 | ) |                       |   | (108    | )                        |  |   | (281         | ) |  |              |         |   |  |   | (14,591 | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                              | (30,929 | ) |                       |   | 24,469  |                          |  |   | (1,009       | ) |  |              |         |   |  |   | (7,469  | )
|MINORITY INTEREST IN INCOME                             |  |                                              |        |   |                       |   |        |                          |  |   |             |   |  |              | (145     | ) |  |   | (145    | )
|BENEFIT FOR INCOME TAXES                                |  |                                              | 1,988   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 1,988   |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET (LOSS) INCOME                                       |  | $                                            | (28,941 | ) |                       | $ | 24,469  |                          |  | $ | (1,009       | ) |  | $            | (145     | ) |  | $ | (5,626  | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                        |  | For the Nine Months Ended September 30, 2003 |        
|                                                        |  | Parent                                       |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|SALES                                                   |  | $                                            |        |   |                       | $ | 887,056 |                          |  | $ | 27,864       |   |  | $            | (162,162 | ) |  | $ | 752,758 |  
|COST OF SALES                                           |  |                                              |        |   |                       |   | 768,091 |                          |  |   | 25,302       |   |  |              | (162,162 | ) |  |   | 631,231 |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Gross profit                                            |  |                                              |        |   |                       |   | 118,965 |                          |  |   | 2,562        |   |  |              |         |   |  |   | 121,527 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |  |                                              | 16,639  |   |                       |   | 90,874  |                          |  |   | 4,035        |   |  |              |         |   |  |   | 111,548 |  
|RESTRUCTURING AND IMPAIRMENT COSTS                      |  |                                              |        |   |                       |   | 9,252   |                          |  |   |             |   |  |              |         |   |  |   | 9,252   |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(Loss) income from operations                           |  |                                              | (16,639 | ) |                       |   | 18,839  |                          |  |   | (1,473       | ) |  |              |         |   |  |   | 727     |  
|OTHER (EXPENSE) INCOME:                                 |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|Interest expense                                        |  |                                              | (32,590 | ) |                       |   | (234    | )                        |  |   | (319         | ) |  |              | 311      |   |  |   | (32,832 | )
|Interest income                                         |  |                                              | 1,031   |   |                       |   | 1       |                          |  |   | 1            |   |  |              | (311     | ) |  |   | 722     |  
|Write-off of deferred debt costs                        |  |                                              | (1,812  | ) |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | (1,812  | )
|Equity in income of unconsolidated affiliates           |  |                                              | 4,681   |   |                       |   |        |                          |  |   |             |   |  |              |         |   |  |   | 4,681   |  
|Other, net                                              |  |                                              |        |   |                       |   | 528     |                          |  |   | (270         | ) |  |              |         |   |  |   | 258     |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|                                                        |  |                                              | (28,690 | ) |                       |   | 295     |                          |  |   | (588         | ) |  |              |         |   |  |   | (28,983 | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES |  |                                              | (45,329 | ) |                       |   | 19,134  |                          |  |   | (2,061       | ) |  |              |         |   |  |   | (28,256 | )
|MINORITY INTEREST IN LOSSES                             |  |                                              |        |   |                       |   |        |                          |  |   |             |   |  |              | 92       |   |  |   | 92      |  
|BENEFIT (PROVISION) FOR INCOME TAXES                    |  |                                              | 10,105  |   |                       |   |        |                          |  |   | (51          | ) |  |              |         |   |  |   | 10,054  |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  
|NET (LOSS) INCOME                                       |  | $                                            | (35,224 | ) |                       | $ | 19,134  |                          |  | $ | (2,112       | ) |  | $            | 92       |   |  | $ | (18,110 | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |  |              |          |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Nine Months Ended September 30, 2004 |        
|                                                        |  | Parent                                       |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities     |  | $                                            | 17,088  |   |                       | $ | 11,832  |                          |  | $ | (177         | ) |              | $ |  |  | $ | 28,743  |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                              | (1,330  | ) |                       |   | (13,691 | )                        |  |   | (623         | ) |              |   |  |  |   | (15,644 | )
|Proceeds from disposal of property, plant and equipment |  |                                              |        |   |                       |   | 1,992   |                          |  |   | 49           |   |              |   |  |  |   | 2,041   |  
|Investment in unconsolidated affiliates                 |  |                                              | (150    | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (150    | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                              | (1,480  | ) |                       |   | (11,699 | )                        |  |   | (574         | ) |              |   |  |  |   | (13,753 | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of short and long-term debt                  |  |                                              | (14,159 | ) |                       |   | (17     | )                        |  |   |             |   |              |   |  |  |   | (14,176 | )
|Proceeds from swap agreement unwind                     |  |                                              | 380     |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 380     |  
|Issuances of stock, net of forfeitures                  |  |                                              | 2,450   |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 2,450   |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities                   |  |                                              | (11,329 | ) |                       |   | (17     | )                        |  |   |             |   |              |   |  |  |   | (11,346 | )
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents    |  |                                              | 4,279   |   |                       |   | 116     |                          |  |   | (751         | ) |              |   |  |  |   | 3,644   |  
|Cash and cash equivalents at beginning of period        |  |                                              | 84,303  |   |                       |   |        |                          |  |   | 1,248        |   |              |   |  |  |   | 85,551  |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                            | 88,582  |   |                       | $ | 116     |                          |  | $ | 497          |   |              | $ |  |  | $ | 89,195  |  
|                                                        |  |                                              |         |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------------------------- | ------ | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | For the Nine Months Ended September 30, 2003 |       
|                                                        |  | Parent                                       |        |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by operating activities               |  | $                                            | 29,092 |   |                       | $ | 12,356  |                          |  | $ | 1,400        |   |              | $ |  |  | $ | 42,848  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Investing activities:                                   |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Purchases of property, plant and equipment              |  |                                              | (1,222 | ) |                       |   | (12,446 | )                        |  |   | (1,039       | ) |              |   |  |  |   | (14,707 | )
|Acquisitions of businesses, net of cash acquired        |  |                                              |       |   |                       |   | (695    | )                        |  |   |             |   |              |   |  |  |   | (695    | )
|Proceeds from disposal of property, plant and equipment |  |                                              |       |   |                       |   | 802     |                          |  |   | 182          |   |              |   |  |  |   | 984     |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                   |  |                                              | (1,222 | ) |                       |   | (12,339 | )                        |  |   | (857         | ) |              |   |  |  |   | (14,418 | )
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Financing activities:                                   |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Repayments of short and long-term debt                  |  |                                              |       |   |                       |   | (17     | )                        |  |   |             |   |              |   |  |  |   | (17     | )
|Proceeds from swap agreement unwinds                    |  |                                              | 15,950 |   |                       |   |        |                          |  |   |             |   |              |   |  |  |   | 15,950  |  
|Deferred debt costs                                     |  |                                              | (2,201 | ) |                       |   |        |                          |  |   |             |   |              |   |  |  |   | (2,201  | )
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities     |  |                                              | 13,749 |   |                       |   | (17     | )                        |  |   |             |   |              |   |  |  |   | 13,732  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net increase in cash and cash equivalents               |  |                                              | 41,619 |   |                       |   |        |                          |  |   | 543          |   |              |   |  |  |   | 42,162  |  
|Cash and cash equivalents at beginning of period        |  |                                              | 33,544 |   |                       |   |        |                          |  |   | 770          |   |              |   |  |  |   | 34,314  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                                            | 75,163 |   |                       | $ |        |                          |  | $ | 1,313        |   |              | $ |  |  | $ | 76,476  |  
|                                                        |  |                                              |        |   |                       |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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Note 13.Commitments and Contingencies



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



Note 14.Subsequent Events



In October 2004, the Company purchased $10.0 million of its 97/8% senior or senior subordinated notes in the open market for $10.8 million. This purchase reduced the
Companys total long term debt accordingly. The Companys Board of Directors has authorized purchases of up to an additional $10.0 million of the Companys senior subordinated notes as market conditions warrant, however, these
purchases may be limited by compliance with certain debt agreements.



In October 2004, the Company unwound the $50.0 million December 2003 and the $50.0 million April 2004 interest rate swap agreements related to the 97/8% senior subordinated notes and received approximately $5 thousand from the bank counter-party. The unwinding of these two agreements eliminated all interest rate swap agreements
for the Company.



In October 2004, the Company completed
the sale of its Chicago Paperboard property for $11.1 million in net cash proceeds. This transaction will result in an approximate $10.1 million gain and will be included in the Companys fourth quarter results.



In October 2004, the Company obtained an amendment from its lenders which
waived certain defaults with respect to the Companys sale of assets and repurchase of its 97/8% senior
subordinated notes.



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CARAUSTAR INDUSTRIES, INC.



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



The following is managements discussion and analysis of certain
significant factors that have affected our financial condition and operating results during the periods included in the accompanying condensed consolidated financial statements.



General



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



Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion
of our own paperboard production, approximately 43% in the first nine months of 2004. The remaining 57% of our paperboard production is sold to external customers in any of four recycled paperboard end-use markets: tube, core and composite
containers; folding cartons; gypsum wallboard facing paper and other specialty products. These integration statistics do not include volume produced or converted by our 50% owned, unconsolidated, joint ventures Premier Boxboard Limited and Standard
Gypsum, LLP. As part of our strategy to optimize our operating efficiency, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production among mills in response to customer or market demands.



