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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)



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



For the quarterly period ended March 31, 2004



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



For the transition period from
 to



Commission File Number 0-20646



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Caraustar Industries, Inc.

(Exact name of registrant as specified in its charter)



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



(770) 948-3101

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



Indicate the number of shares
outstanding of each of issuers classes of common stock, as of the latest practicable date, April 30, 2004.



|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 28,441,579   
|(Class)                      |  | (Outstanding)



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##### Table of Contents

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004



CARAUSTAR INDUSTRIES, INC.



TABLE OF
CONTENTS



|                               |  |                                                                                                           |  |     
|------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                           |  | Page
|PART I  FINANCIAL INFORMATION |  |                                                                                                          
|                               |  |                                                                                                          
|Item 1.                        |  | Condensed Consolidated Financial Statements:                                                              |  |     
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                          |  | 3   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2004 and 2003 |  | 4   
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2004 and 2003 |  | 5   
|                               |  |                                                                                                          
|                               |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|                               |  |                                                                                                          
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 21  
|                               |  |                                                                                                          
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 29  
|                               |  |                                                                                                          
|Item 4.                        |  | Controls and Procedures                                                                                   |  | 29  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                          
|                               |  |                                                                                                          
|Item 2.                        |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                          |  | 30  
|                               |  |                                                                                                          
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                          |  | 30  
|                               | 
|Signatures                     |  | 31                                                                                                       
|                               | 
|Exhibit Index                  |  | 32                                                                                                       



2



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ITEM 1. Condensed Consolidated Financial Statements



CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)



|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                          |  | March 31,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|CURRENT ASSETS:                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                 |  | $             | 81,377   |   |                  | $ | 85,551   |  
|Receivables, net of allowances                                                                                                                                            |  |               | 109,107  |   |                  |   | 93,892   |  
|Inventories                                                                                                                                                               |  |               | 86,106   |   |                  |   | 87,608   |  
|Refundable income taxes                                                                                                                                                   |  |               | 193      |   |                  |   | 250      |  
|Current deferred tax asset                                                                                                                                                |  |               | 8,796    |   |                  |   | 7,457    |  
|Other current assets                                                                                                                                                      |  |               | 13,872   |   |                  |   | 12,461   |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                      |  |               | 299,451  |   |                  |   | 287,219  |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                                            |  |               |          |   |                  |   |          |  
|Land                                                                                                                                                                      |  |               | 12,067   |   |                  |   | 12,211   |  
|Buildings and improvements                                                                                                                                                |  |               | 140,247  |   |                  |   | 141,022  |  
|Machinery and equipment                                                                                                                                                   |  |               | 617,982  |   |                  |   | 617,688  |  
|Furniture and fixtures                                                                                                                                                    |  |               | 14,978   |   |                  |   | 15,225   |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|                                                                                                                                                                          |  |               | 785,274  |   |                  |   | 786,146  |  
|Less accumulated depreciation                                                                                                                                             |  |               | (378,663 | ) |                  |   | (375,374 | )
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Property, plant and equipment, net                                                                                                                                        |  |               | 406,611  |   |                  |   | 410,772  |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|GOODWILL                                                                                                                                                                  |  |               | 183,130  |   |                  |   | 183,130  |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES                                                                                                                                   |  |               | 54,955   |   |                  |   | 54,623   |  
|OTHER ASSETS                                                                                                                                                              |  |               | 28,932   |   |                  |   | 24,801   |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|                                                                                                                                                                          |  | $             | 973,079  |   |                  | $ | 960,545  |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                      |  |               |          |   |                  |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Current maturities of debt                                                                                                                                                |  | $             | 106      |   |                  | $ | 106      |  
|Accounts payable                                                                                                                                                          |  |               | 80,953   |   |                  |   | 75,013   |  
|Accrued interest                                                                                                                                                          |  |               | 20,198   |   |                  |   | 8,832    |  
|Accrued compensation                                                                                                                                                      |  |               | 11,333   |   |                  |   | 9,800    |  
|Other accrued liabilities                                                                                                                                                 |  |               | 31,904   |   |                  |   | 31,307   |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                 |  |               | 144,494  |   |                  |   | 125,058  |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|SENIOR CREDIT FACILITY                                                                                                                                                    |  |               |         |   |                  |   |         |  
|OTHER LONG-TERM DEBT, less current maturities                                                                                                                             |  |               | 529,438  |   |                  |   | 531,001  |  
|DEFERRED INCOME TAXES                                                                                                                                                     |  |               | 56,746   |   |                  |   | 58,920   |  
|PENSION LIABILITY                                                                                                                                                         |  |               | 21,141   |   |                  |   | 18,632   |  
|DEFERRED COMPENSATION                                                                                                                                                     |  |               | 1,561    |   |                  |   | 1,522    |  
|OTHER LIABILITIES                                                                                                                                                         |  |               | 4,180    |   |                  |   | 5,031    |  
|MINORITY INTEREST                                                                                                                                                         |  |               | 668      |   |                  |   | 504      |  
|COMMITMENTS AND CONTINGENCIES (Note 14)                                                                                                                                   |  |               |          |   |                  |   |          |  
|SHAREHOLDERS EQUITY:                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued                                                                                            |  |               |         |   |                  |   |         |  
|Common stock, $.10 par value; 60,000,000 shares authorized, 28,440,719 and 28,222,205 shares issued and outstanding at March 31, 2004 and
December 31, 2003, respectively |  |               | 2,844    |   |                  |   | 2,822    |  
|Additional paid-in capital                                                                                                                                                |  |               | 186,735  |   |                  |   | 185,031  |  
|Unearned compensation                                                                                                                                                     |  |               | (1,825   | ) |                  |   | (1,865   | )
|Retained earnings                                                                                                                                                         |  |               | 45,758   |   |                  |   | 52,531   |  
|Accumulated other comprehensive (loss) income:                                                                                                                            |  |               |          |   |                  |   |          |  
|Minimum pension liability adjustment                                                                                                                                      |  |               | (19,244  | ) |                  |   | (19,244  | )
|Foreign currency translation                                                                                                                                              |  |               | 583      |   |                  |   | 602      |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total accumulated other comprehensive loss                                                                                                                                |  |               | (18,661  | ) |                  |   | (18,642  | )
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total Shareholders Equity                                                                                                                                                |  |               | 214,851  |   |                  |   | 219,877  |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|                                                                                                                                                                          |  | $             | 973,079  |   |                  | $ | 960,545  |  
|                                                                                                                                                                          |  |               |          |   |                  |   |          |  



