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

Commission File Number 0-20646



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Caraustar Industries, Inc.
(Exact name of registrant as specified in its charter)

|                                                                                  |  |                                                  
|--------------------------------------------------------------------------------- |  | -------------------------------------------------
|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.



Yes x        No o

Indicate the number of shares outstanding of each of issuers classes of common
stock, as of the latest practicable date, August 1, 2002.

|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 27,860,869   
|                             |  |              
|(Class)                      |  | (Outstanding)



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TABLE OF CONTENTS



|                                      |                                                                                       |                                                      |  |  |  |  |  | 
|------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                                      |                                                                                       | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                      |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                      |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                      |                                                                                       | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION           
|                                      | ITEM 1. LEGAL PROCEEDINGS                                                            
|                                      | ITEM 2. CHANGES IN SECURITIES                                                        
|                                      | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                          
|                                      | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                             
|SIGNATURES                           
|EXHIBIT INDEX                        
|Amendment No. 4 to Credit Agreement  
|Fifth Amendment to Guaranty Agreement
|Fifth Amendment to Parent Guaranty   
|Asset Purchase Agreement             
|Earnings Per Share                   



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED JUNE 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 June 30, 2002 and December 31, 2001.                                                 |  | 3   
|              |  |                                                                                                                                  |  |     
|              |  | Condensed Consolidated Statements of Operations for the three-month and six-month periods
ended June 30, 2002 and June 30, 2001. |  | 4   
|              |  |                                                                                                                                  |  |     
|              |  | Condensed Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 2002 and June 30, 2001.                 |  | 5   
|              |  |                                                                                                                                  |  |     
|              |  | Notes to Condensed Consolidated Financial Statements                                                                             |  | 6   
|              |  |                                                                                                                                  |  |     
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                            |  | 22  
|              |  |                                                                                                                                  |  |     
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                       |  | 37  
|              |  |                                                                                                                                  |  |     
|PART II      |  | OTHER INFORMATION                                                                                                                |  |     
|              |  |                                                                                                                                  |  |     
|Item 1.       |  | Legal Proceedings                                                                                                                |  | 38  
|              |  |                                                                                                                                  |  |     
|Item 2.       |  | Changes in Securities                                                                                                            |  | 38  
|              |  |                                                                                                                                  |  |     
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                                              |  | 38  
|              |  |                                                                                                                                  |  |     
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                                 |  | 39  
|              |  |                                                                                                                                  |  |     
|Signatures    |  |                                                                                                                                  |  | 40  
|              |  |                                                                                                                                  |  |     
|Exhibit Index |  |                                                                                                                                  |  | 41  

2



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##### Table of Contents






CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)

|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |              |          |         |  | 
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | - | -------- | -------- | ------- | ------------ | -------- | ------- |  | 
|                                        |  |                                                                                                                                                                          |                           |   |          | June 30, |         | December 31,
|                                        |  |                                                                                                                                                                          |                           |   |          | 2002     |         | 2001        
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                       
|                                       
|                                       
|ASSETS                                  |  |                                                                                                                                                                          |                           |   |          |          |         |             
|CURRENT ASSETS:                         |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  | Cash and cash equivalents                                                                                                                                                |                           | $ | 86,502   |          |         | $            | 64,244   |        
|                                        |  | Receivables, net of allowances                                                                                                                                           |                           |   | 106,177  |          |         |              | 86,297   |        
|                                        |  | Inventories                                                                                                                                                              |                           |   | 100,349  |          |         |              | 101,823  |        
|                                        |  | Refundable income taxes                                                                                                                                                  |                           |   | 1,310    |          |         |              | 17,949   |        
|                                        |  | Other current assets                                                                                                                                                     |                           |   | 20,083   |          |         |              | 16,456   |        
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  |                                                                                                                                                                          | Total current assets      |   |          | 314,421  |         |              |          | 286,769 | 
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|PROPERTY, PLANT AND EQUIPMENT:          |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  | Land                                                                                                                                                                     |                           |   | 12,620   |          |         |              | 12,620   |        
|                                        |  | Buildings and improvements                                                                                                                                               |                           |   | 138,156  |          |         |              | 135,727  |        
|                                        |  | Machinery and equipment                                                                                                                                                  |                           |   | 632,452  |          |         |              | 625,691  |        
|                                        |  | Furniture and fixtures                                                                                                                                                   |                           |   | 14,292   |          |         |              | 14,326   |        
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  |                                                                                                                                                                          | 797,520                   |   |          |          | 788,364 |             
|                                        |  | Less accumulated depreciation                                                                                                                                            |                           |   | (366,989 | )        |         |              | (337,988 | )      
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  | Property, plant and equipment, net                                                                                                                                       |                           |   | 430,531  |          |         |              | 450,376  |        
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|GOODWILL, net                           |  |                                                                                                                                                                          | 148,577                   |   |          |          | 146,465 |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |  |                                                                                                                                                                          | 58,877                    |   |          |          | 62,285  |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|OTHER ASSETS                            |  |                                                                                                                                                                          | 16,818                    |   |          |          | 15,086  |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  | $                                                                                                                                                                        | 969,224                   |   |          | $        | 960,981 |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|LIABILITIES AND SHAREHOLDERS EQUITY    |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|CURRENT LIABILITIES:                    |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  | Current maturities of debt                                                                                                                                               |                           | $ | 48       |          |         | $            | 48       |        
|                                        |  | Accounts payable                                                                                                                                                         |                           |   | 62,505   |          |         |              | 52,133   |        
|                                        |  | Accrued liabilities                                                                                                                                                      |                           |   | 39,473   |          |         |              | 37,749   |        
|                                        |  | Dividends payable                                                                                                                                                        |                           |   |         |          |         |              | 833      |        
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  |                                                                                                                                                                          | Total current liabilities |   |          | 102,026  |         |              |          | 90,763  | 
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|LONG-TERM DEBT, less current maturities |  |                                                                                                                                                                          | 512,140                   |   |          |          | 508,691 |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|DEFERRED INCOME TAXES                   |  |                                                                                                                                                                          | 66,619                    |   |          |          | 66,760  |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|DEFERRED COMPENSATION                   |  |                                                                                                                                                                          | 1,598                     |   |          |          | 1,741   |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|OTHER LIABILITIES                       |  |                                                                                                                                                                          | 4,679                     |   |          |          | 12,512  |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|MINORITY INTEREST                       |  |                                                                                                                                                                          | 857                       |   |          |          | 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, 27,857,768 and 27,853,897 shares
issued and outstanding at June 30, 2002
and December 31, 2001, respectively |                           |   | 2,786    |          |         |              | 2,785    |        
|                                        |  | Additional paid-in capital                                                                                                                                               |                           |   | 181,689  |          |         |              | 180,116  |        
|                                        |  | Retained earnings                                                                                                                                                        |                           |   | 97,404   |          |         |              | 97,488   |        
|                                        |  | Accumulated other comprehensive loss                                                                                                                                     |                           |   | (574     | )        |         |              | (810     | )      
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  |                                                                                                                                                                          | 281,305                   |   |          |          | 279,579 |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             
|                                        |  | $                                                                                                                                                                        | 969,224                   |   |          | $        | 960,981 |             
|                                        |  |                                                                                                                                                                          |                           |   |          |          |         |             

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

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)

|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |         | 
|--------------------------------------------------------------------------- | ---------------- | - | -------------------------- | ------ | ------------------------ | - | ------- | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                            |                  |   | For The Three Months Ended |        | For The Six Months Ended
|                                                                            |                  |   | June 30,                   |        | June 30,                
|                                                                            |                  |   |                            |        |                         
|                                                                            |                  |   | 2002                       |        | 2001                     |   | 2002    |        | 2001
|                                                                            |                  |   |                            |        |                          |   |         |        |     
|                                                                           
|                                                                           
|                                                                           
|SALES                                                                       |                  | $ | 233,220                    |        |                          | $ | 229,759 |        |      | $ | 455,383 |         |  | $ | 462,847 |        
|COST OF SALES                                                               |                  |   | 174,202                    |        |                          |   | 165,615 |        |      |   | 339,682 |         |  |   | 344,022 |        
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|                                                                            | Gross profit     |   |                            | 59,018 |                          |   |         | 64,144 |      |   |         | 115,701 |  |   |         | 118,825 | 
|FREIGHT COSTS                                                               |                  |   | 14,709                     |        |                          |   | 13,444  |        |      |   | 27,730  |         |  |   | 26,430  |        
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                |                  |   | 36,396                     |        |                          |   | 36,312  |        |      |   | 70,391  |         |  |   | 73,029  |        
|RESTRUCTURING COSTS                                                         |                  |   | 985                        |        |                          |   |        |        |      |   | 985     |         |  |   | 7,083   |        
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|                                                                            | Operating income |   |                            | 6,928  |                          |   |         | 14,388 |      |   |         | 16,595  |  |   |         | 12,283  | 
|OTHER (EXPENSE) INCOME:                                                     |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|Interest expense                                                            |                  |   | (9,377                     | )      |                          |   | (11,556 | )      |      |   | (18,679 | )       |  |   | (20,766 | )      
|Interest income                                                             |                  |   | 492                        |        |                          |   | 217     |        |      |   | 868     |         |  |   | 305     |        
|Equity in income (loss) of unconsolidated affiliates                        |                  |   | 1,032                      |        |                          |   | (1,150  | )      |      |   | 1,035   |         |  |   | (2,735  | )      
|Other, net                                                                  |                  |   | (79                        | )      |                          |   | (791    | )      |      |   | (111    | )       |  |   | (513    | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|                                                                            |                  |   | (7,932                     | )      |                          |   | (13,280 | )      |      |   | (16,887 | )       |  |   | (23,709 | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY INTEREST,
INCOME TAXES AND EXTRAORDINARY LOSS |                  |   | (1,004                     | )      |                          |   | 1,108   |        |      |   | (292    | )       |  |   | (11,426 | )      
|MINORITY INTEREST                                                           |                  |   | 55                         |        |                          |   | 65      |        |      |   | 78      |         |  |   | 37      |        
|(BENEFIT) PROVISION FOR INCOME TAXES                                        |                  |   | (368                       | )      |                          |   | 797     |        |      |   | (132    | )       |  |   | (3,634  | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|(LOSS) INCOME BEFORE EXTRAORDINARY LOSS                                     |                  |   | (581                       | )      |                          |   | 376     |        |      |   | (82     | )       |  |   | (7,755  | )      
|EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT
OF DEBT, NET OF TAX BENEFIT    |                  |   |                           |        |                          |   |        |        |      |   |        |         |  |   | (2,695  | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|NET (LOSS) INCOME                                                           |                  | $ | (581                       | )      |                          | $ | 376     |        |      | $ | (82     | )       |  | $ | (10,450 | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|BASIC                                                                       |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|(LOSS) INCOME PER COMMON SHARE BEFORE
EXTRAORDINARY LOSS                    |                  | $ | (0.02                      | )      |                          | $ | 0.01    |        |      | $ | (0.00   | )       |  | $ | (0.28   | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|EXTRAORDINARY LOSS PER COMMON SHARE                                         |                  | $ | 0.00                       |        |                          | $ | 0.00    |        |      | $ | 0.00    |         |  | $ | (0.10   | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|NET (LOSS) INCOME PER COMMON SHARE                                          |                  | $ | (0.02                      | )      |                          | $ | 0.01    |        |      | $ | (0.00   | )       |  | $ | (0.38   | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|Weighted average number of shares outstanding                               |                  |   | 27,857                     |        |                          |   | 27,852  |        |      |   | 27,857  |         |  |   | 27,834  |        
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|DILUTED                                                                     |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|(LOSS) INCOME PER COMMON SHARE BEFORE
EXTRAORDINARY LOSS                    |                  | $ | (0.02                      | )      |                          | $ | 0.01    |        |      | $ | (0.00   | )       |  | $ | (0.28   | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|EXTRAORDINARY LOSS PER COMMON SHARE                                         |                  | $ | 0.00                       |        |                          | $ | 0.00    |        |      | $ | 0.00    |         |  | $ | (0.10   | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|NET (LOSS) INCOME PER COMMON SHARE                                          |                  | $ | (0.02                      | )      |                          | $ | 0.01    |        |      | $ | (0.00   | )       |  | $ | (0.38   | )      
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        
|Diluted weighted average number of shares outstanding                       |                  |   | 27,857                     |        |                          |   | 27,865  |        |      |   | 27,857  |         |  |   | 27,834  |        
|                                                                            |                  |   |                            |        |                          |   |         |        |      |   |         |         |  |   |         |        