Historically, we have grown our business, revenues and
production capacity to a significant degree through acquisitions. Based on the difficult operating climate for our industry and our financial position over the last three years, the pace of our acquisition activity, and correspondingly, our revenue
growth, has slowed as we have focused on conserving cash and maximizing the productivity of our existing facilities.



We are a holding company that operates our business through 25 subsidiaries as of September 30, 2004. We also own a 50% interest in two joint ventures
with Temple-Inland, Inc. We account for these interests in our joint ventures under the equity method of accounting. See Liquidity and Capital Resources below.



Key Business Indicator and Trends



Our industry has historically been closely correlated with the domestic economy in general, and with consumer nondurable consumption (packaging segment)
and industrial production (tube, core and composite containers segment), specifically. These demand drivers tend to be cyclical in nature, with cycles lasting 3  5 years depending on such factors as gross domestic production (GDP), interest
rates and other factors. As these demand drivers fluctuate, we typically experience changes in volume and revenue in our business. Since late 1999, the recycled paperboard and converted paperboard products industry has been in a down cycle. While we
believe that future operating results may improve, and some improvements have been noted in 2004, we cannot ascertain to what extent this may occur.



A key operating indicator of our business is paperboard mill capacity utilization. Capacity utilization is calculated as the ratio of days operated versus
days available. As paperboard mill capacity utilization increases, cost per ton of paperboard generally decreases. As these tons are sold, profitability increases since fixed production costs are absorbed by more tons produced. Additionally, higher
capacity utilization rates generally provide enhanced opportunity to recover material, energy and labor increases through improved pricing. This positively affects paperboard and converted products income from operations and cash flow.
Paperboard mill capacity utilization is affected by demand and by mill closures. Industry demand decreased from 2000  2002 due primarily to a recessionary U.S. general economy, the continued migration of U.S. manufacturing offshore to lower
labor cost environments and product substitution, for example, flexible standup pouches used for packaging instead of cartons used for packaging. The decrease in demand resulted in a decrease in capacity utilization. We expect the migration of U.S.
manufacturing offshore and product substitution to continue, although at a slower rate, which could continue to negatively affect operating income and cash flow. We further expect these trends to be somewhat offset by the improving domestic economy
and our own paperboard mill capacity reductions. Recent industry improvement in capacity utilization has been driven by paperboard mill closures, as over 1.8 million tons of capacity, or approximately 17% of the recycled paperboard mill total
capacity, has been closed since 2000. We have closed or idled approximately 398 thousand tons of our own paperboard mill capacity during this period to better match our supply capabilities to demand.



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##### Table of Contents

MILL CAPACITY UTILIZATION



LOGO



Caraustars utilization rates
exclude closed or idled machines

Industry source: American Forest and Paper Association.



Restructuring has been a primary component of managements strategy to
address the decrease in demand resulting from secular trends, as discussed above, and generally weak domestic economic conditions. Between 2001 and September 30, 2004, restructuring charges have totaled $44.4 million, of which approximately $22.9
million have been noncash charges. We have also experienced increases in near-term manufacturing and selling, general and administrative costs as a result of our transitioning of business within our mill and converting systems to other company
facilities. Our strategic initiatives are designed to enhance our competitiveness through reduced costs, increase revenue through delivery of differentiated quality products and services to our customers, and promote compliance with recent changes
in legal and regulatory requirements. Our restructuring efforts have been directed toward reducing costs through manufacturing and converting facilities rationalization where we believed it was advantageous to do so due to geographic overlap,
duplicative capabilities, changes in customer base and other factors. Rationalization of facilities typically results in increased cash outlays and expenses initially, for example, severance costs. Under current market conditions, we expect that
restructuring charges will continue to decline and we believe that future earnings and cash flows will be favorably impacted by our efforts to reconfigure our business to increase efficiency and better match supply with customer demand.



Recovered fiber, which is derived from recycled paper stock, is our most
significant raw material. During the past five years, 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 $26 per ton
or 33% from 1999 to 2000, decreased $39 per ton or 38% from 2000 to 2001, and then increased again $20 per ton or 31% from 2001 to 2002. Recovered fiber cost per ton averaged $88 during 2003 and averaged $107 during the first nine months of 2004, a
23% increase over 2003.



Excluding raw materials and labor,
energy is our most significant manufacturing cost. Energy consists of fuel used to generate steam used in the paper making process and electrical purchases to operate our paperboard machines and all of our converting machinery. In 2003 energy costs
averaged $61 per ton. During the first nine months of 2004, energy costs were $56 per ton compared with $62 per ton in the first nine months of 2003, a 9.1% decrease. The decrease was primarily due to higher operating rates combined with an
increased usage of lower cost energy sources, primarily fuel oil. Until the last few years, our business had not been significantly affected by energy cost increases, and we historically have not passed increases in energy costs through to our
customers. Consequently, as the volatility of energy prices has increased dramatically over the last three years, we have not been able to pass through to our customers all of the energy cost increases we have incurred. As a result, our operating
margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be
adversely affected by rising energy costs.



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##### Table of Contents

We raise our selling prices in response to increases in raw material and energy costs. However, we are
not always able to pass the full amount of these costs through to our customers on a timely basis due to supply and demand in the industry, and as a result often cannot maintain our operating margins in the face of rapid cost increases. We
experience margin shrinkage during all periods of cost increases due to customary time lags in implementing our price increases. We cannot give assurance that we will be able to recover any future increases in the cost of recovered fiber or energy
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.



Critical Accounting Policies



Our accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The critical accounting
matters that are very important to the portrayal of our financial condition and results of operations and require some of managements most difficult, subjective and complex judgments are described in detail in our annual report on Form 10-K
for the year ended December 31, 2003. The accounting for these matters involves forming estimates based on current facts, circumstances and assumptions which, in managements judgment, could change in a manner that would materially affect
managements future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results of operations to differ materially from financial results reported based on managements current
estimates. Changes in these estimates are recorded when better information is known. There has been no material changes in our critical accounting policies during the nine-month period ended September 30, 2004.



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##### Table of Contents

Three Months Ended September 30, 2004 and 2003



The following table shows paperboard shipment volume and gross paper margins for the periods indicated. The gross paper
margin information shown below is presented because it is the most significant driver of profitability for the paperboard segment and the tube, core and composite container segment. However, these drivers are not the only factors that can impact
these segments. See  Risk Factors in Part 1, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2003 for additional discussion of factors that impact our business. Also note that a portion of our sales do not have
related paperboard volume, such as sales of contract packaging services and sales of recovered fiber. 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.



|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|------------------------------------------------------------ |  | ------------------------------- | ----- | ------ | - | ----- | ------- | - | ---- | - |  | ----- | --
|                                                             |  | Three Months EndedSeptember 30, |       | Change |   |       | %Change |  
|                                                             |  | 2004                            |       | 2003   |   |      
|Paperboard tons shipped by production source (in thousands): |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|From internal paperboard mill production                     |  |                                 | 251.1 |        |   | 243.5 |         |   | 7.6  |   |  | 3.1   | % 
|Purchases from external sources                              |  |                                 | 33.9  |        |   | 32.1  |         |   | 1.8  |   |  | 5.6   | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Total paperboard tonnage                                     |  |                                 | 285.0 |        |   | 275.6 |         |   | 9.4  |   |  | 3.4   | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Paperboard tons shipped by end-use market (in thousands):    |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Tube, core and composite container volume                    |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Paperboard (internal)                                        |  |                                 | 63.5  |        |   | 63.0  |         |   | 0.5  |   |  | 0.8   | % 
|Purchases from external sources                              |  |                                 | 11.8  |        |   | 8.7   |         |   | 3.1  |   |  | 35.6  | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Tube, core and composite container converted products        |  |                                 | 75.3  |        |   | 71.7  |         |   | 3.6  |   |  | 5.0   | % 
|Unconverted paperboard shipped to external customers         |  |                                 | 11.6  |        |   | 10.4  |         |   | 1.2  |   |  | 11.5  | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Tube, core and composite container volume                    |  |                                 | 86.9  |        |   | 82.1  |         |   | 4.8  |   |  | 5.8   | % 
|Folding carton volume                                        |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Paperboard (internal)                                        |  |                                 | 22.7  |        |   | 22.6  |         |   | 0.1  |   |  | 0.4   | % 
|Purchases from external sources                              |  |                                 | 18.5  |        |   | 19.1  |         |   | (0.6 | ) |  | (3.1  | )%
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Folding carton converted products                            |  |                                 | 41.2  |        |   | 41.7  |         |   | (0.5 | ) |  | (1.2  | )%
|Unconverted paperboard shipped to external customers         |  |                                 | 61.9  |        |   | 64.8  |         |   | (2.9 | ) |  | (4.5  | )%
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Folding carton volume                                        |  |                                 | 103.1 |        |   | 106.5 |         |   | (3.4 | ) |  | (3.2  | )%
|Gypsum wallboard facing paper volume                         |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Unconverted paperboard shipped to external customers         |  |                                 | 25.4  |        |   | 27.9  |         |   | (2.5 | ) |  | (9.0  | )%
|Other specialty products volume                              |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Paperboard (internal)                                        |  |                                 | 24.3  |        |   | 18.1  |         |   | 6.2  |   |  | 34.3  | % 
|Purchases from external sources                              |  |                                 | 3.6   |        |   | 4.3   |         |   | (0.7 | ) |  | (16.3 | )%
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Other specialty converted products                           |  |                                 | 27.9  |        |   | 22.4  |         |   | 5.5  |   |  | 24.6  | % 
|Unconverted paperboard shipped to external customers         |  |                                 | 41.7  |        |   | 36.7  |         |   | 5.0  |   |  | 13.6  | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Other specialty products volume                              |  |                                 | 69.6  |        |   | 59.1  |         |   | 10.5 |   |  | 17.8  | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Total paperboard tonnage                                     |  |                                 | 285.0 |        |   | 275.6 |         |   | 9.4  |   |  | 3.4   | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Gross paper margins ($/ton):                                 |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Paperboard mills:                                            |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Average net selling price                                    |  | $                               | 437   |        | $ | 421   |         | $ | 16   |   |  | 3.8   | % 
|Average recovered fiber cost                                 |  |                                 | 111   |        |   | 88    |         |   | 23   |   |  | 26.1  | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Paperboard mill gross paper margin                           |  | $                               | 326   |        | $ | 333   |         | $ | (7   | ) |  | (2.1  | )%
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Tube and core facilities:                                    |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Average net selling price                                    |  | $                               | 817   |        | $ | 819   |         | $ | (2   | ) |  | (0.2  | )%
|Average paperboard cost                                      |  |                                 | 482   |        |   | 466   |         |   | 16   |   |  | 3.4   | % 
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   
|Tube and core gross paper margin                             |  | $                               | 335   |        | $ | 353   |         | $ | (18  | ) |  | (5.1  | )%
|                                                             |  |                                 |       |        |   |       |         |   |      |   |  |       |   