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



3



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                                      |  |                                     |         |   |      |   |         |  
|----------------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | For the Three MonthsEnded March 31, |        
|                                                      |  | 2004                                |         |   | 2003 |  
|SALES                                                 |  | $                                   | 257,095 |   |      | $ | 252,902 |  
|COST OF SALES                                         |  |                                     | 216,651 |   |      |   | 206,346 |  
|                                                      |  |                                     |         |   |      |   |         |  
|Gross profit                                          |  |                                     | 40,444  |   |      |   | 46,556  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES          |  |                                     | 39,497  |   |      |   | 43,594  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                    |  |                                     | 3,042   |   |      |   | 4,332   |  
|                                                      |  |                                     |         |   |      |   |         |  
|Loss from operations                                  |  |                                     | (2,095  | ) |      |   | (1,370  | )
|OTHER (EXPENSE) INCOME:                               |  |                                     |         |   |      |   |         |  
|Interest expense                                      |  |                                     | (10,857 | ) |      |   | (10,337 | )
|Interest income                                       |  |                                     | 340     |   |      |   | 201     |  
|Equity in income of unconsolidated affiliates         |  |                                     | 2,682   |   |      |   | 20      |  
|Other, net                                            |  |                                     | (31     | ) |      |   | 98      |  
|                                                      |  |                                     |         |   |      |   |         |  
|                                                      |  |                                     | (7,866  | ) |      |   | (10,018 | )
|                                                      |  |                                     |         |   |      |   |         |  
|LOSS BEFORE MINORITY INTEREST AND INCOME TAXES        |  |                                     | (9,961  | ) |      |   | (11,388 | )
|MINORITY INTEREST IN INCOME                           |  |                                     | (164    | ) |      |   | (5      | )
|BENEFIT FOR INCOME TAXES                              |  |                                     | (3,352  | ) |      |   | (4,265  | )
|                                                      |  |                                     |         |   |      |   |         |  
|NET LOSS                                              |  | $                                   | (6,773  | ) |      | $ | (7,128  | )
|                                                      |  |                                     |         |   |      |   |         |  
|OTHER COMPREHENSIVE (GAIN) LOSS:                      |  |                                     |         |   |      |   |         |  
|Foreign currency translation adjustment               |  |                                     | (19     | ) |      |   | 196     |  
|                                                      |  |                                     |         |   |      |   |         |  
|COMPREHENSIVE LOSS                                    |  | $                                   | (6,792  | ) |      | $ | (6,932  | )
|                                                      |  |                                     |         |   |      |   |         |  
|BASIC                                                 |  |                                     |         |   |      |   |         |  
|NET LOSS PER COMMON SHARE                             |  | $                                   | (0.24   | ) |      | $ | (0.26   | )
|                                                      |  |                                     |         |   |      |   |         |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING         |  |                                     | 28,391  |   |      |   | 27,911  |  
|                                                      |  |                                     |         |   |      |   |         |  
|DILUTED                                               |  |                                     |         |   |      |   |         |  
|NET LOSS PER COMMON SHARE                             |  | $                                   | (0.24   | ) |      | $ | (0.26   | )
|                                                      |  |                                     |         |   |      |   |         |  
|DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |  |                                     | 28,391  |   |      |   | 27,911  |  
|                                                      |  |                                     |         |   |      |   |         |  