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 CASH FLOWS (UNAUDITED)
(In thousands)

|                           |                                                  |                                                                             |   |                          |         |      |   |        |          |  
|-------------------------- | ------------------------------------------------ | --------------------------------------------------------------------------- | - | ------------------------ | ------- | ---- | - | ------ | -------- | -
|                           |                                                  |                                                                             |   | For the Six Months Ended
|                           |                                                  |                                                                             |   | June 30,                
|                           |                                                  |                                                                             |   |                         
|                           |                                                  |                                                                             |   | 2002                     |         | 2001
|                           |                                                  |                                                                             |   |                          |         |     
|Cash provided by (used in) |                                                  |                                                                             |   |                          |         |      |   |       
|                           | Operating activities:                            |                                                                             |   |                          |         |      |   |        |         
|                           |                                                  | Net loss                                                                    |   | $                        | (82     | )    |   | $      | (10,450  | )
|                           |                                                  | Extraordinary loss from early extinguishment of debt                        |   |                          |        |      |   |        | 4,305    |  
|                           |                                                  | Depreciation and amortization                                               |   |                          | 30,896  |      |   |        | 31,011   |  
|                           |                                                  | Restructuring costs                                                         |   |                          | 985     |      |   |        | 3,987    |  
|                           |                                                  | Other noncash adjustments                                                   |   |                          | (347    | )    |   |        | (5,867   | )
|                           |                                                  | Equity in income or loss of unconsolidated affiliates,
net of distributions |   |                          | 1,920   |      |   |        | 2,735    |  
|                           |                                                  | Changes in current assets and liabilities, net of businesses acquired       |   |                          | 7,312   |      |   |        | (9,430   | )
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  | Net cash provided by operating activities                                   |   |                          | 40,684  |      |   |        | 16,291   |  
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           | Investing activities:                            |                                                                             |   |                          |         |      |   |        |         
|                           |                                                  | Purchases of property, plant and equipment                                  |   |                          | (10,701 | )    |   |        | (17,868  | )
|                           |                                                  | Acquisitions of businesses, net of cash acquired                            |   |                          | (115    | )    |   |        | (34      | )
|                           |                                                  | Other                                                                       |   |                          | 875     |      |   |        | 89       |  
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  | Net cash used in investing activities                                       |   |                          | (9,941  | )    |   |        | (17,813  | )
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           | Financing activities:                            |                                                                             |   |                          |         |      |   |        |         
|                           |                                                  | Proceeds from senior credit facility                                        |   |                          |        |      |   |        | 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                                |   |                          | (6,581  | )    |   |        | (67,109  | )
|                           |                                                  | 7.74% senior notes prepayment penalty                                       |   |                          |        |      |   |        | (3,565   | )
|                           |                                                  | Dividends paid                                                              |   |                          | (833    | )    |   |        | (7,202   | )
|                           |                                                  | Other                                                                       |   |                          | (1,071  | )    |   |        | (1,525   | )
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  | Net cash (used in) provided by financing activities                         |   |                          | (8,485  | )    |   |        | 17,799   |  
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           | Net change in cash and cash equivalents          |                                                                             |   | 22,258                   |         |      |   | 16,277 |         
|                           | Cash and cash equivalents at beginning of period |                                                                             |   | 64,244                   |         |      |   | 8,900  |         
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           | Cash and cash equivalents at end of period       |                                                                             | $ | 86,502                   |         |      | $ | 25,177 |         
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           | Supplemental Disclosures:                        |                                                                             |   |                          |         |      |   |        |         
|                           |                                                  | Cash payments for interest                                                  |   | $                        | 18,244  |      |   | $      | 14,504   |  
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  | Cash payments for income taxes                                              |   | $                        | 247     |      |   | $      | 1,113    |  
|                           |                                                  |                                                                             |   |                          |         |      |   |       
|                           |                                                  | Stock issued for acquisitions                                               |   | $                        |        |      |   | $      | 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
JUNE 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 six months ended
June 30, 2002 are not necessarily indicative of the results to be expected
for the full year.

Note 2.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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The acquisition was 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.
Final allocations of the purchase price will be completed by
December 31, 2002. The acquisition is not expected to
have a material impact on the operations of the Company.

Note 3.Inventory



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



| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories are carried at the lower of cost or market. Cost includes
materials, labor and overhead. Market, with respect to all inventories, is
replacement cost or net realizable value. As described above, all inventories
are valued using the first-in, first-out method.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Inventories at June 30, 2002 and December 31, 2001 were as follows (in
thousands):

|                                   |  |          |         |              |  |   |         | 
|---------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | 
|                                   |  | June 30, |         | December 31,
|                                   |  | 2002     |         | 2001        
|                                   |  |          |         |             
|Raw materials and supplies         |  | $        | 39,462  |              |  | $ | 40,357  | 
|Finished goods and work in process |  |          | 60,887  |              |  |   | 61,466  | 
|                                   |  |          |         |              |  |   |         | 
|Total inventory                    |  | $        | 100,349 |              |  | $ | 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
June 30, 2002 and 2001 was a loss of $290,000 and income of $390,000,
respectively. For the six months ended June 30, 2002 and 2001 total
comprehensive income or loss was income of $154,000 and a loss of
$10,574,000, respectively.

6



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##### Table of Contents



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



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

|                                        |  |          |         |              |  |   |         |  
|--------------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | -
|                                        |  | June 30, |         | December 31,
|                                        |  | 2002     |         | 2001        
|                                        |  |          |         |             
|Senior credit facility                  |  | $        |        |              |  | $ |        |  
|7 1/4 percent senior notes              |  |          | 25,594  |              |  |   | 25,449  |  
|7 3/8 percent senior notes              |  |          | 194,387 |              |  |   | 197,716 |  
|9 7/8 percent senior subordinated notes |  |          | 283,959 |              |  |   | 277,326 |  
|Other notes payable                     |  |          | 8,248   |              |  |   | 8,248   |  
|                                        |  |          |         |              |  |   |         |  
|Total debt                              |  |          | 512,188 |              |  |   | 508,739 |  
|Less current maturities                 |  |          | (48     | )            |  |   | (48     | )
|                                        |  |          |         |              |  |   |         |  
|Total long-term debt                    |  | $        | 512,140 |              |  | $ | 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. No borrowings were outstanding under the
facility as of June 30, 2002, although an aggregate of $10,000,000 in letter
of credit obligations were outstanding. The Company intends to use the
facility for working capital, capital expenditures and other general
corporate purposes. Although the facility is currently unsecured, the Companys
obligations under the facility are unconditionally guaranteed, on a joint and
several basis, by all of its existing and subsequently acquired wholly-owned
domestic subsidiaries. In addition, the Company expects that it and
its subsidiary guarantors under the senior credit facility will
likely be required to provide security to its senior lenders in
exchange for proposed modifications to certain compliance covenants
as discussed below.
|
| | Borrowings under the facility bear interest at a rate equal to, at the
Companys option, either (1) the base rate (which is equal to the greater of
the prime rate most recently announced by Bank of America, N.A., the
administrative agent under the facility, or the federal funds rate plus
one-half of 1 percent) or (2) the adjusted Eurodollar Interbank Offered Rate,
in each case plus an applicable margin determined by reference to the
Companys leverage ratio (which is defined under the facility as the ratio of
the Companys total debt to its total capitalization). Based on the Companys
leverage ratio at June 30, 2002, the current margins are 2.0 percent for
Eurodollar rate loans and 0.75 percent for base rate loans. Additionally, the
undrawn portion of the facility is subject to a facility fee at an annual
rate that is currently set at 0.5 percent based on the Companys leverage
ratio at June 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 interest coverage ratio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The facility contains events of default including, but not limited to,
nonpayment of principal or interest, violation of covenants, incorrectness of
representations and warranties, cross-default to other indebtedness,
bankruptcy and other insolvency events, material judgments, certain ERISA
events, actual or asserted invalidity of loan documentation and certain
changes of control of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | During the third and fourth quarters of 2001 and the first and second
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 this agreement. This amendment modified the definitions of
Interest Expense, Premier Boxboard Interest Expense and Standard Gypsum
Interest Expense to include interest income and the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

7



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 proposed acquisition of the Smurfit Industrial
Packaging Group, the Company entered into a fourth amendment to
its senior
credit facility in July 2002. The purpose of this amendment was to
obtain the lenders' required consent to the consummation of the
acquisition, including the incurrence of no less than
$50,000,000, but up to $60,000,000 in subordinated
financing to fund a portion of the acquisition price, and to lower
the minimum allowable tangible net worth for all periods after the
effective date of the amendment. Additionally, this amendment
increased 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 provisions of
the amendment permitting the partial subordinated debt financing for
the acquisition are currently effective, and the remainder of the amendment
will become effective upon (and only upon) the closing of the
acquisition. Under the existing terms of the fourth amendment, and
assuming the Company utilizes the financing contemplated by those
terms, the Company
expects, based on its leverage ratio after giving effect to the
acquisition, that the new margins would be 2.75 percent for Eurodollar loans
and 1.50 percent for base rate loans and that the new facility fee rate would be
0.55 percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | In addition, under the existing terms of
the fourth amendment, the Company will be required upon the closing
of its acquisition of the Smurfit Industrial Packaging Group, to
enter into a security agreement under which the Company and its
subsidiary guarantors under the senior credit facility will grant a
first priority security interest in the Companys respective accounts
receivable and inventory to secure its obligations under the credit
facility and its obligations under the Companys 50% guarantees of
the credit facilities of Standard Gypsum and Premier Boxboard. As
provided under the existing terms of the fourth amendment, this
security interest does not become effective until the first date on
which the Companys utilization of the credit facility (including
the issuance of letters of credit) equals or exceeds 50% of
the aggregate commitments and the ratio of the Companys total debt
to EBITDA, measured as of the fiscal quarter then most recently
ended, is greater than 4.25 to 1.0. The Company is currently in discussions
with the lenders under its senior credit agreement to further modify the terms of the fourth
amendment to expand its potential financing options for the
acquisition, to modify the maximum permitted leverage ratio covenant
beginning with the third quarter of 2002 and to replace the minium
interest coverage ratio covenant with a minimum fixed charge ratio
covenant beginning with the third quarter of 2002. The company
believes these further modifications may, in addition to increasing
its flexibility to finance the acquisition, be necessary to enable it to avoid violations of the
leverage ratio and interest coverage ratio covenants for the third
quarter of 2002. The Company expects that in exchange for these
proposed modifications, the Companys lenders may require
increased pricing and immediate effectiveness of the collateral
requirement described above. Although the Company expects to be able to
obtain these modifications on acceptable terms, it can give no
assurance that it will be able to do so. See Management's Discussion
and Analysis of Financial Condition and Results of Operations Liquidity
Sources and Risks.
|
| | 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 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 June 30, 2002 for each
of the Companys interest rate swaps. The June 30, 2002 three-month LIBOR is
presented for informational purposes only and does not represent the
Companys actual effective rates in place at June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                        |  |          |         |        |  |          |       |               |  |             |      |   |  |  |       |  
|--------------------------------------- |  | -------- | ------- | ------ |  | -------- | ----- | ------------- |  | ----------- | ---- | - |  |  | ----- | -
|                                        |  |          |         |        |  |          |       |               |  | Three-Month |      |   |  | 
|                                        |  | Notional |         |        |  |          |       | LIBOR at      |  |             |      |  
|                                        |  | Amount   |         | Fixed  |  | June 30, |       | Total        
|Debt Instrument                         |  | (000's)  |         | Spread |  | 2002     |       | Variable Rate
|                                        |  |          |         |        |  |          |       |              
|7 3/8 percent senior notes              |  | $        | 50,000  |        |  |          | 2.365 | %             |  |             | 1.86 | % |  |  | 4.225 | %
|7 3/8 percent senior notes              |  |          | 25,000  |        |  |          | 1.445 |               |  |             | 1.86 |   |  |  | 3.305 |  
|7 3/8 percent senior notes              |  |          | 25,000  |        |  |          | 1.775 |               |  |             | 1.86 |   |  |  | 3.635 |  
|9 7/8 percent senior subordinated notes |  |          | 185,000 |        |  |          | 4.400 |               |  |             | 1.86 |   |  |  | 6.260 |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 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. See
Note 13.
Subsequent Events regarding the subsequent August 2002
unwinding of the $185,000,000 interest rate swap
agreement related to the 9 7/8 percent senior subordinated notes.

8



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|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     | 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 June 30, 2002 the
aggregate fair value of the swap agreements is approximately $2,498,000 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.                                                                                                                                                                         
|                                    
|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 will be reviewed periodically (at least
annually) for impairment. The Company adopted this pronouncement effective
January 1, 2002. The Company is required to complete the initial impairment
test within six months of adoption of SFAS 142. The Company has completed its
initial impairment test and has determined that no impairment of goodwill
exists.                                                                                                                                                                                                                                                                          
|                                    
|                                     | 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 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 cans.
The carton and custom packaging segment consists of facilities that produce
printed and unprinted folding carton and set-up boxes and facilities that provide
contract manufacturing and contract packaging services. Intersegment sales
are recorded at prices which approximate market prices.
|
| | Operating income includes all costs and expenses directly related to the
segment involved. Corporate expenses include corporate, general,
administrative, and unallocated information systems expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

9



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##### Table of Contents





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

|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |         |         | 
|-------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ------ | -------------- | ------- | -------------- | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                           |                                                      |       |        | Three Months   |         | Six Months    
|                                                                           |                                                      |       |        | Ended June 30, |         | Ended June 30,
|                                                                           |                                                      |       |        |                |         |               
|                                                                           |                                                      |       |        | 2002           |         | 2001           |        | 2002    |         | 2001
|                                                                           |                                                      |       |        |                |         |                |        |         |         |     
|Sales (external customers):                                                |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|                                                                           | Paperboard                                           |       | $      | 81,299         |         |                | $      | 81,993  |         |      | $      | 159,128 |         |   | $       | 164,791 |        
|                                                                           | Tube, core and composite container                   |       |        | 68,942         |         |                |        | 66,691  |         |      |        | 133,800 |         |   |         | 134,837 |        
|                                                                           | Carton and custom packaging                          |       |        | 82,979         |         |                |        | 81,075  |         |      |        | 162,455 |         |   |         | 163,219 |        
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|                                                                           |                                                      | Total |        | $              | 233,220 |                |        | $       | 229,759 |      |        | $       | 455,383 |   |         | $       | 462,847 | 
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |         |        
|Sales (intersegment):                                                      |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|                                                                           | Paperboard                                           |       | $      | 36,317         |         |                | $      | 27,849  |         |      | $      | 68,575  |         |   | $       | 63,492  |        
|                                                                           | Tube, core and composite container                   |       |        | 956            |         |                |        | 953     |         |      |        | 1,835   |         |   |         | 1,955   |        
|                                                                           | Carton and custom packaging                          |       |        | 214            |         |                |        | 166     |         |      |        | 371     |         |   |         | 301     |        
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|                                                                           |                                                      | Total |        | $              | 37,487  |                |        | $       | 28,968  |      |        | $       | 70,781  |   |         | $       | 65,748  | 
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |         |        
|Operating income:                                                          |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|                                                                           | Paperboard(A)                                        |       | $      | 4,621          |         |                | $      | 13,365  |         |      | $      | 13,912  |         |   | $       | 13,153  |        
|                                                                           | Tube, core and composite container                   |       |        | 3,128          |         |                |        | 2,193   |         |      |        | 6,401   |         |   |         | 5,221   |        
|                                                                           | Carton and custom packaging(B)                       |       |        | 2,744          |         |                |        | 1,619   |         |      |        | 3,836   |         |   |         | 641     |        
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|                                                                           |                                                      | Total |        |                | 10,493  |                |        |         | 17,177  |      |        |         | 24,149  |   |         |         | 19,015  | 
|Corporate expense                                                          |                                                      |       | (3,565 | )              |         |                | (2,789 | )       |         |      | (7,554 | )       |         |   | (6,732  | )      
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|Operating income                                                           |                                                      |       | 6,928  |                |         |                | 14,388 |         |         |      | 16,595 |         |         |   | 12,283  |        
|                                                                           | Interest expense                                     |       |        | (9,377         | )       |                |        | (11,556 | )       |      |        | (18,679 | )       |   |         | (20,766 | )      
|                                                                           | Interest income                                      |       |        | 492            |         |                |        | 217     |         |      |        | 868     |         |   |         | 305     |        
|                                                                           | Equity in income (loss) of unconsolidated affiliates |       |        | 1,032          |         |                |        | (1,150  | )       |      |        | 1,035   |         |   |         | (2,735  | )      
|                                                                           | Other, net                                           |       |        | (79            | )       |                |        | (791    | )       |      |        | (111    | )       |   |         | (513    | )      
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |        
|(Loss) Income before income taxes, minority interest
andextraordinary loss |                                                      | $     | (1,004 | )              |         | $              | 1,108  |         |         | $    | (292   | )       |         | $ | (11,426 | )      
|                                                                           |                                                      |       |        |                |         |                |        |         |         |      |        |         |         |   |         |         |        



---



| | (A) |  | Results include a second quarter 2002 charge to operations of
$985,000 related to the revised estimate of fixed asset disposals 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 $3,800,000 reduction in reserves in the second
quarter of 2001 related to expiring unfavorable supply contracts at 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. SFAS No. 142 requires that goodwill no longer be
amortized, but instead tested for impairment at least annually. 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.



