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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q

(Mark One)

|  |  |                                                                                                            |  | 
|- |  | ---------------------------------------------------------------------------------------------------------- |  | 
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934                    |  | 
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|  |  | For the quarterly period ended September 30, 2002                                                          |  | 
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|  |  | OR                                                                                                         |  | 
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|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |  | 
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|  |  | 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)


|                                                                                  |  |                                                  
|--------------------------------------------------------------------------------- |  | -------------------------------------------------
|North Carolina(State or other jurisdiction of
incorporation or organization)      |  | 58-1388387(I.R.S. Employer
Identification Number)
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |  |                                                  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|3100 Joe Jerkins Blvd., Austell, Georgia
(Address of principal executive offices) |  | 30106
(Zip Code)                                 

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

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

Yesx                    Noo

Indicate the number of shares outstanding of each of issuers classes of common
stock, as of the latest practicable date, October 28, 2002.

|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 27,908,210   
|                             |  |              
|(Class)                      |  | (Outstanding)



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TABLE OF CONTENTS



|                                                            |                                                                                       |  |  |  |  |  |  | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)          
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS       
|                                                            | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                            | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                            | ITEM 4. CONTROLS AND PROCEDURES                                                      
|PART II. OTHER INFORMATION                                 
|                                                            | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                             
|SIGNATURES                                                 
|CERTIFICATIONS                                             
|EXHIBIT INDEX                                              
|EX-10.07 AMENDMENT NO. 4 TO CREDIT AGREEMENT               
|EX-10.08 SECURITY AGREEMENT                                
|EX-10.19 FIFTH AMENDMENT TO GUARANTY AGREEMENT             
|EX-10.21 REVISED FIFTH AMENDMENT                           
|EX-10.25 FIRST AMENDMENT TO ASSET PURCHASE                 
|EX-10.26 EMPLOYMENT AGREEMENT                              
|EX-10.27 EMPLOYMENT AGREEMENT                              
|EX-10.28 RESIGNATION AGREEMENT                             
|EX-10.29 MASTER LEASE AGREEMENT                            
|EX-10.30 CHANGE IN CONTROL SEVERANCE AGREEMENT             
|EX-11.01 COMPUTATION OF EARNINGS PER SHARE                 
|SECTION 906 CERTIFICATION OF THE CEO                       
|SECTION 906 CERTIFICATION OF THE CFO                       



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002

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, 2002 and December 31, 2001.                                                        |  | 3   
|              
|              
|              
|              
|               |  | Condensed Consolidated Statements of Operations for the three-month and nine-month  periods
ended September 30, 2002 and September 30, 2001. |  | 4   
|              
|              
|              
|              
|               |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended  September 30,
2002 and September 30, 2001.                 |  | 5   
|              
|              
|              
|              
|               |  | Notes to Condensed Consolidated Financial Statements.                                                                                        |  | 6   
|              
|              
|              
|              
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                        |  | 25  
|              
|              
|              
|              
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                   |  | 45  
|              
|              
|              
|              
|Item 4.        |  | Disclosure Controls and Procedures                                                                                                           |  | 45  
|              
|              
|              
|              
|PART II       |  | OTHER INFORMATION                                                                                                                            |  |     
|              
|              
|              
|              
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                                             |  | 48  
|              
|              
|              
|              
|Signatures     |  |                                                                                                                                              |  | 49  
|              
|              
|              
|              
|Certifications |  |                                                                                                                                              |  | 50  
|              
|              
|              
|              
|Exhibit Index  |  |                                                                                                                                              |  | 52  

2



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)


|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |              |          |         |         | 
|--------------------------------------------- | ------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | -------- | ------------- | ------- | ------------ | -------- | ------- | ------- | 
|                                              |                           |                                                                                                                                                                               |                            |                                      |          | September 30, |         | December 31,
|                                              |                           |                                                                                                                                                                               |                            |                                      |          | 2002          |         | 2001        
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           |                                                                                                                                                                               |                            | ASSETS                               |          |               |         |              |          |         |         | 
|                                             
|                                             
|                                             
|                                             
|CURRENT ASSETS:                               |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                             
|                                             
|                                             
|                                             
|                                              | Cash and cash equivalents |                                                                                                                                                                               | $                          | 64,507                               |          |               | $       | 64,244       |         
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Receivables, net of allowances                                                                                                                                                |                            |                                      | 116,600  |               |         |              | 86,297   |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Inventories                                                                                                                                                                   |                            |                                      | 115,332  |               |         |              | 101,823  |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Refundable income taxes                                                                                                                                                       |                            |                                      | 7,975    |               |         |              | 17,949   |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Other current assets                                                                                                                                                          |                            |                                      | 22,876   |               |         |              | 16,456   |        
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           |                                                                                                                                                                               |                            | Total current assets                 |          |               | 327,290 |              |          |         | 286,769 | 
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|PROPERTY, PLANT AND EQUIPMENT:                |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                             
|                                             
|                                             
|                                             
|                                              |                           |                                                                                                                                                                               | Land                       |                                      |          | 14,872        |         |              |          | 12,620  |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           |                                                                                                                                                                               | Buildings and improvements |                                      |          | 151,008       |         |              |          | 135,727 |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           |                                                                                                                                                                               | Machinery and equipment    |                                      |          | 652,761       |         |              |          | 625,691 |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           |                                                                                                                                                                               | Furniture and fixtures     |                                      |          | 14,536        |         |              |          | 14,326  |        
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           |                                                                                                                                                                               | 833,177                    |                                      |          |               | 788,364 |             
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Less accumulated depreciation                                                                                                                                                 |                            |                                      | (382,002 | )             |         |              | (337,988 | )      
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           | Property, plant and equipment, net                                                                                                                                            |                            |                                      | 451,175  |               |         |              | 450,376  |        
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|GOODWILL AND INTANGIBLE ASSETS, net           |                           |                                                                                                                                                                               | 187,341                    |                                      |          |               | 146,465 |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|INVESTMENT IN UNCONSOLIDATED AFFILIATES       |                           |                                                                                                                                                                               | 56,203                     |                                      |          |               | 62,285  |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|OTHER ASSETS                                  |                           |                                                                                                                                                                               | 35,036                     |                                      |          |               | 15,086  |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           | $                                                                                                                                                                             | 1,057,045                  |                                      |          | $             | 960,981 |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                             
|                                             
|                                             
|                                             
|                                              |                           |                                                                                                                                                                               |                            | LIABILITIES AND SHAREHOLDERS EQUITY |          |               |         |              |          |         |         | 
|                                             
|                                             
|                                             
|                                             
|CURRENT LIABILITIES:                          |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Current maturities of debt                                                                                                                                                    |                            | $                                    | 65       |               |         | $            | 48       |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Accounts payable                                                                                                                                                              |                            |                                      | 72,125   |               |         |              | 52,133   |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Accrued liabilities                                                                                                                                                           |                            |                                      | 56,685   |               |         |              | 37,749   |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Dividends payable                                                                                                                                                             |                            |                                      |         |               |         |              | 833      |        
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           |                                                                                                                                                                               |                            | Total current liabilities            |          |               | 128,875 |              |          |         | 90,763  | 
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|SENIOR CREDIT FACILITY                        |                           |                                                                                                                                                                               | 38,000                     |                                      |          |               |        |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|OTHER LONG-TERM DEBT, less current maturities |                           |                                                                                                                                                                               | 532,435                    |                                      |          |               | 508,691 |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|DEFERRED INCOME TAXES                         |                           |                                                                                                                                                                               | 73,544                     |                                      |          |               | 66,760  |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|DEFERRED COMPENSATION                         |                           |                                                                                                                                                                               | 1,536                      |                                      |          |               | 1,741   |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|OTHER LIABILITIES                             |                           |                                                                                                                                                                               | 4,699                      |                                      |          |               | 12,512  |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|MINORITY INTEREST                             |                           |                                                                                                                                                                               | 822                        |                                      |          |               | 935     |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|COMMITMENTS AND CONTINGENCIES (NOTE 10)       |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                             
|                                             
|                                             
|                                             
|SHAREHOLDERS EQUITY:                         |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Preferred stock, $.10 par value; 5,000,000 shares authorized; none issued                                                                                                     |                            |                                      |         |               |         |              |         |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Common stock, $.10 par value; 60,000,000 shares authorized,
27,894,142 and 27,853,897 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively |                            |                                      | 2,789    |               |         |              | 2,785    |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Additional paid-in capital                                                                                                                                                    |                            |                                      | 182,078  |               |         |              | 180,116  |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Retained earnings                                                                                                                                                             |                            |                                      | 92,915   |               |         |              | 97,488   |        
|                                             
|                                             
|                                             
|                                             
|                                              |                           | Accumulated other comprehensive loss                                                                                                                                          |                            |                                      | (648     | )             |         |              | (810     | )      
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           |                                                                                                                                                                               | 277,134                    |                                      |          |               | 279,579 |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             
|                                              |                           | $                                                                                                                                                                             | 1,057,045                  |                                      |          | $             | 960,981 |             
|                                              |                           |                                                                                                                                                                               |                            |                                      |          |               |         |             

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

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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)


|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |         |  
|--------------------------------------------------------------------------- | ------------------- | - | -------------------------- | ------ | ------------------------- | - | ------- | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                            |                     |   | For The Three Months Ended |        | For The Nine Months Ended
|                                                                            |                     |   | September 30,              |        | September 30,            
|                                                                            |                     |   |                            |        |                          
|                                                                            |                     |   | 2002                       |        | 2001                      |   | 2002    |        | 2001
|                                                                            |                     |   |                            |        |                           |   |         |        |     
|SALES                                                                       |                     | $ | 240,016                    |        |                           | $ | 234,851 |        |      | $ | 695,399 |         |   | $ | 697,698 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|COST OF SALES                                                               |                     |   | 187,322                    |        |                           |   | 172,807 |        |      |   | 527,004 |         |   |   | 516,829 |        
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|                                                                            | Gross profit        |   |                            | 52,694 |                           |   |         | 62,044 |      |   |         | 168,395 |   |   |         | 180,869 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|FREIGHT COSTS                                                               |                     |   | 14,482                     |        |                           |   | 13,869  |        |      |   | 42,212  |         |   |   | 40,299  |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES                                |                     |   | 37,353                     |        |                           |   | 36,832  |        |      |   | 107,744 |         |   |   | 109,861 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|RESTRUCTURING COSTS                                                         |                     |   |                           |        |                           |   |        |        |      |   | 985     |         |   |   | 7,083   |        
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|                                                                            | Operating income    |   |                            | 859    |                           |   |         | 11,343 |      |   |         | 17,454  |   |   |         | 23,626  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|OTHER (EXPENSE) INCOME:                                                     |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest expense                                                            |                     |   | (9,431                     | )      |                           |   | (10,393 | )      |      |   | (28,110 | )       |   |   | (31,159 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest income                                                             |                     |   | 493                        |        |                           |   | 319     |        |      |   | 1,361   |         |   |   | 624     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Equity in income (loss) of unconsolidated affiliates                        |                     |   | 826                        |        |                           |   | 936     |        |      |   | 1,861   |         |   |   | (1,799  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other, net                                                                  |                     |   | 39                         |        |                           |   | (98     | )      |      |   | (72     | )       |   |   | (611    | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|                                                                            | Total other expense |   |                            | (8,073 | )                         |   |         | (9,236 | )    |   |         | (24,960 | ) |   |         | (32,945 | )
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|(LOSS) INCOME BEFORE MINORITY INTEREST,
INCOME TAXES AND EXTRAORDINARY LOSS |                     |   | (7,214                     | )      |                           |   | 2,107   |        |      |   | (7,506  | )       |   |   | (9,319  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|MINORITY INTEREST IN LOSSES                                                 |                     |   | 35                         |        |                           |   | 120     |        |      |   | 113     |         |   |   | 157     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|(BENEFIT) PROVISION FOR INCOME TAXES                                        |                     |   | (2,690                     | )      |                           |   | 1,272   |        |      |   | (2,822  | )       |   |   | (2,362  | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|(LOSS) INCOME BEFORE EXTRAORDINARY
LOSS                                     |                     |   | (4,489                     | )      |                           |   | 955     |        |      |   | (4,571  | )       |   |   | (6,800  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX
BENEFIT    |                     |   |                           |        |                           |   |        |        |      |   |        |         |   |   | (2,695  | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|NET (LOSS) INCOME                                                           |                     | $ | (4,489                     | )      |                           | $ | 955     |        |      | $ | (4,571  | )       |   | $ | (9,495  | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|BASIC                                                                       |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|(LOSS) INCOME PER COMMON SHARE
BEFORE EXTRAORDINARY LOSS                    |                     | $ | (0.16                      | )      |                           | $ | 0.03    |        |      | $ | (0.16   | )       |   | $ | (0.24   | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|EXTRAORDINARY LOSS PER COMMON SHARE                                         |                     | $ | 0.00                       |        |                           | $ | 0.00    |        |      | $ | 0.00    |         |   | $ | (0.10   | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|NET (LOSS) INCOME PER COMMON SHARE                                          |                     | $ | (0.16                      | )      |                           | $ | 0.03    |        |      | $ | (0.16   | )       |   | $ | (0.34   | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|Weighted average number of shares outstanding                               |                     |   | 27,862                     |        |                           |   | 27,856  |        |      |   | 27,859  |         |   |   | 27,841  |        
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|DILUTED                                                                     |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|(LOSS) INCOME PER COMMON SHARE
BEFORE EXTRAORDINARY LOSS                    |                     | $ | (0.16                      | )      |                           | $ | 0.03    |        |      | $ | (0.16   | )       |   | $ | (0.24   | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|EXTRAORDINARY LOSS PER COMMON SHARE                                         |                     | $ | 0.00                       |        |                           | $ | 0.00    |        |      | $ | 0.00    |         |   | $ | (0.10   | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|NET (LOSS) INCOME PER COMMON SHARE                                          |                     | $ | (0.16                      | )      |                           | $ | 0.03    |        |      | $ | (0.16   | )       |   | $ | (0.34   | )      
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        
|Diluted weighted average number of shares
outstanding                       |                     |   | 27,862                     |        |                           |   | 27,856  |        |      |   | 27,859  |         |   |   | 27,841  |        
|                                                                            |                     |   |                            |        |                           |   |         |        |      |   |         |         |   |   |         |        

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

4



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


|                           |                                                  |                                                                             |   |                           |         |      |   |        |          |  
|-------------------------- | ------------------------------------------------ | --------------------------------------------------------------------------- | - | ------------------------- | ------- | ---- | - | ------ | -------- | -
|                           |                                                  |                                                                             |   | For the Nine Months Ended
|                           |                                                  |                                                                             |   | September 30,            
|                           |                                                  |                                                                             |   |                          
|                           |                                                  |                                                                             |   | 2002                      |         | 2001
|                           |                                                  |                                                                             |   |                           |         |     
|Cash provided by (used in) |                                                  |                                                                             |   |                           |         |      |   |       
|                          
|                          
|                          
|                          
|                           | Operating activities:                            |                                                                             |   |                           |         |      |   |        |         
|                          
|                          
|                          
|                          
|                           |                                                  | Net loss                                                                    |   | $                         | (4,571  | )    |   | $      | (9,495   | )
|                          
|                          
|                          
|                          
|                           |                                                  | Extraordinary loss from early extinguishment of debt                        |   |                           |        |      |   |        | 4,305    |  
|                          
|                          
|                          
|                          
|                           |                                                  | Depreciation and amortization                                               |   |                           | 46,148  |      |   |        | 46,986   |  
|                          
|                          
|                          
|                          
|                           |                                                  | Restructuring costs                                                         |   |                           | 985     |      |   |        | 3,987    |  
|                          
|                          
|                          
|                          
|                           |                                                  | Change in deferred income taxes                                             |   |                           | 6,543   |      |   |        | 3,414    |  
|                          
|                          
|                          
|                          
|                           |                                                  | Other noncash adjustments                                                   |   |                           | 56      |      |   |        | 10       |  
|                          
|                          
|                          
|                          
|                           |                                                  | Equity in income or loss of unconsolidated affiliates, net of distributions |   |                           | 4,794   |      |   |        | 1,799    |  
|                          
|                          
|                          
|                          
|                           |                                                  | Changes in current assets and liabilities, net of businesses acquired       |   |                           | 1,964   |      |   |        | (4,361   | )
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           |                                                  | Net cash provided by operating activities                                   |   |                           | 55,919  |      |   |        | 46,645   |  
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           | Investing activities:                            |                                                                             |   |                           |         |      |   |        |         
|                          
|                          
|                          
|                          
|                           |                                                  | Purchases of property, plant and equipment                                  |   |                           | (16,126 | )    |   |        | (22,500  | )
|                          
|                          
|                          
|                          
|                           |                                                  | Acquisitions of businesses, net of cash acquired                            |   |                           | (69,144 | )    |   |        | (34      | )
|                          
|                          
|                          
|                          
|                           |                                                  | Investment in unconsolidated affiliates                                     |   |                           | (200    | )    |   |        |         |  
|                          
|                          
|                          
|                          
|                           |                                                  | Other                                                                       |   |                           | 1,056   |      |   |        | 572      |  
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           |                                                  | Net cash used in investing activities                                       |   |                           | (84,414 | )    |   |        | (21,962  | )
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           | Financing activities:                            |                                                                             |   |                           |         |      |   |        |         
|                          
|                          
|                          
|                          
|                           |                                                  | Proceeds from senior credit facility                                        |   |                           | 38,000  |      |   |        | 18,000   |  
|                          
|                          
|                          
|                          
|                           |                                                  | Repayments of senior credit facility                                        |   |                           |        |      |   |        | (212,000 | )
|                          
|                          
|                          
|                          
|                           |                                                  | Proceeds from the issuance of the 7 1/4% and 9 7/8% notes                   |   |                           |        |      |   |        | 291,200  |  
|                          
|                          
|                          
|                          
|                           |                                                  | Repayments of other long and short-term debt                                |   |                           | (6,628  | )    |   |        | (67,110  | )
|                          
|                          
|                          
|                          
|                           |                                                  | 7.74% senior notes prepayment penalty                                       |   |                           |        |      |   |        | (3,565   | )
|                          
|                          
|                          
|                          
|                           |                                                  | Dividends paid                                                              |   |                           | (833    | )    |   |        | (8,037   | )
|                          
|                          
|                          
|                          
|                           |                                                  | Other                                                                       |   |                           | (1,781  | )    |   |        | (1,826   | )
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           |                                                  | Net cash provided by financing activities                                   |   |                           | 28,758  |      |   |        | 16,662   |  
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           | Net change in cash and cash equivalents          |                                                                             |   | 263                       |         |      |   | 41,345 |         
|                          
|                          
|                          
|                          
|                           | Cash and cash equivalents at beginning of period |                                                                             |   | 64,244                    |         |      |   | 8,900  |         
|                           |                                                  |                                                                             |   |                           |         |      |   |       
|                           | Cash and cash equivalents at end of period       |                                                                             | $ | 64,507                    |         |      | $ | 50,245 |         
|                           |                                                  |                                                                             |   |                           |         |      |   |        |          |  
|                           | Supplemental Disclosures:                        |                                                                             |   |                           |         |      |   |        |         
|                          
|                          
|                          
|                          
|                           |                                                  | Cash payments for interest                                                  |   | $                         | 21,673  |      |   | $      | 14,629   |  
|                           |                                                  |                                                                             |   |                           |         |      |   |        |          |  
|                           |                                                  | Cash payments for income taxes                                              |   | $                         | 474     |      |   | $      | 1,276    |  
|                           |                                                  |                                                                             |   |                           |         |      |   |        |          |  
|                           |                                                  | Stock issued for acquisitions                                               |   | $                         | 325     |      |   | $      | 18,799   |  
|                           |                                                  |                                                                             |   |                           |         |      |   |        |          |  

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

5



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##### Table of Contents






NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002
(UNAUDITED)