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



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



|                                                                    |  |                                     |        |   |      |   |         |  
|------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                    |  | For the Three MonthsEnded March 31, |       
|                                                                    |  | 2004                                |        |   | 2003 |  
|                                                                    |  |                                     |        |   |      |   |         |  
|OPERATING ACTIVITIES:                                               |  |                                     |        |   |      |   |         |  
|Net loss                                                            |  | $                                   | (6,773 | ) |      | $ | (7,128  | )
|Depreciation and amortization                                       |  |                                     | 7,251  |   |      |   | 7,748   |  
|Disposal of property, plant and equipment, net                      |  |                                     | 130    |   |      |   | 294     |  
|Restructuring costs                                                 |  |                                     | 1,175  |   |      |   | 5,627   |  
|Other noncash adjustments                                           |  |                                     | (3,258 | ) |      |   | (2,628  | )
|Equity in income of unconsolidated affiliates, net of distributions |  |                                     | (182   | ) |      |   | 480     |  
|Changes in operating assets and liabilities, net of acquisitions    |  |                                     | 2,132  |   |      |   | 11,702  |  
|                                                                    |  |                                     |        |   |      |   |         |  
|Net cash provided by operating activities                           |  |                                     | 475    |   |      |   | 16,095  |  
|                                                                    |  |                                     |        |   |      |   |         |  
|INVESTING ACTIVITIES:                                               |  |                                     |        |   |      |   |         |  
|Purchases of property, plant and equipment                          |  |                                     | (4,379 | ) |      |   | (6,290  | )
|Acquisition of businesses, net of cash acquired                     |  |                                     |       |   |      |   | (707    | )
|Proceeds from disposal of property, plant and equipment             |  |                                     | 1,351  |   |      |   | 134     |  
|Investment in unconsolidated affiliates                             |  |                                     | (150   | ) |      |   |        |  
|                                                                    |  |                                     |        |   |      |   |         |  
|Net cash used in investing activities                               |  |                                     | (3,178 | ) |      |   | (6,863  | )
|                                                                    |  |                                     |        |   |      |   |         |  
|FINANCING ACTIVITIES:                                               |  |                                     |        |   |      |   |         |  
|Repayments of short and long-term debt                              |  |                                     | (3,509 | ) |      |   |        |  
|Proceeds from swap agreement unwind                                 |  |                                     | 380    |   |      |   | 4,264   |  
|Issuances of stock, net of forfeitures                              |  |                                     | 1,658  |   |      |   |        |  
|Deferred debt costs                                                 |  |                                     |       |   |      |   | (809    | )
|                                                                    |  |                                     |        |   |      |   |         |  
|Net cash (used in) provided by financing activities                 |  |                                     | (1,471 | ) |      |   | 3,455   |  
|                                                                    |  |                                     |        |   |      |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                |  |                                     | (4,174 | ) |      |   | 12,687  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    |  |                                     | 85,551 |   |      |   | 34,314  |  
|                                                                    |  |                                     |        |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                          |  | $                                   | 81,377 |   |      | $ | 47,001  |  
|                                                                    |  |                                     |        |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES:                                           |  |                                     |        |   |      |   |         |  
|Cash payments for interest                                          |  | $                                   |       |   |      | $ | 850     |  
|                                                                    |  |                                     |        |   |      |   |         |  
|Income tax payments (refunds), net                                  |  | $                                   | 116    |   |      | $ | (16,992 | )
|                                                                    |  |                                     |        |   |      |   |         |  



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



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(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, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the
results to be expected for the full year. Certain reclassifications have been made to prior year balances to conform with the 2004 presentation.