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

|                                  |                                           |                                           |   |               |       |                  |   |             |      |  |   |      |      | 
|--------------------------------- | ----------------------------------------- | ----------------------------------------- | - | ------------- | ----- | ---------------- | - | ----------- | ---- |  | - | ---- | ---- | 
|                                  |                                           |                                           |   | Three Months  |       | Income Per Share
|                                  |                                           |                                           |   | Ended         |       |                 
|                                  |                                           |                                           |   | June 30, 2001 |       | Basic (1)        |   | Diluted (1)
|                                  |                                           |                                           |   |               |       |                  |   |            
|Income before extraordinary item: |                                           |                                           |   |               |       |                  |   |             |      |  |   |     
|                                  | Reported income before extraordinary item |                                           | $ | 376           |       |                  | $ | 0.01        |      |  | $ | 0.01 |     
|                                  | Goodwill amortization                     |                                           |   | 670           |       |                  |   | 0.02        |      |  |   | 0.02 |     
|                                  |                                           |                                           |   |               |       |                  |   |             |      |  |   |     
|                                  |                                           | Adjusted income before extraordinary item |   | $             | 1,046 |                  |   | $           | 0.04 |  |   | $    | 0.04 | 
|                                  |                                           |                                           |   |               |       |                  |   |             |      |  |   |      |     
|Net income:                       |                                           |                                           |   |               |       |                  |   |             |      |  |   |     
|                                  | Reported net income                       |                                           | $ | 376           |       |                  | $ | 0.01        |      |  | $ | 0.01 |     
|                                  | Goodwill amortization                     |                                           |   | 670           |       |                  |   | 0.02        |      |  |   | 0.02 |     
|                                  |                                           |                                           |   |               |       |                  |   |             |      |  |   |     
|                                  |                                           | Adjusted net income                       |   | $             | 1,046 |                  |   | $           | 0.04 |  |   | $    | 0.04 | 
|                                  |                                           |                                           |   |               |       |                  |   |             |      |  |   |      |     

10



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##### Table of Contents



|                                |                                         |                                         |   |               |        |                |   |         |       |   |   |       |       |  
|------------------------------- | --------------------------------------- | --------------------------------------- | - | ------------- | ------ | -------------- | - | ------- | ----- | - | - | ----- | ----- | -
|                                |                                         |                                         |   | Six Months    |        | Loss Per Share
|                                |                                         |                                         |   | Ended         |        |               
|                                |                                         |                                         |   | June 30, 2001 |        | Basic          |   | Diluted
|                                |                                         |                                         |   |               |        |                |   |        
|Loss before extraordinary item: |                                         |                                         |   |               |        |                |   |         |       |   |   |      
|                                | Reported loss before extraordinary item |                                         | $ | (7,755        | )      |                | $ | (0.28   | )     |   | $ | (0.28 | )    
|                                | Goodwill amortization                   |                                         |   | 1,372         |        |                |   | 0.05    |       |   |   | 0.05  |      
|                                |                                         |                                         |   |               |        |                |   |         |       |   |   |      
|                                |                                         | Adjusted loss before extraordinary item |   | $             | (6,383 | )              |   | $       | (0.23 | ) |   | $     | (0.23 | )
|                                |                                         |                                         |   |               |        |                |   |         |       |   |   |       |      
|Net loss:                       |                                         |                                         |   |               |        |                |   |         |       |   |   |      
|                                | Reported net loss                       |                                         | $ | (10,450       | )      |                | $ | (0.38   | )     |   | $ | (0.38 | )    
|                                | Goodwill amortization                   |                                         |   | 1,372         |        |                |   | 0.05    |       |   |   | 0.05  |      
|                                |                                         |                                         |   |               |        |                |   |         |       |   |   |      
|                                |                                         | Adjusted net loss                       |   | $             | (9,078 | )              |   | $       | (0.33 | ) |   | $     | (0.33 | )
|                                |                                         |                                         |   |               |        |                |   |         |       |   |   |       |      



---

|(1) |  | Individual per share components do not sum to the total due to
rounding.
|--- |  | ------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of June 30, 2002, goodwill of $148,577,000 (net of $20,500,000 of
amortization) was attributable to the Companys segments as follows:
$77,648,000 for Paperboard, $27,759,000 for Tube, Core and Composite
Container and $43,170,000 for Carton and Custom Packaging. During the first
six months of 2002, $1,000,000 of goodwill was acquired by the Company and no
goodwill was 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 June 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.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | The following is a summary of the Camden
and Chicago mills' restructuring activity from January 1, 2001 to
June 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    |       
|                                     |         |            |      |            |  |               |        |            |   |       |        |       |  |   |      |     |  |   |        |       



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

11



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

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   |        | Six Months    
|                                                                       |  | Ended June 30, |        | Ended June 30,
|                                                                       |  |                |        |               
|                                                                       |  | 2002           |        | 2001           |  | 2002 |        | 2001
|                                                                       |  |                |        |                |  |      |        |     
|Calculation of Basic (Loss) Income Per Share:                          |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|(Loss) income before extraordinary item                                |  | $              | (581   | )              |  | $    | 376    |      |  | $ | (82    | ) |  | $ | (7,755 | )
|Weighted average number of common shares
outstanding                   |  |                | 27,857 |                |  |      | 27,852 |      |  |   | 27,857 |   |  |   | 27,834 |  
|                                                                       |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|Basic (loss) income per share                                          |  | $              | (0.02  | )              |  | $    | 0.01   |      |  | $ | (0.00  | ) |  | $ | (0.28  | )
|                                                                       |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|Calculation of Diluted (Loss) Income Per Share:                        |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|(Loss) income before extraordinary item                                |  | $              | (581   | )              |  | $    | 376    |      |  | $ | (82    | ) |  | $ | (7,755 | )
|Weighted average number of common shares
outstanding                   |  |                | 27,857 |                |  |      | 27,852 |      |  |   | 27,857 |   |  |   | 27,834 |  
|Effect of dilutive stock options                                       |  |                |       |                |  |      | 13     |      |  |   |       |   |  |   |       |  
|                                                                       |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
outstanding assuming dilution |  |                | 27,857 |                |  |      | 27,865 |      |  |   | 27,857 |   |  |   | 27,834 |  
|                                                                       |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted (loss) income per share                                        |  | $              | (0.02  | )              |  | $    | 0.01   |      |  | $ | (0.00  | ) |  | $ | (0.28  | )
|                                                                       |  |                |        |                |  |      |        |      |  |   |        |   |  |   |        |  



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Approximately 1,484,000 and 1,856,000 common stock equivalents are excluded
from the three month periods ended June 30, 2002 and 2001,
respectively, and approximately 1,620,000 and 1,813,000 common stock
equivalents are excluded from the first half of 2002 and 2001,
respectively. These common stock equivalents are excluded because they are anti-dilutive.

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 the condensed consolidating
financial statements presented are more meaningful in understanding
the financial position of the Subsidiary Guarantors and the separate
financial statements are deemed not material to investors.

12



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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 June 30, 2002                 
|                                        |                                      |                           |         |                                     
|                                        |                                      |                           |         |                                      |         |              |         | Guarantor    |         | Nonguarantor |        |         |       |   |          |          |      |  
|                                        |                                      |                           |         | Parent                               |         | Subsidiaries |         | Subsidiaries |         | Eliminations |        | Total  
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |        
|                                        |                                      |                           |         | ASSETS                              
|CURRENT ASSETS:                         |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |         
|                                        | Cash and cash equivalents            |                           | $       | 85,773                               |         |              | $       | 199          |         |              | $      | 530     |       |   |          |          |      |   | $       | 86,502   |        
|                                        | Intercompany funding                 |                           |         | 285,536                              |         |              |         | (275,958     | )       |              |        | (9,578  | )     |   |          |          |      |   |         |         |        
|                                        | Receivables, net of allowances       |                           |         | 2,703                                |         |              |         | 99,467       |         |              |        | 4,007   |       |   |          |          |      |   |         | 106,177  |        
|                                        | Intercompany accounts receivable     |                           |         |                                     |         |              |         | 455          |         |              |        | 131     |       |   | $        | (586     | )    |   |         |         |        
|                                        | Inventories                          |                           |         |                                     |         |              |         | 96,203       |         |              |        | 4,146   |       |   |          |          |      |   |         | 100,349  |        
|                                        | Refundable income taxes              |                           |         | 1,005                                |         |              |         | 139          |         |              |        | 166     |       |   |          |          |      |   |         | 1,310    |        
|                                        | Other current assets                 |                           |         | 13,111                               |         |              |         | 6,447        |         |              |        | 525     |       |   |          |          |      |   |         | 20,083   |        
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        |                                      | Total current assets      |         |                                      | 388,128 |              |         |              | (73,048 | )            |        |         | (73   | ) |          |          | (586 | ) |         |          | 314,421 | 
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|PROPERTY, PLANT AND EQUIPMENT           |                                      |                           | 10,618  |                                      |         |              | 760,202 |              |         |              | 26,700 |         |       |   |          |          |      |   | 797,520 |         
|                                        | Less accumulated depreciation        |                           |         | (5,463                               | )       |              |         | (345,390     | )       |              |        | (16,136 | )     |   |          |          |      |   |         | (366,989 | )      
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        | Property, plant and equipment, net   |                           |         | 5,155                                |         |              |         | 414,812      |         |              |        | 10,564  |       |   |          |          |      |   |         | 430,531  |        
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |                                      |                           | 522,958 |                                      |         |              | 129,849 |              |         |              |       |         |       |   | (652,807 | )        |      |   |        |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|GOODWILL, net                           |                                      |                           |        |                                      |         |              | 145,515 |              |         |              | 3,062  |         |       |   |          |          |      |   | 148,577 |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |                                      |                           | 58,295  |                                      |         |              | 582     |              |         |              |       |         |       |   |          |          |      |   | 58,877  |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|OTHER ASSETS                            |                                      |                           | 14,098  |                                      |         |              | 2,230   |              |         |              | 490    |         |       |   |          |          |      |   | 16,818  |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        |                                      | $                         | 988,634 |                                      |         | $            | 619,940 |              |         | $            | 14,043 |         |       | $ | (653,393 | )        |      | $ | 969,224 |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        |                                      |                           |         | LIABILITIES AND SHAREHOLDERS EQUITY
|CURRENT LIABILITIES:                    |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |         
|                                        | Current maturities of debt           |                           | $       |                                     |         |              | $       | 48           |         |              | $      |        |       |   |          |          |      |   | $       | 48       |        
|                                        | Accounts payable                     |                           |         | 14,133                               |         |              |         | 45,401       |         |              |        | 2,971   |       |   |          |          |      |   |         | 62,505   |        
|                                        | Intercompany accounts payable        |                           |         |                                     |         |              |         | 131          |         |              |        | 455     |       |   | $        | (586     | )    |   |         |         |        
|                                        | Accrued liabilities                  |                           |         | 7,002                                |         |              |         | 31,412       |         |              |        | 1,059   |       |   |          |          |      |   |         | 39,473   |        
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        |                                      | Total current liabilities |         |                                      | 21,135  |              |         |              | 76,992  |              |        |         | 4,485 |   |          |          | (586 | ) |         |          | 102,026 | 
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|LONG-TERM DEBT, less current maturities |                                      |                           | 503,940 |                                      |         |              | 8,200   |              |         |              |       |         |       |   |          |          |      |   | 512,140 |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|DEFERRED INCOME TAXES                   |                                      |                           | 52,985  |                                      |         |              | 12,241  |              |         |              | 1,393  |         |       |   |          |          |      |   | 66,619  |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|DEFERRED COMPENSATION                   |                                      |                           | 1,544   |                                      |         |              | 54      |              |         |              |       |         |       |   |          |          |      |   | 1,598   |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|OTHER LIABILITIES                       |                                      |                           |        |                                      |         |              | 4,679   |              |         |              |       |         |       |   |          |          |      |   | 4,679   |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|MINORITY INTEREST                       |                                      |                           |        |                                      |         |              |        |              |         |              |       |         |       |   | 857      |          |      |   | 857     |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|SHAREHOLDERS EQUITY:                   |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |         
|                                        | Common stock                         |                           |         | 2,739                                |         |              |         | 884          |         |              |        | 523     |       |   |          | (1,360   | )    |   |         | 2,786    |        
|                                        | Additional paid-in capital           |                           |         | 207,341                              |         |              |         | 600,030      |         |              |        | 7,961   |       |   |          | (633,643 | )    |   |         | 181,689  |        
|                                        | Retained earnings                    |                           |         | 198,950                              |         |              |         | (83,140      | )       |              |        | 255     |       |   |          | (18,661  | )    |   |         | 97,404   |        
|                                        | Accumulated other comprehensive loss |                           |         |                                     |         |              |         |             |         |              |        | (574    | )     |   |          |          |      |   |         | (574     | )      
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        |                                      |                           | 409,030 |                                      |         |              | 517,774 |              |         |              | 8,165  |         |       |   | (653,664 | )        |      |   | 281,305 |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        
|                                        |                                      | $                         | 988,634 |                                      |         | $            | 619,940 |              |         | $            | 14,043 |         |       | $ | (653,393 | )        |      | $ | 969,224 |         
|                                        |                                      |                           |         |                                      |         |              |         |              |         |              |        |         |       |   |          |          |      |   |         |          |        