27



---

##### Table of Contents

The following table shows paperboard shipment volume on our business segment basis (thousands of tons).



|                                                                        |  |                                 |  |        |  |      |          |  |       |   
|----------------------------------------------------------------------- |  | ------------------------------- |  | ------ |  | ---- | -------- |  | ----- | --
|                                                                        |  | Three Months EndedSeptember 30, |  | Change |  |      | % Change | 
|                                                                        |  | 2004                            |  | 2003   |  |     
|Paperboard segment                                                      |  |                                 |  |        |  |      |          |  |       |   
|Unconverted paperboard shipped to external customers                    |  | 140.6                           |  | 139.8  |  | 0.8  |          |  | 0.6   | % 
|Paperboard shipped internally to converters in the paperboard segment   |  | 17.0                            |  | 12.1   |  | 4.9  |          |  | 40.5  | % 
|Paperboard purchased externally by converters in the paperboard segment |  | 0.2                             |  | 0.3    |  | (0.1 | )        |  | (33.3 | )%
|                                                                        |  |                                 |  |        |  |      |          |  |       |   
|Total volume                                                            |  | 157.8                           |  | 152.2  |  | 5.6  |          |  | 3.7   | % 
|                                                                        |  |                                 |  |       
|Tube, core and composite container segment                              |  |                                 |  |        |  |      |          |  |       |   
|Paperboard (internal)                                                   |  | 70.8                            |  | 69.0   |  | 1.8  |          |  | 2.6   | % 
|Purchases from external sources                                         |  | 15.2                            |  | 12.7   |  | 2.5  |          |  | 19.7  | % 
|                                                                        |  |                                 |  |        |  |      |          |  |       |   
|Total volume converted                                                  |  | 86.0                            |  | 81.7   |  | 4.3  |          |  | 5.3   | % 
|                                                                        |  |                                 |  |       
|Carton and custom packaging segment                                     |  |                                 |  |        |  |      |          |  |       |   
|Paperboard (internal)                                                   |  | 22.7                            |  | 22.6   |  | 0.1  |          |  | 0.4   | % 
|Purchases from external sources                                         |  | 18.5                            |  | 19.1   |  | (0.6 | )        |  | (3.1  | )%
|                                                                        |  |                                 |  |        |  |      |          |  |       |   
|Total volume converted                                                  |  | 41.2                            |  | 41.7   |  | (0.5 | )        |  | (1.2  | )%
|                                                                        |  |                                 |  |       
|Total paperboard tonnage                                                |  | 285.0                           |  | 275.6  |  | 9.4  |          |  | 3.4   | % 
|                                                                        |  |                                 |  |        |  |      |          |  |       |   



Paperboard
Tonnage. Total paperboard tonnage for the three months ended September 30, 2004, increased 3.4% to 285.0 thousand tons from 275.6 thousand tons for the same period in 2003. Tons sold from paperboard mill production and total tonnage
converted increased 3.1% and 6.3%, respectively, for the three months ended September 30, 2004, compared with the same period in 2003.



Total paperboard tonnage increased due to the following factors:



| |  | An increase in internal conversion by our other specialty and tube, core and composite container operations.
| | - | ------------------------------------------------------------------------------------------------------------



| |  | An increase in sales of unconverted paperboard to the other specialty and tube, core and composite container end-use markets.
| | - | -----------------------------------------------------------------------------------------------------------------------------



These increases were partially offset by:



| |  | A decrease in sales of unconverted paperboard to external customers in the folding carton end-use market, primarily due to weaker demand in our coated paperboard mill system.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A decrease in sales of unconverted paperboard to external customers in the gypsum wallboard facing end-use market.
| | - | ------------------------------------------------------------------------------------------------------------------



Sales. Our consolidated sales for the three months ended
September 30, 2004, increased 8.2% to $273.8 million from $253.0 million in the same period in 2003. The following table presents sales by business segment (in thousands):



|                                   |  |                                 |         |          |   |          |  |   |        |  |      |  
|---------------------------------- |  | ------------------------------- | ------- | -------- | - | -------- |  | - | ------ |  | ---- | -
|                                   |  | Three Months EndedSeptember 30, |         | $ Change |   | % Change | 
|                                   |  | 2004                            |         | 2003     |   |         
|Paperboard                         |  | $                               | 95,014  |          | $ | 81,485   |  | $ | 13,529 |  | 16.6 | %
|Tube, core and composite container |  |                                 | 99,872  |          |   | 96,583   |  |   | 3,289  |  | 3.4  | %
|Carton and custom packaging        |  |                                 | 78,903  |          |   | 74,945   |  |   | 3,958  |  | 5.3  | %
|                                   |  |                                 |         |          |   |          |  |   |        |  |      |  
|Total                              |  | $                               | 273,789 |          | $ | 253,013  |  | $ | 20,776 |  | 8.2  | %
|                                   |  |                                 |         |          |   |          |  |   |        |  |      |  



Paperboard Segment



Sales for the paperboard segment increased due to the following factors:



| |  | Sales from the paperboard segments non-mill operations, which include recovered fiber operations and converting operations, improved by approximately $10.1 million due to an
increase in recovered fiber volume and higher selling prices, partially offset by the divestiture of the chemical sales operation in the second quarter of 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Higher selling prices for unconverted paperboard accounted for approximately $2.4 million of the increase.
| | - | ----------------------------------------------------------------------------------------------------------



28



---

##### Table of Contents

Tube, Core and Composite Container Segment



Sales for the tube, core and composite container segment increased due to higher volume for the tube and core operations which accounted for
approximately $2.9 million of the increase.



Carton and Custom Packaging
Segment



Sales for the carton and custom packaging segment increased due
to the following factors:



| |  | Higher carton pricing and volume accounted for approximately $2.2 million of the increase.
| | - | ------------------------------------------------------------------------------------------



| |  | Higher contract packaging volume accounted for approximately $1.7 million of the increase.
| | - | ------------------------------------------------------------------------------------------



Gross Profit Margin. Gross profit margin for the three months ended September 30, 2004, decreased to 14.9% of
sales from 16.3% in the same period in 2003. This margin decrease was due to the following factors:



| |  | A decline in mill and tube and core gross paper margins accounted for an estimated $3.2 million decrease in gross profit. This decline was due primarily to higher recovered fiber
cost partially offset by higher selling prices.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of approximately $1.3 million related to the closure of the Charlotte, North Carolina carton plant, the Georgetown, Kentucky plastics plant and the
Mooresville, North Carolina puzzle operation. These facilities will cease operations in the fourth quarter of 2004 and are a part of our restructuring activities explained below, see -Restructuring and Impairment Costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | An $8.7 million increase in recovered fiber sales which have substantially lower gross margins compared with our other business.
| | - | --------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by:



| |  | An improvement in selling prices in the carton and custom packaging segment which accounted for an estimated $900 thousand increase in gross profit.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower energy and fuel costs of approximately $500 thousand improved gross profit in the paperboard segment.
| | - | -----------------------------------------------------------------------------------------------------------



Selling, General and Administrative Expenses. Selling, general
and administrative expenses were $33.9 million for the three months ended September 30, 2004, a 6.6% increase from the same period in 2003. Selling, general and administrative expenses increased due to the following factors:



| |  | A $1.9 million reversal of a reserve for accounts receivable recorded in the third quarter of 2003 for a significant carton customer that filed Chapter 11 bankruptcy.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A $1.6 million expense related to the 2004 vesting of performance accelerated restricted stock.
| | - | -----------------------------------------------------------------------------------------------



| |  | Fees for consultants related to Sabanes-Oxley compliance of approximately $850 thousand.
| | - | ----------------------------------------------------------------------------------------