Note 2.New Accounting Pronouncements



In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132, Employers Disclosures about Pensions
and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106. SFAS No. 132 requires disclosures about defined benefit pension plans and other postretirement plans assets, obligations, cash flows and net
cost. The Company adopted the annual disclosure provisions for the fiscal year ended December 31, 2003. The Company adopted the interim disclosure provisions effective with this filing as provided in Note 10.



Note 3.Accounting for Stock-Based Compensation





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



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



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##### Table of Contents

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



|                                                                                                 |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                 |  | Three Months EndedMarch 31, |       
|                                                                                                 |  | 2004                        |        |   | 2003 |  
|Net loss:                                                                                        |  |                             |        |   |      |   |        |  
|As reported                                                                                      |  | $                           | (6,773 | ) |      | $ | (7,128 | )
|Stock based compensation expense determined pursuant to SFAS No. 123, net of related tax effects |  |                             | (699   | ) |      |   | (1,011 | )
|                                                                                                 |  |                             |        |   |      |   |        |  
|Pro forma                                                                                        |  |                             | (7,472 | ) |      |   | (8,139 | )
|Diluted loss per common share:                                                                   |  |                             |        |   |      |   |        |  
|As reported                                                                                      |  | $                           | (0.24  | ) |      | $ | (0.26  | )
|Pro forma                                                                                        |  |                             | (0.26  | ) |      |   | (0.29  | )



Note 4.Acquisition



In January 2003, the
Company acquired its venture partners 50% interest in the equity of Caraustar Northwest, LLC, located in Tacoma, WA, for approximately $695 thousand. The Tacoma facility, which manufactures tubes, cores and edge protectors and performs custom
slitting for customers on the West coast, became a part of the tube, core and composite container segment. This acquisition was accounted for under the purchase method of accounting, applying the provisions of Statements of Financial Accounting
Standards No. 141 Business Conditions. As a result, the Company recorded the assets and liabilities of the acquired company at its estimated fair value. The financial statements reflect the operating results of the acquired business for
the periods after the date of acquisition.



Note 5.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. The Company reviews inventory at least quarterly to determine the necessity of write-offs
for excess, obsolete or unsaleable inventory. The Company estimates reserves for inventory obsolescence and shrinkage based on managements judgment of future realization. These reviews require management to assess customer and market demand.
All inventories are valued using the first-in, first-out method.



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



|                                   |  |               |        |                  |   |       
|---------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                   |  | March 31,2004 |        | December 31,2003
|Raw materials and supplies         |  | $             | 38,599 |                  | $ | 37,294
|Finished goods and work in process |  |               | 47,507 |                  |   | 50,314
|                                   |  |               |        |                  |   |       
|Total inventory                    |  | $             | 86,106 |                  | $ | 87,608
|                                   |  |               |        |                  |   |       



Note 6.Senior Credit
Facility and Other Long-Term Debt



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



|                                                      |  |               |         |   |                  |   |         |  
|----------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                      |  | March 31,2004 |         |   | December 31,2003 |  
|Senior credit facility                                |  | $             |        |   |                  | $ |        |  
|97/8% senior subordinated notes                       |  |               | 285,000 |   |                  |   | 285,000 |  
|73/8% senior notes                                    |  |               | 189,750 |   |                  |   | 193,250 |  
|71/4% senior notes                                    |  |               | 29,000  |   |                  |   | 29,000  |  
|Other notes payable                                   |  |               | 9,886   |   |                  |   | 9,895   |  
|Mark-to-market value of interest rate swap agreements |  |               | 1,042   |   |                  |   | (1,145  | )
|Realized interest rate swap gains (1)                 |  |               | 14,866  |   |                  |   | 15,107  |  
|                                                      |  |               |         |   |                  |   |         |  
|Total debt                                            |  |               | 529,544 |   |                  |   | 531,107 |  
|Less current maturities                               |  |               | (106    | ) |                  |   | (106    | )
|                                                      |  |               |         |   |                  |   |         |  
|Total long-term debt                                  |  | $             | 529,438 |   |                  | $ | 531,001 |  
|                                                      |  |               |         |   |                  |   |         |  

---

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



7



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Senior Credit Facility



The Companys senior credit facility provides for a revolving line of credit of $75.0 million and is secured primarily
by a first priority security interest in the Companys accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and
inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of March 31, 2004, no borrowings were outstanding under the facility; however, an aggregate of $40.5
million in letter of credit obligations were outstanding. Availability under the facility at March 31, 2004 was limited to $24.5 million after taking into consideration outstanding letter of credit obligations and minimum borrowing availability
requirements.