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 for a fair
statement of results for the interim periods. Certain notes and other
information have been condensed or omitted from the interim financial
statements; therefore, these financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2001. The results of operations for the nine months
ended September 30, 2002 are not necessarily indicative of the results to
be expected for the full year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2.Acquisitions



| |  | Each of the following acquisitions are being accounted for under the
purchase method of accounting, applying the provisions of Statements of
Financial Accounting Standards No. 141 and, as a result, the Company
recorded the assets and liabilities of the acquired company at their
estimated fair values with the excess of the purchase price over these
amounts being recorded as goodwill. Actual allocation of goodwill and
other identifiable assets will be based on further studies and may change
during the allocation period, generally one year following the date of the
acquisition. The financial statements for the nine months ended September
30, 2002 reflect the operations of the acquired businesses for the periods
after their respective dates of acquisition.  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In April 2002, the Company acquired the remaining 51 percent of the
outstanding stock of Design Tubes Company Limited (Design Tubes),
Toronto, Ontario, Canada in exchange for shares of a subsidiary of the
Company convertible at the holders option (for no additional
consideration) into approximately 141,000 shares of the Companys common
stock, valued at $1,472,000. The Company originally acquired its minority
interest in Design Tubes in November 1998 and accounted for its 49 percent
ownership using the equity method. Design Tubes manufactures paperboard
tubes and also produces paper tube manufacturing equipment for companies
throughout North America. Goodwill in the amount of $1,000,000 was recorded
in the connection with the Design Tubes acquisition.
|
| |  | On September 30, 2002, the Company acquired certain operating assets
(excluding accounts receivable) of the Smurfit Industrial Packaging Group,
a business unit of Jefferson Smurfit Corporation (U.S.), for approximately
$67,100,000, and assumed $1,700,000 of indebtedness outstanding under
certain industrial revenue bonds. The acquisition was funded by
$38,000,000 of borrowings under Caraustars revolving credit facility and
$29,100,000 of cash on hand. The purchase agreement includes a purchase
price working capital adjustment which will be finalized in the fourth
quarter. Goodwill and intangible assets of approximately $38,600,000
were
recorded in conjunction with the Smurfit Industrial Packaging Group
acquisition.                                        
|
| |  | The Company also entered into operating lease agreements with a third party
to lease machinery and equipment at these locations. The terms of the
agreements are six years. The future minimum rental payments required
under these leases are approximately $1,700,000 each year in 2002 through
2007 and $1,300,000 in 2008. The Company will recognize operating lease
expense of approximately $480,000 in 2002, $2,000,000 each year in
2003 through 2007 and $1,400,000 in 2008.                                                                                                                                                                                                                                                                                                      
|
| |  | Smurfit Industrial Packaging Group operations included seventeen paper tube
and core plants, three uncoated recycled paperboard mills and three
partition manufacturing plants. These facilities are located in 16 states
across the U.S. and in Canada. The Company believes that these assets
enhance the Companys capabilities in its tube, core and composite
container market and position the Company as a prominent producer in this
market. In conjunction with the acquisition, the Company is evaluating its
existing and acquired locations to determine which locations should be
closed or consolidated to achieve economies of scale and other
efficiencies.                                                                                                                 

6



---



##### Table of Contents





| |  | The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The Company
is in the process of obtaining third-party valuations of the acquired
assets including certain intangible assets; thus, the allocation of the
purchase price is preliminary.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                  |                             |                           |  |            |  |   |            |  |            | 
|------------------------------------------------- | --------------------------- | ------------------------- |  | ---------- |  | - | ---------- |  | ---------- | 
|Cash paid to Jefferson Smurfit Corporation (U.S.) |                             |                           |  |            |  | $ | 67,100,000 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Acquisition expenses (estimated)                  |                             |                           |  |            |  |   | 1,900,000  | 
|                                                  |                             |                           |  |            |  |   |            | 
|Total allocable cost                              |                             |                           |  |            |  |   | 69,000,000 | 
|                                                  |                             |                           |  |            |  |   |            | 
|Assets acquired:                                  |                             |                           |  |            |  |   |            | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Current assets              |                           |  | 10,400,000 |  |   |            |  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Property, plant & equipment |                           |  | 30,500,000 |  |   |            |  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other assets                |                           |  | 300,000    |  |   |            |  |           
|                                                  |                             |                           |  |            |  |   |            | 
|                                                  |                             | Total assets purchased    |  |            |  |   |            |  | 41,200,000 | 
|                                                  |                             |                           |  |            |  |   |            | 
|Liabilities assumed:                              |                             |                           |  |            |  |   |            | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Current liabilities         |                           |  | 9,100,000  |  |   |            |  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Long-term debt              |                           |  | 1,700,000  |  |   |            |  |           
|                                                  |                             |                           |  |            |  |   |            | 
|                                                  |                             | Total liabilities assumed |  |            |  |   |            |  | 10,800,000 | 
|                                                  |                             |                           |  |            |  |   |            | 
|Net assets acquired                               |                             |                           |  |            |  |   | 30,400,000 | 
|                                                  |                             |                           |  |            |  |   |            | 
|Total goodwill and intangible assets              |                             |                           |  |            |  | $ | 38,600,000 | 
|                                                  |                             |                           |  |            |  |   |            | 

The following unaudited pro forma financial data (in thousands, except per
share amounts) gives effect to the acquisition of Smurfit Industrial Packaging
Group as if it had occurred on the first day of each period presented. The pro
forma financial data is provided for comparative purposes only and is not
necessarily indicative of the results which would have been obtained if the
Smurfit Industrial Packaging Group acquisition had been effected at that date.

|                            |  |                     |         |      |  |   |         |  
|--------------------------- |  | ------------------- | ------- | ---- |  | - | ------- | -
|                            |  | Nine Months        
|                            |  | Ended September 30,
|                            |  |                    
|                            |  | 2002                |         | 2001
|                            |  |                     |         |     
|Total revenues              |  | $                   | 805,242 |      |  | $ | 803,090 |  
|                           
|                           
|                           
|                           
|Net (loss) income           |  | $                   | 260     |      |  | $ | (6,025  | )
|                           
|                           
|                           
|                           
|Net (loss) income per share |  |                     |         |      |  |   |         |  
|                           
|                           
|                           
|                           
|Basic                       |  | $                   | 0.01    |      |  | $ | (0.22   | )
|                           
|                           
|                           
|                           
|Diluted                     |  | $                   | 0.01    |      |  | $ | (0.22   | )

Note 3.Inventory



| |  | Inventories are carried at the lower of cost or market. Cost includes
materials, labor and overhead. Market, with respect to all inventories, is
replacement cost or net realizable value. All inventories are valued using
the first-in, first-out method.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Inventories at September 30, 2002 and December 31, 2001 were as follows (in
thousands):                                                                                                                                                                    

|                                   |  |               |         |              |  |   |         | 
|---------------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | 
|                                   |  | September 30, |         | December 31,
|                                   |  | 2002          |         | 2001        
|                                   |  |               |         |             
|Raw materials and supplies         |  | $             | 49,808  |              |  | $ | 40,357  | 
|                                  
|                                  
|                                  
|                                  
|Finished goods and work in process |  |               | 65,524  |              |  |   | 61,466  | 
|                                   |  |               |         |              |  |   |         | 
|Total inventory                    |  | $             | 115,332 |              |  | $ | 101,823 | 
|                                   |  |               |         |              |  |   |         | 

Note 4.Comprehensive Income or Loss



| |  | Total comprehensive income or loss, consisting of net income or loss plus
changes in foreign currency translation adjustment for the three months
ended September 30, 2002 and 2001 was a loss of $4,563,000 and
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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##### Table of Contents





| |  | income of $1,041,000, respectively. For the nine months ended September 30,
2002 and 2001 total comprehensive loss was $4,409,000 and $9,533,000,
respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  | At September 30, 2002 and December 31, 2001, total long-term debt consisted
of the following (in thousands):
| |  | ------------------------------------------------------------------------------------------------------------

|                                        |  |               |         |              |  |   |         |  
|--------------------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | -
|                                        |  | September 30, |         | December 31,
|                                        |  | 2002          |         | 2001        
|                                        |  |               |         |             
|Senior credit facility                  |  | $             | 38,000  |              |  | $ |        |  
|                                       
|                                       
|                                       
|                                       
|7 1/4 percent senior notes              |  |               | 25,668  |              |  |   | 25,449  |  
|                                       
|                                       
|                                       
|                                       
|7 3/8 percent senior notes              |  |               | 202,096 |              |  |   | 197,716 |  
|                                       
|                                       
|                                       
|                                       
|9 7/8 percent senior subordinated notes |  |               | 294,791 |              |  |   | 277,326 |  
|                                       
|                                       
|                                       
|                                       
|Other notes payable                     |  |               | 9,945   |              |  |   | 8,248   |  
|                                        |  |               |         |              |  |   |         |  
|Total debt                              |  |               | 570,500 |              |  |   | 508,739 |  
|                                       
|                                       
|                                       
|                                       
|Less current maturities                 |  |               | (65     | )            |  |   | (48     | )
|                                        |  |               |         |              |  |   |         |  
|Total long-term debt                    |  | $             | 570,435 |              |  | $ | 508,691 |  
|                                        |  |               |         |              |  |   |         |  



| |  | On March 29, 2001, the Company obtained a credit facility that provides for
a revolving line of credit in the aggregate principal amount of $75,000,000
for a term of three years, including subfacilities of $10,000,000 for
swingline loans and $15,000,000 for letters of credit, usage of which
reduces availability under the facility. As of September 30, 2002 the
Company borrowed $38,000,000 under the facility at an average interest rate
of 4.28 percent, and an aggregate of $10,000,000 in letter of credit
obligations were outstanding. The Company used the $38,000,000 to fund a
portion of the acquisition price of the Smurfit Industrial Packaging Group
(see Note 2). The Company intends to use the remaining balance of the
facility for working capital, capital expenditures and other general
corporate purposes. The Companys obligations under the facility are
unconditionally guaranteed, on a joint and several basis, by all of its
existing and subsequently acquired wholly-owned domestic subsidiaries and
are secured by a first priority security interest in the accounts
receivable and inventory of the Company and all of its existing and
subsequently acquired wholly-owned domestic subsidiaries (see discussion
below of amendments to the senior credit facility).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Borrowings under the facility bear interest at a rate equal to, at the
Companys option, either (1) the base rate (which is equal to the greater
of the prime rate most recently announced by Bank of America, N.A., the
administrative agent under the facility, or the federal funds rate plus
one-half of one percent) or (2) the adjusted Eurodollar Interbank Offered
Rate, in each case plus an applicable margin determined by reference to the
Companys leverage ratio (which is defined under the facility as the ratio
of the Companys total debt to its total capitalization). Based on the
Companys leverage ratio at September 30, 2002, the current margins are
2.75 percent for Eurodollar rate loans and 1.50 percent for base rate
loans. Additionally, the undrawn portion of the facility is subject to a
facility fee at an annual rate that is currently set at 0.55 percent based
on the Companys leverage ratio at September 30, 2002.                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The facility contains covenants that restrict, among other things, the
Companys ability and its subsidiaries ability to create liens, merge or
consolidate, dispose of assets, incur indebtedness and guarantees, pay
dividends, repurchase or redeem capital stock and indebtedness, make
certain investments or acquisitions, enter into certain transactions with
affiliates, make capital expenditures or change the nature of the Companys
business. The facility also contains several financial maintenance
covenants, including covenants establishing a maximum leverage ratio (as
described above), minimum tangible net worth and a minimum fixed charge
coverage ratio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The facility contains events of default including, but not limited to,
nonpayment of principal or interest, violation of covenants, incorrectness
of representations and warranties, cross-default to other indebtedness,
bankruptcy and other insolvency events, material judgments, certain ERISA
events, actual or asserted invalidity of loan documentation and certain
changes of control of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

8



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| |  | During the third and fourth quarters of 2001 and the first and third
quarters of 2002, the Company completed four amendments to its senior
credit facility agreement. The first amendment, dated September 10, 2001,
allows the Company to acquire up to $30,000,000 of its senior subordinated
notes so long as no default or event of default exists on the date of the
transaction, or will result from the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The second amendment, dated November 30, 2001, provides for the issuance of
letters of credit under the senior credit facility having an original
expiration date more than one year from the date of issuance, if required
under related industrial revenue bond documents and agreed to by the
issuing lender.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The third amendment was completed on January 22, 2002 with an effective
date of September 30, 2001. The Company obtained this amendment in order to
avoid the occurrence of an event of default under its senior credit
facility agreement resulting from a violation of the interest coverage
ratio covenant contained in the agreement. This amendment modified the
definitions of Interest Expense, Premier Boxboard Interest Expense and
Standard Gypsum Interest Expense to include interest income and the
benefit or expense derived from interest rate swap agreements or other
interest hedge agreements. Additionally, the amendment lowered the minimum
allowable interest coverage ratio for the fourth quarter of 2001 from
2.5:1.0 to 2.25:1.0, the first quarter of 2002 from 2.75:1.0 to 2.25:1.0,
and the second quarter of 2002 from 2.75:1.0 to 2.50:1.0.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In connection with the Companys acquisition of the Smurfit Industrial
Packaging Group, the Company entered into a fourth amendment to its senior
credit facility in September 2002. The purpose of this amendment was to
obtain the required lender consent under the senior credit facility for the
consummation of the acquisition (and the incurrence of up to
$60,000,000
in subordinated debt financing to refinance borrowings under the credit
facility and restore cash used to fund a portion of the acquisition price),
to lower the minimum allowable tangible net worth for all periods after the
effective date of the amendment, and to increase the maximum permitted
leverage ratio covenant to 70.0 percent for the fiscal quarters ending December
31, 2002, March 31, 2003 and June 30, 2003, and 67.5 percent for the fiscal
quarter ending September 30, 2003. Additionally, the minimum interest
coverage ratio covenant was replaced with a minimum fixed charge coverage
ratio covenant beginning with the third quarter of 2002. These
modifications, in addition to increasing the Companys flexibility to
finance the acquisition, were necessary to enable the Company to avoid
violations of the leverage ratio and interest coverage ratio covenants for
the third quarter of 2002 and violations of the leverage ratio covenant in
future periods.
|
| |  | In exchange for these modifications, the Companys lenders required an
increase in the applicable margin component of the interest rates
applicable to borrowings under the facility and the facility fee rate
applicable to the undrawn portion of the facility. The amendment also
provides for a margin pricing increase of 0.25 percent effective November 15,
2002, if the Company has not issued at least $50,000,000 in senior
subordinated notes by that date, and an increase of 0.25 percent every three
months after that date until the first date on which the Companys balance
of cash and cash equivalents is at least $50,000,000 and the Company has
no loans outstanding under the facility (subject to a maximum interest
margin of 3.75 percent for Eurodollar rate loans and 2.50 percent for base rate loans).
In addition, under the terms of the fourth amendment, the Company was
required to enter into a security agreement under which the Company and its
subsidiary guarantors under the senior credit facility granted a first
priority security interest in their respective accounts receivable and
inventory to secure their obligations under the credit facility and the
Companys obligations under its 50 percent guarantees of the credit facilities of
Standard Gypsum and Premier Boxboard.                                              
|
| |  | On March 22, 2001, the Company obtained commitments and executed an
agreement for the issuance of $285,000,000 of
9 7/8 percent senior
subordinated notes due April 1, 2011 and $29,000,000 of 7 1/4 percent
senior notes due May 1, 2010. These senior subordinated notes and senior
notes were issued at a discount to yield effective interest rates of 10.5
percent and 9.4 percent, respectively. Under the terms of the agreement,
the Company received aggregate proceeds, net of issuance costs, of
approximately $291,200,000 on March 29, 2001. These proceeds were used to
repay borrowings outstanding under the Companys former senior credit
facility and its 7.74 percent senior notes. In connection with the
repayment of the 7.74 percent senior notes, the Company incurred a
prepayment penalty of approximately $3,600,000. The Company recorded an
extraordinary loss of $2,695,000, which included the prepayment penalty and
unamortized issuance costs of $705,000, net of tax benefit of $1,610,000.
The difference between issue price and principal amount at                                                                                                                                                                                                                                                                                         

9



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##### Table of Contents





| |  | maturity of the Companys 7 1/4 percent senior and 9 7/8 percent senior
subordinated notes will be accreted each year as interest expense in its
financial statements. These notes are unsecured, but are guaranteed, on a
joint and several basis, by all of the Companys domestic subsidiaries,
other than two that are not wholly-owned.                                                                                                                                                                                                                                
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 1998, the Company registered with the Securities and Exchange
Commission a total of $300,000,000 in public debt securities for issuance
in one or more series and with such specific terms as to be determined from
time to time. On June 1, 1999, the Company issued $200,000,000 in aggregate
principal amount of its 7 3/8 percent notes due June 1, 2009. The 7 3/8
percent notes were issued at a discount to yield an effective interest rate
of 7.473 percent and pay interest semiannually. The 7 3/8 percent notes are
unsecured obligations of the Company.
|
| |  | During the second and third quarters of 2001, the Company entered into four
interest rate swap agreements in notional amounts totaling $285,000,000.
The agreements, which have payment and expiration dates that correspond to
the terms of the note obligations they cover, effectively converted
$185,000,000 of the Companys fixed rate 9 7/8 percent senior subordinated
notes and $100,000,000 of the Companys fixed rate 7 3/8 percent senior
notes into variable rate obligations. The variable rates are based on the
three-month LIBOR plus a fixed spread.     
|
| |  | The following table identifies the debt instrument hedged, the notional
amount, the fixed spread and the three-month LIBOR at September 30, 2002
for each of the Companys interest rate swaps. The September 30, 2002
three-month LIBOR is presented for informational purposes only and does not
represent the Companys actual effective rates in place at September 30,
2002.                                                                                                                                                                                           

|                                        |  |          |         |        |  |               |       |               |  |             |       |   |  |  |       |   |  |  |  | 
|--------------------------------------- |  | -------- | ------- | ------ |  | ------------- | ----- | ------------- |  | ----------- | ----- | - |  |  | ----- | - |  |  |  | 
|                                        |  |          |         |        |  |               |       |               |  | Three-Month |       |   |  |  |       |   |  | 
|                                        |  | Notional |         |        |  |               |       | LIBOR at      |  |             |       |   |  |  |       |  
|                                        |  | Amount   |         | Fixed  |  | September 30, |       | Total         |  |             |       |  
|Debt Instrument                         |  | (000's)  |         | Spread |  | 2002          |       | Variable Rate
|                                        |  |          |         |        |  |               |       |              
|7 3/8 percent senior notes              |  | $        | 50,000  |        |  |               | 2.365 | %             |  |             | 1.806 | % |  |  | 4.171 | %
|                                       
|                                       
|                                       
|                                       
|7 3/8 percent senior notes              |  |          | 25,000  |        |  |               | 1.445 |               |  |             | 1.806 |   |  |  | 3.251 |  
|                                       
|                                       
|                                       
|                                       
|7 3/8 percent senior notes              |  |          | 25,000  |        |  |               | 1.775 |               |  |             | 1.806 |   |  |  | 3.581 |  
|                                       
|                                       
|                                       
|                                       
|9 7/8 percent senior subordinated notes |  |          | 185,000 |        |  |               | 4.495 |               |  |             | 1.806 |   |  |  | 6.301 |  



| |  | In October 2001, the Company unwound its $185,000,000 interest rate swap
agreement related to the 9 7/8 percent senior subordinated notes and
received $9,093,000 from the bank counter-party. Simultaneously, the
Company executed a new swap agreement with a fixed spread that was 85 basis
points higher than the original swap agreement. The new swap agreement is
the same notional amount, has the same terms and covers the same notes as
the original agreement. The $9,093,000 gain, which was classified as a
component of debt, is accreted to interest expense over the life of the
notes and partially offsets the increase in interest expense. The Company
executed these transactions in order to take advantage of market
conditions.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In August 2002, the Company unwound its $185,000,000 interest rate swap
agreement related to the 9 7/8 percent senior subordinated notes and received
$5,500,000 million from the bank counter-party. Simultaneously, the
Company executed a new swap agreement with a fixed spread that was 17 basis
points higher than the original swap agreement. The new swap agreement is
the same notional amount, has the same terms and covers the same notes as
the original agreement. In September 2002, the Company repaid the
$5,500,000 and entered into a new swap agreement that lowered the fixed
spread by 7.5 basis points from the August 2002 swap.                                                                                               
|
| |  | Under the provisions of SFAS No. 133, the Company has designated and
accounted for its interest rate swap agreements as fair value hedges. The
Company has assumed no ineffectiveness with regard to these agreements as
they qualify for the short-cut method of accounting for fair value hedges
of debt obligations, as prescribed by SFAS No. 133. At September 30, 2002
the aggregate fair value of the swap agreements is approximately
$20,986,000 and is classified as a component of long-term assets and
long-term debt in the accompanying balance sheet. The December 31, 2001
aggregate fair value of the swaps was $7,418,000 and is classified as a
component of other long-term liabilities and long-term debt.                         