13



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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 |         | Total  
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |        
|                                        |                                      |                           |            | ASSETS                              
|CURRENT ASSETS:                         |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |         
|                                        | Cash and cash equivalents            |                           | $          | 63,277                               |         |              | $        | 432          |          |              | $       | 535     |       |   |           |          |      |   | $        | 64,244   |        
|                                        | Intercompany funding                 |                           |            | 324,844                              |         |              |          | (315,985     | )        |              |         | (8,859  | )     |   |           |          |      |   |          |         |        
|                                        | 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      |            |                                      | 419,795 |              |          |              | (131,763 | )            |         |         | (705  | ) |           |          | (558 | ) |          |          | 286,769 | 
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|PROPERTY, PLANT AND EQUIPMENT           |                                      |                           | 9,830      |                                      |         |              | 753,133  |              |          |              | 25,401  |         |       |   |           |          |      |   | 788,364  |         
|                                        | Less accumulated depreciation        |                           |            | (4,523                               | )       |              |          | (318,010     | )        |              |         | (15,455 | )     |   |           |          |      |   |          | (337,988 | )      
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|                                        | Property, plant and equipment, net   |                           |            | 5,307                                |         |              |          | 435,123      |          |              |         | 9,946   |       |   |           |          |      |   |          | 450,376  |        
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES |                                      |                           | 522,958    |                                      |         |              | 126,774  |              |          |              |        |         |       |   | (649,732  | )        |      |   |         |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|GOODWILL, net                           |                                      |                           |           |                                      |         |              | 145,515  |              |          |              | 950     |         |       |   |           |          |      |   | 146,465  |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|INVESTMENT IN UNCONSOLIDATED AFFILIATES |                                      |                           | 60,134     |                                      |         |              | 2,151    |              |          |              |        |         |       |   |           |          |      |   | 62,285   |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|OTHER ASSETS                            |                                      |                           | 12,289     |                                      |         |              | 2,754    |              |          |              | 43      |         |       |   |           |          |      |   | 15,086   |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|                                        |                                      |                           | $1,020,483 |                                      |         | $            | 580,554  |              |          |              | $10,234 |         |       |   | $(650,290 | )        |      |   | $960,981 |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|                                        |                                      |                           |            | LIABILITIES AND SHAREHOLDERS EQUITY
|CURRENT LIABILITIES:                    |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |         
|                                        | Current maturities of debt           |                           | $          |                                     |         |              | $        | 48           |          |              | $       |        |       |   |           |          |      |   | $        | 48       |        
|                                        | Accounts payable                     |                           |            | 16,862                               |         |              |          | 32,866       |          |              |         | 2,405   |       |   |           |          |      |   |          | 52,133   |        
|                                        | Intercompany accounts payable        |                           |            |                                     |         |              |          | 288          |          |              |         | 270     |       |   | $         | (558     | )    |   |          |         |        
|                                        | Accrued liabilities                  |                           |            | 7,538                                |         |              |          | 29,428       |          |              |         | 783     |       |   |           |          |      |   |          | 37,749   |        
|                                        | Dividends payable                    |                           |            | 833                                  |         |              |          |             |          |              |         |        |       |   |           |          |      |   |          | 833      |        
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|                                        |                                      | Total current liabilities |            |                                      | 25,233  |              |          |              | 62,630   |              |         |         | 3,458 |   |           |          | (558 | ) |          |          | 90,763  | 
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|LONG-TERM DEBT, less current maturities |                                      |                           | 499,708    |                                      |         |              | 8,983    |              |          |              |        |         |       |   |           |          |      |   | 508,691  |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|DEFERRED INCOME TAXES                   |                                      |                           | 53,367     |                                      |         |              | 12,243   |              |          |              | 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                                |         |              |          | 884          |          |              |         | 142     |       |   |           | (979     | )    |   |          | 2,785    |        
|                                        | Additional paid-in capital           |                           |            | 207,240                              |         |              |          | 598,597      |          |              |         | 5,228   |       |   |           | (630,949 | )    |   |          | 180,116  |        
|                                        | Retained earnings                    |                           |            | 222,035                              |         |              |          | (106,874     | )        |              |         | 1,066   |       |   |           | (18,739  | )    |   |          | 97,488   |        
|                                        | Accumulated other comprehensive loss |                           |            |                                     |         |              |          |             |          |              |         | (810    | )     |   |           |          |      |   |          | (810     | )      
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|                                        |                                      |                           | 432,013    |                                      |         |              | 492,607  |              |          |              | 5,626   |         |       |   | (650,667  | )        |      |   | 279,579  |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        
|                                        |                                      |                           | $1,020,483 |                                      |         |              | $580,554 |              |          |              | $10,234 |         |       |   | $(650,290 | )        |      |   | $960,981 |         
|                                        |                                      |                           |            |                                      |         |              |          |              |          |              |         |         |       |   |           |          |      |   |          |          |        

14



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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 June 30, 2002
|                                                        |                         |   |                                         
|                                                        |                         |   |                                          |        |              |   | Guarantor    |        | Nonguarantor |   |       |       |   |   |         |   | 
|                                                        |                         |   | Parent                                   |        | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Total
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |      
|SALES                                                   |                         | $ |                                         |        |              | $ | 270,555      |        |              | $ | 6,521 |       |   | $ | (43,856 | ) |  | $ | 233,220 |       
|COST OF SALES                                           |                         |   | (94                                      | )      |              |   | 213,073      |        |              |   | 5,079 |       |   |   | (43,856 | ) |  |   | 174,202 |       
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       
|                                                        | Gross profit            |   |                                          | 94     |              |   |              | 57,482 |              |   |       | 1,442 |   |   |         |  |  |   |         | 59,018 | 
|FREIGHT COSTS                                           |                         |   |                                         |        |              |   | 14,444       |        |              |   | 265   |       |   |   |         |   |  |   | 14,709  |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |                         |   | 3,637                                    |        |              |   | 31,463       |        |              |   | 1,296 |       |   |   |         |   |  |   | 36,396  |       
|RESTRUCTURING COSTS                                     |                         |   |                                         |        |              |   | 985          |        |              |   |      |       |   |   |         |   |  |   | 985     |       
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       
|                                                        | Operating
(loss) income |   |                                          | (3,543 | )            |   |              | 10,590 |              |   |       | (119  | ) |   |         |  |  |   |         | 6,928  | 
|OTHER (EXPENSE) INCOME:                                 |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       
|Interest expense                                        |                         |   | (9,288                                   | )      |              |   | (88          | )      |              |   | (102  | )     |   |   | 101     |   |  |   | (9,377  | )     
|Interest income                                         |                         |   | 495                                      |        |              |   | 97           |        |              |   | 1     |       |   |   | (101    | ) |  |   | 492     |       
|Equity in income (loss) of unconsolidated affiliates    |                         |   | 1,037                                    |        |              |   | (5           | )      |              |   |      |       |   |   |         |   |  |   | 1,032   |       
|Other, net                                              |                         |   |                                         |        |              |   | 51           |        |              |   | (130  | )     |   |   |         |   |  |   | (79     | )     
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       
|                                                        |                         |   | (7,756                                   | )      |              |   | 55           |        |              |   | (231  | )     |   |   |        |   |  |   | (7,932  | )     
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       
|(LOSS) INCOME
BEFORE MINORITY INTEREST AND INCOME TAXES |                         |   | (11,299                                  | )      |              |   | 10,645       |        |              |   | (350  | )     |   |   |        |   |  |   | (1,004  | )     
|MINORITY INTEREST                                       |                         |   |                                         |        |              |   |             |        |              |   |      |       |   |   | 55      |   |  |   | 55      |       
|BENEFIT FOR INCOME TAXES                                |                         |   | (368                                     | )      |              |   |             |        |              |   |      |       |   |   |         |   |  |   | (368    | )     
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       
|NET (LOSS) INCOME                                       |                         | $ | (10,931                                  | )      |              | $ | 10,645       |        |              | $ | (350  | )     |   | $ | 55      |   |  | $ | (581    | )     
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       |       |   |   |         |   |  |   |         |       

15



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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 Three Months Ended June 30, 2001
|                                                        |                         |   |                                         
|                                                        |                         |   |                                          |        |              |   | Guarantor    |        | Nonguarantor |   |        |        |   |   |         |   | 
|                                                        |                         |   | Parent                                   |        | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Total 
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |       
|SALES                                                   |                         | $ |                                         |        |              | $ | 261,116      |        |              | $ | 6,123  |        |   | $ | (37,480 | ) |  | $ | 229,759 |       
|COST OF SALES                                           |                         |   | 6                                        |        |              |   | 198,125      |        |              |   | 4,964  |        |   |   | (37,480 | ) |  |   | 165,615 |       
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       
|                                                        | Gross profit            |   |                                          | (6     | )            |   |              | 62,991 |              |   |        | 1,159  |   |   |         |  |  |   |         | 64,144 | 
|FREIGHT COSTS                                           |                         |   |                                          |        |              |   | 13,237       |        |              |   | 207    |        |   |   |         |   |  |   | 13,444  |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |                         |   | 3,977                                    |        |              |   | 30,223       |        |              |   | 2,112  |        |   |   |         |   |  |   | 36,312  |       
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       
|                                                        | Operating
(loss) income |   |                                          | (3,983 | )            |   |              | 19,531 |              |   |        | (1,160 | ) |   |         |  |  |   |         | 14,388 | 
|OTHER (EXPENSE) INCOME:                                 |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       
|Interest expense                                        |                         |   | (11,448                                  | )      |              |   | (314         | )      |              |   | (4     | )      |   |   | 210     |   |  |   | (11,556 | )     
|Interest income                                         |                         |   | 418                                      |        |              |   | 6            |        |              |   | 3      |        |   |   | (210    | ) |  |   | 217     |       
|Equity in loss of unconsolidated affiliates             |                         |   | (1,138                                   | )      |              |   | (12          | )      |              |   |       |        |   |   |         |   |  |   | (1,150  | )     
|Other, net                                              |                         |   |                                         |        |              |   | (799         | )      |              |   | 8      |        |   |   |         |   |  |   | (791    | )     
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       
|                                                        |                         |   | (12,168                                  | )      |              |   | (1,119       | )      |              |   | 7      |        |   |   |        |   |  |   | (13,280 | )     
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       
|(LOSS) INCOME
BEFORE MINORITY INTEREST AND INCOME TAXES |                         |   | (16,151                                  | )      |              |   | 18,412       |        |              |   | (1,153 | )      |   |   |        |   |  |   | 1,108   |       
|MINORITY INTEREST                                       |                         |   |                                         |        |              |   |             |        |              |   |       |        |   |   | 65      |   |  |   | 65      |       
|PROVISION FOR INCOME TAXES                              |                         |   | 797                                      |        |              |   |             |        |              |   |       |        |   |   |        |   |  |   | 797     |       
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       
|NET
(LOSS) INCOME                                       |                         | $ | (16,948                                  | )      |              | $ | 18,412       |        |              | $ | (1,153 | )      |   | $ | 65      |   |  | $ | 376     |       
|                                                        |                         |   |                                          |        |              |   |              |        |              |   |        |        |   |   |         |   |  |   |         |       

16



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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 Six Months Ended June 30, 2002
|                                                        |                         |   |                                       
|                                                        |                         |   |                                        |        |              |   | Guarantor    |         | Nonguarantor |   |        |       |   |   |         |   | 
|                                                        |                         |   | Parent                                 |        | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Total 
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |       
|SALES                                                   |                         | $ |                                       |        |              | $ | 525,653      |         |              | $ | 11,775 |       |   | $ | (82,045 | ) |  | $ | 455,383 |        
|COST OF SALES                                           |                         |   | (94                                    | )      |              |   | 412,557      |         |              |   | 9,264  |       |   |   | (82,045 | ) |  |   | 339,682 |        
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        
|                                                        | Gross profit            |   |                                        | 94     |              |   |              | 113,096 |              |   |        | 2,511 |   |   |         |  |  |   |         | 115,701 | 
|FREIGHT COSTS                                           |                         |   |                                       |        |              |   | 27,250       |         |              |   | 480    |       |   |   |         |   |  |   | 27,730  |        
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            |                         |   | 7,053                                  |        |              |   | 60,819       |         |              |   | 2,519  |       |   |   |         |   |  |   | 70,391  |        
|RESTRUCTURING COSTS                                     |                         |   |                                       |        |              |   | 985          |         |              |   |       |       |   |   |         |   |  |   | 985     |        
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        
|                                                        | Operating
(loss) income |   |                                        | (6,959 | )            |   |              | 24,042  |              |   |        | (488  | ) |   |         |  |  |   |         | 16,595  | 
|OTHER (EXPENSE) INCOME:                                 |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        
|Interest expense                                        |                         |   | (18,508                                | )      |              |   | (167         | )       |              |   | (201   | )     |   |   | 197     |   |  |   | (18,679 | )      
|Interest income                                         |                         |   | 1,048                                  |        |              |   | 14           |         |              |   | 3      |       |   |   | (197    | ) |  |   | 868     |        
|Equity in income (loss) of unconsolidated affiliates    |                         |   | 1,117                                  |        |              |   | (82          | )       |              |   |       |       |   |   |         |   |  |   | 1,035   |        
|Other, net                                              |                         |   | 87                                     |        |              |   | (73          | )       |              |   | (125   | )     |   |   |         |   |  |   | (111    | )      
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        
|                                                        |                         |   | (16,256                                | )      |              |   | (308         | )       |              |   | (323   | )     |   |   |        |   |  |   | (16,887 | )      
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        
|(LOSS) INCOME
BEFORE MINORITY INTEREST AND INCOME TAXES |                         |   | (23,215                                | )      |              |   | 23,734       |         |              |   | (811   | )     |   |   |        |   |  |   | (292    | )      
|MINORITY INTEREST                                       |                         |   |                                       |        |              |   |             |         |              |   |       |       |   |   | 78      |   |  |   | 78      |        
|BENEFIT FOR INCOME TAXES                                |                         |   | (132                                   | )      |              |   |             |         |              |   |       |       |   |   |         |   |  |   | (132    | )      
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        
|NET (LOSS) INCOME                                       |                         | $ | (23,083                                | )      |              | $ | 23,734       |         |              | $ | (811   | )     |   | $ | 78      |   |  | $ | $(82    | )      
|                                                        |                         |   |                                        |        |              |   |              |         |              |   |        |       |   |   |         |   |  |   |         |        