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



The facility contains covenants that
restrict, among other things, the Companys ability and its subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and
indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of the Companys business. The facility also contains a
fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts
receivable and inventory (less reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant
did not require measurement at March 31, 2004.



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



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



Senior and
Senior Subordinated Notes



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



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



Interest Rate Swap Agreements



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



In May 2003, the Company unwound
the remaining $50.0 million of its interest rate swap agreement related to the 97/8% senior subordinated notes
and received approximately $4.6 million from the bank counter-party. The $4.6 million gain, which



8



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##### Table of Contents

was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially
offset the increase in interest expense. The $4.6 million gain lowered the effective interest rate of the 97/8%
senior subordinated notes by approximately 30 basis points.



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



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



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



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



Under the provisions of SFAS No.
133 Accounting for Derivative Instruments and Hedging Activities, as amended, the Company has designated and accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no ineffectiveness with regard to
these agreements as they qualified for the short-cut method of accounting for fair value hedges of debt obligations, as prescribed by SFAS No. 133. The March 31, 2004 estimated fair value of the swap was $1.0 million and is classified as a component
of other long-term assets, with a corresponding adjustment to long-term debt in the accompanying balance sheet. The December 31, 2003 aggregate estimated liability related to the swaps was $1.1 million and is classified as a component of other
long-term liabilities, with a corresponding adjustment to long-term debt in the accompanying balance sheet.



Note 7.Segment Information



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



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



9



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##### Table of Contents

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



|                                               |  |                             |         |   |      |   |         |  
|---------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                               |  | Three Months EndedMarch 31, |        
|                                               |  | 2004                        |         |   | 2003 |  
|Sales (external customers):                    |  |                             |         |   |      |   |         |  
|Paperboard                                     |  | $                           | 87,859  |   |      | $ | 83,903  |  
|Tube, core, and composite container            |  |                             | 94,223  |   |      |   | 94,958  |  
|Carton and custom packaging                    |  |                             | 75,013  |   |      |   | 74,041  |  
|                                               |  |                             |         |   |      |   |         |  
|Total                                          |  | $                           | 257,095 |   |      | $ | 252,902 |  
|                                               |  |                             |         |   |      |   |         |  
|Sales (intersegment):                          |  |                             |         |   |      |   |         |  
|Paperboard                                     |  | $                           | 44,139  |   |      | $ | 44,363  |  
|Tube, core, and composite container            |  |                             | 2,153   |   |      |   | 1,482   |  
|Carton and custom packaging                    |  |                             | 391     |   |      |   | 334     |  
|                                               |  |                             |         |   |      |   |         |  
|Total                                          |  | $                           | 46,683  |   |      | $ | 46,179  |  
|                                               |  |                             |         |   |      |   |         |  
|Income (loss) from operations:                 |  |                             |         |   |      |   |         |  
|Paperboard (A)                                 |  | $                           | 4,820   |   |      | $ | 1,880   |  
|Tube, core, and composite container            |  |                             | 3,279   |   |      |   | 2,334   |  
|Carton and custom packaging (B)                |  |                             | (4,536  | ) |      |   | (81     | )
|                                               |  |                             |         |   |      |   |         |  
|                                               |  |                             | 3,563   |   |      |   | 4,133   |  
|Corporate expense (C)                          |  |                             | (5,658  | ) |      |   | (5,503  | )
|                                               |  |                             |         |   |      |   |         |  
|(Loss) income from operations                  |  |                             | (2,095  | ) |      |   | (1,370  | )
|Interest expense                               |  |                             | (10,857 | ) |      |   | (10,337 | )
|Interest income                                |  |                             | 340     |   |      |   | 201     |  
|Equity in income of unconsolidated affiliates  |  |                             | 2,682   |   |      |   | 20      |  
|Other, net                                     |  |                             | (31     | ) |      |   | 98      |  
|                                               |  |                             |         |   |      |   |         |  
|Loss before minority interest and income taxes |  | $                           | (9,961  | ) |      | $ | (11,388 | )
|                                               |  |                             |         |   |      |   |         |  