10



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##### Table of Contents



Note 6.New Accounting Pronouncements



| |  | SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets. This
pronouncement prescribes the accounting practices for goodwill and other
intangible assets. Under this pronouncement, goodwill will no longer be
amortized to earnings, but instead is reviewed periodically (at least
annually) for impairment. The Company has completed the required
transitional impairment test as of January 1, 2002 and found no impairment
of goodwill. On an ongoing basis (absent any impairment indicators), the
Company expects to perform its impairment tests during the fourth quarter.                                                                                                                                                                                                                                                                                                                     
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). This pronouncement requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, the entity either settles the obligation for the amount
recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The Company is currently assessing the
impact of SFAS No. 143 on its financial position and results of operations.               
|
| |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). This
pronouncement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS No. 121.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company adopted SFAS No. 144 as of January 1, 2002. This
pronouncement did not have a material impact on the Companys consolidated
financial statements upon adoption.                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In April 2002, the FASB issued SFAS No. 145 Recission of FASB Statements
No. 4, 44 and 46, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). This statement eliminates the current
requirement that gains and losses on extinguishment of debt must be
classified as extraordinary items in the statement of operations. Instead,
the statement requires that gains and losses on extinguishment of debt be
evaluated against the criteria in APB Opinion 30 to determine whether or
not it should be classified as an extraordinary item. Additionally, the
statement contains other corrections to authoritative accounting literature
in SFAS No. 4, 44 and 46. The changes in SFAS No. 145 related to debt
extinguishment become effective for the Company in fiscal 2003, and the
other changes were effective for all financial statements issued on or
after May 15, 2002.
|
| |  | In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). This pronouncement
addresses accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 becomes effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements.                                                                                                                                                                                                  

Note 7.Segment Information



| |  | The Company operates principally in three business segments based on its
products. The paperboard segment consists of facilities that manufacture
100 percent 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 income includes all costs and expenses directly related to the
segment involved. Corporate expenses include corporate, general,
administrative, and unallocated information systems expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

11



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

|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |         | 
|--------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ------ | ------------------- | ------- | ------------------- | ------ | ------- | ------- | ---- | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                            |                                                      |       |        | Three Months        |         | Nine Months        
|                                                                            |                                                      |       |        | Ended September 30, |         | Ended September 30,
|                                                                            |                                                      |       |        |                     |         |                    
|                                                                            |                                                      |       |        | 2002                |         | 2001                |        | 2002    |         | 2001
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |     
|Sales (external customers):                                                 |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Paperboard                                           |       | $      | 89,268              |         |                     | $      | 83,797  |         |      | $       | 248,396 |         |   | $      | 248,588 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Tube, core and composite container                   |       |        | 68,563              |         |                     |        | 65,786  |         |      |         | 202,363 |         |   |        | 200,623 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Carton and custom packaging                          |       |        | 82,185              |         |                     |        | 85,268  |         |      |         | 244,640 |         |   |        | 248,487 |        
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|                                                                            |                                                      | Total |        | $                   | 240,016 |                     |        | $       | 234,851 |      |         | $       | 695,399 |   |        | $       | 697,698 | 
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|Sales (intersegment):                                                       |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Paperboard                                           |       | $      | 37,639              |         |                     | $      | 39,245  |         |      | $       | 106,214 |         |   | $      | 102,737 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Tube, core and composite container                   |       |        | 1,030               |         |                     |        | 1,046   |         |      |         | 2,865   |         |   |        | 3,001   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Carton and custom packaging                          |       |        | 173                 |         |                     |        | 123     |         |      |         | 579     |         |   |        | 424     |        
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|                                                                            |                                                      | Total |        | $                   | 38,842  |                     |        | $       | 40,414  |      |         | $       | 109,658 |   |        | $       | 106,162 | 
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|Operating income:                                                           |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Paperboard(A)                                        |       | $      | 1,421               |         |                     | $      | 11,094  |         |      | $       | 15,333  |         |   | $      | 24,247  |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Tube, core and composite container                   |       |        | 2,585               |         |                     |        | 1,653   |         |      |         | 8,986   |         |   |        | 6,874   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Carton and custom packaging(B)                       |       |        | 1,366               |         |                     |        | 1,565   |         |      |         | 5,202   |         |   |        | 2,206   |        
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|                                                                            |                                                      | Total |        |                     | 5,372   |                     |        |         | 14,312  |      |         |         | 29,521  |   |        |         | 33,327  | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Corporate expense                                                           |                                                      |       | (4,513 | )                   |         |                     | (2,969 | )       |         |      | (12,067 | )       |         |   | (9,701 | )      
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|Operating income                                                            |                                                      |       | 859    |                     |         |                     | 11,343 |         |         |      | 17,454  |         |         |   | 23,626 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest expense                                     |       |        | (9,431              | )       |                     |        | (10,393 | )       |      |         | (28,110 | )       |   |        | (31,159 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest income                                      |       |        | 493                 |         |                     |        | 319     |         |      |         | 1,361   |         |   |        | 624     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Equity in income (loss) of
unconsolidated affiliates |       |        | 826                 |         |                     |        | 936     |         |      |         | 1,861   |         |   |        | (1,799  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Other, net                                           |       |        | 39                  |         |                     |        | (98     | )       |      |         | (72     | )       |   |        | (611    | )      
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        
|(Loss) Income before income taxes,
minority interest and extraordinary loss |                                                      | $     | (7,214 | )                   |         | $                   | 2,107  |         |         | $    | (7,506  | )       |         | $ | (9,319 | )      
|                                                                            |                                                      |       |        |                     |         |                     |        |         |         |      |         |         |         |   |        |         |        



---

|(A) |  | Results include a second quarter 2002 charge to
operations of $985,000 related to the revised estimate of fixed
asset disposal costs at the Camden and Chicago paperboard mills.
Results include first quarter 2001 charges to operations of
$4,447,000 for restructuring costs related to the closing of the
Chicago, Illinois paperboard mill (See Note 9). Results also
include a $3,854,000 and $1,635,000 reduction in reserves in the
second and third quarters of 2001, respectively, related to
expiring unfavorable supply contracts acquired with the Sprague
paperboard mill. These are related to the paperboard segment and
are reflected in the segments operating income.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(B) |  | Results include 2001 charges to operations of $2,636,000
related to the consolidation of the operations of the Salt Lake
City, Utah carton plant into the Denver, Colorado carton plant.
These costs are related to the carton and custom packaging segment
and are reflected in the segments operating income (See Note 9).                                                                                                                                                                                                                                                                                                                                                            

Note 8.Goodwill Accounting



| |  | Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets and no longer amortizes goodwill.
| |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  | Income (loss) before extraordinary item, net income (loss) and related
income (loss) per share for the third quarter and first nine months of 2001
adjusted to exclude goodwill amortization expense are as follows (in
thousands, except per share information):
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |       |  
|------------------------------- | --------------------------------------- | --------------------------------------- | - | ------------------ | ------ | ---------------- | - | ------- | ----- | - | - | ----- | ----- | -
|                                |                                         |                                         |   | Three Months       |        | Income Per Share
|                                |                                         |                                         |   | Ended              |        |                 
|                                |                                         |                                         |   | September 30, 2001 |        | Basic            |   | Diluted
|                                |                                         |                                         |   |                    |        |                  |   |        
|Net income:                     |                                         |                                         |   |                    |        |                  |   |         |       |   |   |      
|                               
|                               
|                               
|                               
|                                | Reported net income                     |                                         | $ | 955                |        |                  | $ | 0.03    |       |   | $ | 0.03  |      
|                               
|                               
|                               
|                               
|                                | Goodwill amortization                   |                                         |   | 712                |        |                  |   | 0.03    |       |   |   | 0.03  |      
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |      
|                                |                                         | Adjusted net income                     |   | $                  | 1,667  |                  |   | $       | 0.06  |   |   | $     | 0.06  |  
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |      
|                               
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |       |  
|                                |                                         |                                         |   | Nine Months        |        | Loss Per Share  
|                                |                                         |                                         |   | Ended              |        |                 
|                                |                                         |                                         |   | September 30, 2001 |        | Basic            |   | Diluted
|                                |                                         |                                         |   |                    |        |                  |   |        
|Loss before extraordinary item: |                                         |                                         |   |                    |        |                  |   |         |       |   |   |      
|                               
|                               
|                               
|                               
|                                | Reported loss before extraordinary item |                                         | $ | (6,800             | )      |                  | $ | (0.24   | )     |   | $ | (0.24 | )    
|                               
|                               
|                               
|                               
|                                | Goodwill amortization                   |                                         |   | 2,084              |        |                  |   | 0.07    |       |   |   | 0.07  |      
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |      
|                                |                                         | Adjusted loss before extraordinary item |   | $                  | (4,716 | )                |   | $       | (0.17 | ) |   | $     | (0.17 | )
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |      
|Net loss:                       |                                         |                                         |   |                    |        |                  |   |         |       |   |   |      
|                               
|                               
|                               
|                               
|                                | Reported net loss                       |                                         | $ | (9,495             | )      |                  | $ | (0.34   | )     |   | $ | (0.34 | )    
|                               
|                               
|                               
|                               
|                                | Goodwill amortization                   |                                         |   | 2,084              |        |                  |   | 0.07    |       |   |   | 0.07  |      
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |      
|                                |                                         | Adjusted net loss                       |   | $                  | (7,411 | )                |   | $       | (0.27 | ) |   | $     | (0.27 | )
|                                |                                         |                                         |   |                    |        |                  |   |         |       |   |   |       |      



| |  | As of September 30, 2002,
goodwill and intangible assets of $187,341,000 (net of $20,500,000 of
amortization) was attributable to the Companys segments as follows:
$77,648,000 for Paperboard, $66,353,000 for Tube, Core and Composite
Container and $43,340,000 for Carton and Custom Packaging. During the first
nine months of 2002, $40,876,000 of goodwill and intangible assets was
acquired by the Company and no goodwill or intangible assets were impaired
or written off.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 9.Restructuring Costs



| |  | In January 2001, the Company initiated a plan to close its paperboard mill
located in Chicago, Illinois and recorded a pretax charge to operations of
approximately $4,447,000. The mill was profitable through 1998, but
declining sales resulted in losses of approximately $2,600,000 and
$1,500,000 in 1999 and 2000, respectively. The $4,447,000 charge included a
$2,237,000 noncash asset impairment write down of fixed assets to estimated
net realizable value and a $1,221,000 accrual for severance and termination
benefits for 16 salaried and 59 hourly employees terminated in connection
with this plan as well as a $989,000 accrual for other exit costs. The
remaining other exit costs will be paid by December 31, 2002. As of
September 30, 2002, one employee remained to assist in the closing of the
mill. The Company is marketing the property and will complete the exit plan
upon the sale of the property, which it anticipates will occur prior to
December 31, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



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##### Table of Contents





| |  | The following is a summary of the Camden and Chicago mills impairment
charges and restructuring reserve activity from January 1, 2001 to
September 30, 2002 (in thousands):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |        |  
|------------------------------------ | ------- | - | ---------- | - | ---------- | - | ----------- | ------ | ---------- | - | ------------- | ----- |  | - | ---- | --- |  | - | ------ | ------ | -
|                                     |         |   | Camden     |   | Chicago    |   |             |        |           
|                                     |         |   |            |   |            |   |             |        |           
|                                     |         |   |            |   |            |   |             |        |            |   | Severance and |       |  |   |      |     |  |   |       
|                                     |         |   |            |   |            |   |             |        |            |   | Other         |       |  |   |      |     |  |   |       
|                                     |         |   | Asset      |   | Asset      |   | Termination |        | Other Exit |   |               |       | 
|                                     |         |   | Impairment |   | Impairment |   | Benefits    |        | Costs      |   | Total        
|                                     |         |   |            |   |            |   |             |        |            |   |              
|2001 provision                       |         |   |           |   |            | $ | 2,237       |        |            | $ | 1,221         |       |  | $ | 989  |     |  | $ | 4,447  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Noncash |   |            |  |            |   |             | (2,237 | )          |   |               |      |  |   |      |    |  |   |        | (2,237 | )
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       
|                                     | Cash    |   |            |  |            |   |             |       |            |   |               | 1,221 |  |   |      | 989 |  |   |        | 2,210  |  
|                                    
|                                    
|                                    
|                                    
|2001 cash activity                   |         |   |           |   |            |   |            |        |            |   | (1,221        | )     |  |   | (597 | )   |  |   | (1,818 | )     
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       
|Balance as of December 31, 2001      |         |   |           |   |            |   |            |        |            |   |              |       |  |   | 392  |     |  |   | 392    |       
|                                    
|                                    
|                                    
|                                    
|First quarter 2002 cash activity     |         |   |           |   |            |   |            |        |            |   |              |       |  |   | (177 | )   |  |   | (177   | )     
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       
|Balance as of March 31, 2002         |         |   |           |   |            |   |            |        |            |   |              |       |  |   | 215  |     |  |   | 215    |       
|                                    
|                                    
|                                    
|                                    
|2002 noncash (benefit) provision     |         | $ | (500       | ) |            |   | 1,485       |        |            |   |              |       |  |   |     |     |  |   | 985    |       
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       
|Second quarter 2002 noncash activity |         |   | 500        |   |            |   | (1,485      | )      |            |   |              |       |  |   |     |     |  |   | (985   | )     
|                                    
|                                    
|                                    
|                                    
|Second quarter 2002 cash activity    |         |   |           |   |            |   |            |        |            |   |              |       |  |   | (4   | )   |  |   | (4     | )     
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       
|Balance as of June 30, 2002          |         |   |           |   |            |   |            |        |            |   |              |       |  |   | 211  |     |  |   | 211    |       
|                                    
|                                    
|                                    
|                                    
|Third quarter 2002 cash activity     |         |   |           |   |            |   |            |        |            |   |              |       |  |   | (18  | )   |  |   | (18    | )     
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       
|Balance as of September 30, 2002     |         | $ |           |   |            | $ |            |        |            | $ |              |       |  | $ | 193  |     |  | $ | 193    |       
|                                     |         |   |            |   |            |   |             |        |            |   |               |       |  |   |      |     |  |   |        |       



| |  | In March 2001, the Company initiated a plan to consolidate the operations
of the Salt Lake City, Utah carton plant into the Denver, Colorado carton
plant and recorded a pretax charge to operations of approximately
$2,636,000. The $2,636,000 charge included a $1,750,000 noncash asset
impairment write down of fixed assets to estimated net realizable value and
a $464,000 accrual for severance and termination benefits for 5 salaried
and 31 hourly employees terminated in connection with this plan as well as
a $422,000 accrual for other exit costs. All exit costs were paid as of
December 31, 2001, and the exit plan was completed.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The second quarter 2002 results include a $985,000 noncash, pre-tax
restructuring charge related to the permanent closure of our Camden and
Chicago paperboard mills, which were shut down in 2000 and 2001,
respectively. The $985,000 charge represents a revised estimate of fixed
asset disposals at these mills. The Chicago mill recorded a $1,485,000
additional provision while the Camden mill overestimated the fixed asset
write-off and recorded a credit of $500,000.                                                                                                                                                                     

Note 10.Litigation



| |  | On March 26, 2002, the Company reached a final settlement with
Georgia-Pacific Corporation concerning the dispute regarding the terms of
the long-term supply agreement that had been the subject of the Companys
previously reported litigation with Georgia-Pacific. The Company and G-P
Gypsum Corporation, a wholly-owned subsidiary of Georgia-Pacific, have
resolved the dispute by entering into a new five-year paperboard supply
agreement that provides that the Company will produce and sell to G-P
Gypsum between 0.378 and 0.756 billion square feet (10,000 to 20,000 tons)
of paper per year to be used in their ToughRock wallboard. This new
paperboard supply agreement supersedes the terms of the tentative
settlement previously announced on May 9, 2001 and the agreement and
transition period that had been a part of that tentative settlement. As a
result of the final settlement, the Companys previously filed suit against
Georgia-Pacific in the General Court of Justice, Superior Court Division of
Mecklenburg County, North Carolina (Case No. 00-CVS-12302), and
Georgia-Pacifics previously reported separate action filed in the Superior
Court of Fulton County, Georgia (Case No. 2000-CV-27684), were each
dismissed with prejudice on April 1 and 2, 2002, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Note 11.Income (Loss) Per Share



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

|                                                                       |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------- |  | ------------------- | ------ | ------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                       |  | Three Months        |        | Nine Months        
|                                                                       |  | Ended September 30, |        | Ended September 30,
|                                                                       |  |                     |        |                    
|                                                                       |  | 2002                |        | 2001                |  | 2002 |        | 2001
|                                                                       |  |                     |        |                     |  |      |        |     
|Calculation of Basic (Loss) Income Per Share:                          |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|(Loss) income before extraordinary loss                                |  | $                   | (4,489 | )                   |  | $    | 955    |      |  | $ | (4,571 | ) |  | $ | (6,800 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Weighted average number of common shares outstanding                   |  |                     | 27,862 |                     |  |      | 27,856 |      |  |   | 27,859 |   |  |   | 27,841 |  
|                                                                       |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|Basic (loss) income per share before extraordinary loss                |  | $                   | (0.16  | )                   |  | $    | 0.03   |      |  | $ | (0.16  | ) |  | $ | (0.24  | )
|                                                                       |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|Calculation of Diluted (Loss) Income Per Share:                        |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|(Loss) income before extraordinary item                                |  | $                   | (4,489 | )                   |  | $    | 955    |      |  | $ | (4,571 | ) |  | $ | (6,800 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Weighted average number of common shares outstanding                   |  |                     | 27,862 |                     |  |      | 27,856 |      |  |   | 27,859 |   |  |   | 27,841 |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Effect of dilutive stock options                                       |  |                     |       |                     |  |      |       |      |  |   |       |   |  |   |       |  
|                                                                       |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares outstanding
assuming dilution |  |                     | 27,862 |                     |  |      | 27,856 |      |  |   | 27,859 |   |  |   | 27,841 |  
|                                                                       |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted (loss) income per share before extraordinary loss              |  | $                   | (0.16  | )                   |  | $    | 0.03   |      |  | $ | (0.16  | ) |  | $ | (0.24  | )
|                                                                       |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        |  



| |  | Approximately 1,360,000 and 1,668,000 common stock equivalents are excluded
from the three month periods ended September 30, 2002 and 2001,
respectively, and approximately 1,533,000 and 1,765,000 common stock
equivalents are excluded from the first nine months of 2002 and 2001,
respectively. These common stock equivalents are excluded because they are
antidilutive.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 12.Guarantor Condensed Consolidating Financial Statements



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

15



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)