These factors were partially offset by:



| |  | Savings of $900 thousand resulting from closing and consolidating facilities.
| | - | -----------------------------------------------------------------------------



| |  | Lower 2004 accounts receivable reserve expense of $1.7 million.
| | - | ---------------------------------------------------------------



Income (Loss) From Operations. Income from operations for the three months ended September 30, 2004 was $1.9 million, a decrease of $4.5
million compared with operating income of $6.4 million for the same period in 2003. The following table presents income (loss) from operations by business segment (in thousands):



|                                   |  |                                 |        |   |          |   |        |          |  |   |        |   |  |       |   
|---------------------------------- |  | ------------------------------- | ------ | - | -------- | - | ------ | -------- |  | - | ------ | - |  | ----- | --
|                                   |  | Three Months EndedSeptember 30, |        |   | $ Change |   |        | % Change | 
|                                   |  | 2004                            |        |   | 2003     |   |        |         
|Paperboard                         |  | $                               | 8,912  |   |          | $ | 10,666 |          |  | $ | (1,754 | ) |  | (16.4 | )%
|Tube, core and composite container |  |                                 | 1,765  |   |          |   | 2,712  |          |  |   | (947   | ) |  | (34.9 | )%
|Carton and custom packaging        |  |                                 | (2,648 | ) |          |   | (1,687 | )        |  |   | (961   | ) |  | (57.0 | )%
|Corporate expense                  |  |                                 | (6,092 | ) |          |   | (5,293 | )        |  |   | (799   | ) |  | (15.1 | )%
|                                   |  |                                 |        |   |          |   |        |          |  |   |        |   |  |       |   
|Total                              |  | $                               | 1,937  |   |          | $ | 6,398  |          |  | $ | (4,461 | ) |  | (69.7 | )%
|                                   |  |                                 |        |   |          |   |        |          |  |   |        |   |  |       |   



29



---

##### Table of Contents

Paperboard Segment



The decrease in income from operations was due to the following factors:



| |  | Lower paperboard mill gross paper margins accounted for a decrease in income from operations of approximately $1.7 million.
| | - | ---------------------------------------------------------------------------------------------------------------------------



| |  | Higher restructuring costs of $1.1 million.
| | - | -------------------------------------------



| |  | Expense of approximately $500 thousand related to the vesting of performance accelerated restricted stock.
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of $500 thousand related to closing the puzzle operations at the Mooresville, North Carolina converting operation.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by:



| |  | Higher mill volume accounted for an estimated $1.1 million improvement in income from operations.
| | - | -------------------------------------------------------------------------------------------------



| |  | Lower energy and fuel costs of approximately $500 thousand.
| | - | -----------------------------------------------------------



| |  | Improved operating results of approximately $400 thousand resulting from closing and consolidating facilities.
| | - | --------------------------------------------------------------------------------------------------------------



Tube, Core and Composite Container Segment



The decrease in income from operations was due to the following factors:



| |  | Lower tube and core gross paper margins accounted for approximately $1.5 million of the decrease.
| | - | -------------------------------------------------------------------------------------------------



| |  | Expense of approximately $250 thousand related to the vesting of performance accelerated restricted stock.
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of $300 thousand related to closing the Georgetown, Kentucky plastics plant.
| | - | -------------------------------------------------------------------------------------------------------------



| |  | Higher restructuring costs of $375 thousand.
| | - | --------------------------------------------



These factors were partially offset by:



| |  | Higher volume accounted for an estimated $450 thousand improvement in income from operations.
| | - | ---------------------------------------------------------------------------------------------



| |  | Lower accounts receivable reserve expense of $500 thousand.
| | - | -----------------------------------------------------------



| |  | Cost cutting initiatives improved income from operations by an estimated $300 thousand.
| | - | ---------------------------------------------------------------------------------------



Carton and Custom Packaging Segment



The increase in loss from operations was due to the following factors:



| |  | A $1.9 million reversal of a reserve for accounts receivable recorded in the third quarter of 2003 for a significant carton customer that filed Chapter 11 bankruptcy.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of $500 thousand related to closing the Charlotte, North Carolina carton plant.
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | Expense of approximately $400 thousand related to the vesting of performance accelerated restricted stock.
| | - | ----------------------------------------------------------------------------------------------------------



These factors were partially offset by a margin and volume improvement which accounted for an
estimated $1.7 million improvement in income from operations.



Other Income (Expense). Interest expense decreased 5.0% to $10.7 million for the three months ended September 30, 2004 from $11.3 million for the same period in 2003. This decrease was due to the benefits of fixed to floating
interest rate swaps. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest rate swap agreements.



Equity in income from unconsolidated affiliates was $7.7 million for the three months ended September 30, 2004, an
improvement of $4.5 million over equity in income from unconsolidated affiliates of $3.2 million for the same period in 2003. This increase was primarily due to a $4.3 million improvement in operating results for Standard Gypsum, our gypsum
wallboard joint venture with Temple-Inland. The improved results were due primarily to an increase in selling prices and volume driven by the strong housing and remodeling markets. Premier Boxboards results also improved by approximately $200
thousand in 2004 compared to 2003, primarily due to increased volume and higher selling prices.



30



---

##### Table of Contents

(Provision) Benefit for Income Taxes. The effective rate of income tax provision for the
three months ended September 30, 2004 was 15.3% compared to a benefit of 10.9% for the same period in 2003. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the income tax
provision for the three months ended September 30, 2004 included tax expense relating to an increase in the valuation allowance for state net operating losses.



Net Loss. Due to the factors discussed above, net loss for the three months ended September 30, 2004 was $0.6 million, or $0.02 net loss
per common share, compared to net loss of $1.1 million, or $0.04 net loss per common share, for the same period in 2003.



Nine Months Ended September 30, 2004 and 2003



The following table shows paperboard shipment volume and gross paper margins for the periods indicated. The gross paper margin information shown below is
presented because it is the most significant driver of profitability for the paperboard segment and the tube, core and composite container segment. However, these drivers are not the only factors that can impact these segments. See  Risk
Factors in Part 1, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2003 for additional discussion of factors that impact our business. Also note that a portion of our sales do not have related paperboard volume, such
as sales of contract packaging services and sales of recovered fiber. 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.



|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|------------------------------------------------------------ |  | ------------------------------ | ----- | ------ | - | ----- | ------- | - | ----- | - |  | ----- | --
|                                                             |  | Nine Months EndedSeptember 30, |       | Change |   |       | %Change |  
|                                                             |  | 2004                           |       | 2003   |   |      
|Paperboard tons shipped by production source (in thousands): |  |                                |       |        |   |       |         |   |       |   |  |       |   
|From internal paperboard mill production                     |  |                                | 745.2 |        |   | 735.1 |         |   | 10.1  |   |  | 1.4   | % 
|Purchases from external sources                              |  |                                | 100.8 |        |   | 88.7  |         |   | 12.1  |   |  | 13.6  | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Total paperboard tonnage                                     |  |                                | 846.0 |        |   | 823.8 |         |   | 22.2  |   |  | 2.7   | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Paperboard tons shipped by end-use market (in thousands):    |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Tube, core and composite container volume                    |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                                | 186.9 |        |   | 188.4 |         |   | (1.5  | ) |  | (0.8  | )%
|Purchases from external sources                              |  |                                | 33.7  |        |   | 21.6  |         |   | 12.1  |   |  | 56.0  | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Tube, core and composite container converted products        |  |                                | 220.6 |        |   | 210.0 |         |   | 10.6  |   |  | 5.0   | % 
|Unconverted paperboard shipped to external customers         |  |                                | 36.6  |        |   | 33.4  |         |   | 3.2   |   |  | 9.6   | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Tube, core and composite container volume                    |  |                                | 257.2 |        |   | 243.4 |         |   | 13.8  |   |  | 5.7   | % 
|Folding carton volume                                        |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                                | 71.4  |        |   | 68.8  |         |   | 2.6   |   |  | 3.8   | % 
|Purchases from external sources                              |  |                                | 58.2  |        |   | 54.2  |         |   | 4.0   |   |  | 7.4   | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Folding carton converted products                            |  |                                | 129.6 |        |   | 123.0 |         |   | 6.6   |   |  | 5.4   | % 
|Unconverted paperboard shipped to external customers         |  |                                | 179.3 |        |   | 204.1 |         |   | (24.8 | ) |  | (12.2 | )%
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Folding carton volume                                        |  |                                | 308.9 |        |   | 327.1 |         |   | (18.2 | ) |  | (5.6  | )%
|Gypsum wallboard facing paper volume                         |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Unconverted paperboard shipped to external customers         |  |                                | 77.2  |        |   | 82.0  |         |   | (4.8  | ) |  | (5.9  | )%
|Other specialty products volume                              |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Paperboard (internal)                                        |  |                                | 61.2  |        |   | 53.4  |         |   | 7.8   |   |  | 14.6  | % 
|Purchases from external sources                              |  |                                | 8.9   |        |   | 12.9  |         |   | (4.0  | ) |  | (31.0 | )%
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Other specialty converted products                           |  |                                | 70.1  |        |   | 66.3  |         |   | 3.8   |   |  | 5.7   | % 
|Unconverted paperboard shipped to external customers         |  |                                | 132.6 |        |   | 105.0 |         |   | 27.6  |   |  | 26.3  | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Other specialty products volume                              |  |                                | 202.7 |        |   | 171.3 |         |   | 31.4  |   |  | 18.3  | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Total paperboard tonnage                                     |  |                                | 846.0 |        |   | 823.8 |         |   | 22.2  |   |  | 2.7   | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Gross paper margins ($/ton):                                 |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Paperboard mills:                                            |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Average net selling price                                    |  | $                              | 425   |        | $ | 417   |         | $ | 8     |   |  | 1.9   | % 
|Average recovered fiber cost                                 |  |                                | 107   |        |   | 87    |         |   | 20    |   |  | 23.0  | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Paperboard mill gross paper margin                           |  | $                              | 318   |        | $ | 330   |         | $ | (12   | ) |  | (3.6  | )%
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Tube and core facilities:                                    |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Average net selling price                                    |  | $                              | 820   |        | $ | 811   |         | $ | 9     |   |  | 1.1   | % 
|Average paperboard cost                                      |  |                                | 473   |        |   | 465   |         |   | 8     |   |  | 1.7   | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   
|Tube and core gross paper margin                             |  | $                              | 347   |        | $ | 346   |         | $ | 1     |   |  | 0.3   | % 
|                                                             |  |                                |       |        |   |       |         |   |       |   |  |       |   