---

|(A) | First quarter 2004 and 2003 results include charges to operations of $1.3 million and $4.3 million respectively, for restructuring and impairment costs. These costs relate to
closing and consolidating operations within the paperboard segment (See Note 9).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | First quarter 2004 results include charges to operations of $924 thousand for restructuring and impairment costs related to closing and consolidating operations within the carton
and custom packaging segment (See Note 9).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | First quarter 2004 results include charges to operations of $800 thousand for centralizing the accounting and finance operations (See Note 9).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



Note 8.Goodwill and Other Intangible Assets



Goodwill



Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under this
pronouncement the Company no longer amortizes goodwill but instead performs an impairment test at least annually. The Companys most recent impairment test was performed during the fourth quarter of 2003 and did not result in an impairment
charge. There were no changes in goodwill during the three months ended March 31, 2004.



Intangible Assets



As of March 31, 2004
and December 31, 2003, the Company had an intangible asset of $7.7 million, net of $1.0 million of accumulated amortization, and $7.8 million, net of $858 thousand of accumulated amortization, respectively, which is classified with other assets.
Amortization expense for the three months ended March 31, 2004 and 2003 was $142 thousand. The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group, which was completed in 2002, and is
attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2004            |  | $ | 568  
|2005            |  |   | 568  
|2006            |  |   | 568  
|2007            |  |   | 568  
|2008            |  |   | 568  
|                |  |   |      
|Five year total |  | $ | 2,840
|                |  |   |      



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##### Table of Contents

Note 9.Restructuring and Impairment Costs



In March 2003, the Company announced the permanent closure of its Buffalo
Paperboard mill located in Lockport, New York. The Company recorded a charge of approximately $4.3 million in connection with this closure. The $4.3 million charge included a $3.1 million impairment charge for assets, a $670 thousand accrual for
severance and other termination benefits, and a $607 thousand accrual for other exit costs leaving no accrual as of March 31, 2004. At December 31, 2003, a $3 thousand liability remained for other exit costs. During the first quarter of 2004, all
remaining other exit costs were paid and an additional $45 thousand for other exit costs were expensed and paid leaving no accrual as of March 31, 2004. As of March 31, 2004 the exit plan for Buffalo was complete except for the sale of the property
which the Company is currently marketing.



In June 2003, the
Company initiated a plan to permanently close its Ashland, Ohio carton facility. The Company downsized this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the Company decided to close the facility.
During 2003, the Company recorded a charge of approximately $6.7 million, which includes a $4.1 million impairment charge for assets, a $1.2 million accrual for severance and other termination benefits and an accrual of $1.4 million for other exit
costs. At December 31, 2003 an accrual of $302 thousand for severance and other termination benefits remained and an accrual of $43 thousand remained for other exit costs. Substantially all of the Ashland carton sales were transferred to the
Companys other carton manufacturing facilities. During the first quarter of 2004, the Company recorded an additional $429 thousand impairment charge for assets and an additional $495 thousand for other exit costs. During the first quarter of
2004, the Company paid $142 thousand related to severance and other termination benefits and $495 thousand for other exit costs, leaving accruals of $160 thousand and $43 thousand for severance and other termination benefits and other exit costs,
respectively.



In January 2004, the Company announced the
permanent closure of the Cedartown paperboard mill located in Cedartown, Georgia. The Company recorded a charge of approximately $1.0 million in connection with this closure. The $1.0 million charge included a $500 thousand impairment charge for
assets, a $188 thousand charge for severance and other termination benefits and a $339 thousand charge for other exit costs. During the first quarter of 2004 all of these costs were paid and no accrual remained. As of March 31, 2004, there was one
employee remaining at the mill. Substantially all of Cedartowns paperboard production was transferred to the Companys other paperboard mills. As of March 31, 2004, the exit plan for Cedartown was complete except for the sale of the
property which the Company is currently marketing.



In January
2004, the Company initiated a plan to centralize the accounting and finance operations to the Companys headquarters located in Austell, Georgia. This action was initiated to enhance the accounting control environment and reduce costs. The
Company recorded a charge of approximately $800 thousand in connection with this plan related to consulting fees and relocation expenses that were paid during the period leaving no accrual as of March 31, 2004. The Company expects to incur an
additional $300 thousand in restructuring charges and to complete this centralization plan during the second quarter of 2004.