|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |          |         | 
|--------------------------------------- | -------------------------------- | ------------------------------------ | ------------------------- | ------ | ------------------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | ------------ | ----- | -------- | ---- | -------- | ---- | --------- | ------- | -------- | ------- | 
|                                        |                                  |                                      |                           |        | As of September 30, 2002
|                                        |                                  |                                      |                           |        |                         
|                                        |                                  |                                      |                           |        |                          |         |              |         | Guarantor    |         | Nonguarantor |        |              |       |          |      |          |      |          
|                                        |                                  |                                      |                           |        | Parent                   |         | Subsidiaries |         | Subsidiaries |         | Eliminations |        | Consolidated
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |             
|ASSETS                                 
|                                       
|                                       
|                                       
|                                       
|CURRENT ASSETS:                         |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |        
|                                       
|                                       
|                                       
|                                       
|                                        | Cash and cash equivalents        |                                      | $                         | 63,664 |                          |         | $            | 150     |              |         | $            | 693    |              |       |          |      |          |      | $         | 64,507  |         
|                                       
|                                       
|                                       
|                                       
|                                        | Intercompany funding             |                                      |                           | 93,480 |                          |         |              | (85,724 | )            |         |              | (7,756 | )            |       |          |      |          |      |           |        |         
|                                       
|                                       
|                                       
|                                       
|                                        | Receivables, net of allowances   |                                      |                           | 8,063  |                          |         |              | 104,807 |              |         |              | 3,730  |              |       |          |      |          |      |           | 116,600 |         
|                                       
|                                       
|                                       
|                                       
|                                        | Intercompany accounts receivable |                                      |                           |       |                          |         |              | 450     |              |         |              | 102    |              |       | $        | (552 | )        |      |           |        |         
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories                      |                                      |                           |       |                          |         |              | 110,925 |              |         |              | 4,407  |              |       |          |      |          |      |           | 115,332 |         
|                                       
|                                       
|                                       
|                                       
|                                        | Refundable income taxes          |                                      |                           | 7,699  |                          |         |              | 139     |              |         |              | 137    |              |       |          |      |          |      |           | 7,975   |         
|                                       
|                                       
|                                       
|                                       
|                                        | Other current assets             |                                      |                           | 16,322 |                          |         |              | 6,078   |              |         |              | 476    |              |       |          |      |          |      |           | 22,876  |         
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|                                        |                                  |                                      | Total current assets      |        |                          | 189,228 |              |         |              | 136,825 |              |        |              | 1,789 |          |      |          | (552 | )         |         |          | 327,290 | 
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|PROPERTY, PLANT AND EQUIPMENT           |                                  |                                      | 11,256                    |        |                          |         | 795,061      |         |              |         | 26,860       |        |              |       |          |      |          |      | 833,177   |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Less accumulated depreciation        |                           |        | (5,964                   | )       |              |         | (359,510     | )       |              |        | (16,528      | )     |          |      |          |      |           |         | (382,002 | )      
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|                                        |                                  | Property, plant and equipment, net   |                           |        | 5,292                    |         |              |         | 435,551      |         |              |        | 10,332       |       |          |      |          |      |           |         | 451,175  |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |                                  |                                      | 592,312                   |        |                          |         | 126,774      |         |              |         |             |        |              |       | (719,086 | )    |          |      |          |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|GOODWILL AND INTANGIBLE ASSETS, net     |                                  |                                      |                          |        |                          |         | 184,242      |         |              |         | 3,099        |        |              |       |          |      |          |      | 187,341   |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |                                  |                                      | 55,465                    |        |                          |         | 738          |         |              |         |             |        |              |       |          |      |          |      | 56,203    |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|OTHER ASSETS                            |                                  |                                      | 32,633                    |        |                          |         | 2,049        |         |              |         | 354          |        |              |       |          |      |          |      | 35,036    |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|                                        |                                  | $                                    | 874,930                   |        |                          | $       | 886,179      |         |              | $       | 15,574       |        |              | $     | (719,638 | )    |          | $    | 1,057,045 |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY   
|                                       
|                                       
|                                       
|                                       
|CURRENT LIABILITIES:                    |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Current maturities of debt           |                           | $      |                         |         |              | $       | 65           |         |              | $      |             |       |          |      |          |      |           | $       | 65       |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Accounts payable                     |                           |        | 20,951                   |         |              |         | 48,598       |         |              |        | 2,576        |       |          |      |          |      |           |         | 72,125   |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Intercompany accounts payable        |                           |        |                         |         |              |         | 102          |         |              |        | 450          |       |          | $    | (552     | )    |           |         |         |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Accrued liabilities                  |                           |        | 19,249                   |         |              |         | 36,409       |         |              |        | 1,027        |       |          |      |          |      |           |         | 56,685   |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|                                        |                                  |                                      | Total current liabilities |        |                          | 40,200  |              |         |              | 85,174  |              |        |              | 4,053 |          |      |          | (552 | )         |         |          | 128,875 | 
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|SENIOR CREDIT FACILITY                  |                                  |                                      | 38,000                    |        |                          |         |             |         |              |         |             |        |              |       |          |      |          |      | 38,000    |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|LONG-TERM DEBT, less current maturities |                                  |                                      | 522,555                   |        |                          |         | 9,880        |         |              |         |             |        |              |       |          |      |          |      | 532,435   |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|DEFERRED INCOME TAXES                   |                                  |                                      | 59,911                    |        |                          |         | 12,242       |         |              |         | 1,391        |        |              |       |          |      |          |      | 73,544    |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|DEFERRED COMPENSATION                   |                                  |                                      | 1,482                     |        |                          |         | 54           |         |              |         |             |        |              |       |          |      |          |      | 1,536     |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|OTHER LIABILITIES                       |                                  |                                      |                          |        |                          |         | 4,699        |         |              |         |             |        |              |       |          |      |          |      | 4,699     |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|MINORITY INTEREST                       |                                  |                                      |                          |        |                          |         |             |         |              |         |             |        |              |       | 822      |      |          |      | 822       |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|SHAREHOLDERS EQUITY:                   |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Common stock                         |                           |        | 2,742                    |         |              |         | 502          |         |              |        | 523          |       |          |      | (978     | )    |           |         | 2,789    |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Additional paid-in capital           |                           |        | 207,730                  |         |              |         | 666,729      |         |              |        | 7,922        |       |          |      | (700,303 | )    |           |         | 182,078  |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Retained earnings                    |                           |        | 2,310                    |         |              |         | 106,899      |         |              |        | 2,333        |       |          |      | (18,627  | )    |           |         | 92,915   |        
|                                       
|                                       
|                                       
|                                       
|                                        |                                  | Accumulated other comprehensive loss |                           |        |                         |         |              |         |             |         |              |        | (648         | )     |          |      |          |      |           |         | (648     | )      
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|                                        |                                  |                                      | 212,782                   |        |                          |         | 774,130      |         |              |         | 10,130       |        |              |       | (719,908 | )    |          |      | 277,134   |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         
|                                        |                                  | $                                    | 874,930                   |        |                          | $       | 886,179      |         |              | $       | 15,574       |        |              | $     | (719,638 | )    |          | $    | 1,057,045 |        
|                                        |                                  |                                      |                           |        |                          |         |              |         |              |         |              |        |              |       |          |      |          |      |           |         |         

16



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)

|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |        |         | 
|--------------------------------------- | ------------------------------------ | ------------------------- | -------------------- | ------- | ----------------------- | ------- | ------------ | -------- | ------------ | ------ | ------------ | ------- | ------------ | ----- | -------- | -------- | ---- | ---- | ------- | -------- | ------ | ------- | 
|                                        |                                      |                           |                      |         | As of December 31, 2001
|                                        |                                      |                           |                      |         |                        
|                                        |                                      |                           |                      |         |                         |         |              |          | Guarantor    |        | Nonguarantor |         |              |       |          |          |      |      |        
|                                        |                                      |                           |                      |         | Parent                  |         | Subsidiaries |          | Subsidiaries |        | Eliminations |         | Consolidated
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |             
|ASSETS                                 
|                                       
|                                       
|                                       
|                                       
|CURRENT ASSETS:                         |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |         
|                                       
|                                       
|                                       
|                                       
|                                        | Cash and cash equivalents            |                           | $                    | 63,277  |                         |         | $            | 432      |              |        | $            | 535     |              |       |          |          |      |      | $       | 64,244   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Intercompany funding                 |                           |                      | 139,496 |                         |         |              | (132,948 | )            |        |              | (6,548  | )            |       |          |          |      |      |         |         |       
|                                       
|                                       
|                                       
|                                       
|                                        | Receivables, net of allowances       |                           |                      | 1,817   |                         |         |              | 81,669   |              |        |              | 2,811   |              |       |          |          |      |      |         | 86,297   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Intercompany accounts receivable     |                           |                      |        |                         |         |              | 270      |              |        |              | 288     |              |       | $        | (558     | )    |      |         |         |       
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories                          |                           |                      |        |                         |         |              | 98,063   |              |        |              | 3,760   |              |       |          |          |      |      |         | 101,823  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Refundable income taxes              |                           |                      | 17,689  |                         |         |              | 140      |              |        |              | 120     |              |       |          |          |      |      |         | 17,949   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Other current assets                 |                           |                      | 12,168  |                         |         |              | 3,648    |              |        |              | 640     |              |       |          |          |      |      |         | 16,456   |       
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|                                        |                                      |                           | Total current assets |         |                         | 234,447 |              |          |              | 51,274 |              |         |              | 1,606 |          |          |      | (558 | )       |          |        | 286,769 | 
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|PROPERTY, PLANT AND EQUIPMENT           |                                      |                           | 9,830                |         |                         |         | 753,133      |          |              |        | 25,401       |         |              |       |          |          |      |      | 788,364 |         
|                                       
|                                       
|                                       
|                                       
|                                        | Less accumulated depreciation        |                           |                      | (4,523  | )                       |         |              | (318,010 | )            |        |              | (15,455 | )            |       |          |          |      |      |         | (337,988 | )     
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|                                        | Property, plant and equipment, net   |                           |                      | 5,307   |                         |         |              | 435,123  |              |        |              | 9,946   |              |       |          |          |      |      |         | 450,376  |       
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |                                      |                           | 522,958              |         |                         |         | 126,774      |          |              |        |             |         |              |       | (649,732 | )        |      |      |        |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|GOODWILL AND INTANGIBLE ASSETS, net     |                                      |                           |                     |         |                         |         | 145,515      |          |              |        | 950          |         |              |       |          |          |      |      | 146,465 |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |                                      |                           | 60,134               |         |                         |         | 2,151        |          |              |        |             |         |              |       |          |          |      |      | 62,285  |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|OTHER ASSETS                            |                                      |                           | 12,289               |         |                         |         | 2,754        |          |              |        | 43           |         |              |       |          |          |      |      | 15,086  |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|                                        |                                      | $                         | 835,135              |         |                         | $       | 763,591      |          |              | $      | 12,545       |         |              | $     | (650,290 | )        |      | $    | 960,981 |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|LIABILITIES AND SHAREHOLDERS EQUITY   
|                                       
|                                       
|                                       
|                                       
|CURRENT LIABILITIES:                    |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |         
|                                       
|                                       
|                                       
|                                       
|                                        | Current maturities of debt           |                           | $                    |        |                         |         | $            | 48       |              |        | $            |        |              |       |          |          |      |      | $       | 48       |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts payable                     |                           |                      | 16,861  |                         |         |              | 32,866   |              |        |              | 2,406   |              |       |          |          |      |      |         | 52,133   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Intercompany accounts payable        |                           |                      |        |                         |         |              | 288      |              |        |              | 270     |              |       | $        | (558     | )    |      |         |         |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued liabilities                  |                           |                      | 8,371   |                         |         |              | 28,596   |              |        |              | 782     |              |       |          |          |      |      |         | 37,749   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Dividends payable                    |                           |                      | 833     |                         |         |              |         |              |        |              |        |              |       |          |          |      |      |         | 833      |       
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|                                        |                                      | Total current liabilities |                      |         | 26,065                  |         |              |          | 61,798       |        |              |         | 3,458        |       |          |          | (558 | )    |         |          | 90,763 |        
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|LONG-TERM DEBT, less current maturities |                                      |                           | 500,491              |         |                         |         | 8,200        |          |              |        |             |         |              |       |          |          |      |      | 508,691 |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|DEFERRED INCOME TAXES                   |                                      |                           | 53,366               |         |                         |         | 12,244       |          |              |        | 1,150        |         |              |       |          |          |      |      | 66,760  |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|DEFERRED COMPENSATION                   |                                      |                           | 1,687                |         |                         |         | 54           |          |              |        |             |         |              |       |          |          |      |      | 1,741   |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|OTHER LIABILITIES                       |                                      |                           | 8,475                |         |                         |         | 4,037        |          |              |        |             |         |              |       |          |          |      |      | 12,512  |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|MINORITY INTEREST                       |                                      |                           |                     |         |                         |         |             |          |              |        |             |         |              |       | 935      |          |      |      | 935     |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|SHAREHOLDERS EQUITY:                   |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |         
|                                       
|                                       
|                                       
|                                       
|                                        | Common stock                         |                           |                      | 2,738   |                         |         |              | 883      |              |        |              | 142     |              |       |          | (978     | )    |      |         | 2,785    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Additional paid-in capital           |                           |                      | 207,241 |                         |         |              | 598,597  |              |        |              | 5,227   |              |       |          | (630,949 | )    |      |         | 180,116  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Retained earnings                    |                           |                      | 35,072  |                         |         |              | 77,778   |              |        |              | 3,378   |              |       |          | (18,740  | )    |      |         | 97,488   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accumulated other comprehensive loss |                           |                      |        |                         |         |              |         |              |        |              | (810    | )            |       |          |          |      |      |         | (810     | )     
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|                                        |                                      |                           | 245,051              |         |                         |         | 677,258      |          |              |        | 7,937        |         |              |       | (650,667 | )        |      |      | 279,579 |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       
|                                        |                                      | $                         | 835,135              |         |                         | $       | 763,591      |          |              | $      | 12,545       |         |              | $     | (650,290 | )        |      | $    | 960,981 |         
|                                        |                                      |                           |                      |         |                         |         |              |          |              |        |              |         |              |       |          |          |      |      |         |          |       

17



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)

|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |        | 
|------------------------------------------------------- | ----------------------- | - | --------------------------------------------- | ------ | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ----- | - | - | ------- | - |  | - | ------- | ------ | 
|                                                        |                         |   | For The Three Months Ended September 30, 2002
|                                                        |                         |   |                                              
|                                                        |                         |   |                                               |        |              |   | Guarantor    |        | Nonguarantor |   |              |       |   |   |         |   | 
|                                                        |                         |   | Parent                                        |        | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Consolidated
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |             
|SALES                                                   |                         | $ |                                              |        |              | $ | 280,887      |        |              | $ | 6,185        |       |   | $ | (47,056 | ) |  | $ | 240,016 |       
|                                                       
|                                                       
|                                                       
|                                                       
|COST OF SALES                                           |                         |   | (47                                           | )      |              |   | 229,632      |        |              |   | 4,793        |       |   |   | (47,056 | ) |  |   | 187,322 |       
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       
|                                                        | Gross profit            |   |                                               | 47     |              |   |              | 51,255 |              |   |              | 1,392 |   |   |         |  |  |   |         | 52,694 | 
|                                                       
|                                                       
|                                                       
|                                                       
|FREIGHT COSTS                                           |                         |   |                                              |        |              |   | 14,218       |        |              |   | 264          |       |   |   |         |   |  |   | 14,482  |       
|                                                       
|                                                       
|                                                       
|                                                       
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES            |                         |   | 4,525                                         |        |              |   | 31,580       |        |              |   | 1,248        |       |   |   |         |   |  |   | 37,353  |       
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       
|                                                        | Operating (loss) income |   |                                               | (4,478 | )            |   |              | 5,457  |              |   |              | (120  | ) |   |         |  |  |   |         | 859    | 
|                                                       
|                                                       
|                                                       
|                                                       
|OTHER (EXPENSE) INCOME:                                 |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       
|                                                       
|                                                       
|                                                       
|                                                       
|Interest expense                                        |                         |   | (9,347                                        | )      |              |   | (75          | )      |              |   | (100         | )     |   |   | 91      |   |  |   | (9,431  | )     
|                                                       
|                                                       
|                                                       
|                                                       
|Interest income                                         |                         |   | 588                                           |        |              |   | (5           | )      |              |   | 1            |       |   |   | (91     | ) |  |   | 493     |       
|                                                       
|                                                       
|                                                       
|                                                       
|Equity in income (loss) of
unconsolidated affiliates    |                         |   | 870                                           |        |              |   | (44          | )      |              |   |             |       |   |   |         |   |  |   | 826     |       
|                                                       
|                                                       
|                                                       
|                                                       
|Other, net                                              |                         |   |                                              |        |              |   | 54           |        |              |   | (15          | )     |   |   |         |   |  |   | 39      |       
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       
|                                                        |                         |   | (7,889                                        | )      |              |   | (70          | )      |              |   | (114         | )     |   |   |        |   |  |   | (8,073  | )     
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       
|(LOSS) INCOME BEFORE MINORITY
INTEREST AND INCOME TAXES |                         |   | (12,367                                       | )      |              |   | 5,387        |        |              |   | (234         | )     |   |   |        |   |  |   | (7,214  | )     
|                                                       
|                                                       
|                                                       
|                                                       
|MINORITY INTEREST IN LOSSES                             |                         |   |                                              |        |              |   |             |        |              |   |             |       |   |   | 35      |   |  |   | 35      |       
|                                                       
|                                                       
|                                                       
|                                                       
|BENEFIT FOR INCOME TAXES                                |                         |   | (2,690                                        | )      |              |   |             |        |              |   |             |       |   |   |         |   |  |   | (2,690  | )     
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       
|NET (LOSS) INCOME                                       |                         | $ | (9,677                                        | )      |              | $ | 5,387        |        |              | $ | (234         | )     |   | $ | 35      |   |  | $ | (4,489  | )     
|                                                        |                         |   |                                               |        |              |   |              |        |              |   |              |       |   |   |         |   |  |   |         |       

18



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)

|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |        | 
|------------------------------------------------------- | ----------------------- | - | --------------------------------------------- | ----- | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ---- | - | - | ------- | - |  | - | ------- | ------ | 
|                                                        |                         |   | For The Three Months Ended September 30, 2001
|                                                        |                         |   |                                              
|                                                        |                         |   |                                               |       |              |   | Guarantor    |        | Nonguarantor |   |              |      |   |   |         |   | 
|                                                        |                         |   | Parent                                        |       | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Consolidated
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |             
|SALES                                                   |                         | $ |                                              |       |              | $ | 269,068      |        |              | $ | 5,211        |      |   | $ | (39,428 | ) |  | $ | 234,851 |       
|                                                       
|                                                       
|                                                       
|                                                       
|COST OF SALES                                           |                         |   | (5,700                                        | )     |              |   | 213,683      |        |              |   | 4,252        |      |   |   | (39,428 | ) |  |   | 172,807 |       
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       
|                                                        | Gross profit            |   |                                               | 5,700 |              |   |              | 55,385 |              |   |              | 959  |   |   |         |  |  |   |         | 62,044 | 
|                                                       
|                                                       
|                                                       
|                                                       
|FREIGHT COSTS                                           |                         |   |                                              |       |              |   | 13,673       |        |              |   | 196          |      |   |   |         |   |  |   | 13,869  |       
|                                                       
|                                                       
|                                                       
|                                                       
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES            |                         |   | 2,361                                         |       |              |   | 33,335       |        |              |   | 1,136        |      |   |   |         |   |  |   | 36,832  |       
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       
|                                                        | Operating (loss) income |   |                                               | 3,339 |              |   |              | 8,377  |              |   |              | (373 | ) |   |         |  |  |   |         | 11,343 | 
|                                                       
|                                                       
|                                                       
|                                                       
|OTHER (EXPENSE) INCOME:                                 |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       
|                                                       
|                                                       
|                                                       
|                                                       
|Interest expense                                        |                         |   | (10,300                                       | )     |              |   | (160         | )      |              |   | (252         | )    |   |   | 319     |   |  |   | (10,393 | )     
|                                                       
|                                                       
|                                                       
|                                                       
|Interest income                                         |                         |   | 631                                           |       |              |   | 3            |        |              |   | 4            |      |   |   | (319    | ) |  |   | 319     |       
|                                                       
|                                                       
|                                                       
|                                                       
|Equity in income (loss) of unconsolidated affiliates    |                         |   | 963                                           |       |              |   | (27          | )      |              |   |             |      |   |   |         |   |  |   | 936     |       
|                                                       
|                                                       
|                                                       
|                                                       
|Other, net                                              |                         |   |                                              |       |              |   | (42          | )      |              |   | (56          | )    |   |   |         |   |  |   | (98     | )     
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       
|                                                        |                         |   | (8,706                                        | )     |              |   | (226         | )      |              |   | (304         | )    |   |   |        |   |  |   | (9,236  | )     
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       
|(LOSS) INCOME BEFORE MINORITY
INTEREST AND INCOME TAXES |                         |   | (5,367                                        | )     |              |   | 8,151        |        |              |   | (677         | )    |   |   |        |   |  |   | 2,107   |       
|                                                       
|                                                       
|                                                       
|                                                       
|MINORITY INTEREST IN LOSSES                             |                         |   |                                              |       |              |   |             |        |              |   |             |      |   |   | 120     |   |  |   | 120     |       
|                                                       
|                                                       
|                                                       
|                                                       
|PROVISION FOR INCOME TAXES                              |                         |   | 1,272                                         |       |              |   |             |        |              |   |             |      |   |   |        |   |  |   | 1,272   |       
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       
|NET (LOSS) INCOME                                       |                         | $ | (6,639                                        | )     |              | $ | 8,151        |        |              | $ | (677         | )    |   | $ | 120     |   |  | $ | 955     |       
|                                                        |                         |   |                                               |       |              |   |              |        |              |   |              |      |   |   |         |   |  |   |         |       

19



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##### Table of Contents



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)

|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |         | 
|------------------------------------------------------- | ----------------------- | - | -------------------------------------------- | ------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ----- | - | - | -------- | - |  | - | ------- | ------- | 
|                                                        |                         |   | For The Nine Months Ended September 30, 2002
|                                                        |                         |   |                                             
|                                                        |                         |   |                                              |         |              |   | Guarantor    |         | Nonguarantor |   |              |       |   |   |          |   | 
|                                                        |                         |   | Parent                                       |         | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |             
|SALES                                                   |                         | $ |                                             |         |              | $ | 806,540      |         |              | $ | 17,960       |       |   | $ | (129,101 | ) |  | $ | 695,399 |        
|                                                       
|                                                       
|                                                       
|                                                       
|COST OF SALES                                           |                         |   | (141                                         | )       |              |   | 642,189      |         |              |   | 14,057       |       |   |   | (129,101 | ) |  |   | 527,004 |        
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        
|                                                        | Gross profit            |   |                                              | 141     |              |   |              | 164,351 |              |   |              | 3,903 |   |   |          |  |  |   |         | 168,395 | 
|                                                       
|                                                       
|                                                       
|                                                       
|FREIGHT COSTS                                           |                         |   |                                             |         |              |   | 41,468       |         |              |   | 744          |       |   |   |          |   |  |   | 42,212  |        
|                                                       
|                                                       
|                                                       
|                                                       
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES            |                         |   | 11,578                                       |         |              |   | 92,399       |         |              |   | 3,767        |       |   |   |          |   |  |   | 107,744 |        
|                                                       
|                                                       
|                                                       
|                                                       
|RESTRUCTURING COSTS                                     |                         |   |                                             |         |              |   | 985          |         |              |   |             |       |   |   |          |   |  |   | 985     |        
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        
|                                                        | Operating (loss) income |   |                                              | (11,437 | )            |   |              | 29,499  |              |   |              | (608  | ) |   |          |  |  |   |         | 17,454  | 
|                                                       
|                                                       
|                                                       
|                                                       
|OTHER (EXPENSE) INCOME:                                 |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        
|                                                       
|                                                       
|                                                       
|                                                       
|Interest expense                                        |                         |   | (27,855                                      | )       |              |   | (242         | )       |              |   | (301         | )     |   |   | 288      |   |  |   | (28,110 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|Interest income                                         |                         |   | 1,636                                        |         |              |   | 9            |         |              |   | 4            |       |   |   | (288     | ) |  |   | 1,361   |        
|                                                       
|                                                       
|                                                       
|                                                       
|Equity in income (loss) of
unconsolidated affiliates    |                         |   | 1,987                                        |         |              |   | (126         | )       |              |   |             |       |   |   |          |   |  |   | 1,861   |        
|                                                       
|                                                       
|                                                       
|                                                       
|Other, net                                              |                         |   | 87                                           |         |              |   | (19          | )       |              |   | (140         | )     |   |   |          |   |  |   | (72     | )      
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        
|                                                        |                         |   | (24,145                                      | )       |              |   | (378         | )       |              |   | (437         | )     |   |   |         |   |  |   | (24,960 | )      
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY
INTEREST AND INCOME TAXES |                         |   | (35,582                                      | )       |              |   | 29,121       |         |              |   | (1,045       | )     |   |   |         |   |  |   | (7,506  | )      
|                                                       
|                                                       
|                                                       
|                                                       
|MINORITY INTEREST IN LOSSES                             |                         |   |                                             |         |              |   |             |         |              |   |             |       |   |   | 113      |   |  |   | 113     |        
|                                                       
|                                                       
|                                                       
|                                                       
|BENEFIT FOR INCOME TAXES                                |                         |   | (2,822                                       | )       |              |   |             |         |              |   |             |       |   |   |          |   |  |   | (2,822  | )      
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        
|NET (LOSS) INCOME                                       |                         | $ | (32,760                                      | )       |              | $ | 29,121       |         |              | $ | (1,045       | )     |   | $ | 113      |   |  | $ | (4,571  | )      
|                                                        |                         |   |                                              |         |              |   |              |         |              |   |              |       |   |   |          |   |  |   |         |        