31



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The following table shows paperboard shipment volume on our business segment basis (thousands of tons).



|                                                                        |  |                                |  |        |  |      |          |  |       |   
|----------------------------------------------------------------------- |  | ------------------------------ |  | ------ |  | ---- | -------- |  | ----- | --
|                                                                        |  | Nine Months EndedSeptember 30, |  | Change |  |      | % Change | 
|                                                                        |  | 2004                           |  | 2003   |  |     
|Paperboard segment                                                      |  |                                |  |        |  |      |          |  |       |   
|Unconverted paperboard shipped to external customers                    |  | 425.7                          |  | 424.5  |  | 1.2  |          |  | 0.3   | % 
|Paperboard shipped internally to converters in the paperboard segment   |  | 39.5                           |  | 36.2   |  | 3.3  |          |  | 9.1   | % 
|Paperboard purchased externally by converters in the paperboard segment |  | 0.3                            |  | 2.4    |  | (2.1 | )        |  | (87.5 | )%
|                                                                        |  |                                |  |        |  |      |          |  |       |   
|Total volume                                                            |  | 465.5                          |  | 463.1  |  | 2.4  |          |  | 0.5   | % 
|                                                                        |  |                                |  |       
|Tube, core and composite container segment                              |  |                                |  |        |  |      |          |  |       |   
|Paperboard (internal)                                                   |  | 208.6                          |  | 205.7  |  | 2.9  |          |  | 1.4   | % 
|Purchases from external sources                                         |  | 42.3                           |  | 32.1   |  | 10.2 |          |  | 31.8  | % 
|                                                                        |  |                                |  |        |  |      |          |  |       |   
|Total volume converted                                                  |  | 250.9                          |  | 237.8  |  | 13.1 |          |  | 5.5   | % 
|                                                                        |  |                                |  |       
|Carton and custom packaging segment                                     |  |                                |  |        |  |      |          |  |       |   
|Paperboard (internal)                                                   |  | 71.4                           |  | 68.7   |  | 2.7  |          |  | 3.9   | % 
|Purchases from external sources                                         |  | 58.2                           |  | 54.2   |  | 4.0  |          |  | 7.4   | % 
|                                                                        |  |                                |  |        |  |      |          |  |       |   
|Total volume converted                                                  |  | 129.6                          |  | 122.9  |  | 6.7  |          |  | 5.5   | % 
|                                                                        |  |                                |  |       
|Total paperboard tonnage                                                |  | 846.0                          |  | 823.8  |  | 22.2 |          |  | 2.7   | % 
|                                                                        |  |                                |  |        |  |      |          |  |       |   



Paperboard
Tonnage. Total paperboard tonnage for the nine months ended September 30, 2004, increased 2.7% to 846.0 thousand tons from 823.8 thousand tons for the same period in 2003. Tons sold from paperboard mill production increased 1.4% for the nine
months ended September 30, 2004, compared to the same period in 2003. Total tonnage converted increased 5.3% for the nine months ended September 30, 2004.



Total paperboard tonnage increased due to the following factors:



| |  | An increase in sales of unconverted paperboard to the other specialty and tube, core and composite container end-use markets.
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | An increase in internal conversion by our tube, core and composite container, folding carton and other specialty operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------



These increases were partially offset by:



| |  | A decrease in sales of unconverted paperboard to external customers in the folding carton end-use market, primarily driven by weak demand in our coated paperboard mill system,
combined with the idling of one of two coated recycled paperboard machines at our Rittman, Ohio facility.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower sales of unconverted paperboard shipped to our customers in the gypsum end-use market.
| | - | --------------------------------------------------------------------------------------------



Sales. Our consolidated sales for the nine months ended September 30, 2004, increased 6.2% to $799.4 million
from $752.8 million for the same period in 2003. The following table presents sales by business segment (in thousands):



|                                   |  |                                |         |          |   |          |  |   |        |  |      |  
|---------------------------------- |  | ------------------------------ | ------- | -------- | - | -------- |  | - | ------ |  | ---- | -
|                                   |  | Nine Months EndedSeptember 30, |         | $ Change |   | % Change | 
|                                   |  | 2004                           |         | 2003     |   |         
|Paperboard                         |  | $                              | 276,320 |          | $ | 245,074  |  | $ | 31,246 |  | 12.7 | %
|Tube, core and composite container |  |                                | 293,234 |          |   | 287,122  |  |   | 6,112  |  | 2.1  | %
|Carton and custom packaging        |  |                                | 229,801 |          |   | 220,562  |  |   | 9,239  |  | 4.2  | %
|                                   |  |                                |         |          |   |          |  |   |        |  |      |  
|Total                              |  | $                              | 799,355 |          | $ | 752,758  |  | $ | 46,597 |  | 6.2  | %
|                                   |  |                                |         |          |   |          |  |   |        |  |      |  



Paperboard Segment



Sales for the paperboard segment increased due to the following factors:



| |  | Sales in the paperboard segment increased approximately $28.8 million due to higher sales from the paperboard segments non-mill operations, which include recovered fiber
operations, chemical sales and converting operations. This increase was due to higher selling prices and an increase in recovered fiber sales.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | Higher selling prices accounted for approximately $3.9 million of the sales increase.
| | - | -------------------------------------------------------------------------------------



Tube, Core and Composite Container Segment



Sales for the tube, core and composite container segment increased due to the following factors:



| |  | Higher composite container products volume accounted for approximately $3.1 million of the increase.
| | - | ----------------------------------------------------------------------------------------------------



| |  | Higher tube and core volume accounted for approximately $3.0 million of the increase.
| | - | -------------------------------------------------------------------------------------



| |  | Higher selling prices for tubes and cores accounted for approximately $2.1 million of the increase.
| | - | ---------------------------------------------------------------------------------------------------



The increases were partially offset by a decline in sales of plastic cores and paperboard partitions of approximately $2.1 million.



Carton and Custom Packaging Segment



Sales for the carton and custom packaging segment increased due to the following factors:



| |  | Higher contract packaging volume accounted for approximately $4.8 million of the increase.
| | - | ------------------------------------------------------------------------------------------



| |  | Higher carton pricing and volume accounted for approximately $4.4 million of the increase.
| | - | ------------------------------------------------------------------------------------------



Gross Profit Margin. Gross profit margin for the nine months ended September 30, 2004, decreased to 15.0% of
sales from 16.1% in the same period in 2003. This margin decrease was due to the following factors:



| |  | A decline in paperboard mill gross paper margins lowered gross profit by approximately $8.7 million. This decline was primarily due to an increase in recovered fiber costs.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of approximately $1.3 million related to the closure of the Charlotte, North Carolina carton plant, the Georgetown, Kentucky plastics plant and the
Mooresville, North Carolina puzzle operation. These facilities will cease operations in the fourth quarter of 2004 and are a part of our restructuring activities explained below, see -Restructuring and Impairment Costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A reserve for inventory of $1.0 million for a specific carton customer that filed Chapter 11 bankruptcy in 2004.
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | A $21.4 million increase in recovered fiber sales which have substantially lower gross margins compared with our other business.
| | - | --------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by:



| |  | A $4.1 million decrease in energy and fuel costs for our paperboard mills as a result of increased capacity utilization.
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | A write-off of inventory and equipment in the second quarter of 2003 of $2.9 million in the paperboard and tube, core and composite container segments.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



Selling, General and Administrative
Expenses. Selling, general and administrative expenses were $103.1 million for the nine months ended September 30, 2004, a 7.6% decrease from the same period in 2003. Selling, general and administrative expenses decreased due to the
following factors:



| |  | Savings of $4.0 million resulting from closing and consolidating facilities.
| | - | ----------------------------------------------------------------------------



| |  | Lower 2004 accounts receivable reserve expense of $2.0 million.
| | - | ---------------------------------------------------------------



| |  | Expenses of $1.5 million related to idling one of two coated recycled paperboard machines at our Rittman, Ohio facility recorded in 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower information technology costs of approximately $1.5 million.
| | - | -----------------------------------------------------------------



These factors were partially offset by:



| |  | Higher consolidated accounting costs and fees for consultants related to Sarbanes-Oxley compliance of $2.0 million.
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | Expense of approximately $1.6 million related to the 2004 vesting of performance accelerated restricted stock
| | - | -------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

Restructuring and Impairment Costs. In March 2003, we announced the permanent closure of
our Buffalo Paperboard mill located in Lockport, New York. We recorded a charge of approximately $4.3 million in connection with this closure. The majority of the Buffalo mills sales were transferred to our other paperboard mills and our 50
percent owned Premier Boxboard joint venture. The exit plan for Buffalo was completed in May 2004 when the property was sold.