During 2001 and 2002, the Company initiated restructuring activities to consolidate its Carolina Converting Inc. operation with its Carolina Components
operation, to close the Chicago paperboard mill, and to close the Halifax paperboard mill. At December 31, 2003, a $4.2 million accrual remained for other exit costs related to these activities. During the first quarter of 2004, the Company incurred
an additional $246 thousand charge for impairment of assets related to these restructuring activities. The Company also paid $573 thousand in other exit costs, leaving an accrual of $3.6 million at March 31, 2004. All of these restructuring
activities are substantially complete except for selling the real estate or fulfilling the Companys obligation under a real estate lease.





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##### Table of Contents

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



|                                     |  |                 |       |                                       |   |      |                 |  |   |                        |   |  |                                       |        |   |  |   |      
|------------------------------------ |  | --------------- | ----- | ------------------------------------- | - | ---- | --------------- |  | - | ---------------------- | - |  | ------------------------------------- | ------ | - |  | - | -----
|                                     |  | AssetImpairment |       | Severance andOtherTerminationBenefits |   |      | Other ExitCosts |  |   | RestructuringLiability |   |  | TotalRestructuringandImpairmentCharge
|Liability balance, December 31, 2003 |  |                 |       |                                       | $ | 302  |                 |  | $ | 4,230                  |   |  | $                                     | 4,532  |   |  |   |      
|First quarter 2004 charges           |  | $               | 1,175 |                                       |   | 188  |                 |  |   | 1,679                  |   |  |                                       | 1,867  |   |  | $ | 3,042
|                                     |  |                 |       |                                       |   |      |                 |  |   |                        |   |  |                                       |        |   |  |   |      
|Expenditures                         |  |                 |       |                                       |   | (330 | )               |  |   | (2,255                 | ) |  |                                       | (2,585 | ) |  |   |      
|                                     |  |                 |       |                                       |   |      |                 |  |   |                        |   |  |                                       |        |   |  |   |      
|Liability balance, March 31, 2004    |  |                 |       |                                       | $ | 160  |                 |  | $ | 3,654                  |   |  | $                                     | 3,814  |   |  |   |      
|                                     |  |                 |       |                                       |   |      |                 |  |   |                        |   |  |                                       |        |   |  |   |      



For restructuring
plans initiated during 2003 and 2004, the paperboard segment recorded $1.1 million of restructuring and impairment costs during the first quarter of 2004. The paperboard segment has recorded $6.1 million cumulatively related to these plans and
expects to record an additional $300 thousand in other exit costs to complete the plans. The carton and custom packaging segment recorded $924 thousand of restructuring and impairment costs during the first quarter of 2004. The carton and custom
packaging segment has recorded $7.6 million cumulatively related to these plans and expects to record an additional $700 thousand in other exit costs to complete the plans.



10. Pension Plan and Other Postretirement Benefits



Pension Plan and Supplemental Executive Retirement Plan



Substantially all of the Companys employees participate in a noncontributory defined benefit pension plan (the
Pension Plan). The Pension Plan calls for benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plans assets
consist of shares held in collective investment funds and group annuity contracts. The Companys policy is to fund benefits attributed to employees service to date as well as service expected to be earned in the future. Based on estimates
at December 31, 2003 no contributions will be required for the year ended December 31, 2004.



During 1996, the Company adopted a supplemental executive retirement plan (SERP), which provides benefits to participants based on average compensation. The SERP covers certain executives of the Company
commencing upon retirement. The SERP is unfunded at March 31, 2004.



Pension expense for the Pension Plan and the SERP includes the following components for the three months ended March 31, 2004 and 2003 (in thousands):



|                                              |  |           |        |   |      |   |        |  
|--------------------------------------------- |  | --------- | ------ | - | ---- | - | ------ | -
|                                              |  | March 31, |       
|                                              |  | 2004      |        |   | 2003 |  
|Service cost of benefits earned               |  | $         | 1,512  |   |      | $ | 1,317  |  
|Interest cost on projected benefit obligation |  |           | 1,493  |   |      |   | 1,400  |  
|Estimated return on plan assets               |  |           | (1,674 | ) |      |   | (3,399 | )
|Net amortization and deferral                 |  |           | 849    |   |      |   | 3,180  |  
|                                              |  |           |        |   |      |   |        |  
|Net pension expense                           |  | $         | 2,180  |   |      | $ | 2,498  |  
|                                              |  |           |        |   |      |   |        |  