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)

|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |         | 
|--------------------------------------------------------------------------- | ----------------------- | - | -------------------------------------------- | ------ | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ------ | - | - | -------- | - |  | - | ------- | ------- | 
|                                                                            |                         |   | For The Nine Months Ended September 30, 2001
|                                                                            |                         |   |                                             
|                                                                            |                         |   |                                              |        |              |   | Guarantor    |         | Nonguarantor |   |              |        |   |   |          |   | 
|                                                                            |                         |   | Parent                                       |        | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |             
|SALES                                                                       |                         | $ |                                             |        |              | $ | 795,164      |         |              | $ | 17,415       |        |   | $ | (114,881 | ) |  | $ | 697,698 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|COST OF SALES                                                               |                         |   | (5,672                                       | )      |              |   | 623,604      |         |              |   | 13,778       |        |   |   | (114,881 | ) |  |   | 516,829 |        
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                                            | Gross profit            |   |                                              | 5,672  |              |   |              | 171,560 |              |   |              | 3,637  |   |   |          |  |  |   |         | 180,869 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|FREIGHT COSTS                                                               |                         |   |                                             |        |              |   | 39,695       |         |              |   | 604          |        |   |   |          |   |  |   | 40,299  |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES                                |                         |   | 10,281                                       |        |              |   | 95,071       |         |              |   | 4,509        |        |   |   |          |   |  |   | 109,861 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|RESTRUCTURING COSTS                                                         |                         |   |                                             |        |              |   | 7,083        |         |              |   |             |        |   |   |          |   |  |   | 7,083   |        
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                                            | Operating (loss) income |   |                                              | (4,609 | )            |   |              | 29,711  |              |   |              | (1,476 | ) |   |          |  |  |   |         | 23,626  | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|OTHER (EXPENSE) INCOME:                                                     |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest expense                                                            |                         |   | (30,846                                      | )      |              |   | (795         | )       |              |   | (261         | )      |   |   | 743      |   |  |   | (31,159 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest income                                                             |                         |   | 1,322                                        |        |              |   | 30           |         |              |   | 15           |        |   |   | (743     | ) |  |   | 624     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Equity in loss of unconsolidated
affiliates                                 |                         |   | (1,748                                       | )      |              |   | (51          | )       |              |   |             |        |   |   |          |   |  |   | (1,799  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other, net                                                                  |                         |   |                                             |        |              |   | (543         | )       |              |   | (68          | )      |   |   |          |   |  |   | (611    | )      
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|                                                                            |                         |   | (31,272                                      | )      |              |   | (1,359       | )       |              |   | (314         | )      |   |   |         |   |  |   | (32,945 | )      
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY
INTEREST, INCOME TAXES AND
EXTRAORDINARY LOSS |                         |   | (35,881                                      | )      |              |   | 28,352       |         |              |   | (1,790       | )      |   |   |         |   |  |   | (9,319  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|MINORITY INTEREST IN LOSSES                                                 |                         |   |                                             |        |              |   |             |         |              |   |             |        |   |   | 157      |   |  |   | 157     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|BENEFIT FOR INCOME TAXES                                                    |                         |   | (2,362                                       | )      |              |   |             |         |              |   |             |        |   |   |          |   |  |   | (2,362  | )      
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|(LOSS) INCOME BEFORE EXTRAORDINARY
LOSS                                     |                         |   | (33,519                                      | )      |              |   | 28,352       |         |              |   | (1,790       | )      |   |   | 157      |   |  |   | (6,800  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX
BENEFIT    |                         |   | (2,695                                       | )      |              |   |             |         |              |   |             |        |   |   |          |   |  |   | (2,695  | )      
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        
|NET (LOSS) INCOME                                                           |                         | $ | (36,214                                      | )      |              | $ | 28,352       |         |              | $ | (1,790       | )      |   | $ | 157      |   |  | $ | (9,495  | )      
|                                                                            |                         |   |                                              |        |              |   |              |         |              |   |              |        |   |   |          |   |  |   |         |        

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)

|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|--------------------------------------------------- |  | -------------------------------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ---- | - |  | - | - |  |  | - | ------- | -
|                                                    |  | For The Nine Months Ended September 30, 2002
|                                                    |  |                                             
|                                                    |  |                                              |         |              |  | Guarantor    |         | Nonguarantor |  |              |      |   |  |   |   | 
|                                                    |  | Parent                                       |         | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Consolidated
|                                                    |  |                                              |         |              |  |              |         |              |  |             
|Net cash (used in) provided by operating
activities |  | $                                            | (26,302 | )            |  | $            | 81,352  |              |  | $            | 869  |   |  | $ |  |  |  | $ | 55,919  |  
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|Investing activities:                               |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|Purchases of property, plant and
equipment          |  |                                              | (1,284  | )            |  |              | (14,273 | )            |  |              | (569 | ) |  |   |   |  |  |   | (16,126 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Acquisitions of businesses, net of
cash acquired    |  |                                              |        |              |  |              | (69,029 | )            |  |              | (115 | ) |  |   |   |  |  |   | (69,144 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Other                                               |  |                                              | (833    | )            |  |              | 1,716   |              |  |              | (27  | ) |  |   |   |  |  |   | 856     |  
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|Net cash used in investing activities               |  |                                              | (2,117  | )            |  |              | (81,586 | )            |  |              | (711 | ) |  |   |  |  |  |   | (84,414 | )
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|Financing activities:                               |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|Borrowings from senior credit facility              |  |                                              | 38,000  |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   | 38,000  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Repayments of other long and short-term
debt        |  |                                              | (6,580  | )            |  |              | (48     | )            |  |              |     |   |  |   |   |  |  |   | (6,628  | )
|                                                   
|                                                   
|                                                   
|                                                   
|Dividends paid                                      |  |                                              | (833    | )            |  |              |        |              |  |              |     |   |  |   |   |  |  |   | (833    | )
|                                                   
|                                                   
|                                                   
|                                                   
|Other                                               |  |                                              | (1,781  | )            |  |              |        |              |  |              |     |   |  |   |   |  |  |   | (1,781  | )
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|Net
cash provided by (used in) financing activities |  |                                              | 28,806  |              |  |              | (48     | )            |  |              |     |   |  |   |  |  |  |   | 28,758  |  
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|Net change in cash and cash
equivalents             |  |                                              | 387     |              |  |              | (282    | )            |  |              | 158  |   |  |   |   |  |  |   | 263     |  
|                                                   
|                                                   
|                                                   
|                                                   
|Cash and cash equivalents at
beginning of period    |  |                                              | 63,277  |              |  |              | 432     |              |  |              | 535  |   |  |   |   |  |  |   | 64,244  |  
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  
|Cash and cash equivalents at end of
period          |  | $                                            | 63,664  |              |  | $            | 150     |              |  | $            | 693  |   |  | $ |  |  |  | $ | 64,507  |  
|                                                    |  |                                              |         |              |  |              |         |              |  |              |      |   |  |   |   |  |  |   |         |  

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)

|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|--------------------------------------------------------- |  | -------------------------------------------- | -------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------ | - |  | - | - |  |  | - | -------- | -
|                                                          |  | For The Nine Months Ended September 30, 2001
|                                                          |  |                                             
|                                                          |  |                                              |          |              |  | Guarantor    |         | Nonguarantor |  |              |        |   |  |   |   | 
|                                                          |  | Parent                                       |          | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Consolidated
|                                                          |  |                                              |          |              |  |              |         |              |  |             
|Net cash provided by
operating activities                 |  | $                                            | 24,707   |              |  | $            | 20,964  |              |  | $            | 974    |   |  | $ |  |  |  | $ | 46,645   |  
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|Investing activities:                                     |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|                                                         
|                                                         
|                                                         
|                                                         
|Purchases of property, plant and
equipment                |  |                                              | (1,201   | )            |  |              | (20,120 | )            |  |              | (1,179 | ) |  |   |   |  |  |   | (22,500  | )
|                                                         
|                                                         
|                                                         
|                                                         
|Acquisitions of businesses, net of
cash acquired          |  |                                              |         |              |  |              | (34     | )            |  |              |       |   |  |   |   |  |  |   | (34      | )
|                                                         
|                                                         
|                                                         
|                                                         
|Other                                                     |  |                                              | 803      |              |  |              | (66     | )            |  |              | (165   | ) |  |   |   |  |  |   | 572      |  
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|Net cash used in investing activities                     |  |                                              | (398     | )            |  |              | (20,220 | )            |  |              | (1,344 | ) |  |   |  |  |  |   | (21,962  | )
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|Financing activities:                                     |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|                                                         
|                                                         
|                                                         
|                                                         
|Proceeds from senior credit facility                      |  |                                              | 18,000   |              |  |              |        |              |  |              |       |   |  |   |   |  |  |   | 18,000   |  
|                                                         
|                                                         
|                                                         
|                                                         
|Repayments of senior credit facility                      |  |                                              | (212,000 | )            |  |              |        |              |  |              |       |   |  |   |   |  |  |   | (212,000 | )
|                                                         
|                                                         
|                                                         
|                                                         
|Proceeds from the issuance of the 7 1/4%
and 9 7/8% notes |  |                                              | 291,200  |              |  |              |        |              |  |              |       |   |  |   |   |  |  |   | 291,200  |  
|                                                         
|                                                         
|                                                         
|                                                         
|Repayments of other long and short-term
debt              |  |                                              | (66,200  | )            |  |              | (910    | )            |  |              |       |   |  |   |   |  |  |   | (67,110  | )
|                                                         
|                                                         
|                                                         
|                                                         
|7.74% senior notes prepayment penalty                     |  |                                              | (3,565   | )            |  |              |        |              |  |              |       |   |  |   |   |  |  |   | (3,565   | )
|                                                         
|                                                         
|                                                         
|                                                         
|Dividends paid                                            |  |                                              | (8,037   | )            |  |              |        |              |  |              |       |   |  |   |   |  |  |   | (8,037   | )
|                                                         
|                                                         
|                                                         
|                                                         
|Other                                                     |  |                                              | (1,661   | )            |  |              | (165    | )            |  |              |       |   |  |   |   |  |  |   | (1,826   | )
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|Net cash provided by (used in)
financing activities       |  |                                              | 17,737   |              |  |              | (1,075  | )            |  |              |       |   |  |   |  |  |  |   | 16,662   |  
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|Net change in cash and cash
equivalents                   |  |                                              | 42,046   |              |  |              | (331    | )            |  |              | (370   | ) |  |   |   |  |  |   | 41,345   |  
|                                                         
|                                                         
|                                                         
|                                                         
|Cash and cash equivalents at
beginning of period          |  |                                              | 7,338    |              |  |              | 536     |              |  |              | 1,026  |   |  |   |   |  |  |   | 8,900    |  
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  
|Cash and cash equivalents at end of
period                |  | $                                            | 49,384   |              |  | $            | 205     |              |  | $            | 656    |   |  | $ |  |  |  | $ | 50,245   |  
|                                                          |  |                                              |          |              |  |              |         |              |  |              |        |   |  |   |   |  |  |   |          |  

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Note 13.Subsequent Event



| |  | In November 2002, the Company unwound $50,000,000 of its $185,000,000
interest rate swap agreement related to the 9 7/8 percent senior subordinated
notes, and received approximately $2,800,000 from the bank counter-party.
Simultaneously, the Company unwound $50,000,000 of one of its interest rate
swap agreements related to the 7 3/8 percent senior notes, and received
approximately $3,400,000. The $6,200,000 gain will be accreted to interest expense over
the life of the notes and will partially offset the increase in interest
expense. The Company executed these transactions in order to take
advantage of market conditions.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 38% in the first nine months of 2002. The remaining 62% of our
paperboard production is sold to external customers in any of the four recycled
paperboard end-use markets: tube, core and composite containers; folding
cartons; gypsum wallboard facing paper and other specialty products. As part of
our strategy to maintain optimum levels of production capacity, each of our
mills can produce recycled paperboard for more than one end-use market. This
allows us to shift production between mills in response to customer or market
demands.

Recovered fiber, which is derived from recycled paper stock, is our most
significant raw material. Historically, the cost of recovered fiber has
fluctuated significantly due to market and industry conditions. For example,
our average recovered fiber cost per ton of paperboard produced increased from
$43 per ton in 1993 to $144 per ton in 1995, an increase of 235%, before
dropping to $66 per ton in 1996. Same-mill recovered fiber cost per ton
averaged $65 during 2001 and $84 during the first nine months of 2002.

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

Excluding labor, energy is our most significant manufacturing cost. Energy
consists of electrical purchases and fuel used to generate steam used in the
paper making process and to operate our paperboard machines and all of our
other converting machinery. Our energy costs increased steadily throughout 2000
and the first quarter of 2001 before showing some improvement by the end of
2001. In 2001, the average energy cost in our mill system was approximately $57
per ton. During the first nine months of 2002, energy costs decreased 16.0% to
approximately $48 per ton. The decrease was due primarily to decreases in
natural gas and fuel oil costs. Until recently, our business had not been
significantly affected by energy costs, and we historically have not passed
increases in energy costs through to our customers. Consequently, we were not
able to pass through to our customers all of the energy cost increases we
incurred in 2000 and 2001. As a result, our operating margins were adversely
affected. We continue to evaluate our energy costs and consider ways to factor
energy costs into our pricing. However, we cannot give assurance that our
operating margins and results of operations will not continue to be adversely
affected by rising energy costs.

Historically, we have grown our business, revenues and production capacity to a
significant degree through acquisitions. Based on the difficult operating
climate for our industry and our financial position over the last two

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##### Table of Contents



years, the pace of our acquisition activity, and accordingly, our revenue
growth, has slowed as we have focused on maximizing the productivity of our
existing facilities. However, we recently purchased our joint venture partners
interest in our Design Tubes Company Limited Canadian joint venture and
acquired substantially all of the assets of Smurfit-Stones Industrial
Packaging Group, see Liquidity and Capital Resources Acquisitions.

We are a holding company that currently operates our business through 22
subsidiaries. We also own a 50% interest in two joint ventures with
Temple-Inland, Inc. We have an additional joint venture with an unrelated
entity in which our investment and share of earnings are immaterial. We account
for these interests in our joint ventures under the equity method of
accounting. See  Liquidity and Capital Resources below.

Critical Accounting Policies

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

Revenue Recognition.We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
(SAB 101). SAB 101 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the selling price is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criterion (4) is
based on managements judgments regarding the collectibility of our accounts
receivable. Generally, we recognize revenue when we ship our manufactured
products or when we complete a service.

Accounts Receivable.We perform ongoing credit evaluations of our customers and
adjust credit limits based on payment history and the customers current
creditworthiness, as determined by our review of their current credit
information. We continuously monitor collections from our customers and
maintain a provision for estimated credit losses based on our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past.

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

Impairment of Long-Lived Assets and Goodwill.We periodically evaluate acquired
businesses for potential impairment indicators. Effective January 1, 2002 we
adopted SFAS No. 142, Goodwill and Other Intangible Assets. This
pronouncement requires us to perform a goodwill impairment test at least
annually. See Note 8 of Notes to Condensed Consolidated Financial Statements
for additional information regarding our goodwill accounting. Our judgments
regarding the existence of impairment indicators are based on legal factors,
market conditions and operational performance of our acquired businesses.
Future events could cause us to conclude that impairment indicators exist and
that goodwill associated with our acquired businesses is impaired. Evaluating
the impairment of goodwill also requires us to estimate future operating
results and cash flows, which also require judgment by management. Any
resulting impairment loss could have a material adverse impact on our net
income and our balance sheet.

Self-Insurance.We are self-insured for the majority of our workers
compensation costs and group health insurance costs, subject to specific
retention levels. Consulting actuaries and administrators assist us in
determining our liability for self-insured claims. While we believe that our
assumptions are appropriate, significant differences in our

26



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##### Table of Contents



actual experience or significant changes in our assumptions may materially
affect our workers compensation costs and group health insurance costs.

Accounting for Income Taxes.As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure, together with assessing temporary
differences resulting from differing treatment of items for tax and financial
reporting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.

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

Pension and Other Postretirement Benefits.The determination of our obligation
and expense for pension and other postretirement benefits is dependent on our
selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in compensation and
healthcare costs. In accordance with generally accepted accounting principles,
actual results that differ from our assumptions are accumulated and amortized
over future periods and therefore, generally affect our recognized expense,
recorded obligation and funding requirements in future periods. While we
believe that our assumptions are appropriate, significant differences in our
actual experience or significant changes in our assumptions may materially
affect our pension and other postretirement benefit obligations and our future
expense. Additionally, a significant decline in the value of pension plan
assets could potentially result in eliminating our prepaid position and reduce
our shareholders equity significantly (see Liquidity Sources and Risks
below).

Depreciation.Management is required to make estimates regarding useful lives
and salvage values of acquired assets. These estimates can significantly
impact depreciation expense and accordingly, both net income and the asset
values reflected on the balance sheet. As a result of our acquisition of the
Smurfit Industrial Packaging Group facilities and managements own review of
our estimated useful lives for depreciation of machinery and equipment, we have
initiated a study by independent professional valuation advisors to determine
the appropriate remaining estimated useful lives for the newly acquired assets
and for our existing machinery and equipment. We expect the study to be
completed in the fourth quarter of 2002. Any adjustment to the estimated
useful lives of our existing machinery and equipment would be reflected in
future periods.