In June 2003, we initiated a plan to permanently close our Ashland, Ohio carton facility. We recorded a charge of $6.7 million in connection with this
closure. We restructured this facility in 2002; however, due to severe margin pressure and excess industry capacity, the aggressive downsizing undertaken in December 2002 was unsuccessful so the facility was permanently closed. Substantially all of
Ashlands carton sales were transferred to our other carton manufacturing facilities. During the nine months ended September 30, 2004, we recorded an additional $429 thousand charge for impairment of assets and an additional $2.7 million in
severance and other termination benefits and $1.0 million for other exit costs related to this restructuring activity.



In January 2004, we announced the permanent closure of our Cedartown Paperboard mill located in Cedartown, Georgia. During the nine months ended September
30, 2004, we recorded a charge of approximately $1.3 million in connection with this closure, including a $500 thousand impairment charge for assets. All of the paperboard produced at this facility had been consumed internally by our converting
operations. The paperboard production was transitioned to our other paperboard mills. This closure is not expected to have a significant impact on our operations and is expected to improve operating results and capacity utilization.



In January 2004, we initiated a plan to centralize the accounting and finance
operations to our headquarters located in Austell, Georgia. This action was initiated to enhance the control environment and reduce costs. During the nine months ended September 30, 2004, we recorded a charge of approximately $1.9 million in
connection with this plan. This plan is expected to be completed in the fourth quarter of 2004.



In June 2004, we announced the permanent closure of our Charlotte, North Carolina carton facility. During the nine months ended September 30, 2004, we
recorded a charge of approximately $603 thousand in connection with this closure. Substantially all of Charlotte Cartons production will be transferred to our other carton facilities. This closure is not expected to have a significant impact
on our operations and is expected to improve operating results and capacity utilization.



In June 2004, we announced the permanent closure of our Georgetown, Kentucky plastics plant. During the nine months ended September 30, 2004, we recorded a charge of approximately $150 thousand in connection with this
closure. Substantially all of Georgetowns production will be transferred to our other plastics plants. This closure is not expected to have a significant impact on our operations and is expected to improve operating results and capacity
utilization.



In August 2004, we announced the permanent
closure of our puzzle manufacturing operations of our specialty converting plant in Mooresville, North Carolina. During the three months ended September 30, 2004, we recorded a charge of approximately $693 thousand in connection with this closure.
This closure is not expected to have a significant impact on our operating results.



During 2001 and 2002, we initiated restructuring activities to consolidate our Carolina Converting Inc. operation with our Carolina Components operation, to close the Chicago paperboard mill, to close the Halifax
paperboard mill and to close our Jacksonville, Florida tube plant. During the nine months ended September 30, 2004, we incurred an additional $884 thousand charge for impairment of assets and an additional $43 thousand for other exit costs related
to these restructuring activities. All of these restructuring activities are substantially complete except for selling the real estate or fulfilling our obligation under a real estate lease.



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



Income (Loss) From Operations. Income from operations for the nine months ended September 30, 2004, was $7.1 million, an increase of $6.4 million compared with operating income of $727 thousand for the same period in 2003. The
following table presents income (loss) from operations by business segment (in thousands):



|                                   |  |                                |         |   |          |   |         |          |  |   |       |   |  |       |   
|---------------------------------- |  | ------------------------------ | ------- | - | -------- | - | ------- | -------- |  | - | ----- | - |  | ----- | --
|                                   |  | Nine Months EndedSeptember 30, |         |   | $ Change |   |         | % Change | 
|                                   |  | 2004                           |         |   | 2003     |   |         |         
|Paperboard                         |  | $                              | 20,963  |   |          | $ | 17,261  |          |  | $ | 3,702 |   |  | 21.4  | % 
|Tube, core and composite container |  |                                | 9,591   |   |          |   | 7,652   |          |  |   | 1,939 |   |  | 25.3  | % 
|Carton and custom packaging        |  |                                | (6,711  | ) |          |   | (7,961  | )        |  |   | 1,250 |   |  | 15.7  | % 
|Corporate expense                  |  |                                | (16,721 | ) |          |   | (16,225 | )        |  |   | (496  | ) |  | (3.1  | )%
|                                   |  |                                |         |   |          |   |         |          |  |   |       |   |  |       |   
|Total                              |  | $                              | 7,122   |   |          | $ | 727     |          |  | $ | 6,395 |   |  | 879.6 | % 
|                                   |  |                                |         |   |          |   |         |          |  |   |       |   |  |       |   



34



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##### Table of Contents

Paperboard Segment



Income from operations increased due to the following factors:



| |  | Improved operating results of approximately $4.3 million resulting from closing and consolidating facilities.
| | - | -------------------------------------------------------------------------------------------------------------



| |  | Lower fuel and energy costs of $4.1 million. The decrease in costs was primarily due to higher operating rates by producing more paperboard tons using fewer machines.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower restructuring costs of $1.7 million.
| | - | ------------------------------------------



| |  | A write-off of inventory of $1.7 million in the second quarter of 2003.
| | - | -----------------------------------------------------------------------



| |  | Lower accounts receivable reserve expense of $1.5 million.
| | - | ----------------------------------------------------------



| |  | Expenses of $1.5 million related to idling one of two coated recycled paperboard machines at our Rittman, Ohio facility recorded in 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by:



| |  | Lower paperboard mill gross paper margins, which accounted for a decrease in income from operations of approximately $8.7 million, which was driven by recovered fiber cost
increases.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Higher accounting, marketing and information technology costs formerly recorded as corporate expenses of approximately $1.2 million in 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | Expense of approximately $500 thousand related to the vesting of performance accelerated restricted stock.
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of approximately $500 thousand related to the Mooresville, North Carolina puzzle operation.
| | - | ----------------------------------------------------------------------------------------------------------------------------



Tube, Core and Composite Container Segment



Income from operations increased due to the following factors:



| |  | The write-off of inventory and equipment of $1.2 million in the second quarter of 2003.
| | - | ---------------------------------------------------------------------------------------



| |  | Higher volume and slightly higher gross paper margins accounted for an estimated $800 thousand improvement in income from operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower accounts receivable reserve expense of approximately $500 thousand.
| | - | -------------------------------------------------------------------------



These factors were partially offset by:



| |  | Expense of approximately $250 thousand related to the vesting of performance accelerated restricted stock.
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of approximately $300 thousand related to the closure of the Georgetown, Kentucky plastics plant.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Carton and Custom Packaging Segment



The decline in the loss from operations was due to the following factors:



| |  | Improved operating results of approximately $1.8 million resulting from closing and consolidating operations.
| | - | -------------------------------------------------------------------------------------------------------------



| |  | Higher volume accounted for an estimated improvement of approximately $1.1 million.
| | - | -----------------------------------------------------------------------------------



| |  | Lower restructuring costs of approximately $300 thousand.
| | - | ---------------------------------------------------------



These factors were partially offset by:



| |  | A reserve for inventory and accounts receivable of approximately $1.0 million for a specific carton customer that filed Chapter 11 bankruptcy in 2004.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accelerated depreciation expense of approximately $500 thousand related to closure of the Charlotte, North Carolina carton plant.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | Expense of approximately $400 thousand related to the vesting of performance accelerated restricted stock.
| | - | ----------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

Other Income (Expense). Interest expense remained essentially flat during the nine months
ended September 30, 2004 compared to the same period in 2003. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest rate swap agreements.



Equity in income from unconsolidated affiliates was $16.8 million for the
nine months ended September 30, 2004, an improvement of $12.1 million over equity in income from unconsolidated affiliates of $4.7 million for the same period in 2003. This increase was primarily due to an $11.2 million improvement in operating
results for Standard Gypsum, our gypsum wallboard joint venture with Temple-Inland. The improved results were due primarily to an increase in selling prices and volume driven by the strong housing and remodeling markets. Premier Boxboards
results improved $600 thousand for the nine-month period ended September 30, 2004 compared to 2003, primarily due to increased volume and higher selling prices, partially offset by higher recovered fiber costs.



Benefit for Income Taxes. The effective rate of income tax
benefit for the nine months ended September 30, 2004, was 26.1% compared to 35.7% for the same period in 2003. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the income tax
benefit for the nine months ended September 30, 2004 included tax expense relating to an increase in the valuation allowance for state net operating losses.