17



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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 Six Months Ended June 30, 2001
|                                                                            |                         |   |                                       
|                                                                            |                         |   |                                        |        |              |   | Guarantor    |         | Nonguarantor |   |        |        |   |   |         |   | 
|                                                                            |                         |   | Parent                                 |        | Subsidiaries |   | Subsidiaries |         | Eliminations |   | Total 
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |       
|SALES                                                                       |                         | $ |                                       |        |              | $ | 526,096      |         |              | $ | 12,204 |        |   | $ | (75,453 | ) |  | $ | 462,847 |        
|COST OF SALES                                                               |                         |   | 28                                     |        |              |   | 409,921      |         |              |   | 9,526  |        |   |   | (75,453 | ) |  |   | 344,022 |        
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|                                                                            | Gross profit            |   |                                        | (28    | )            |   |              | 116,175 |              |   |        | 2,678  |   |   |         |  |  |   |         | 118,825 | 
|FREIGHT COSTS                                                               |                         |   |                                       |        |              |   | 26,022       |         |              |   | 408    |        |   |   |         |   |  |   | 26,430  |        
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                |                         |   | 7,920                                  |        |              |   | 61,736       |         |              |   | 3,373  |        |   |   |         |   |  |   | 73,029  |        
|RESTRUCTURING COSTS                                                         |                         |   |                                       |        |              |   | 7,083        |         |              |   |       |        |   |   |         |   |  |   | 7,083   |        
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|                                                                            | Operating
(loss) income |   |                                        | (7,948 | )            |   |              | 21,334  |              |   |        | (1,103 | ) |   |         |  |  |   |         | 12,283  | 
|OTHER (EXPENSE) INCOME:                                                     |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|Interest expense                                                            |                         |   | (20,546                                | )      |              |   | (635         | )       |              |   | (9     | )      |   |   | 424     |   |  |   | (20,766 | )      
|Interest income                                                             |                         |   | 691                                    |        |              |   | 27           |         |              |   | 11     |        |   |   | (424    | ) |  |   | 305     |        
|Equity in
loss of unconsolidated affiliates                                 |                         |   | (2,711                                 | )      |              |   | (24          | )       |              |   |       |        |   |   |         |   |  |   | (2,735  | )      
|
|Other, net                                                                  |                         |   |                                       |        |              |   | (501         | )       |              |   | (12    | )      |   |   |         |   |  |   | (513    | )      
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|                                                                            |                         |   | (22,566                                | )      |              |   | (1,133       | )       |              |   | (10    | )      |   |   |        |   |  |   | (23,709 | )      
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|(LOSS) INCOME BEFORE MINORITY INTEREST,
INCOME TAXES AND EXTRAORDINARY LOSS |                         |   | (30,514                                | )      |              |   | 20,201       |         |              |   | (1,113 | )      |   |   |        |   |  |   | (11,426 | )      
|MINORITY INTEREST                                                           |                         |   |                                       |        |              |   |             |         |              |   |       |        |   |   | 37      |   |  |   | 37      |        
|BENEFIT FOR INCOME TAXES                                                    |                         |   | (3,634                                 | )      |              |   |             |         |              |   |       |        |   |   |         |   |  |   | (3,634  | )      
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|(LOSS) INCOME BEFORE EXTRAORDINARY LOSS                                     |                         |   | (26,880                                | )      |              |   | 20,201       |         |              |   | (1,113 | )      |   |   | 37      |   |  |   | (7,755  | )      
|EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT
OF DEBT, NET OF TAX BENEFIT    |                         |   | (2,695                                 | )      |              |   |             |         |              |   |       |        |   |   |         |   |  |   | (2,695  | )      
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        
|NET (LOSS) INCOME                                                           |                         | $ | (29,575                                | )      |              | $ | 20,201       |         |              | $ | (1,113 | )      |   | $ | 37      |   |  | $ | (10,450 | )      
|                                                                            |                         |   |                                        |        |              |   |              |         |              |   |        |        |   |   |         |   |  |   |         |        

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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 Six Months Ended June 30, 2002
|                                                 |                                                  |  |         |                                       
|                                                 |                                                  |  |         |                                        |   |              |        | Guarantor    |   | Nonguarantor |      |       |   |  |    |   |  | 
|                                                 |                                                  |  |         | Parent                                 |   | Subsidiaries |        | Subsidiaries |   | Eliminations |      | Total
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |      
|Net cash provided by operating activities        |                                                  |  | $31,274 |                                        |   |              | $8,876 |              |   |              | $534 |       |   |  | $ |   |  |  | $40,684 |        
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  
|Investing activities:                            |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |        
|                                                 | Purchases of property, plant and equipment       |  |         | (787                                   | ) |              |        | (9,503       | ) |              |      | (411  | ) |  |    |   |  |  |         | (10,701 | )
|                                                 | Acquisitions of businesses, net of cash acquired |  |         |                                       |   |              |        |             |   |              |      | (115  | ) |  |    |   |  |  |         | (115    | )
|                                                 | Other                                            |  |         | 494                                    |   |              |        | 394          |   |              |      | (13   | ) |  |    |   |  |  |         | 875     |  
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  
|                                                 | Net cash used in investing activities            |  |         | (293                                   | ) |              |        | (9,109       | ) |              |      | (539  | ) |  |    |  |  |  |         | (9,941  | )
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  
|Financing activities:                            |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |        
|                                                 | Repayments of other long and short-term debt     |  |         | (6,581                                 | ) |              |        |             |   |              |      |      |   |  |    |   |  |  |         | (6,581  | )
|                                                 | Dividends paid                                   |  |         | (833                                   | ) |              |        |             |   |              |      |      |   |  |    |   |  |  |         | (833    | )
|                                                 | Other                                            |  |         | (1,071                                 | ) |              |        |             |   |              |      |      |   |  |    |   |  |  |         | (1,071  | )
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  
|                                                 | Net cash used in financing activities            |  |         | (8,485                                 | ) |              |        |             |   |              |      |      |   |  |    |  |  |  |         | (8,485  | )
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  
|Net change in cash and cash equivalents          |                                                  |  | 22,496  |                                        |   |              | (233   | )            |   |              | (5   | )     |   |  |    |   |  |  | 22,258  |        
|Cash and cash equivalents at beginning of period |                                                  |  | 63,277  |                                        |   |              | 432    |              |   |              | 535  |       |   |  |    |   |  |  | 64,244  |        
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  
|Cash and cash equivalents at end of period       |                                                  |  | $85,773 |                                        |   | $            | 199    |              |   |              | $530 |       |   |  | $ |   |  |  | $86,502 |        
|                                                 |                                                  |  |         |                                        |   |              |        |              |   |              |      |       |   |  |    |   |  |  |         |         |  

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##### Table of Contents



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

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)

|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |   | 
|--------------------------------------------------- | --------------------------------------------------------- | - | ------ | -------------------------------------- | - | ------------ | ------ | ------------ | - | ------------ | ----- | ----- | - | - | -- | - |  | - | ------ | -------- | - | 
|                                                    |                                                           |   |        | For
The Six Months Ended June 30, 2001
|                                                    |                                                           |   |        |                                       
|                                                    |                                                           |   |        |                                        |   |              |        | Guarantor    |   | Nonguarantor |       |       |   |   |    |   |  |  
|                                                    |                                                           |   |        | Parent                                 |   | Subsidiaries |        | Subsidiaries |   | Eliminations |       | Total
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |      
|Net
cash (used in) provided by operating activities |                                                           | $ | (815   | )                                      |   | $            | 16,621 |              |   | $            | 485   |       |   |   | $ |   |  | $ | 16,291 |         
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  
|Investing activities:                               |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |         
|                                                    | Purchases of property, plant and equipment                |   |        | (671                                   | ) |              |        | (16,498      | ) |              |       | (699  | ) |   |    |   |  |   |        | (17,868  | )
|                                                    | Acquisitions of businesses, net of cash acquired          |   |        |                                       |   |              |        | (34          | ) |              |       |      |   |   |    |   |  |   |        | (34      | )
|                                                    | Other                                                     |   |        | (375                                   | ) |              |        | 710          |   |              |       | (246  | ) |   |    |   |  |   |        | 89       |  
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  
|                                                    | Net cash used in investing activities                     |   |        | (1,046                                 | ) |              |        | (15,822      | ) |              |       | (945  | ) |   |    |  |  |   |        | (17,813  | )
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  
|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                                | ) |              |        | (909         | ) |              |       |      |   |   |    |   |  |   |        | (67,109  | )
|                                                    | 7.74% senior notes prepayment penalty                     |   |        | (3,565                                 | ) |              |        |             |   |              |       |      |   |   |    |   |  |   |        | (3,565   | )
|                                                    | Dividends paid                                            |   |        | (7,202                                 | ) |              |        |             |   |              |       |      |   |   |    |   |  |   |        | (7,202   | )
|                                                    | Other                                                     |   |        | (1,525                                 | ) |              |        |             |   |              |       |      |   |   |    |   |  |   |        | (1,525   | )
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  
|                                                    | Net
cash (used in) provided by financing activities       |   |        | 18,708                                 |   |              |        | (909         | ) |              |       |      |   |   |    |  |  |   |        | 17,799   |  
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  
|Net change in cash and cash equivalents             |                                                           |   | 16,847 |                                        |   |              | (110   | )            |   |              | (460  | )     |   |   |    |   |  |   | 16,277 |         
|Cash and cash equivalents at beginning of period    |                                                           |   | 7,338  |                                        |   |              | 536    |              |   |              | 1,026 |       |   |   |    |   |  |   | 8,900  |         
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  
|Cash and cash equivalents at end of period          |                                                           | $ | 24,185 |                                        |   | $            | 426    |              |   | $            | 566   |       |   | $ |   |   |  | $ | 25,177 |         
|                                                    |                                                           |   |        |                                        |   |              |        |              |   |              |       |       |   |   |    |   |  |   |        |          |  

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Note 13.Subsequent Events



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On July 22, 2002, the Company entered into a
definitive agreement with a subsidiary of Smurfit-Stone Container
Corporation to acquire substantially all the assets (excluding
accounts receivable) of Smurfits Industrial Packaging Group
business. The Smurfit business consists of 17 paper tube and core
plants, 3 uncoated recycled paperboard mills and 3 partition
manufacturing plants located in 16 states across the U.S. and in
Canada. The purchase price is approximately $79,800,000, as
adjusted to account for any difference in the working capital of the
acquired business between December 31, 2001 and the closing date
and reduced by the assumption of $1,700,000 of indebtedness
outstanding under certain industrial development revenue bonds. The Company will record an acquisition
liability of approximately $5,000,000 in expected costs associated
with the anticipated closing of several facilities. In
accordance with the terms of long-term supply agreements (with
initial terms of seven years, subject to renewal), the Company will supply
Smurfit with tubes and cores and uncoated recycled boxboard that are
currently supplied internally and Smurfit will supply the Company with all
requirements of trim rolls for the purchased facilities. The
acquisition is subject to various conditions, including expiration or
early termination of the pre-merger notification period under the
Hart-Scott-Rodino Act, and may be abandoned by mutual consent of the
parties, by one party in the event of a material misrepresentation,
breach or inability to timely satisfy a closing condition by the
other, or by either party if the acquisition is not consummated by
September 15, 2002. The acquisition is currently expected to
close on or before September 12, 2002, subject to expiration of the
waiting period under the Hart-Scott-Rodino Act. The Company has
received an inquiry from the United States Department of Justice
regarding the acquisition, and has submitted additional documentation
to supplement its pre-merger notification filing. The Department of
Justice recently has confirmed that the submission of this additional
documentation will extend the expiration of the waiting period to
September 11, 2002. Although the Company currently believes that it
will be able to satisfy the inquiry without incurring significant
additional delays in, or a challenge to, its ability to consummate
the acquisition, the Company can give no assurance that this will be
the case.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In August 2002, the Company unwound its $185,000,000 interest rate swap
agreement related to the 9 7/8% senior subordinated notes, which was
previously unwound in October 2001, and received $5,500,000 from the bank
counter-party. Simultaneously, the Company executed a new swap agreement with
a fixed margin 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. The $5,500,000
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 six 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. We are the
only major manufacturer to serve all four end-use markets. As part of our
strategy to maintain optimum levels of production capacity, we regularly
purchase paperboard from other manufacturers in an effort to minimize the
potential impact of demand declines on our own mill system. Additionally, each
of our mills can produce recycled paperboard for more than one end-use market.
This allows us to shift production between mills in response to customer or
market demands.

Recovered fiber, which is derived from recycled paper stock, is our most
significant raw material. Historically, the cost of recovered fiber has
fluctuated significantly due to market and industry conditions. For example,
our average recovered fiber cost per ton of paperboard produced increased from
$43 per ton in 1993 to $144 per ton in 1995, an increase of 235%, before
dropping to $66 per ton in 1996. Same-mill recovered fiber cost per ton
averaged $65 during 2001 and $70 during the first half 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 assure you that we will be able to
recover any future increases in the cost of recovered fiber by raising the
prices of our products. Even if we are able to recover future cost increases,
our operating margins and results of operations may still be materially and
adversely affected by time delays in the implementation of price increases.