27



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##### Table of Contents



Three Months Ended September 30, 2002 and 2001

The following table shows volume, gross paper margins and related data for the
periods indicated. The volume information shown below includes shipments of
unconverted paperboard and converted paperboard products. Tonnage volumes from
our business segments, excluding tonnage produced or converted by our
unconsolidated joint ventures, are combined and presented along end-use market
lines. Additional financial information is reported by segment in Note 7 to the
consolidated financial statements.

|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |       |       |  
|--------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------- |  | ------------- | ----- | ---- |  | ------ | ----- | ------ |  | ---- | ---- | - |  | ----- | ----- | -
|                                                          |                                                       |                                           |  | Three Months  |       |      |  |        |       |        |  |     
|                                                          |                                                       |                                           |  | Ended         |       |      |  |        |       |        |  |     
|                                                          |                                                       |                                           |  | September 30, |       |      |  |        |       | %     
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |     
|                                                          |                                                       |                                           |  | 2002          |       | 2001 |  | Change |       | Change
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |       
|Production source of paperboard tons sold (in thousands): |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | From paperboard mill production                       |                                           |  | 238.6         |       |      |  | 231.4  |       |        |  | 7.2  |      |   |  | 3.1   | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Outside purchases                                     |                                           |  | 36.6          |       |      |  | 30.9   |       |        |  | 5.7  |      |   |  | 18.4  | %    
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Total paperboard tonnage                  |  |               | 275.2 |      |  |        | 262.3 |        |  |      | 12.9 |   |  |       | 4.9   | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          | Tons sold by market (in thousands):                   |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |       |      
|                                                         
|                                                         
|                                                         
|                                                         
|Tube, core and composite container volume                
|                                                          |                                                       | Paperboard (internal)                     |  |               | 49.9  |      |  |        | 47.2  |        |  |      | 2.7  |   |  |       | 5.7   | %
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Outside purchases                         |  |               | 8.8   |      |  |        | 5.9   |        |  |      | 2.9  |   |  |       | 49.2  | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          | Tube, core and composite container converted products |                                           |  | 58.7          |       |      |  | 53.1   |       |        |  | 5.6  |      |   |  | 10.5  | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unconverted paperboard                                |                                           |  | 10.1          |       |      |  | 8.5    |       |        |  | 1.6  |      |   |  | 18.8  | %    
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Tube, core and composite container volume |  |               | 68.8  |      |  |        | 61.6  |        |  |      | 7.2  |   |  |       | 11.7  | %
|                                                         
|                                                         
|                                                         
|                                                         
|Folding carton volume                                    
|                                                          |                                                       | Paperboard (internal)                     |  |               | 24.5  |      |  |        | 23.9  |        |  |      | 0.6  |   |  |       | 2.5   | %
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Outside purchases                         |  |               | 26.7  |      |  |        | 23.9  |        |  |      | 2.8  |   |  |       | 11.7  | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          | Folding carton converted products                     |                                           |  | 51.2          |       |      |  | 47.8   |       |        |  | 3.4  |      |   |  | 7.1   | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unconverted paperboard                                |                                           |  | 70.4          |       |      |  | 60.0   |       |        |  | 10.4 |      |   |  | 17.3  | %    
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Folding carton volume                     |  |               | 121.6 |      |  |        | 107.8 |        |  |      | 13.8 |   |  |       | 12.8  | %
|                                                         
|                                                         
|                                                         
|                                                         
|Gypsum wallboard facing paper volume                     
|                                                          | Unconverted paperboard                                |                                           |  | 34.1          |       |      |  | 42.8   |       |        |  | (8.7 | )    |   |  | -20.3 | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Outside purchases (for resale)                        |                                           |  |              |       |      |  |       |       |        |  |     |      |   |  |      |      
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Gypsum wallboard facing paper volume      |  |               | 34.1  |      |  |        | 42.8  |        |  |      | (8.7 | ) |  |       | -20.3 | %
|                                                         
|                                                         
|                                                         
|                                                         
|Other specialty products volume                          
|                                                          |                                                       | Paperboard (internal)                     |  |               | 16.6  |      |  |        | 16.6  |        |  |      |     |   |  |       |      |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Outside purchases                         |  |               | 1.1   |      |  |        | 1.1   |        |  |      |     |   |  |       |      |  
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          | Other specialty converted products                    |                                           |  | 17.7          |       |      |  | 17.7   |       |        |  |     |      |   |  |      |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unconverted paperboard                                |                                           |  | 33.0          |       |      |  | 32.4   |       |        |  | 0.6  |      |   |  | 1.9   | %    
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Other specialty products volume           |  |               | 50.7  |      |  |        | 50.1  |        |  |      | 0.6  |   |  |       | 1.2   | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Total paperboard tonnage                  |  |               | 275.2 |      |  |        | 262.3 |        |  |      | 12.9 |   |  |       | 4.9   | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|Gross paper margins ($/ton):                              |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Paperboard mill:                                      |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |       |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Average same-mill net selling price       |  | $             | 409   |      |  | $      | 411   |        |  | $    | (2   | ) |  |       | -0.5  | %
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Average same-mill recovered fiber cost    |  |               | 113   |      |  |        | 63    |        |  |      | 50   |   |  |       | 79.4  | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Paperboard mill gross paper margin        |  | $             | 296   |      |  | $      | 348   |        |  | $    | (52  | ) |  |       | -14.9 | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          | Tube and core:                                        |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |       |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Average net selling price                 |  | $             | 797   |      |  | $      | 778   |        |  | $    | 19   |   |  |       | 2.4   | %
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Average paperboard cost                   |  |               | 451   |      |  |        | 446   |        |  |      | 5    |   |  |       | 1.1   | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      
|                                                          |                                                       | Tube and core gross paper margin          |  | $             | 346   |      |  | $      | 332   |        |  | $    | 14   |   |  |       | 4.2   | %
|                                                          |                                                       |                                           |  |               |       |      |  |        |       |        |  |      |      |   |  |      

Sales.Our consolidated sales for the third quarter of 2002 were $240.0
million, an increase of 2.2% from $234.9 million in the same period of 2001.
This increase was due primarily to increased volume in all segments combined
with increased selling prices in the tube, core and composite container
segment. These increases were partially offset by a decrease in volume in the
gypsum wallboard facing paper market and a decrease in selling prices in the
carton and custom packaging segment.

Total paperboard tonnage for the third quarter of 2002 increased 4.9% to 275.2
thousand tons compared to 262.3 thousand tons in the third quarter of 2001.
This increase was primarily due to higher internal conversion by our

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converting operations in the tube, core and composite container and carton and
custom packaging segments and higher shipments of unconverted paperboard to
external customers in the carton and custom packaging, tube, core and composite
container and other specialty products markets. These improvements were
partially offset by a 20.3% decrease in gypsum wallboard facing paper volume.
However, including gypsum facing paper volume transferred to our 50% owned,
unconsolidated Premier Boxboard joint venture, gypsum facing paper volume
decreased by only 16.3%. Third quarter 2002 outside purchases increased 18.4%
to 36.6 thousand tons. Tons sold from paperboard mill production increased 3.1%
for the third quarter of 2002 to 238.6 thousand tons, compared with 231.4
thousand tons for the same period last year. Total tonnage converted increased
7.6% for the third quarter of 2002 to 127.6 thousand tons compared to 118.6
thousand tons in the third quarter of 2001.

Gross Profit Margin.Gross profit margin for the third quarter of 2002
decreased to 22.0% of sales from 26.4% in the same period in 2001. The margin
decrease was partially due to the effect of a $1.6 million pretax reduction in
reserves related to expiring unfavorable supply contracts at the Sprague
paperboard mill recorded in the third quarter of 2001. Excluding this reduction
in reserves, gross profit margin was 25.7% in the third quarter of 2001. The
balance of the margin decrease was due primarily to increased recovered fiber
costs in the paperboard segment and increased paperboard costs in the tube,
core and composite container segment, partially offset by lower energy costs.

Operating Income.Operating income for the third quarter of 2002 was $859
thousand, a decrease of $10.5 million from $11.3 million for the same period
last year. We adopted SFAS No. 142 effective January 1, 2002. This new
accounting standard discontinues the amortization of acquisition-related
goodwill and other intangible assets with indefinite lives and establishes new
methods for testing the impairment of such assets. Excluding goodwill
amortization expense of $1.1 million and the Sprague reserve reduction of $1.6
million, third quarter 2001 operating income was $10.8 million. The decrease in
operating income in the third quarter of 2002 from the same period last year
was primarily due to lower margins in the paperboard segment, partially offset
by higher margins in the tube, core and composite container segment. The lower
margins in the paperboard segment were due to higher recovered fiber costs and
lower selling prices. The higher margins in the tube, core and composite
container segment were due primarily to increased selling prices.

Selling, general and administrative expenses increased 1.4% to $37.4 million in
the third quarter of 2002 compared to the third quarter of 2001. As a
percentage of sales, selling, general and administrative expenses were
essentially unchanged at 15.6%.

In April 1999, we purchased International Paper Companys Sprague boxboard mill
located in Versailles, Connecticut. This acquisition has had a significant
impact on our earnings since that time. Sprague incurred an operating loss of
$2.9 million in the three months ended September 30, 2002, which is an
improvement of $0.5 million over the operating loss incurred for the three
months ended September 30, 2001 of $3.4 million. Our primary objectives at
Sprague have been to improve quality, reduce costs and increase sales volume.
We have made significant progress in quality and cost and are beginning to
realize the benefits. Based on improvements we have made since the acquisition,
we now believe Sprague is competitive in terms of cost and quality, and we
expect Spragues financial performance to improve with increases in sales
volume. Although we expect losses at Sprague to continue to decline, in light
of current difficult industry conditions, we do not expect Sprague to be
profitable until at least the fourth quarter of 2002 provided that recovered
fiber costs decrease to more normalized levels.

Other Income (Expense).Interest expense for the third quarter of 2002 was $9.4
million versus $10.4 million in the same period of 2001. This decrease was due
to savings from interest rate swap agreements which effectively converted
portions of our fixed rate notes into variable rate obligations. See Liquidity
and Capital Resources for additional information regarding our debt, interest
expense and interest rate swap agreements.

Equity in income from unconsolidated affiliates was $826 thousand in the third
quarter of 2002 compared to $936 thousand in the third quarter of 2001. This
decrease was primarily due to lower operating results for our Premier Boxboard
paper mill joint venture, partially offset by improved operating results for
Standard Gypsum, L.P., our gypsum wallboard joint venture. Premier Boxboard
Limiteds operating results declined due to lower selling prices and higher
recovered fiber costs, while Standard Gypsums operating results improved
primarily due to increased selling prices and volume. Both of these joint
ventures are with Temple-Inland.

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##### Table of Contents



Net (Loss) Income.Net loss for the third quarter of 2002 was $4.5 million, or
$0.16 net loss per common share, compared to net income of $955 thousand, or
$0.03 net income per common share, for the same period last year. As discussed
above, the results for the third quarter of 2001 included the Sprague reserve
reduction of $1.6 million ($1.0 million, net of tax provision, or $0.03 per
common share). Net loss excluding the Sprague reserve reduction for the third
quarter of 2001 was $69 thousand, or $0.00 net loss per common share, and,
after further excluding amortization of goodwill of $712 thousand for the third
quarter of 2001, net income was $643 thousand, or $0.02 net income per common
share.

Nine Months Ended September 30, 2002 and 2001

The following table shows volume, gross paper margins and related data for the
periods indicated. The volume information shown below includes shipments of
unconverted paperboard and converted paperboard products. Tonnage volumes from
our business segments, excluding tonnage produced or converted by our
unconsolidated joint ventures, are combined and presented along end-use market
lines. Additional financial information is reported by segment in Note 7 of the
consolidated financial statements.

|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |      |      |       |  
|--------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------- | -------------------------------------- | ----- | ----------------- | --- | ---- | ----- | ------ | --- | ------ | ---- | ---- | --- | - | ---- | ---- | ----- | -
|                                                          |                                                       |                                           |                                        |       | Nine Months Ended |     |      |       |        |     |        |      |     
|                                                          |                                                       |                                           |                                        |       | September 30,     |     |      |       |        |     | %     
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |     
|                                                          |                                                       |                                           |                                        |       | 2002              |     | 2001 |       | Change |     | Change
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |       
|Production source of paperboard tons sold (in thousands): |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | From paperboard mill production                       |                                           |                                        | 703.2 |                   |     |      | 673.0 |        |     |        | 30.2 |      |     |   | 4.5  | %   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Outside purchases                                     |                                           |                                        | 104.3 |                   |     |      | 95.3  |        |     |        | 9.0  |      |     |   | 9.4  | %   
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       | Total paperboard tonnage                  |                                        |       | 807.5             |     |      |       | 768.3  |     |        |      | 39.2 |     |   |      | 5.1  | %    
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          | Tons sold by market (in thousands):                   |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|Tube, core and composite container volume                
|                                                          |                                                       | Paperboard (internal)                     |                                        |       | 142.9             |     |      |       | 141.9  |     |        |      | 1.0  |     |   |      | 0.7  | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Outside purchases                         |                                        |       | 23.3              |     |      |       | 19.3   |     |        |      | 4.0  |     |   |      | 20.7 | %    
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          | Tube, core and composite container converted products |                                           |                                        | 166.2 |                   |     |      | 161.2 |        |     |        | 5.0  |      |     |   | 3.1  | %   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unconverted paperboard                                |                                           |                                        | 27.7  |                   |     |      | 24.7  |        |     |        | 3.0  |      |     |   | 12.1 | %   
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       | Tube, core and composite container volume |                                        |       | 193.9             |     |      |       | 185.9  |     |        |      | 8.0  |     |   |      | 4.3  | %    
|                                                         
|                                                         
|                                                         
|                                                         
|Folding carton volume                                    
|                                                          |                                                       | Paperboard (internal)                     |                                        |       | 74.3              |     |      |       | 62.7   |     |        |      | 11.6 |     |   |      | 18.5 | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Outside purchases                         |                                        |       | 77.1              |     |      |       | 71.9   |     |        |      | 5.2  |     |   |      | 7.2  | %    
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          | Folding carton converted products                     |                                           |                                        | 151.4 |                   |     |      | 134.6 |        |     |        | 16.8 |      |     |   | 12.5 | %   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unconverted paperboard                                |                                           |                                        | 189.5 |                   |     |      | 170.8 |        |     |        | 18.7 |      |     |   | 10.9 | %   
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       | Folding carton volume                     |                                        |       | 340.9             |     |      |       | 305.4  |     |        |      | 35.5 |     |   |      | 11.6 | %    
|                                                         
|                                                         
|                                                         
|                                                         
|Gypsum wallboard facing paper volume                     
|                                                          | Unconverted paperboard                                |                                           |                                        | 108.2 |                   |     |      | 117.7 |        |     |        | (9.5 | )    |     |   | -8.1 | %   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Outside purchases (for resale)                        |                                           |                                        |      |                   |     |      |      |        |     |        |     |      |     |   |     |     
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       | Gypsum wallboard facing paper volume      |                                        |       | 108.2             |     |      |       | 117.7  |     |        |      | (9.5 | )   |   |      | -8.1 | %    
|                                                         
|                                                         
|                                                         
|                                                         
|Other specialty products volume                          
|                                                          |                                                       | Paperboard (internal)                     |                                        |       | 50.1              |     |      |       | 52.6   |     |        |      | (2.5 | )   |   |      | -4.8 | %    
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Outside purchases                         |                                        |       | 3.9               |     |      |       | 4.1    |     |        |      | (0.2 | )   |   |      | -4.9 | %    
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          | Other specialty converted products                    |                                           |                                        | 54.0  |                   |     |      | 56.7  |        |     |        | (2.7 | )    |     |   | -4.8 | %   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Unconverted paperboard                                |                                           |                                        | 110.5 |                   |     |      | 102.6 |        |     |        | 7.9  |      |     |   | 7.7  | %   
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          | Other specialty products volume                       |                                           |                                        | 164.5 |                   |     |      | 159.3 |        |     |        | 5.2  |      |     |   | 3.3  | %   
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       | Total paperboard tonnage                  |                                        |       | 807.5             |     |      |       | 768.3  |     |        |      | 39.2 |     |   |      | 5.1  | %    
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|Gross paper margins ($/ton):                              |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       | Paperboard mill:                          |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |      |      |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       |                                           | Average same-mill net selling price    |       | $                 | 396 |      |       | $      | 416 |        |      | $    | (20 | ) |      |      | -4.8  | %
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       |                                           | Average same-mill recovered fiber cost |       |                   | 84  |      |       |        | 65  |        |      |      | 19  |   |      |      | 29.2  | %
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       |                                           | Paperboard mill gross paper margin     |       | $                 | 312 |      |       | $      | 351 |        |      | $    | (39 | ) |      |      | -11.1 | %
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       | Tube and core:                            |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |      |      |      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       |                                           | Average net selling price              |       | $                 | 782 |      |       | $      | 791 |        |      | $    | (9  | ) |      |      | -1.1  | %
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                       |                                           | Average paperboard cost                |       |                   | 438 |      |       |        | 450 |        |      |      | (12 | ) |      |      | -2.7  | %
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     
|                                                          |                                                       |                                           | Tube and core gross paper margin       |       | $                 | 344 |      |       | $      | 341 |        |      | $    | 3   |   |      |      | 0.9   | %
|                                                          |                                                       |                                           |                                        |       |                   |     |      |       |        |     |        |      |      |     |   |     

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Sales.Our consolidated sales for the nine months ended September 30, 2002 were
$695.4 million, which was essentially unchanged compared to the same period of
2001.

Total paperboard tonnage for the first nine months of 2002 increased 5.1% to
807.5 thousand tons compared to 768.3 thousand tons in the first nine months of
2001. This increase was primarily due to higher shipments of unconverted
paperboard to external customers in the carton and custom packaging, other
specialty products and tube, core and composite container markets combined with
higher internal conversion by our carton and custom packaging and tube, core
and composite container segments. These improvements were partially offset by a
decline in converted volume in our other specialty products business
(paperboard segment). In addition, our gypsum facing paper volume declined
8.1%. However, including gypsum facing paper volume transferred to our 50%
owned, unconsolidated Premier Boxboard joint venture, gypsum facing paper
volume decreased by only 4.0%. Outside purchases increased 9.4% to 104.3
thousand tons compared to the prior year period. Tons sold from paperboard mill
production increased 4.5% for the first nine months of 2002 to 703.2 thousand
tons, compared with 673.0 thousand tons for the same period last year. Total
tonnage converted increased 5.4% for the first nine months of 2002 to 371.6
thousand tons compared to 352.5 thousand tons in the first nine months of 2001.

Gross Profit Margin.Gross profit margin for the first nine months of 2002
decreased to 24.2% of sales from 25.9% in the same period in 2001. Included in
the gross profit margin for the first nine months of 2001 was the $5.4 million
pretax reduction in reserves related to expiring unfavorable supply contracts
at the Sprague paperboard mill. Excluding this reduction in reserves, gross
profit margin was 25.2% in the first nine months of 2001. The balance of the
margin decrease was due primarily to lower margins in the paperboard segment
due to lower selling prices and higher recovered fiber costs. These margins
were partially offset by lower energy costs and improved margins in the tube,
core and composite container segment.

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

In January 2001, we initiated a plan to close our paperboard mill located in
Chicago, Illinois and recorded a pretax charge to operations of approximately
$4.4 million. The mill was profitable through 1998, but declining sales
resulted in losses of approximately $2.6 million and $1.5 million in 1999 and
2000, respectively. We expect the proceeds from the sale of the real estate to
more than offset the pretax charge. The $4.4 million charge included a $2.2
million noncash asset impairment write down of fixed assets to estimated net
realizable value, a $1.2 million accrual for severance and termination benefits
for 16 salaried and 59 hourly employees terminated in connection with this plan
and a $989 thousand accrual for other exit costs. During 2001 and the first
nine months of 2002, we paid $1.2 million in severance and termination benefits
and $796 thousand in other exit costs. The remaining other exit costs will be
paid by December 31, 2002. As of September 30, 2002, one employee remained to
assist in the closing of the mill. We are marketing the property and will
complete the exit plan upon the sale of the property, which we anticipate will
occur prior to December 31, 2003.

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

Operating Income.Operating income for the first nine months of 2002 was $17.5
million, a decrease of $6.2 million from $23.6 million for the same period last
year. Included in the first nine months of 2002 operating income was a $985
thousand noncash pretax restructuring charge related to the permanent closure
of our Camden and Chicago paperboard mills. Excluding the restructuring charge,
operating income for the first nine months of 2002 was $18.4 million. We
adopted SFAS No. 142 effective January 1, 2002. This new accounting standard
discontinues the amortization of acquisition-related goodwill and other
intangible assets with indefinite lives and establishes new methods for testing
the impairment of such assets. Excluding goodwill amortization expense of $3.3
million, restructuring charges and the Sprague reserve reduction of $5.4
million, operating income for the first nine months

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of 2001 was $28.7 million. The decrease in operating income in the first nine
months of 2002 from the same period last year was primarily due to lower
margins in the paperboard segment due to lower selling prices and increased
recovered fiber costs, partially offset by higher volume in all segments, lower
energy costs and higher margins in the tube, core and composite container
segment.

Selling, general and administrative expenses decreased by $2.1 million, or
1.9%, in the first nine months of 2002 compared to the same period last year.
This decrease was attributable primarily to the discontinuation of goodwill
amortization expense in 2002, as described above.

Our Sprague boxboard mill incurred an operating loss of $6.8 million in the
first nine months of 2002, which is an improvement of $4.8 million from the
$11.6 million operating loss incurred in the first nine months of 2001. This
improvement was the result of significantly improved volume generated from new
customers and lower operating costs.

Other Income (Expense).Interest expense for the first nine months of 2002 was
$28.1 million versus $31.2 million in the same period of 2001. This decrease
was due to savings from interest rate swap agreements which effectively
converted portions of our fixed rate notes into variable rate obligations,
partially offset by higher outstanding debt balances at higher interest rates.
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 $1.9 million in the first
nine months of 2002, an improvement of $3.7 million from equity in loss of $1.8
million in the first nine months of 2001. This increase was primarily due to
improved operating results for Standard Gypsum, L.P., our gypsum wallboard
joint venture, partially offset by lower operating results for Premier Boxboard
Limited LLC, our paper mill joint venture. Standard Gypsums operating results
improved primarily due to increased selling prices and volume, while Premier
Boxboard Limiteds operating results declined due to lower selling prices and
higher recovered fiber costs. Both of these joint ventures are with
Temple-Inland.