Net Loss. Due to the factors discussed above, net loss for the nine months ended September 30, 2004 was $5.6 million, or $0.20 net loss per
common share, compared to net loss of $18.1 million, or $0.65 net loss per common share, for the same period in 2003.



Liquidity and Capital Resources



Liquidity Sources and Risks. Our primary sources of liquidity are cash from operations and borrowings under our senior credit facility,
described below. Downturns in operations can significantly affect our ability to generate cash. For the nine-month period ended September 30, 2004, the Company provided $28.7 million cash from operating activities compared with a source of cash of
$42.8 million during the same period in 2003. See Cash from Operations below. We believe that our cash on hand at September 30, 2004 of $89.2 million and borrowing availability under our senior credit facility will be sufficient to
meet our cash requirements for the next twelve months and the foreseeable future. Additionally, based on our historical ability to generate cash, we believe we will be able to meet our long-term cash requirements. However, if we are unable to
generate cash at historic levels our ability to generate cash sufficient to meet long-term requirements is uncertain. The following are factors that could affect our future ability to generate cash from operations:



| |  | A contraction in domestic demand for recycled paperboard and related packaging products similar to what our industry experienced in 2000, 2001 and 2002.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Alternative products such as flexible packaging and plastics which replaced certain paperboard packaging products.
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | Continued export of domestic manufacturing operations.
| | - | ------------------------------------------------------



| |  | Significant unforeseen adverse conditions in our industry or the markets we serve.
| | - | ----------------------------------------------------------------------------------



Although we believe that our liquidity will be sufficient to meet expected needs for the foreseeable future, the occurrence,
continuation or exacerbation of these conditions could require us to seek additional funds from external sources in order to meet our liquidity requirements. In such event, our ability to obtain such funds would depend on the various business and
credit market conditions prevailing at the time, which are difficult to predict and many of which are out of our control. Availability of additional funds could also be materially adversely affected by our substantial existing indebtedness.
Additional risks related to our substantial indebtedness are discussed under Risk Factors  Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill our obligations under our indebtedness in our
Annual Report on Form 10-K for the year ended December 31, 2003.



The availability of liquidity from borrowings under our senior credit facility is primarily affected by our continued compliance with the terms of the agreement governing our senior credit facility, including the payment of interest and
compliance with various covenants and financial maintenance tests. We were in compliance with the covenants under our senior credit facility during 2003 and the nine months ended September 30, 2004, except for certain defaults for which we obtained
waivers from our lenders. Absent further material deterioration of the U.S. economy as a whole or the specific sectors on which our business depends, we believe it is likely that we will be in compliance with our covenants under the senior credit
agreement for the balance of 2004 and the foreseeable future.



36



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##### Table of Contents

Borrowings. At September 30, 2004 and December 31, 2003, total debt (consisting of current
maturities of debt and long-term debt, as reported on our condensed consolidated balance sheets) was as follows (in thousands):



|                                                 |  |                   |         |   |                  |   |         |  
|------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                 |  | September 30,2004 |         |   | December 31,2003 |  
|Senior credit facility                           |  | $                 |        |   |                  | $ |        |  
|97/8%
senior subordinated notes                  |  |                   | 275,000 |   |                  |   | 285,000 |  
|73/8%
senior notes                               |  |                   | 189,750 |   |                  |   | 193,250 |  
|71/4%
senior notes                               |  |                   | 29,000  |   |                  |   | 29,000  |  
|Other notes payable                              |  |                   | 9,735   |   |                  |   | 9,895   |  
|Mark-to-market value of interest swap agreements |  |                   | (19     | ) |                  |   | (1,145  | )
|Realized interest rate swap gains (1)            |  |                   | 13,551  |   |                  |   | 15,107  |  
|                                                 |  |                   |         |   |                  |   |         |  
|Total debt                                       |  | $                 | 517,017 |   |                  | $ | 531,107 |  
|                                                 |  |                   |         |   |                  |   |         |  

---

|(1) | Net of original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes. As described below under Interest Rate Swap
Agreements, realized gains resulting from unwinding interest rate swap agreements are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our senior credit facility provides for a revolving line of credit of $75.0
million and is secured primarily by a first priority security interest in our accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts
receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of September 30, 2004, no borrowings were outstanding under the facility; however, an
aggregate of $38.9 million in letter of credit obligations were outstanding. Availability under the facility at September 30, 2004, was limited to $26.1 million after taking into consideration outstanding letter of credit obligations and minimum
borrowing availability requirements.



Borrowings under the
facility bear interest at a rate equal to, at our option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of 0.50% or (2) the adjusted
Eurodollar Interbank Offered Rate plus a margin of 2.50%. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for
Eurodollar-based loans.



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 in excess of $30.0 million per year or change the nature of our business. The facility also contains a fixed charge coverage ratio
covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less
reserves and aggregate credit outstanding) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstanding) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at
September 30, 2004. Based on levels of accounts receivable, inventory and liquidity at September 30, 2004 and expectations for the remainder of 2004, we do not expect to be required to measure the fixed charge ratio covenant in 2004.



The facility contains events of default including, but not limited to,
nonpayment of principal or interest, violation of covenants, breaches 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.



We were in compliance with the covenants under our senior credit facility as of September 30, 2004, except for certain defaults with respect to our sale of assets for approximately $182 thousand and our repurchase of
$10.0 million of our 97/8% senior subordinated notes, for which we obtained an amendment from our lenders that
waived these defaults.



On June 1, 1999, we issued
$200.0 million in aggregate principal amount of our 73/8% senior notes due June 1, 2009. Our 73/8% senior notes were issued at a discount to yield an effective interest rate of 7.47%, are unsecured obligations of
our Company and pay interest semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 73/8% senior notes is 6.4%. In connection with the offering of our 71/4% senior notes and 97/8% senior subordinated notes, as described
below, our subsidiary guarantors also guaranteed our 73/8% senior notes. We have purchased an aggregate of $10.3
million in principal amount of our outstanding 73/8% senior notes in the open market, including $3.5 million
purchased in February 2004. These purchases lowered our interest expense by approximately $700 thousand annually.



On March 29, 2001, we issued $29.0 million in aggregate principal amount of 71/4% senior notes due May 1, 2010 and $285.0 million in aggregate principal amount of 97/8% senior subordinated notes due April 1, 2011. The 71/4% senior notes and 97/8% senior subordinated notes were issued at a discount to yield effective
interest rates of 9.4% and 10.5%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 97/8% senior subordinated notes is 9.2%. These publicly traded notes 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. In August 2004 we purchased $10.0 million of these notes in the open market.



See Subsequent Events regarding the purchase of an additional $10.0 million of our 97/8% senior subordinated notes in the open market and the amendment to our senior credit facility.



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Interest Rate Swap Agreements.In January 2003, we effectively unwound $85.0 million
of our $135.0 million interest rate swap agreement related to the 97/8% senior subordinated notes by assigning
our rights and obligations under the swap to one of the lenders under our senior credit facility. In exchange, we received approximately $4.3 million. The $4.3 million gain, which is classified as a component of debt, will be accreted to interest
expense over the remaining life of the notes and will partially offset the increase in interest expense. The $4.3 million gain lowered the effective interest rate of the 97/8% senior subordinated notes by approximately 30 basis points.



In May 2003, we unwound the remaining $50.0 million interest rate swap agreement related to the 97/8% senior subordinated notes, and received approximately $4.6 million from the bank counter-party. Simultaneously, we unwound $50.0 million of our remaining
interest rate swap agreements related to the 73/8% senior notes, and received approximately $7.1 million. The
$11.7 million gain, which is classified as a component of debt, will be accreted to interest expense over the remaining life of the notes and will partially offset the increase in interest expense. The $4.6 million gain lowered the effective
interest rate of the 97/8% senior subordinated notes by approximately 30 basis points. The $7.1 million gain
lowered the effective interest rate of the 73/8% senior notes by approximately 80 basis points.



In July 2003, we entered into an
interest rate swap agreement in the notional amount of $50.0 million. This agreement, which had payment and expiration dates that corresponded to the terms of the note obligations it covered, effectively converted $50.0 million of our fixed rate
97/8% senior subordinated notes into variable rate obligations. The variable rates were based on the
sixmonth LIBOR plus a fixed margin.



In December
2003, we entered into a second interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0
million of our fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates are
based on the sixmonth LIBOR plus a fixed margin.



In March 2004, we unwound our July 2003 $50.0 million interest rate swap agreement related to the 97/8%
senior subordinated notes and received approximately $380 thousand from the bank counter-party. The $380 thousand gain, which is classified as a component of debt, will be accreted to interest expense over the remaining life of the notes and will
partially offset the increase in interest expense.



In
April 2004, we entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0
million of our fixed rate 97/8% senior subordinated notes into variable rate obligations. The variable rates are
based on six-month LIBOR plus a fixed margin.



See Subsequent
Events regarding the unwinding of our December 2003 and April 2004 swap agreements.



Off-Balance Sheet Arrangements  Joint Venture Financings. As noted above, we own a 50% interest in two joint ventures with Temple-Inland, Inc.: Standard Gypsum, L.P. and Premier Boxboard Limited
LLC. Because we account for these interests in our joint ventures under the equity method of accounting, the indebtedness of these joint ventures is not reflected in the liabilities included on our consolidated balance sheets. Standard Gypsum
manufactures gypsum wallboard, and Premier Boxboard is a low-cost recycled paperboard mill that produces lightweight gypsum facing paper and containerboard grades.