Excluding labor, energy is our most significant manufacturing cost. Energy
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 six months of 2002,
energy costs decreased 14.0% to approximately $49 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 assure you
that our operating margins and results of operations will not continue to be
adversely affected by rising energy costs.

Historically, we have grown our business, revenues and production capacity to a
significant degree through acquisitions. Based on the difficult operating
climate for our industry and our financial position over the last two
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. Other than the purchase of our joint venture partners
interest in our Design Tubes Company Limited Canadian joint venture,
see Liquidity and Capital Resources Acquisition, we made
no acquisitions during the first six months of 2002. As discussed
below under Subsequent Events, however, we recently signed
a definitive agreement to
acquire substantially all of the assets of Smurfit-Stones
Industrial Packaging Group.

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

Inventory.Inventories are carried at the lower of cost or market. Cost
includes materials, labor and overhead. Market, with respect to all
inventories, is replacement cost or net realizable value. Management frequently
reviews inventory to determine the necessity of reserves for excess, obsolete
or unsaleable inventory. These reviews require management to assess customer
and market demand. These estimates may prove to be inaccurate, in which case we
may have 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 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 accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within our consolidated balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. We record 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 retained earnings (other comprehensive loss)
significantly.

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Three Months Ended June 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 |       |       |      |        |       |        |      |    
|                                                          |                                                       |                                |                                        |                                           |      | June 30,           |       |       |      |        |       |        |      |    
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |    
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |      |      | %   
|                                                          |                                                       |                                |                                        |                                           |      | 2002               |       | 2001  |      | Change |       | Change
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |       
|Production source of paperboard tons sold (in thousands): |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          | From paperboard mill production                       |                                |                                        | 237.7                                     |      |                    |       | 223.7 |      |        |       | 14.0   |      |     |      | 6.3  | %   
|                                                          | Outside purchases                                     |                                |                                        | 35.6                                      |      |                    |       | 32.6  |      |        |       | 3.0    |      |     |      | 9.2  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Total paperboard tonnage                  |      |                    | 273.3 |       |      |        | 256.3 |        |      |     | 17.0 |      |      |      | 6.6  | %
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          | Tons sold by market (in thousands):                   |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |      |     
|Tube, core and composite container volume                 |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard (internal)          |                                        |                                           | 48.5 |                    |       |       | 48.1 |        |       |        | 0.4  |     |      |      | 0.8  | %   
|                                                          |                                                       | Outside purchases              |                                        |                                           | 8.9  |                    |       |       | 6.6  |        |       |        | 2.3  |     |      |      | 34.8 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          | Tube, core and composite container converted products |                                |                                        | 57.4                                      |      |                    |       | 54.7  |      |        |       | 2.7    |      |     |      | 4.9  | %   
|                                                          | Unconverted paperboard                                |                                |                                        | 9.2                                       |      |                    |       | 8.6   |      |        |       | 0.6    |      |     |      | 7.0  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Tube, core and composite container volume |      |                    | 66.6  |       |      |        | 63.3  |        |      |     | 3.3  |      |      |      | 5.2  | %
|Folding carton volume                                     |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard (internal)          |                                        |                                           | 27.0 |                    |       |       | 18.7 |        |       |        | 8.3  |     |      |      | 44.4 | %   
|                                                          |                                                       | Outside purchases              |                                        |                                           | 25.3 |                    |       |       | 24.6 |        |       |        | 0.7  |     |      |      | 2.8  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          | Folding carton converted products                     |                                |                                        | 52.3                                      |      |                    |       | 43.3  |      |        |       | 9.0    |      |     |      | 20.8 | %   
|                                                          | Unconverted paperboard                                |                                |                                        | 60.4                                      |      |                    |       | 56.0  |      |        |       | 4.4    |      |     |      | 7.9  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Folding carton volume                     |      |                    | 112.7 |       |      |        | 99.3  |        |      |     | 13.4 |      |      |      | 13.5 | %
|Gypsum wallboard facing paper volume                      |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Unconverted paperboard         |                                        |                                           | 34.4 |                    |       |       | 39.8 |        |       |        | (5.4 | )   |      | -    | 13.6 | %   
|                                                          |                                                       | Outside purchases (for resale) |                                        |                                           |     |                    |       |       |     |        |       |        |     |     |      |      |     |     
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Gypsum wallboard facing paper volume      |      |                    | 34.4  |       |      |        | 39.8  |        |      |     | (5.4 | )    |      | -    | 13.6 | %
|Other specialty products volume                           |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard (internal)          |                                        |                                           | 17.2 |                    |       |       | 17.3 |        |       |        | (0.1 | )   |      |      | -0.6 | %   
|                                                          |                                                       | Outside purchases              |                                        |                                           | 1.4  |                    |       |       | 1.4  |        |       |        |     |     |      |      |     |     
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          | Other specialty converted products                    |                                |                                        | 18.6                                      |      |                    |       | 18.7  |      |        |       | (0.1   | )    |     |      | -0.5 | %   
|                                                          | Unconverted paperboard                                |                                |                                        | 41.0                                      |      |                    |       | 35.2  |      |        |       | 5.8    |      |     |      | 16.5 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Other specialty products volume           |      |                    | 59.6  |       |      |        | 53.9  |        |      |     | 5.7  |      |      |      | 10.6 | %
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Total paperboard tonnage                  |      |                    | 273.3 |       |      |        | 256.3 |        |      |     | 17.0 |      |      |      | 6.6  | %
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|Gross paper margins ($/ton):                              |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard mill:               |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |      |      |     
|                                                          |                                                       |                                | Average same-mill net selling price    |                                           | $    | 388                |       |       | $    | 415    |       |        | $    | (27 | )    |      |      | -6.5 | %   
|                                                          |                                                       |                                | Average same-mill recovered fiber cost |                                           |      | 80                 |       |       |      | 61     |       |        |      | 19  |      |      |      | 31.1 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Paperboard mill gross paper margin        |      | $                  | 308   |       |      | $      | 354   |        |      | $   | (46  | )    |      | -    | 13.0 | %
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Tube and core:                 |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |      |      |     
|                                                          |                                                       |                                | Average net selling price              |                                           | $    | 776                |       |       | $    | 797    |       |        | $    | (21 | )    |      |      | -2.6 | %   
|                                                          |                                                       |                                | Average paperboard cost                |                                           |      | 428                |       |       |      | 450    |       |        |      | (22 | )    |      |      | -4.9 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Tube and core gross paper margin          |      | $                  | 348   |       |      | $      | 347   |        |      | $   | 1    |      |      |      | 0.3  | %
|                                                          |                                                       |                                |                                        |                                           |      |                    |       |       |      |        |       |        |      |     |      |     

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Sales.Our consolidated sales for the second quarter of 2002 were $233.2
million, an increase of 1.5% from $229.8 million in the same period of 2001.
This increase was due primarily to increased volume in all segments,
despite a decrease in volume in the gypsum wallboard facing paper
market. The increase in sales was partially
offset by decreased selling prices in the paperboard and tube, core and
composite container segments.

Total paperboard tonnage for the second quarter of 2002 increased 6.6% to 273.3
thousand tons compared to 256.3 thousand tons in the second quarter of 2001.
This increase was primarily due to higher internal conversion by our converting
operations in the carton and custom packaging and tube, core and composite
container segments combined with higher shipments of unconverted paperboard to
external customers in the other specialty products and the carton and custom
packaging markets. These improvements were partially offset by a 13.6%
decrease in gypsum wallboard facing paper volume. However, 60% of this
decrease was the result of transferring gypsum volume to our 50% owned,
unconsolidated Premier Boxboard Limited LLC paper mill joint venture. Second quarter 2002 outside
purchases increased 9.2% to 35.6 thousand tons. Tons sold from paperboard mill
production increased 6.3% for the second quarter of 2002 to 237.7 thousand
tons, compared with 223.7 thousand tons for the same period last year. Total
tonnage converted increased 9.9% for the second quarter of 2002 to 128.3
thousand tons compared to 116.7 thousand tons in the second quarter of 2001.

Gross Profit Margin.Gross profit margin for the second quarter of 2002 decreased to 25.3%
of sales from 27.9% in the same period in 2001. The margin decrease was due
primarily to the $3.8 million pretax reduction in reserves related to expiring
unfavorable supply contracts at the Sprague paperboard mill recorded in the
second quarter of 2001. Excluding this reduction in reserves, gross
profit margin was
26.3% in the second quarter of 2001. This margin decrease was due primarily to
increased recovered fiber costs in the paperboard segment, partially offset by
increased volume in all segments and lower energy costs.

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.

Operating Income.Operating income for the second quarter of 2002 was $6.9
million, a decrease of $7.5 million from $14.4 million for the same period last
year. Included in the second quarter 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, second
quarter 2002 operating income was $7.9 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 $1.1 million and the Sprague reserve
reduction of $3.8 million, second quarter 2001 operating income was $11.7 million. The decrease
in operating income in the second 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 carton and custom packaging and tube, core and
composite container segments. The lower margins in the paperboard segment were
due to higher recovered fiber costs and lower selling prices. The higher
margins in the carton and custom packaging and tube, core and composite
container segments were due primarily to increased volume.

Selling, general and
administrative expenses remained essentially unchanged at $36.4 million in the
second quarter of 2002 compared to the second quarter of 2001.

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
$2.6 million in the three months ended June 30, 2002, which
is an improvement of $0.4 million over the operating loss
incurred for the three months ended June 30, 2001 of
$3.0 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 second quarter of 2002 was
$9.4 million versus $11.6 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 $1.0 million in the second
quarter of 2002, an improvement of $2.2 million from equity in loss of $1.2
million in the second quarter 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 our Premier Boxboard
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, lower volume and increased recovered fiber costs. Both of these joint ventures are with
Temple-Inland.

Net (Loss) Income.Net loss for the second quarter of 2002 was $581 thousand,
or $0.02 net loss per common share on a diluted basis, compared to net income
of $376 thousand, or $0.01 net income per common share on a diluted basis, for
the same period last year. As discussed above, our results for the second
quarter of 2002 included a noncash, pretax 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 second quarter of 2001 included the Sprague
reserve reduction of $3.8 million ($2.4 million, net of tax provision, or $0.08
per common share on a diluted basis). Excluding the restructuring charge, net
income for the second quarter of 2002 was $37 thousand, or $0.00 earnings per
common share on a diluted basis. Net loss excluding the Sprague reserve
reduction for the second quarter of 2001 was $2.0 million, or $0.07 net loss
per common share on a diluted basis, and, after further excluding amortization
of goodwill of $670 thousand for the second quarter of 2001, net loss was $1.3 million, or $0.05
net loss per common share on a diluted basis.

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Six Months Ended June 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.

|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |      |      |      |      |  
|--------------------------------------------------------- | ----------------------------------------------------- | ------------------------------ | -------------------------------------- | ----------------------------------------- | ---- | ---------------- | ----- | ----- | ---- | ------ | ----- | ------ | ---- | --- | ---- | ---- | ---- | ---- | ---- | -
|                                                          |                                                       |                                |                                        |                                           |      | Six Months Ended |       |       |      |        |       |        |      |    
|                                                          |                                                       |                                |                                        |                                           |      | June 30,         |       |       |      |        |       |        |      |    
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       | %     
|                                                          |                                                       |                                |                                        |                                           |      | 2002             |       | 2001  |      | Change |       | Change
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |       
|Production source of paperboard tons sold (in thousands): |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          | From paperboard mill production                       |                                |                                        | 464.7                                     |      |                  |       | 441.6 |      |        |       | 23.1   |      |     |      | 5.2  | %   
|                                                          | Outside purchases                                     |                                |                                        | 67.6                                      |      |                  |       | 64.4  |      |        |       | 3.2    |      |     |      | 5.0  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Total paperboard tonnage                  |      |                  | 532.3 |       |      |        | 506.0 |        |      |     | 26.3 |      |      |      | 5.2  | %
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          | Tons sold by market (in thousands):                   |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |      |     
|Tube, core and composite container volume                 |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard (internal)          |                                        |                                           | 92.9 |                  |       |       | 94.7 |        |       |        | (1.8 | )   |      |      | -1.9 | %   
|                                                          |                                                       | Outside purchases              |                                        |                                           | 14.5 |                  |       |       | 13.4 |        |       |        | 1.1  |     |      |      | 8.2  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          | Tube, core and composite container converted products |                                |                                        | 107.4                                     |      |                  |       | 108.1 |      |        |       | (0.7   | )    |     |      | -0.6 | %   
|                                                          | Unconverted paperboard                                |                                |                                        | 17.6                                      |      |                  |       | 16.2  |      |        |       | 1.4    |      |     |      | 8.6  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Tube, core and composite container volume |      |                  | 125.0 |       |      |        | 124.3 |        |      |     | 0.7  |      |      |      | 0.6  | %
|Folding carton volume                                     |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard (internal)          |                                        |                                           | 49.9 |                  |       |       | 38.7 |        |       |        | 11.2 |     |      |      | 28.9 | %   
|                                                          |                                                       | Outside purchases              |                                        |                                           | 50.3 |                  |       |       | 48.0 |        |       |        | 2.3  |     |      |      | 4.8  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          | Folding carton converted products                     |                                |                                        | 100.2                                     |      |                  |       | 86.7  |      |        |       | 13.5   |      |     |      | 15.6 | %   
|                                                          | Unconverted paperboard                                |                                |                                        | 119.1                                     |      |                  |       | 110.9 |      |        |       | 8.2    |      |     |      | 7.4  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Folding carton volume                     |      |                  | 219.3 |       |      |        | 197.6 |        |      |     | 21.7 |      |      |      | 11.0 | %
|Gypsum wallboard facing paper volume                      |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Unconverted paperboard         |                                        |                                           | 74.1 |                  |       |       | 74.9 |        |       |        | (0.8 | )   |      |      | -1.1 | %   
|                                                          |                                                       | Outside purchases (for resale) |                                        |                                           |     |                  |       |       |     |        |       |        |     |     |      |      |     |     
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Gypsum wallboard facing paper volume      |      |                  | 74.1  |       |      |        | 74.9  |        |      |     | (0.8 | )    |      |      | -1.1 | %
|Other specialty products volume                           |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard (internal)          |                                        |                                           | 33.6 |                  |       |       | 36.0 |        |       |        | (2.4 | )   |      |      | -6.7 | %   
|                                                          |                                                       | Outside purchases              |                                        |                                           | 2.8  |                  |       |       | 3.0  |        |       |        | (0.2 | )   |      |      | -6.7 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          | Other specialty converted products                    |                                |                                        | 36.4                                      |      |                  |       | 39.0  |      |        |       | (2.6   | )    |     |      | -6.7 | %   
|                                                          | Unconverted paperboard                                |                                |                                        | 77.5                                      |      |                  |       | 70.2  |      |        |       | 7.3    |      |     |      | 10.4 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Other specialty products volume           |      |                  | 113.9 |       |      |        | 109.2 |        |      |     | 4.7  |      |      |      | 4.3  | %
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Total paperboard tonnage                  |      |                  | 532.3 |       |      |        | 506.0 |        |      |     | 26.3 |      |      |      | 5.2  | %
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|Gross paper margins ($/ton):                              |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Paperboard mill:               |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |      |      |     
|                                                          |                                                       |                                | Average same-mill net selling price    |                                           | $    | 391              |       |       | $    | 418    |       |        | $    | (27 | )    |      |      | -6.5 | %   
|                                                          |                                                       |                                | Average same-mill recovered fiber cost |                                           |      | 70               |       |       |      | 65     |       |        |      | 5   |      |      |      | 7.7  | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Paperboard mill gross paper margin        |      | $                | 321   |       |      | $      | 353   |        |      | $   | (32  | )    |      |      | -9.1 | %
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       | Tube and core:                 |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |      |      |     
|                                                          |                                                       |                                | Average net selling price              |                                           | $    | 774              |       |       | $    | 796    |       |        | $    | (22 | )    |      |      | -2.8 | %   
|                                                          |                                                       |                                | Average paperboard cost                |                                           |      | 431              |       |       |      | 451    |       |        |      | (20 | )    |      |      | -4.4 | %   
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     
|                                                          |                                                       |                                |                                        | Tube and core gross paper margin          |      | $                | 343   |       |      | $      | 345   |        |      | $   | (2   | )    |      |      | -0.6 | %
|                                                          |                                                       |                                |                                        |                                           |      |                  |       |       |      |        |       |        |      |     |      |     