Net (Loss) Income.Net loss for the first nine months of 2002 was $4.6 million,
or $0.16 per common share, compared to a net loss of $9.5 million, or $0.34 net
loss per common share, for the same period last year. As discussed above, our
results for the first nine months of 2002 included a restructuring charge of
$985 thousand ($618 thousand, net of tax benefit, or $0.02 per common share on
a diluted basis). The results for the same period last year included
restructuring charges recorded in conjunction with the closing of our Chicago,
Illinois paperboard mill and the consolidation of operations of our Salt Lake
City, Utah carton plant into our Denver, Colorado carton plant. These charges
were $7.1 million in the aggregate ($4.4 million, net of tax benefit, or $0.16
per common share on a diluted basis). Also included in the results for 2001 was
an extraordinary loss of $4.3 million related to the early extinguishment of
debt ($2.7 million, net of tax benefit, or $0.10 per common share on a diluted
basis). Partially offsetting the charges in 2001 was the $5.4 million reduction
in reserves related to expiring unfavorable supply contracts at the Sprague
paperboard mill ($3.4 million, net of tax provision, or $0.13 per common share
on a diluted basis). Net loss excluding the restructuring charge for the first
nine months of 2002 was $4.0 million, or $0.14 net loss per common share. Net
loss before extraordinary loss and excluding restructuring charges and the
Sprague reserve reduction for the first nine months of 2001 was $5.8 million,
or $0.21 net loss per common share. After further excluding amortization of
goodwill of $2.1 million (net of tax benefit) for the first nine months of
2001, net loss was $3.7 million, or $0.13 net loss per common share.

Liquidity and Capital Resources

Liquidity Sources and Risks.Our primary sources of liquidity are cash from
operations and borrowings under the various debt facilities described below.
Downturns in operations can significantly affect our ability to generate cash.
Factors that can affect our operating results are discussed further in this
Report under Risk Factors. We generated $55.9 million in cash from operations
in the first nine months of 2002. We believe that our existing cash and
liquidity position will be improved through the sale of the real estate at our
Baltimore, Maryland, Camden, New Jersey and Chicago, Illinois paperboard mills,
which we anticipate will occur prior to December 31, 2003. Additionally, we
received a federal tax refund of approximately $16.0 million in April 2002 from
the carryback of the 2001 net operating loss and expect to receive a federal
tax refund of approximately $7.0 million in the first half of 2003.

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On September 30, 2002, we acquired substantially all the assets of the Smurfit
Industrial Packaging Group for a purchase price of $67.1 million, and the
assumption of $1.7 million of indebtedness outstanding under certain industrial
development revenue bonds. See Acquisitions. In addition, because we did
not purchase any trade accounts receivable as part of the acquisition, we
expect to contribute working capital to the acquired business of approximately
$10.0 million after closing the acquisition. We funded $29.1 million of the
acquisition through cash on hand and $38.0 million through borrowings under our
$75.0 million senior credit facility. If, in addition to the working capital
needs related to the Smurfit acquisition, we were to face unexpected liquidity
needs, we could require additional funds from external sources such as our
senior credit facility.

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

At September 30, 2002, we were in compliance with our various financial tests
under both our senior credit facility and our joint venture guarantees. In
connection with the acquisition of the Smurfit Industrial Packaging Group, we
and the lenders under our senior credit facility amended the facility to
replace our current leverage ratio and interest coverage ratio compliance tests
with covenants that enabled us to avoid third quarter covenant violations and
allowed us more flexibility under these tests in future periods. See
-Borrowings and Acquisitions. For the fourth quarter of 2002, we believe
we face covenant compliance risks associated with a potential increase in our
liability for pension benefits. Based on year-to-date returns for assets that
fund our defined benefit pension plan and projected reductions in the discount
rate assumption due to decreased market interest rates, it is possible that we
will be required to record a significant minimum liability at December 31,
2002. This minimum liability will reduce shareholders equity and could cause
us to default on our minimum tangible net worth and our total leverage ratio
covenants. However, we may be able to avoid this condition by making
significant contributions to the pension plan before December 31, 2002. We and
our plan actuarial advisors are in the process of evaluating our alternatives
and will determine a course of action in the fourth quarter. We believe that
in the event that such a breach occurs, our lenders would provide us with the
necessary waivers and amendments. However, we cannot give assurance that we
will achieve continued compliance with our debt covenants, or that, in such
event, necessary waivers and amendments would be available at all or on
acceptable terms. If our debt or that of our joint ventures were placed in
default, or if we were called upon to satisfy our joint venture guarantees, our
liquidity and financial condition would be materially and adversely affected.

Borrowings.At September 30, 2002, and December 31, 2001, total debt
(consisting of current maturities of debt, senior credit facility, and other
long-term debt, as reported on our consolidated balance sheets) was as follows
(in thousands):

|                                 |  |               |         |              |  |   |         | 
|-------------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | 
|                                 |  | September 30, |         | December 31,
|                                 |  | 2002          |         | 2001        
|                                 |  |               |         |             
|Senior credit facility           |  | $             | 38,000  |              |  | $ |        | 
|                                
|                                
|                                
|                                
|7 1/4% senior notes              |  |               | 25,668  |              |  |   | 25,449  | 
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |               | 202,096 |              |  |   | 197,716 | 
|                                
|                                
|                                
|                                
|9 7/8% senior subordinated notes |  |               | 294,791 |              |  |   | 277,326 | 
|                                
|                                
|                                
|                                
|Other notes payable              |  |               | 9,945   |              |  |   | 8,248   | 
|                                 |  |               |         |              |  |   |         | 
|Total debt                       |  | $             | 570,500 |              |  | $ | 508,739 | 
|                                 |  |               |         |              |  |   |         | 

On March 29, 2001, we completed a series of financing transactions pursuant to
which we (i) issued $29.0 million in aggregate principal amount of 7 1/4%
senior notes due May 1, 2010 and $285.0 million in aggregate principal amount
of 9 7/8% senior subordinated notes due April 1, 2011, (ii) used the proceeds
from these notes to repay in full our former senior credit facility and 7.74%
senior notes, and (iii) obtained a new $75.0 million senior credit

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facility. The 7 1/4% senior notes and 9 7/8% senior subordinated notes were
issued at a discount to yield effective interest rates of 9.4% and 10.5%,
respectively. Aggregate proceeds from the sale of these notes, net of issuance
costs, was approximately $291.2 million. In connection with the repayment of
the 7.74% senior notes, we incurred a prepayment penalty of approximately $3.6
million. We recorded an extraordinary loss of $2.7 million, which included the
prepayment penalty and unamortized issuance costs of $705 thousand, net of tax
benefit of $1.6 million. The difference between issue price and principal
amount at maturity of our 7 1/4% senior notes and 9 7/8% senior subordinated
notes will be accreted each year as interest expense in our financial
statements. These notes are unsecured, but are guaranteed, on a joint and
several basis, by all of our domestic subsidiaries, other than two that are not
wholly-owned.

Our credit facility provides for a revolving line of credit in the aggregate
principal amount of $75.0 million with a term expiring in March of 2005,
including subfacilities of $10.0 million for swingline loans and $15.0 million
for letters of credit, usage of which reduces availability under the facility.
As of September 30, 2002, $38.0 million was outstanding under the facility, and
an aggregate of $10.0 million in letter of credit obligations were outstanding.
No borrowings were outstanding under the facility as of September 30, 2001.
The $38.0 million outstanding balance at September 30, 2002 was used to fund a
portion of the acquisition price of the Smurfit Industrial Packaging Group. We
intend to use the remaining balance of the facility for working capital,
capital expenditures and other general corporate purposes. As described below,
a fourth amendment to the facility was completed in which we were required,
upon the closing of our acquisition of the Smurfit Industrial Packaging Group,
to enter into a security agreement under which we and our subsidiary guarantors
under the senior credit facility granted a first priority security interest in
our respective accounts receivable and inventory to secure our obligations
under the credit facility and our obligations under our 50% guarantees of the
credit facilities of Standard Gypsum and Premier Boxboard.

Borrowings under the facility bear interest at a rate equal to, at our option,
either (1) the base rate (which is equal to the greater of the prime rate most
recently announced by Bank of America, N.A., the administrative agent under the
facility, or the federal funds rate plus one-half of 1%) or (2) the adjusted
Eurodollar Interbank Offered Rate, in each case plus an applicable margin
determined by reference to our leverage ratio (which is defined under the
facility as the ratio of our total debt to our total capitalization). Based on
our leverage ratio at September 30, 2002, the current margins are 2.75% for
Eurodollar rate loans and 1.50% for base rate loans. Additionally, the undrawn
portion of the facility is subject to a facility fee at an annual rate that is
currently set at 0.55% based on our leverage ratio at September 30, 2002.

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

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

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

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

The third amendment was completed on January 22, 2002 with an effective date of
September 30, 2001. We obtained this amendment in order to avoid the occurrence
of an event of default under our senior credit facility

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agreement resulting from a violation of the interest coverage ratio covenant
contained in the agreement. This amendment modified the definitions of
Interest Expense, Premier Boxboard Interest Expense and Standard Gypsum
Interest Expense to include interest income and the benefit or expense derived
from interest rate swap agreements or other interest hedge agreements.
Additionally, the amendment lowered the minimum allowable interest coverage
ratio for the fourth quarter of 2001 from 2.5:1.0 to 2.25:1.0, the first
quarter of 2002 from 2.75:1.0 to 2.25:1.0, and the second quarter of 2002 from
2.75:1.0 to 2.50:1.0.

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

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

In 1998, we registered with the SEC a total of $300.0 million in public debt
securities for issuance in one or more series and with such specific terms as
determined from time to time. On June 1, 1999, we issued $200.0 million in
aggregate principal amount of our 7 3/8% senior notes due June 1, 2009. Our 7
3/8% senior notes were issued at a discount to yield an effective interest rate
of 7.473%, are unsecured obligations of our company and pay interest
semiannually. In connection with the offering of our 7 1/4% senior notes and 9
7/8% senior subordinated notes, our subsidiary guarantors also guaranteed our 7
3/8% senior notes. In February 2002, we purchased $6.75 million in principal
amount of our 7 3/8% senior notes in the open market. This purchase will lower
our interest expense by approximately $500 thousand annually.

Interest Rate Swaps.During the second and third quarters of 2001, we entered
into four interest rate swap agreements in notional amounts totaling $285.0
million. The agreements, which have payment and expiration dates that
correspond to the terms of the note obligations they cover, effectively
converted $185.0 million of our fixed rate 9 7/8% senior subordinated notes and
$100.0 million of our fixed rate 7 3/8% senior notes into variable rate
obligations. The variable rates are based on the three-month LIBOR plus a fixed
spread. These swap agreements decreased interest expense by $7.3 million in the
first nine months of 2002. We expect our swap agreements to continue to lower
our interest expense; however, if the three-month LIBOR increases
significantly, our interest expense could be adversely affected. Based on the
three-month LIBOR at September 30, 2002, our swaps would reduce our interest
expense by approximately $9.9 million for 2002 compared with $3.8 million in
2001. If the three-month LIBOR increases 100 basis points, our savings on
interest expense would be reduced by approximately $2.85 million annually.

The following table identifies the debt instrument hedged, the notional amount,
the fixed spread and the three-month LIBOR at September 30, 2002 for each of
our interest rate swaps. The September 30, 2002 three-month LIBOR is

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presented for informational purposes only and does not represent our actual
effective rates in place at September 30, 2002.

|                                 |  |          |         |        |  |               |       |          |  |             |       |   |  |  |       |  
|-------------------------------- |  | -------- | ------- | ------ |  | ------------- | ----- | -------- |  | ----------- | ----- | - |  |  | ----- | -
|                                 |  |          |         |        |  |               |       |          |  | Three-Month |       |   |  | 
|                                 |  | Notional |         |        |  |               |       | LIBOR at |  | Total      
|                                 |  | Amount   |         | Fixed  |  | September 30, |       | Variable
|Debt Instrument                  |  | (000's)  |         | Spread |  | 2002          |       | Rate    
|                                 |  |          |         |        |  |               |       |         
|7 3/8% senior notes              |  | $        | 50,000  |        |  |               | 2.365 | %        |  |             | 1.806 | % |  |  | 4.171 | %
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 25,000  |        |  |               | 1.445 |          |  |             | 1.806 |   |  |  | 3.251 |  
|                                
|                                
|                                
|                                
|7 3/8% senior notes              |  |          | 25,000  |        |  |               | 1.775 |          |  |             | 1.806 |   |  |  | 3.581 |  
|                                
|                                
|                                
|                                
|9 7/8% senior
subordinated notes |  |          | 185,000 |        |  |               | 4.495 |          |  |             | 1.806 |   |  |  | 6.301 |  

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

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

Joint Venture Financings.As noted above, we own a 50% interest in two joint
ventures with Temple-Inland, Inc.: Standard Gypsum, L.P. and Premier Boxboard
Limited LLC. Because we account for these interests in our joint ventures under
the equity method of accounting, the indebtedness of these joint ventures is
not reflected in the liabilities included on our consolidated balance sheets.
As described below, we have guaranteed certain obligations of these joint
ventures. A default under these guarantees also constitutes a default under the
credit facilities of these joint ventures and our senior credit facility. The
guarantees also contain independent financial maintenance covenants that are
identical to the covenants under our senior credit facility. Accordingly, our
default under one or more of these covenants would technically permit the
lenders under the joint venture credit facilities and our joint venture
partners respective guarantees of those facilities, as well as the lenders
under our senior credit facility, if they so elected, to prohibit any future
borrowings under these facilities and to accelerate all such outstanding
obligations under these facilities. The resulting acceleration of our
obligations could also cause further defaults and accelerations under our 9
7/8% senior subordinated notes, our 7 1/4% senior notes and our 7 3/8% senior
notes. In January 2002 and September 2002, we entered into agreements with the
Premier Boxboard Limited and Standard Gypsum lenders that correspond to the
amendments made in the third and fourth amendments to the senior credit
facility, as described above. At September 30, 2002, we were in compliance with
all covenants under these guarantees. However, to the extent that we are unable
to comply with, or are required to seek waivers under, or modifications of, the
financial maintenance covenants under our senior credit facility in order to
avoid possible events of noncompliance, as described above, we will need
similar waivers or modifications under the joint venture guarantees.

Standard Gypsum is the obligor under reimbursement agreements pursuant to which
direct-pay letters of credit in the aggregate original amount of approximately
$56.2 million have been issued for its account in support of industrial
development bond obligations. We have severally and unconditionally guaranteed
50% of Standard Gypsums obligations for reimbursement of letter of credit
drawings, interest, fees and other amounts. The other Standard Gypsum partner,
Temple-Inland, has similarly guaranteed 50% of Standard Gypsums obligations.
As of September 30, 2002, the outstanding letters of credit totaled
approximately $56.2 million, of which one-half (approximately $28.1 million) is
guaranteed by us.

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Premier Boxboard is the borrower under a credit facility providing for up to
$30.0 million in revolving loans (with a subfacility for up to $1.0 million in
letters of credit). The credit facility was originally entered into in July
1999 and matures in June 2005. We have severally and unconditionally guaranteed
50% of Premier Boxboards obligations under the credit facility for principal
(including reimbursement of letter of credit drawings), interest, fees and
other amounts. Temple-Inland has similarly guaranteed 50% of Premier Boxboards
obligations. As of September 30, 2002, the outstanding principal amount of
borrowings under the facility was approximately $20.2 million (including a $200
thousand undrawn letter of credit), of which one-half (approximately $10.1
million) is guaranteed by us.

Our 50% guarantees of the Standard Gypsum and Premier Boxboard credit
facilities are secured, together with our senior credit facility, by a first
priority security interest in our accounts receivable and inventory and the
accounts receivable and inventory of our existing and future subsidiary
guarantors under the senior credit facility. We were required to enter into
this security agreement under the amendments to our senior credit facility and
joint venture guarantees in September 2002 in connection with the acquisition
of the Smurfit Industrial Packaging Group. See  Acquisitions.

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

Additional contingencies relating to our joint ventures that could affect our
liquidity include possible additional capital contributions and buy-sell
triggers which, under certain circumstances, give us and our joint venture
partner either the right, or the obligation, to purchase the others interest
or to sell an interest to the other. In the case of both Standard Gypsum and
Premier Boxboard, neither joint venture partner is obligated or required to
make additional capital contributions without the consent of the other. With
regard to buy-sell rights, under the Standard Gypsum joint venture, in general,
either party may purchase the others interest upon the occurrence of certain
purported unauthorized transfers or involuntary transfer events (such as
bankruptcy). In addition, under the Standard Gypsum joint venture, either (i)
in the event of an unresolved deadlock over a material matter or (ii) at any
time after April 1, 2001, either party may initiate a Russian roulette buyout
procedure by which it names a price at which the other party must agree either
to sell its interest to the initiating party or to purchase the initiating
partys interest. Under the Premier Boxboard joint venture, in general, mutual
buy-sell rights are triggered upon the occurrence of certain purported
unauthorized or involuntary transfers, but in the event of certain change of
control or deadlock events, the buy-sell rights are structured such that we are
always the party entitled, or obligated, as the case may be, to purchase.

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

Cash from Operations.Cash generated from operations was $55.9 million for the
nine month period ended September 30, 2002 compared with $46.6 million for the
same period of 2001. The increase was due primarily to a tax refund received in
April 2002 combined with improved operating results.

Capital Expenditures.Capital expenditures were $16.1 million in the first nine
months of 2002 versus $22.5 million in the first nine months of 2001. Aggregate
capital expenditures of approximately $25.3 million are anticipated for 2002.
To conserve cash, we intend to limit capital expenditures for 2002 to cost
reduction, productivity improvement and replacement projects.

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Acquisitions. In April 2002, we acquired the remaining 51% of the outstanding
stock of Design Tubes Company Limited, Toronto, Ontario, Canada in
consideration for shares of a subsidiary exchangeable at the holders option
(for no additional consideration) for approximately 141,000 shares of our
common stock, valued at $1.5 million. We originally acquired our minority
interest in Design Tubes in November 1998 and accounted for our 49% ownership
using the equity method. Design Tubes manufactures paperboard tubes and also
produces paper tube manufacturing equipment for companies throughout North
America. Goodwill in the amount of $1.0 million was recorded in connection with
the Design Tubes acquisition.

On September 30, 2002, we acquired all the operating assets (excluding accounts
receivable) of the Smurfit Industrial Packaging Group, a business unit of
Jefferson Smurfit Corporation (U.S.), for approximately $67.1 million, and
assumed $1.7 million of indebtedness outstanding under certain industrial
revenue bonds. The acquisition was funded by $38.0 million of borrowings under
our revolving credit facility and $29.1 million of cash on hand.
Goodwill and intangible assets of
approximately $38.6 million was recorded in conjunction with the Smurfit
Industrial Packaging Group acquisition.

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

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill is no longer amortized, but instead tested for impairment at least
annually. The identification and measurement of goodwill impairment involves
the estimation of the fair value of reporting units, including the related
goodwill. The estimates of fair value of reporting units are based on the best
information available as of the date of the assessment, which primarily
incorporate management assumptions about expected future cash flows and
contemplate other valuation techniques. Future cash flows can be affected by
changes in industry or market conditions or the rate and extent to which
anticipated synergies or cost savings are realized with newly acquired
entities. Although no goodwill impairment has been recorded to date, there can
be no assurances that future goodwill impairments will not occur.

Dividends.We paid cash dividends of $833 thousand in the first nine months of
2002 versus $8.0 million in the same period last year. During 2001, we reduced
our dividend payments from $0.18 to $0.03 per issued and outstanding common
share. Then, in February 2002, we announced that we would suspend future
dividend payments on our common stock until our earnings performance exceeds
the dividend limitation provision of our senior subordinated notes. We made
these decisions to reduce the quarterly dividends to preserve our financial
flexibility in light of difficult industry conditions and due to the
limitations on dividend payments in our financial covenants. We intend to
continue assessing our ability to pay quarterly dividends in light of difficult
industry conditions, our need to preserve financial flexibility and the
limitations on dividends included in our financial covenants.

Share Purchases.We did not purchase any shares of our common stock during the
first nine months of 2002 under our common stock purchase plan. We have
cumulatively purchased 3,169,000 shares since January 1996. Our board of
directors has authorized purchases of up to 831,000 additional shares. However,
our 9 7/8% senior subordinated notes and our senior credit facility currently
preclude us from purchasing our common stock based on our operating results for
the last twelve months.

Subsequent Event

In November 2002, we unwound $50.0 million of our $185.0 million interest rate
swap agreement related to the 9 7/8% senior subordinated notes, and received approximately
$2.8 million from the bank counter-party. Simultaneously, we unwound $50.0
million of one of our interest rate swap agreements related to the 7 3/8%
senior notes, and received approximately $3.4 million from the bank counter-party. The $6.2
million gain will be accreted to interest expense over the life of the notes
and will partially offset the increase in interest expense. We executed these
transactions in order to take advantage of market conditions.