Since December 31, 2003, the only change in our obligations with respect to the letter of credit obligations of these joint
ventures, or in the additional contingencies related to buy-sell agreements for our interests in the joint ventures was the reduction of our letter of credit obligations related to Premier Boxboard Limited from $5.3 million to $800 thousand as of
September 30, 2004. For more information about these obligations and contingencies, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources  Off-Balance Sheet
Arrangements in our Annual Report on Form 10-K for the year ended December 31, 2003.



Cash from Operations. Cash provided by operations was $28.7 million for the nine months ended September 30, 2004, compared with cash generated from operations of $42.8 million for the same period in
2003. The $14.1 million decline in operating cash flow was due to the following factors:



| |  | An $18.8 million use of cash related to an increase in accounts receivable. The increase in accounts receivable was due to higher sales for the comparative periods, partially offset
by improved collections.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | A $17.2 million federal tax refund was received in the first quarter of 2003.
| | - | -----------------------------------------------------------------------------



| |  | A $14.5 million source of cash in 2003 related to a significant reduction of inventory as a result of management initiatives executed in 2003.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



In addition to improved operating results, the following factors partially offset the factors
above:



| |  | A $27.5 million source of cash as a result of changes in accrued liabilities. This source was the result of an $11.7 million payment towards our pension liability in 2003, a $4.7
million payment of liabilities owed to our 50% owned, unconsolidated joint venture, Premier Boxboard Limited, in the first quarter of 2003, higher payments in 2003 for restructuring initiatives and higher accrued compensation in 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A $7.9 million increase in cash distributions from our 50% owned, unconsolidated joint venture, Standard Gypsum.
| | - | ----------------------------------------------------------------------------------------------------------------



Capital Expenditures. Capital expenditures were $15.6 million
for the nine months ended September 30, 2004, versus $14.7 million for the same period in 2003. Aggregate capital expenditures of approximately $20.0 million are anticipated for 2004. To conserve cash, we intend to limit capital expenditures to cost
reduction, productivity improvement and replacement projects.



Inflation



Raw material and energy cost changes have had, and
continue to have, a significant effect on our operations. We do not believe that general economic inflation is a significant determinant of our raw material and energy cost increases or that it has a material effect on our operations.



Subsequent Events



In October 2004, we purchased $10.0 million of our 97/8% senior subordinated notes in the open market for $10.8 million. This purchase reduced our total long term debt. Our Board of Directors has authorized additional purchases of up
to $10.0 million of our senior subordinated notes as market conditions warrant. However, these purchases may be limited by compliance with certain debt obligation agreements.



In October 2004, we unwound the $50.0 million December 2003 and the $50.0 million April 2004 interest swap agreements
related to the 97/8% senior subordinated notes and received approximately $5 thousand from the bank
counter-party. Unwinding these agreements eliminated all of our interest rate swap agreements.



In October 2004, we completed the sale of our Chicago Paperboard property for $11.1 million in net cash proceeds. This transaction will result in an
approximately $10.1 million gain and will be included in our fourth quarter results.



In October 2004, we obtained an amendment from our lenders which waived certain defaults with respect to our sale of assets and repurchase of our 97/8% senior subordinated notes.



New Accounting Pronouncements



See Item 1  Notes to the Condensed Consolidated Financial Statements regarding new accounting pronouncements.



Contractual Obligations



For a discussion of our contractual obligations, see Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources  Contractual Obligations and Note 7 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. There have been no
significant developments with respect to our contractual obligations since December 31, 2003.



Forward-Looking Information



This quarterly report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that represent our expectations, anticipations or beliefs about future events, operating results or financial condition. For this purpose, any statements that are
not statements of historical fact may be deemed to be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially depending on a variety of important factors, including, but not
limited to, fluctuations in raw material prices and energy costs, increases in pension and insurance costs, downturns in industrial production, housing and construction and the consumption of durable and nondurable goods, the degree and nature of
competition, demand for our products, the degree of success achieved by our new product initiatives, changes in government regulations, our ability to complete acquisitions and successfully integrate the operations of acquired businesses (including
specifically the acquired Smurfit-Stone industrial packaging operations), our ability to service our substantial indebtedness and unforeseen difficulties with the consolidation and relocation of our accounting and control operations and the
integration of our IT systems. Additional relevant risk factors that



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could cause actual results to differ materially are discussed in our most recent Annual Report on Form 10-K and in our
other filings with the Securities and Exchange Commission. With respect to such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be
examined at public reference facilities maintained by the Securities and Exchange Commission or, to the extent filed via EDGAR, accessed through the Web Site of the Securities and Exchange Commission (http://www.sec.gov). We do not undertake
any obligation to update any forward-looking statements and are not responsible for any changes made to this 10-Q by wire or Internet services.



Risk Factors



For a discussion of our risk factors, see Risk Factors in Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Except as described in Part I, Item 4, under Controls and Procedures, there have been no significant developments with respect to our risk
factors since December 31, 2003.



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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004



PART I



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For a discussion of certain market risks related to us, see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. There have been no significant developments with respect to our exposure to interest rate market risk. See Note 5 to the condensed consolidated financial statements for
additional information about our interest rate swap agreements and transactions since December 31, 2003.



ITEM 4. CONTROLS AND PROCEDURES



As of the end of the period covered by this quarterly report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (disclosure controls). Included with the exhibits to
this quarterly report are certifications of our Chief Executive Officer and Chief Financial Officer that are required to be furnished by SEC rules adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. The information
discussed in this section of our quarterly report relates to the evaluations of disclosure controls and internal control over financial reporting referenced in these certifications and should be read in conjunction with these certifications.



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



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



In conjunction with its 2002 audit of our financial
statements, our independent accountants, Deloitte & Touche LLP, identified certain items they described as reportable conditions, relating primarily to the decentralized nature of our Company and the inconsistent application of
certain written policies. In 2003, the Company undertook a process of implementing improvements to its policies and engaged PricewaterhouseCoopers LLP to do an extensive evaluation of the Companys internal controls, both to prepare our Company
to comply with the new annual certification regarding internal control over financial reporting that will be required as of December 31, 2004 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rulemaking, as well as to assist
the Company in conforming to certain best practices recommendations with respect to internal controls. In 2003, Deloitte & Touche did not identify any reportable conditions in connection with the audit of the
Companys financial statements.



Our efforts to implement
improvements in these areas continue. Among the measures we have undertaken include costly projects to centralize our accounting functions and reorganize our information technology department. These projects, which represent both operational and
compliance risks, require significant resources, and have stretched the capacity of our personnel to meet the implementation schedule. In addition, as we have moved into the testing phase of these projects, we have continued to discover issues,
primarily regarding the inconsistent application of policies, that will require further effort to remediate if we are to be successful in enabling management to provide the required report, and our independent auditors to provide the required
attestation, by the compliance deadline. Although we have made these projects a top priority for our Company, we can give no assurance that our compliance efforts will be completed on a timely and successful basis to enable management and our
independent auditors to provide the required report and attestation. Additional information regarding these matters, as supplemented by the disclosures herein, is contained in our Annual Report on Form 10-K for the fiscal year ended December 31,
2003, in Managements Discussion and Analysis of Financial Condition and Results of Operations  Risk Factors  Our business is subject to changing regulation of corporate governance and public disclosure that has increased both
our costs and the risk of noncompliance.



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



Subject to the disclosures and limitations noted above, there has been no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.



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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004



PART II. OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a) | Exhibits
| | -- | --------



The Exhibits to this Report on Form 10-Q are listed in the accompanying Exhibit Index.



| | b) | Reports on Form 8-K
| | -- | -------------------



We furnished one current report on Form 8-K during the quarter ended September 30, 2004. This report, furnished on August 2, 2004, attached our press release announcing our financial results for the quarter ended June
30, 2004, and attached transcript of the July 28, 2004 conference call.



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SIGNATURES



Pursuant to the
requirements 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. DomanicoRonald J. DomanicoVice President and Chief Financial Officer




Date: November 9, 2004



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EXHIBIT INDEX



|            |   |  |   |  |                                                                                                                                                                                                             
|----------- | - |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  |   |  | Description                                                                                                                                                                                                 
|3.01        |   |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference  Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])                                      
|            |   | 
|3.02        |   |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])                                                   
|            |   | 
|10.01       |  |  |  |  | Employment Agreement, dated July 15, 2004, between the Company and Michael J. Keough                                                                                                                        
|            |   | 
|10.02       |  |  |  |  | Employment Agreement dated August 20, 2004 between the Company and Steve Kelchen                                                                                                                            
|            |   | 
|10.03       |  |  |  |  | Fourth Amendment to Credit Agreement, dated as of October 25, 2004, by and among the Company and certain subsidiaries identified therein, as guarantors, and Bank of America, N.A., as
Administrative Agent.
|            |   | 
|31.01       |  |  |  |  | Certification of CEO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                           
|            |   | 
|31.02       |  |  |  |  | Certification of CFO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                           
|            |   | 
|32.01       |  |  |  |  | Certification of CEO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             
|            |   | 
|32.02       |  |  |  |  | Certification of CFO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             

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| | Filed herewith
|- | --------------



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