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Sales.Our consolidated sales for the six months ended June 30, 2002 were
$455.4 million, a decrease of 1.6% from $462.8 million in the same period of
2001. This decline was due primarily to a decrease in selling prices in the
paperboard and tube, core and composite container segments, partially offset by
higher volume in all segments.

Total paperboard tonnage for the first six months of 2002 increased 5.2% to
532.3 thousand tons compared to 506.0 thousand tons in the first half 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 segment. These
improvements were partially offset by declines in converted volumes in our
other specialty products business (paperboard segment) and our tube, core and
composite container segment. Our gypsum facing paper volume declined
1.1%. However, including gypsum facing paper volume transferred to our 50% owned,
unconsolidated Premier Boxboard joint venture, gypsum volume increased by 3.8%.
Outside purchases increased 5.0% to 67.6 thousand tons compared to
the prior year period.
Tons sold from paperboard mill production increased 5.2% for the first six
months of 2002 to 464.7 thousand tons, compared with 441.6 thousand tons for
the same period last year. Total tonnage converted increased 4.4% for the first
half of 2002 to 244.0 thousand tons compared to 233.8 thousand tons in the
second half of 2001.

Gross Profit Margin.Gross profit margin for the first six months of 2002 decreased to 25.4%
of sales from 25.7% in the same period in 2001. Included in the gross
profit margin
for the first half of 2001 was the $3.8 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 24.8% in the first
six months of 2001. The margin increase was due primarily to improved margins
in the paperboard and tube, core and composite container segments. Despite
lower selling prices in these segments and increased raw material costs in the
paperboard segment, margins increased due to higher volume and lower energy
costs in the paperboard 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
half of 2002, we paid $1.2 million in severance and termination benefits and
$778 thousand in other exit costs. The remaining other exit costs will be paid
by December 31, 2002. As of June 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 six months of 2002 was $16.6
million, an improvement of $4.3 million over $12.3 million for the same period
last year. Included in the first half 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 half of 2002 was $17.6 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 $2.2 million, restructuring charges and
the Sprague reserve reduction of $3.8 million, operating income for the first half of 2001 was
$17.7 million.

Selling, general and administrative expenses decreased by $2.6 million, or
3.6%, in the first six 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, combined with cost-cutting
efforts in all of our business segments.

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Our Sprague boxboard mill incurred an operating loss of
$4.0 million in the first six months of 2002, which is an improvement of $4.1
million over the operating loss incurred in the first six months of 2001 of $8.1 million.

Other Income (Expense).Interest expense for the first six months of 2002 was
$18.7 million versus $20.8 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 $1.0 million in the first
half of 2002, an improvement of $3.7 million from equity in loss of $2.7
million in the first six 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, higher recovered fiber costs and lower volume.

Net (Loss) Income.Net loss for the first six months of 2002 was $82 thousand,
or $0.00 per common share on a diluted basis, compared to a net loss of $10.5
million, or $0.38 net loss per common share on a diluted basis, for the same
period last year. As discussed above, our results for the first half 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 $3.8 million reduction in reserves related to expiring
unfavorable supply contracts at the Sprague paperboard mill ($2.4 million, net
of tax provision, or $0.08 per common share on a diluted basis). Net income
excluding the restructuring charge for the first half of 2002 was $536
thousand, or $0.02 net income per common share on a diluted basis. Net loss
before extraordinary loss and excluding restructuring charges and the Sprague
reserve reduction for the first half of 2001 was $5.7 million, or $0.20 net
loss per common share on a diluted basis. After further excluding amortization
of goodwill of $1.4 million (net of tax benefit) for the first six months of 2001, net loss was $4.3 million, or
$0.16 net loss per common share on a diluted basis.

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 $40.7 million in cash from operations
in the first six months of 2002 and increased our cash balance by $22.3
million. 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.

On July 22, 2002, we entered into a definitive
agreement to acquire substantially all the assets of
the Smurfit
Industrial Packaging Group for a purchase price of approximately
$79.8 million (subject to adjustment), minus approximately
$1.7 million in assumed indebtedness. See Subsequent
Events. In addition, because we are not purchasing any trade
accounts receivable as part of the acquisition, we expect to
contribute working capital to the acquired business of approximately
$10.2 million after closing the acquisition. Although we
currently have sufficient cash on hand to finance the acquisition, we
may fund a portion of these costs by accessing one or more of a
combination of financing sources, such as our undrawn
$75.0 million senior credit facility, the long-term debt markets
or other alternatives. If, in addition to the financing related to
the 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.

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At June 30, 2002, we were in compliance
with our various financial tests
under both our senior credit facility and our
joint venture guarantees. However, in connection with our
continuing discussions with the lenders under our senior credit
facility regarding the amendment of that facility to permit various
alternatives for financing the acquisition of the Smurfit
Industrial Packaging Group, we have requested amendments to
replace our current leverage ratio and interest coverage ratio
compliance tests with covenants that will allow
us more flexibility based on our belief that we may be unable to
comply with these current covenants for the third quarter of 2002.
See Subsequent Events. We expect that
the lenders will grant these requested modifications to the senior
credit facility to permit the financing of the acquisition and to
relax these compliance covenants on terms acceptable to us, but can
give no assurance that they will do so. Assuming we are able to
secure these amendments, and absent further material
deterioration of the U.S. economy as a whole or the specific sectors
on which our business depends (see Risk Factors  Our
business and financial performance may be adversely affected by
downturns in industrial production, housing and construction and the
consumption of durable and nondurable goods), we believe it is
unlikely that we will breach our covenants under our debt agreements
or joint venture guarantees during the balance of 2002. We also believe that in
the event of such a breach due to a further deterioration in economic
or industry conditions, our lenders would provide us with the
necessary waivers and amendments. However, we cannot assure you that
we will achieve our expected future operating results or continued
compliance with our debt covenants, or that, in such event, necessary
waivers and amendments would be available at all or on acceptable
terms. If our debt or that of our joint ventures were placed in
default, or if we were called upon to satisfy our joint venture
guarantees, our liquidity and financial condition would be materially
and adversely affected.

Borrowings.At June 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):

|                                 |  |          |         |              |  |   |         | 
|-------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | 
|                                 |  | June 30, |         | December 31,
|                                 |  | 2002     |         | 2001        
|                                 |  |          |         |             
|Senior credit facility           |  | $        |        |              |  | $ |        | 
|7 1/4% senior notes              |  |          | 25,594  |              |  |   | 25,449  | 
|7 3/8% senior notes              |  |          | 194,387 |              |  |   | 197,716 | 
|9 7/8% senior subordinated notes |  |          | 283,959 |              |  |   | 277,326 | 
|Other notes payable              |  |          | 8,248   |              |  |   | 8,248   | 
|                                 |  |          |         |              |  |   |         | 
|Total debt                       |  | $        | 512,188 |              |  | $ | 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 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 for a term of three years, including
subfacilities of $10.0 million for swingline loans and $15.0 million for
letters of credit, usage of which reduces availability under the facility. No
borrowings were outstanding under the facility as of June 30, 2002 or June 30,
2001; however, an aggregate of $10.0 million in letter of credit obligations
were outstanding on June 30, 2002. We intend to use the facility for working
capital, capital expenditures and other general corporate purposes
and, as described above, as a possible source of partial funding of
our acquisition of the Smurfit Industrial Packaging Group. Although
the facility is currently unsecured, our obligations under the facility are
unconditionally guaranteed, on a joint and several basis, by all of our
existing and subsequently acquired wholly-owned domestic
subsidiaries. In addition, we expect that we and our subsidiary
guarantors under the senior credit facility will likely be required
to provide security to our senior lenders in exchange for proposed
modifications to certain compliance covenants as discussed below.

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 June 30, 2002, the current margins are 2.0% for
Eurodollar rate loans and 0.75% for base rate loans. Additionally, the undrawn
portion of the facility is subject to a facility fee at an annual rate that is
currently set at 0.5% based on our leverage ratio at June 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,

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make certain investments or acquisitions, enter into certain transactions with
affiliates, make capital expenditures or change the nature of our business. The
facility also contains several financial maintenance covenants, including
covenants establishing a maximum leverage ratio (as described above), minimum
tangible net worth and a minimum interest coverage ratio.

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

During the third and fourth quarters of 2001 and the first and second 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 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 proposed acquisition of the
Smurfit Industrial Packaging Group, we entered into a fourth
amendment to our senior credit facility in July 2002. The purpose of
this amendment was to obtain the lenders required consent to the
consummation of the acquisition, including the incurrence of
no less than $50.0 million, but up to $60.0 million in subordinated financing to fund a portion of the
acquisition price, and to lower the minimum allowable tangible net
worth for all periods after the effective date of the amendment.
Additionally, this amendment increased 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 provisions of the amendment permitting the
partial subordinated debt financing for the acquisition are currently effective,
and the remainder of the amendment will become effective upon (and
only upon) the closing of the acquisition. Under the existing terms of
the fourth amendment, and assuming we utilize the financing
contemplated by those terms, we expect, based on our leverage ratio
after giving effect to the acquisition, that the new margins would be
2.75% for Eurodollar loans and 1.50% for base rate loans and that the
new facility fee rate would be 0.55%.

In addition, under the existing
terms of the fourth amendment, we will be 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 will grant 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 Foxboard. As provided under the existing
terms of the fourth amendment, this security interest does not become
effective until the first date on which our utilization of the credit
facility (including the issuance of letters of credit) equals
or exceeds 50% of the aggregate commitments and the ratio of our
total debt to EBITDA, measured as of the fiscal quarter then most
recently ended, is greater than 4.25 to 1.0.
We are currently in discussions
with the lenders under our senior credit agreement to further modify
the terms of the fourth amendment to expand our potential financing
options for the acquisition, to modify the maximum permitted leverage
ratio covenant beginning with the third quarter of 2002 and to
replace the minimum interest coverage ratio covenant with a minimum
fixed charge ratio covenant beginning with the third quarter of 2002.
We believe these further modifications may, in addition to increasing
our flexibility to finance the acquisition, be necessary to enable us
to avoid violations of the leverage ratio and interest coverage ratio
covenants for the third quarter of 2002. We expect that in exchange
for these proposed modifications, our lenders may require increased
pricing and immediate effectiveness of the collateral requirement
described above.
Although we
expect to be able to obtain these modifications on acceptable terms,
we can give no assurance that we will be able to do so. See
Liquidity Sources and Risks above.

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 $4.9 million in the
first six 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 June 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 June 30, 2002 for each of our
interest rate swaps. The June 30, 2002 three-month LIBOR is presented for
informational purposes only and does not represent our actual effective rates
in place at June 30, 2002.

|                                 |  |          |         |        |  |          |       |          |  |             |       |   |  |  |       |  
|-------------------------------- |  | -------- | ------- | ------ |  | -------- | ----- | -------- |  | ----------- | ----- | - |  |  | ----- | -
|                                 |  |          |         |        |  |          |       |          |  | Three-Month |       |   |  | 
|                                 |  | Notional |         |        |  |          |       | LIBOR at |  | Total      
|                                 |  | Amount   |         | Fixed  |  | June 30, |       | Variable
|Debt Instrument                  |  | (000's)  |         | Spread |  | 2002     |       | Rate    
|                                 |  |          |         |        |  |          |       |         
|7 3/8% senior notes              |  | $        | 50,000  |        |  |          | 2.365 | %        |  |             | 1.860 | % |  |  | 4.225 | %
|7 3/8% senior notes              |  |          | 25,000  |        |  |          | 1.445 |          |  |             | 1.860 |   |  |  | 3.305 |  
|7 3/8% senior notes              |  |          | 25,000  |        |  |          | 1.775 |          |  |             | 1.860 |   |  |  | 3.635 |  
|9 7/8% senior subordinated notes |  |          | 185,000 |        |  |          | 4.400 |          |  |             | 1.860 |   |  |  | 6.260 |  

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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. We executed these transactions in
order to take advantage of market conditions. See Subsequent Events below
regarding the August 2002 unwinding of the $185.0 million interest rate swap agreement related to
the 9 7/8% senior subordinated notes.