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Georgia-Pacific Litigation

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

New Accounting Pronouncements

SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets. This
pronouncement prescribes the accounting practices for goodwill and other
intangible assets. Under this pronouncement, goodwill will no longer be
amortized to earnings, but instead is reviewed periodically (at least
annually) for impairment. We completed the required transitional
impairment test as of January 1, 2002 and found no impairment of
goodwill. On an ongoing basis (absent any impairment indicators), we
expect to perform our impairment tests during the fourth quarter. See Note 8 of Notes to
Consolidated Financial Statements for additional information regarding
goodwill accounting.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This pronouncement requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value
each period and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, the entity either settles the
obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. We are currently
assessing the impact of SFAS No. 143 on our financial position and results of
operations.

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

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

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

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Contractual Obligations

For a discussion of our contractual obligations, see Note 6 of Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. There have been no significant
developments with respect to our contractual obligations other than the
operating lease agreements entered into for the assets related to the Smurfit
Industrial Packaging Group acquisition. The terms of the agreements are six
years. The future minimum rental payments required under these leases are
approximately $1.7 million each year in 2002 through 2007 and $1.3 million in
2008. We will recognize operating lease expense of approximately $480 thousand
in 2002, $2.0 million each year in 2003 through 2007 and $1.4 million in 2008.

Forward-Looking Information

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

Risk Factors

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

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

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

Our operating margins may be adversely affected by rising energy costs.

Excluding labor, energy is our most significant manufacturing cost. We use
energy to generate steam used in the paper making process and to operate our
paperboard machines and all of our other converting machinery. Our energy costs
increased steadily throughout 2000 and the first quarter of 2001 before showing
some improvement by the end of 2001. In 2001, the average energy cost in our
mill system was approximately $57 per ton. During the first nine months of
2002, energy costs decreased to approximately $48 per ton. The decrease was due
primarily to decreases in natural gas and fuel oil costs. Until recently, our
business had not been significantly affected by energy costs, and we
historically have not passed energy costs through to our customers. We were not
able to pass through

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to our customers all of the energy cost increases we incurred in 2000 and
2001 and as a result, our operating margins were adversely affected. We
continue to evaluate our energy costs and consider ways to factor energy costs
into our pricing. However, we cannot give assurance that our operating margins
and results of operations will not continue to be adversely affected by rising
energy costs.

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

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



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

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

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

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

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

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

Historically, we have grown our business, revenues and production capacity
to a significant degree through acquisitions. In the current difficult
operating climate facing our industry and our financial position, the pace of
our acquisition activity (other than the acquisitions described above under
Managements Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Acquisitions), and accordingly, our
revenue growth, has slowed significantly as we have focused on conserving cash
and maximizing the productivity of our existing facilities. We expect to
continue evaluating and pursuing acquisition opportunities on a selective
basis, subject to available funding and credit flexibility. Growth through
acquisitions involves risks, many of which may continue to affect us based on
acquisitions we have completed in the past. For example, we have suffered
significant unexpected losses at our Sprague mill in Versailles, Connecticut,
which we acquired from International Paper Company in 1999, resulting from
unfavorable fixed price contracts, low capacity utilization, high energy costs
and higher fiber costs that we were unable to pass through to our customers.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations. We cannot give assurance that any of our acquired

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businesses, including the Smurfit Industrial Packaging Group, will achieve
the same levels of revenue, profit or productivity as our existing locations or
otherwise perform as we expect.

All acquisitions, including our recently announced acquisition of the
Smurfit Industrial Packaging Group, also involve specific risks. Some of these
risks include:



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



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

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



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

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

Without additional capital, we may have to curtail any acquisition and
expansion plans or forego other significant corporate opportunities that may be
vital to our long-term success. Although we expect to be able to use borrowed
funds to pursue these opportunities, we must continue to comply with financial
and other covenants in order to do so. If our revenues and cash flow do not
meet expectations, then we may lose our ability to borrow money or to do so on
terms that we consider favorable. Conditions in the capital markets also will
affect our ability to borrow, as well as the terms of those borrowings.
Existing weaknesses in the U.S. capital markets have been, and may continue to
be, aggravated by the September 11, 2001 terrorist attacks and their aftermath.
In addition, our financial performance and the conditions of the capital
markets will also affect the value of our common stock, which could make it a
less attractive form of consideration in making acquisitions. All of these
factors could also make it difficult or impossible for us to expand in the
future.

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

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

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

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

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

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

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

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

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company whose financial statements were audited by Arthur Andersen LLP. As
a result, among other things, the price or marketability of our securities
could be impaired.

During the second quarter of 2002, we determined that we had inadvertently
omitted from the footnotes of our audited financial statements for the year
ending December 31, 2001 certain subsidiary financial information required to
be disclosed by Rule 3-10 of Regulation S-X. Rule 3-10 addresses financial
statements of guarantors and issuers of guaranteed registered securities.
Under this rule, every guarantor of registered securities must file financial
statements or alternatively present condensed consolidating financial
information in a footnote to the financial statements. The condensed
consolidating financial information is allowed to be omitted if the parent
company has no independent assets or operations, the guarantee is full and
unconditional and nonguarantor subsidiaries are minor. At December 31, 2001,
our nonguarantor subsidiaries did not meet the minor test. The omitted
subsidiary financial disclosure does not affect our consolidated reported
results or our financial statements (other than to the extent of the required
footnote disclosure) for 2001 or any subsequent period. If our
former auditor were still practicing before the SEC, we would be able to cure
this deficiency by engaging our former auditor to reissue its opinion
on the 2001 financial statements for
the purpose of including the footnote disclosure. However, because Arthur
Andersen is no longer practicing before the SEC, this option is unavailable to
us. We began including the required footnote disclosure in our Form 10-Q
report for the period ended June 30, 2002 (and also have included this
information in Note 12 to the unaudited condensed consolidated financial
statements included in this report), and have been monitoring developments with
respect to potential regulatory guidance on approved methods for correcting
such matters by issuers whose subject financial statements were audited by
Arthur Andersen LLP. The AICPA SEC Regulations Committee, which periodically
meets jointly with the SEC, recently indicated a view that a reaudit of
the financial statements for the year ended December 31, 2001 would be required
in such a circumstance. Although we may request a waiver of the 2001
disclosure requirement from the SEC, in the
absence of any relief from the SEC we may be required to seek a reaudit of
the year ended December 31, 2001 from our new auditors, Deloitte & Touche.
Although such a reaudit would be costly and time consuming, we expect that it
could be completed during the first quarter of 2003. We currently have no
reason to believe that a reaudit of 2001 by our new auditors would identify
discrepancies or other matters that would require any modification to, or
restatement of, of our 2001 financial statements other than to provide the
subsidiary financial information described above. However, we can give no
assurance that this will be the case. If any such modification or restatement
were required, it could, depending on the nature and magnitude of any items
required to be restated or modified, have a material adverse effect on our
reported 2001 financial results, as well as the value and marketability of our
securities, and could expose us to investor lawsuits or other significant
liabilities.

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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002

PART I, ITEM 3.




CARAUSTAR INDUSTRIES, INC.

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, 2001. There have
been no significant developments with respect to our exposure to interest rate
market risk, other than the additional $38.0 million, at an average interest
rate of 4.28 percent, outstanding on our senior credit facility as of September
30, 2002.




ITEM 4.CONTROLS AND PROCEDURES

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

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

Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that
our disclosure controls or our internal controls will prevent or
detect all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the reality of resource
constraints; accordingly the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and possible misstatements due to
fraud or error, if any, within our company have been detected. Among
the inherent limitations in controls are the potential for erroneous
judgments and decisions or simple errors or mistakes in the chain of
recording, processing, summarizing or reporting information.
Additionally, controls can be circumvented by the intentional acts of
individuals or multiple persons acting in concert, or by management
override. The design of any system of controls also is based in part
on assumptions about the likelihood of future events, and we can give
no assurance that our controls as designed will succeed in achieving
their stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.

In the process of evaluating our
disclosure controls and internal controls, we sought, among other
things, to determine whether there were any significant
deficiencies or material weaknesses in our internal
controls, or whether the company had identified any acts of fraud
involving personnel who have a significant role in our internal
controls. Part of the certification of our Chief Executive Officer
and Chief Financial Officer included in the signature pages to this
quarterly report require these officers to make disclosures to the
Audit Committee of our Board of Directors and to our independent
auditors regarding these matters. In the professional auditing
literature, significant deficiencies are referred to as
reportable conditions; these are control issues that
could have a significant adverse effect on the ability to record,
process, summarize and report financial data in the financial
statements. A material weakness is defined in the
auditing literature as a particularly serious reportable condition
where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in
amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in
the normal course of performing their assigned functions.

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

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

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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002

PART II, ITEM 6.




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 filed three current reports on Form 8-K during the quarter ended September
30, 2002. The first report, filed on July 23, 2002, incorporated by reference
the contents of our press release announcing that we had entered into a
definitive agreement with a subsidiary of Smurfit-Stone Container Corporation
to acquire Jefferson Smurfits Industrial Packaging Group business.

The second report, filed on July 31, 2002, incorporated by reference the
contents of our press release announcing our financial results for the quarter
ended June 30, 2002.

The third report, filed on August 14, 2002, furnished the Certifications of
Thomas V. Brown, our President and Chief Executive Officer, and H. Lee Thrash,
III, our former Vice President and Chief Financial Officer, with respect to the
Companys Quarterly Report on Form 10-Q for the period ended June 30, 2002.

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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002




SIGNATURES

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

|                        |  |     |  |                                                                                           
|----------------------- |  | --- |  | ------------------------------------------------------------------------------------------
|                        |  |     |  | CARAUSTAR INDUSTRIES, INC.                                                                
|                       
|                       
|                       
|                       
|                        |  |     |  |                                                                                           
|                       
|                       
|                       
|                       
|                        |  | By: |  | /s/ RONALD J. DOMANICO                                                                    
|                        |  |     |  |                                                                                           
|                        |  |     |  | Ronald J. DomanicoVice President and Chief
Financial Officer
(Principal Financial Officer)
|                       
|                       
|                       
|                       
|                        |  |     |  |                                                                                           
|                       
|                       
|                       
|                       
|Date: November 14, 2002 |  |     |  |                                                                                           

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CERTIFICATIONS

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

1.     I have reviewed this quarterly report on Form 10-Q of Caraustar;

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

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

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

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

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

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

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

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

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

6.     Caraustars other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                        |  |     |  |                                                     
|----------------------- |  | --- |  | ----------------------------------------------------
|                        |  | By: |  | /s/ THOMAS V. BROWN                                 
|                        |  |     |  |                                                     
|                        |  |     |  | Thomas V. BrownPresident and Chief
Executive Officer
|                       
|                       
|                       
|                       
|                        |  |     |  |                                                     
|                       
|                       
|                       
|                       
|Date: November 12, 2002 |  |     |  |                                                     

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

1.     I have reviewed this quarterly report on Form 10-Q of Caraustar;

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

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

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

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

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

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

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

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

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

6.     Caraustars other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                        |  |     |  |                                                             
|----------------------- |  | --- |  | ------------------------------------------------------------
|                        |  | By: |  | /s/ RONALD J. DOMANICO                                      
|                        |  |     |  |                                                             
|                        |  |     |  | Ronald J. DomanicoVice President and Chief
Financial Officer
|                       
|                       
|                       
|                       
|                        |  |     |  |                                                             
|                       
|                       
|                       
|                       
|Date: November 12, 2002 |  |     |  |                                                             

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EXHIBIT INDEX

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|No.     |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3.01    |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference
 Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                                
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|3.02    |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit
3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                                             
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.01    |  |  |  | Specimen Common Stock Certificate (Incorporated by reference  Exhibit 4.01 to
Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.02    |  |  |  | Articles 3 and 4 of the Companys Amended and Restated Articles of Incorporation
(included in Exhibit 3.01)                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.03    |  |  |  | Article II of the Companys Third Amended and Restated Bylaws (included in Exhibit 3.02)                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.04    |  |  |  | Amended and Restated Rights Agreement, dated as of May 24, 1999, between Caraustar
Industries, Inc. and The Bank of New York as Rights Agent (Incorporated by reference
Exhibit 10.1 to current report on Form 8-K dated June 1, 1999 [SEC File No. 020646])                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.05    |  |  |  | Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of
New York, as Trustee, regarding The Companys 7 3/8% Notes due 2009 (Incorporated by
reference  Exhibit 4.05 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC
File No. 0-20646])                                                                                                                                                                                                                              
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.06    |  |  |  | First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries,
Inc. and The Bank of New York, as Trustee (Incorporated by reference  Exhibit 4.06 to
report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|4.07    |  |  |  | Second Supplemental Indenture, dated as of March 29, 2001, between the Company, the
Subsidiary Guarantors and The Bank of New York, as Trustee, regarding the Companys 7
3/8% Notes due 2009 (Incorporated by reference  Exhibit 4.07 to report on Form 10-K for
the year ended December 31, 2000 [SEC File No. 0-20646])                                                                                                                                                                                           
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.01   |  |  |  | Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank
of New York, as Trustee, regarding the Companys 7 1/4% Senior Notes due 2010
(Incorporated by reference  Exhibit 10.01 to report on Form 10-K for the year ended
December 31, 2000 [SEC File No. 0-20646])                                                                                                                                                                                                                  
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.02   |  |  |  | Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank
of New York, as Trustee, regarding the Companys 9 7/8% Senior Subordinated Notes due
2011 (Incorporated by reference  Exhibit 10.02 to report on Form 10-K for the year ended
December 31, 2000 [SEC File No. 0-20646])                                                                                                                                                                                                     
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.03   |  |  |  | Credit Agreement, dated as of March 29, 2001, among the Company, certain subsidiaries of
the Company, various lenders, Bank of America, N.A., as Administrative Agent, Banc of
America Securities LLC and Deutsche Banc Alex. Brown Inc. as Joint Lead Arrangers and
Joint Book Managers and Credit Suisse, First Boston and Credit Lyonnais New York Branch
as Co-Documentation Agents (Incorporated by reference  Exhibit 10.03 to report on Form
10-K for the year ended December 31, 2000 [SEC File No. 0-20646])
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.04   |  |  |  | Amendment No. 1 to Credit Agreement, dated as of September 10, 2001, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by Reference  Exhibit 10.04 to report on Form 10-Q for the quarter ended
September 30, 2001 [SEC File No. 0-20646]                                                                                                               
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.05   |  |  |  | Amendment No. 2 to Credit Agreement, dated as of November 30, 2001, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by reference  Exhibit 10.05 to report on Form 10-K for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                                   
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.06   |  |  |  | Amendment No. 3 to Credit Agreement, dated as of January 22, 2002, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent
(Incorporated by reference  Exhibit 10.06 to report on Form 10-K for the year ended
December 31, 2001 [SEC File No. 0-20646])                                                                                                                    
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.07  |  |  |  | Amendment No. 4 to Credit Agreement, dated as of September 23, 2002, by and among the
Company, as borrower, certain subsidiaries of the Company identified as guarantors listed
therein, the banks listed therein, and Bank of America, N.A., as Administrative Agent                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.08  |  |  |  | Security Agreement, dated as of September 23, 2002, among the Company, certain
subsidiaries of the Company identified as guarantors listed therein, and Bank of America,
N.A., as Collateral Agent                                                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                       
|No.     |  |   |  | Description                                                                                                                                                                                                                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.09   |  |  |  | Employment Agreement, dated December 31, 1990, between the Company and Thomas V. Brown
(Incorporated by reference  Exhibit 10.06 to Registration Statement on Form S-1 [SEC
File No. 33-50582])                                                                                                      
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.10   |  |  |  | Deferred Compensation Plan, together with copies of existing individual deferred
compensation agreements (Incorporated by reference  Exhibit 10.08 to Registration
Statement on Form S-1 [SEC File No. 33-50582])                                                                                    
|       
|       
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|10.11   |  |  |  | 1987 Executive Stock Option Plan (Incorporated by reference  Exhibit 10.09 to
Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                            
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.12   |  |  |  | 1993 Key Employees Share Ownership Plan (Incorporated by reference  Exhibit 10.10 to
Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.13   |  |  |  | Incentive Bonus Plan of the Company (Incorporated by reference  Exhibit 10.10 to Annual
Report for 1993 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                         
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.14   |  |  |  | 1996 Director Equity Plan of the Company (Incorporated by reference  Exhibit 10.12 to
report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No. 0-20646])                                                                                                                               
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.15   |  |  |  | Amendment No. 1 to the Companys 1996 Director Equity Plan, dated July 16, 1998
(Incorporated by reference  Exhibit 10.2 to Current Report on Form 8-K dated June 1,
1999 [SEC File No. 0-20646])                                                                                                    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.16   |  |  |  | Second Amended and Restated 1998 Key Employee Incentive Compensation Plan (Incorporated
by reference  Exhibit 10.13 to report on Form 10-Q for the quarter ended March 31, 2001
[SEC File No. 0-20646])                                                                                              
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.17   |  |  |  | Asset Purchase Agreement between Caraustar Industries, Inc., Sprague Paperboard, Inc. and
International Paper Company, dated as of March 4, 1999 (Incorporated by reference 
Exhibit 10.17 to report on Form 10-Q for the quarter ended March 31, 1999 [SEC File No.
0-20646])                       
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.18   |  |  |  | Guaranty Agreement, dated as of July 30, 1999, as amended of the Company in favor of
SunTrust Bank Atlanta (Incorporated by reference  Exhibit 10.19 to report on Form 10-K
for the year ended December 31, 2001 [SEC File No. 0-20646])                                                             
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.19  |  |  |  | Fifth Amendment to Guaranty Agreement, dated as of September 20, 2002, of the Company in
favor of SunTrust Bank Atlanta                                                                                                                                                                               
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.20   |  |  |  | Second Amended and Restated Parent Guaranty, dated as of August 1, 1999, as amended, of
the Company in favor of Toronto-Dominion (Texas), Inc., as Administrative Agent
(Incorporated by reference  Exhibit 10.20 to report on Form 10-K for the year ended
December 31, 2001 [SEC File
No. 0-20646])
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.21  |  |  |  | Revised Fifth Amendment to Parent Guaranty, dated as of September 23, 2002, of the
Company in favor of Toronto-Dominion (Texas), Inc., as Administrative Agent                                                                                                                                        
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.22   |  |  |  | Partnership Agreement of Standard Gypsum L.P. (Incorporated by reference  Exhibit 10.21
to report on Form 10-K for the year ended December 31, 2001 [SEC File No. 0-20646])                                                                                                                          
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.23   |  |  |  | Operating Agreement of Premier Boxboard Limited LLC (Incorporated by reference  Exhibit
10.22 to report on Form 10-K for the year ended December 31, 2001 [SEC File No. 0-20646])                                                                                                                    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.24   |  |   |  | Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container
Corporation, dated as of July 22, 2002 (Incorporated by reference  Exhibit 2 to Current
Report on Form 8-K dated October 15, 2002
[SEC File No. 0-20646])                                                    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.25  |  |   |  | First Amendment to Asset Purchase Agreement between Caraustar Industries, Inc. and
Smurfit-Stone Container Corporation, dated as of September 9, 2002                                                                                                                                                 
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.26  |  |  |  | Employment Agreement, dated February 13, 2002, between the Company and Michael J. Keough                                                                                                                                                                                                              
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.27  |  |  |  | Employment Agreement, dated October 1, 2002, between the Company and Ronald J. Domanico                                                                                                                                                                                                               
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.28  |  |  |  | Resignation Agreement, dated October 8, 2002, between the Company and Henry L. Thrash, III                                                                                                                                                                                                            
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.29  |  |  |  | Master Lease Agreement, with Riders Nos. 1 through 3 and Equipment Schedules Nos. 1
through 4, dated September 30, 2002, between Caraustar Industries, Inc. and Banc of
America Leasing & Capital, LLC                                                                                                
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|10.30# |  |  |  | Change in Control Severance Agreement, dated October 1, 2002, between the Company and
Ronald J. Domanico                                                                                                                                                                                              
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|        |  |   |  |                                                                                                                                                                                                                                                                                                       
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|11.01  |  |  |  | Computation of Earnings Per Share                                                                                                                                                                                                                                                                     
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|99.1    |  |  |  | Certification of
the CEO                                                                                                                                                                                                                                                                              
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|99.2   |  |  |  | Certification of
the CFO                                                                                                                                                                                                                                                                              



---

| |  | Filed herewith                                                                                                                                                                                                                                                                                                                                                 
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|# |  | This Exhibit is substantially identical to Change in Control Severance
Agreements for the following individuals: Thomas V. Brown, Michael J. Keough,
James L. Walden, Jimmy A. Russell, H. Lee Thrash, III, Gregory B. Cottrell,
John R. Foster, Barry A. Smedstad and William A. Nix, III, except the
agreement is dated March 1, 2002, for these individuals.

53