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, we entered into agreements with the Premier Boxboard
Limited and Standard Gypsum lenders that correspond to the amendments made in
the third amendment to the senior credit facility, as described above. At June
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 June 30, 2002, the outstanding letters of credit totaled approximately
$56.2 million, of which one-half (approximately $28.1 million) is guaranteed by
us.

Premier Boxboard is the borrower under a credit facility providing for up to
$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 June 30, 2002, the outstanding principal amount of
borrowings under the facility (including outstanding letters of credit) was
approximately $20.2 million, which includes a $200 thousand, undrawn, letter of
credit, of which one-half (approximately $10.1 million) is guaranteed by us.

In addition to the general default risks discussed above with respect to the
joint ventures, a substantial portion of the assets of Premier Boxboard are
pledged as security for $50.0 million in outstanding principal amount of senior
notes under which Premier Boxboard is the obligor. These notes are guaranteed
by Temple-Inland, but are not guaranteed by us. 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,

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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 assure you, however, that these assumptions will prove
accurate or that such liquidity events will not arise.

Cash from Operations.Cash generated from operations was $40.7 million for the
six month period ended June 30, 2002 compared with $16.3 million for the same
period of 2001. The increase was due primarily to improved operating results
combined with the $16.0 million tax refund received in April 2002.

Capital Expenditures.Capital expenditures were $10.7 million in the first
half of 2002 versus $17.9 million in the first half of 2001. Aggregate capital
expenditures of approximately $24.4 million are anticipated for 2002. To
conserve cash, we intend to limit capital expenditures for 2002 to cost
reduction, productivity improvement and replacement projects.

Acquisition. 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.

Dividends.We paid cash dividends of $833 thousand in the first half of 2002
versus $7.2 million in the same period last year. Since February 2001, we have
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. Although our
former debt agreements contained no specific limitations on the payment of
dividends, our current debt agreements contain certain limitations on the
payment of future dividends. 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 Repurchases.We did not purchase any shares of our common stock during
the first six 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 limit our
ability to purchase our common stock.

Subsequent Events

On July 22, 2002, we entered into a definitive agreement with a subsidiary of
Smurfit-Stone Container Corporation to acquire substantially all the assets
(excluding accounts receivable) of Smurfits Industrial Packaging Group
business. The Smurfit business consists of 17 paper tube and core
plants, 3 uncoated recycled paperboard mills and 3 partition
manufacturing plants located in 16 states across the U.S. and in
Canada. The purchase price is approximately $79.8 million, as
adjusted to account for any difference in the working capital of the
acquired business between December 31, 2001 and the closing date
and reduced by the assumption of $1.7 million of indebtedness
outstanding under certain industrial development revenue bonds. We will record an acquisition liability of
approximately $5.0 million in expected costs associated with the anticipated
closing of several facilities.
In accordance with the terms of long-term supply
agreements (with initial terms of seven years, subject to renewal), we will supply Smurfit with
tubes and cores and uncoated recycled
boxboard that are currently supplied internally and Smurfit will
supply us with all requirements of trim rolls for the purchased
facilities. The acquisition is subject to
various conditions, including expiration or early termination of the pre-merger
notification period under the Hart-Scott-Rodino Act, and may be
abandoned by mutual consent of the parties, by one party in the event
of a material misrepresentation, breach or inability to timely
satisfy a closing condition by the other, or by either party if the
acquisition is not consummated by September 15, 2002. The
acquisition is currently expected to close
on or before September 12, 2002, subject to expiration of the
waiting period under the Hart-Scott-Rodino Act. We have received
an inquiry from the United States Department of
Justice regarding the acquisition, and have submitted additional
documentation to supplement our pre merger notification filing. The
Department of Justice recently has confirmed that the submission of
this additional documentation will extend the expiration of the
waiting period to September 11, 2002. Although we currently believe
that we will be able to satisfy the
inquiry without incurring significant additional delays in, or a
challenge to, our ability to consummate the acquisition, we can give
no assurance that this will be the case.

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

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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. The $5.5 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.

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 will be reviewed periodically (at least
annually) for impairment. We adopted this pronouncement effective January 1,
2002. We have completed our initial impairment test, which was required to be
completed by June 30, 2002, and have determined that no impairment of goodwill
exists. 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 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.

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.

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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 assure you that we will be able to pass such price
changes through to our customers on a timely basis and maintain
our margins in the face of raw material cost fluctuations in the
future.

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

Excluding labor, energy is our most significant
manufacturing cost. We use energy to generate steam used in the
paper making process and to operate our paperboard machines and
all of our other converting machinery. Our energy costs
increased steadily throughout 2000 and 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 six months of 2002, energy costs
decreased to approximately $49 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
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
assure you 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 acquisition described above
under Subsequent Events), 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 assure you that any of our acquired
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.

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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 six
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.

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

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


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

Arthur Andersen LLP, which audited our financial
statements for the years ended December 31, 1999, 2000 and
2001, was convicted on federal obstruction of justice charges
arising from the governments investigation of Enron
Corporation. In light of the conviction and the underlying
events, Arthur Andersen LLP has informed the SEC that it will
stop practicing before the SEC by August 31, 2002, unless
the SEC determines that another date is appropriate. 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 addition, in the event we are required to make any
technical modifications, reclassifications or restatements with
respect to any of our prior financial statements that were audited by
Arthur Andersen LLP, our ability to do so without obtaining a full
re-audit of such financial statements by another independent
accounting firm may be limited unless the SEC grants relief that
would enable such revisions to be made without the need for a full
re-audit.

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. Any delay or
inability to access the public capital markets, or to comply with
periodic reporting requirements, caused by these
circumstances could have a material adverse effect on our
business, profitability and growth prospects. In addition, some
investors may choose not to hold or invest in securities of a
company whose financial statements were audited by Arthur
Andersen LLP. As a result, among other things, the price or
marketability of our securities could be impaired.

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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED JUNE 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.

37



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##### Table of Contents



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

PART II, ITEM 1.




PART II. OTHER INFORMATION




ITEM 1.LEGAL PROCEEDINGS

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.




ITEM 2.CHANGES IN
SECURITIES

On April 12, 2002, we acquired the remaining 51% of
the outstanding stock of Design Tubes Company Limited, Toronto,
Ontario, Canada from its owner in consideration for shares of our
subsidiary, Caraustar Design Tubes, Inc., that are exchangeable at
the option of the holder (and for no additional consideration) into
approximately 141,000 shares of our common stock, valued at $1.5
million. The exchangeable shares were issued in reliance on exemption
from registration under Canadian securities laws and, to the extent
applicable, the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder. The shares of our common stock issuable upon
exchange of the exchangeable shares have been registered for issuance
under the Securities Act of 1933.




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

Our annual shareholders meeting was held on May 08, 2002. The matters voted
upon at the meeting were (1) a proposal to elect three Class I directors
(Thomas V. Brown, Ralph M. Holt, Jr. and Dennis M. Love) and (2) a proposal to
ratify the selection of Deloitte & Touche LLP as our independent public
accountants for fiscal 2002. Proposals (1) and (2) were approved by the
following margins:

|                                                            |                    |           |            |            |  |             |                  |           |  |  |       |   |        |  |   |   | 
|----------------------------------------------------------- | ------------------ | --------- | ---------- | ---------- |  | ----------- | ---------------- | --------- |  |  | ----- | - | ------ |  | - | - | 
|                                                            |                    |           |            |            |  |             | Votes Against or |           |  |  |       |   | Broker
|Proposal                                                    |                    | Votes For |            | Withheld   |  | Abstentions |                  | Nonvotes 
|                                                            |                    |           |            |            |  |             |                  |          
|Election of Directors                                       |                    |           |            |            |  |             |                  |           |  |  |       |   |        |  |   |  
|                                                            | Thomas V. Brown    |           |            | 23,401,624 |  |             |                  | 687,172   |  |  |       | 0 |        |  |   | 0 | 
|                                                            | Ralph M. Holt, Jr. |           |            | 23,023,524 |  |             |                  | 1,065,272 |  |  |       | 0 |        |  |   | 0 | 
|                                                            | Dennis M. Love     |           |            | 23,405,006 |  |             |                  | 683,790   |  |  |       | 0 |        |  |   | 0 | 
|Ratification of Selection of
Independent Public Accountants |                    |           | 23,573,822 |            |  |             | 512,937          |           |  |  | 2,037 |   |        |  | 0 |  



38



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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 two current reports on Form 8-K during the quarter ended June 30,
2002. The first report, filed on April 2, 2002, gave notice that
we terminated the engagement of Arthur Andersen LLP as our independent public accountants and
engaged Deloitte & Touche to serve as our independent public accountants for
the year ended December 31, 2002.

The second report, filed on June 19, 2002, incorporated by reference the
contents of our press release announcing our expected financial results for the
quarter ended June 30, 2002.

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FORM 10-Q FOR THE QUARTER ENDED JUNE 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/ H. LEE THRASH, IIIH. Lee Thrash, IIIVice President and Chief Financial Officer
(Principal Financial Officer)
|                     
|                      |  |                            |  |                                                                                                                 
|                     
|Date: August 14, 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]                                                                                                               

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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|No.     |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.05   |  |  |  | Amendment No. 2 to Credit Agreement, dated as of November
30, 2001, by and among the Company, as borrower,
certain subsidiaries of the Company identified as
guarantors listed therein, the banks listed therein,
and Bank of America, N.A., as Administrative Agent
(Incorporated by reference  Exhibit 10.05 to report
on Form 10-K for the year ended December 31, 2001
[SEC File No. 0-20646])
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.06   |  |  |  | Amendment No. 3 to Credit Agreement, dated as of January 22,
2002, by and among the Company, as borrower, certain
subsidiaries of the Company identified as guarantors
listed therein, the banks listed therein, and Bank of
America, N.A., as Administrative Agent (Incorporated
by reference  Exhibit 10.06 to report on Form 10-K
for the year ended December 31, 2001 [SEC File No.
0-20646]) 
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.07  |  |  |  | Amendment No. 4 to Credit Agreement, dated as of June 3,
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   |  |  |  | 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])                                                                                                                                                                                                   
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.09   |  |  |  | Deferred Compensation Plan, together with copies of existing
individual deferred compensation agreements
(Incorporated by reference  Exhibit 10.08 to
Registration Statement on Form S-1 [SEC File No.
33-50582])                                                                                                                                                                                 
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.10   |  |  |  | 1987 Executive Stock Option Plan (Incorporated by
reference  Exhibit 10.09 to Registration Statement
on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                         
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.11   |  |  |  | 1993 Key Employees Share Ownership Plan (Incorporated by
reference  Exhibit 10.10 to Registration Statement
on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                 
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.12   |  |  |  | Incentive Bonus Plan of the Company (Incorporated by
reference  Exhibit 10.10 to Annual Report for 1993
on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                      
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.13   |  |  |  | 1996 Director Equity Plan of the Company (Incorporated by
reference  Exhibit 10.12 to report on Form 10-Q for
the quarter ended March 31, 1996 [SEC File No.
0-20646])                                                                                                                                                                                                                            
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.14   |  |  |  | Amendment No. 1 to the Companys 1996 Director Equity Plan,
dated July 16, 1998 (Incorporated by reference 
Exhibit 10.2 to Current Report on Form 8-K dated June
1, 1999 [SEC File No. 0-20646])                                                                                                                                                                                                 
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|10.15   |  |  |  | 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])                                                                                                                                                                                           

42



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##### Table of Contents



|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                       
|No.     |  |   |  | Description                                                                                                                                                                                                                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.16   |  |  |  | Asset Purchase Agreement between Caraustar Industries, Inc.,
Sprague Paperboard, Inc. and International Paper
Company, dated as of March 4, 1999 (Incorporated by
reference  Exhibit 10.17 to report on Form 10-Q for
the quarter ended March 31, 1999 [SEC File No.
0-20646])                       
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.17   |  |  |  | Guaranty Agreement, dated as of July 30, 1999, as amended of
the Company in favor of SunTrust Bank Atlanta
(Incorporated by reference  Exhibit 10.19 to report
on Form 10-K for the year ended December 31, 2001
[SEC File No. 0-20646])                                                             
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.18  |  |  |  | Fifth Amendment
to Guaranty Agreement, dated as of June 6, 2002, of the Company
in favor of SunTrust Bank Atlanta                                                                                                                                                                                     
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.19   |  |  |  | Second Amended and Restated Parent Guaranty, dated as of
August 1, 1999, as amended, of the Company in favor
of Toronto-Dominion (Texas), Inc., as Administrative
Agent (Incorporated by reference  Exhibit 10.20 to
report on Form 10-K for the year ended December 31,
2001 [SEC File No. 0-20646])
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.20  |  |  |  | Fifth Amendment
to Parent Guaranty, dated as of June 6, 2002, of the Company
in favor of Toronto-Dominion (Texas), Inc., as Administrative Agent                                                                                                                                                      
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.21   |  |  |  | Partnership Agreement of Standard Gypsum L.P. (Incorporated by
reference  Exhibit 10.21 to report on Form 10-K for
the year ended December 31, 2001 [SEC File No.
0-20646])                                                                                                                          
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.22   |  |  |  | Operating Agreement of Premier Boxboard Limited LLC
(Incorporated by reference  Exhibit 10.22 to report
on Form 10-K for the year ended December 31, 2001
[SEC File No. 0-20646])                                                                                                                    
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|10.23  |  |  |  | Asset Purchase Agreement between Caraustar Industries, Inc.
and Smurfit-Stone
Container Corporation,
dated as of July 22,
2002                                                                                                                                                                        
|        |  |   |  |                                                                                                                                                                                                                                                                                                       
|11.01  |  |  |  | Computation of Earnings Per Share                                                                                                                                                                                                                                                                     



---

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

43