Other Postretirement Benefits



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



Net periodic postretirement benefit cost for the three months ended March
31, 2004 and 2003 included the following components (in thousands):



|                                                               |  |           |     |      |   |     |  
|-------------------------------------------------------------- |  | --------- | --- | ---- | - | --- | -
|                                                               |  | March 31, |    
|                                                               |  | 2004      |     | 2003 |  
|Service cost of benefits earned                                |  | $         | 5   |      | $ | 20  |  
|Interest cost on accumulated postretirement benefit obligation |  |           | 83  |      |   | 101 |  
|Amortization                                                   |  |           | 70  |      |   | (73 | )
|                                                               |  |           |     |      |   |     |  
|Net periodic postretirement benefit cost                       |  | $         | 158 |      | $ | 48  |  
|                                                               |  |           |     |      |   |     |  



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Note 11.Loss Per Share



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



|                                                     |  |                             |        |   |      |   |        |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                     |  | Three Months EndedMarch 31, |       
|                                                     |  | 2004                        |        |   | 2003 |  
|Calculation of Basic Loss Per Share:                 |  |                             |        |   |      |   |        |  
|Net loss                                             |  | $                           | (6,773 | ) |      | $ | (7,128 | )
|Weighted average number of common shares outstanding |  |                             | 28,391 |   |      |   | 27,911 |  
|                                                     |  |                             |        |   |      |   |        |  
|Basic loss per share                                 |  | $                           | (0.24  | ) |      | $ | (0.26  | )
|                                                     |  |                             |        |   |      |   |        |  
|Calculation of Diluted Loss Per Share:               |  |                             |        |   |      |   |        |  
|Net loss                                             |  | $                           | (6,773 | ) |      | $ | (7,128 | )
|Weighted average number of shares outstanding        |  |                             | 28,391 |   |      |   | 27,911 |  
|                                                     |  |                             |        |   |      |   |        |  
|Diluted loss per share                               |  | $                           | (0.24  | ) |      | $ | (0.26  | )
|                                                     |  |                             |        |   |      |   |        |  



Since the three months
ended March 31, 2004 and 2003 were net losses, the impact of the dilutive effect of stock options, if any, were not added to the weighted average shares.



Note 12.Equity Interests in Unconsolidated Affiliate



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



|                      |  |               |        |                  |   |       
|--------------------- |  | ------------- | ------ | ---------------- | - | ------
|                      |  | March 31,2004 |        | December 31,2003
|Current assets        |  | $             | 21,769 |                  | $ | 15,834
|Noncurrent assets     |  |               | 63,557 |                  |   | 64,189
|Current liabilities   |  |               | 8,169  |                  |   | 7,394 
|Long-term debt        |  |               | 56,200 |                  |   | 56,200
|Long-term liabilities |  |               | 1      |                  |   | 7     
|Net assets            |  |               | 20,956 |                  |   | 16,422



|                       |  |                             |        |      |   |       
|---------------------- |  | --------------------------- | ------ | ---- | - | ------
|                       |  | Three Months EndedMarch 31,
|                       |  | 2004                        |        | 2003
|Sales                  |  | $                           | 33,001 |      | $ | 26,283
|Gross profit           |  |                             | 8,152  |      |   | 2,891 
|Income from operations |  |                             | 7,168  |      |   | 2,114 
|Net income             |  | $                           | 6,930  |      | $ | 1,562 



Note 13.Guarantor
Condensed Consolidating Financial Statements



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



13



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|--------------------------------------------------- |  | -------------------- | ------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                    |  | As of March 31, 2004 |        
|                                                    |  | Parent               |         |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|ASSETS                                              |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT ASSETS:                                     |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Cash and cash equivalents                           |  | $                    | 80,308  |   |                       | $ | 157      |                          |  | $ | 912          |   |  | $            |         |   |  | $ | 81,377   |  
|Intercompany funding                                |  |                      | (7,203  | ) |                       |   | 18,555   |                          |  |   | (11,352      | ) |  |              |         |   |  |   |         |  
|Receivables, net of allowances                      |  |                      |        |   |                       |   | 103,474  |                          |  |   | 5,633        |   |  |              |         |   |  |   | 109,107  |  
|Intercompany accounts receivable                    |  |                      |        |   |                       |   | 158      |                          |  |   | 142          |   |  |              | (300     | ) |  |   |         |  
|Inventories                                         |  |                      |        |   |                       |   | 82,826   |                          |  |   | 3,280        |   |  |              |         |   |  |   | 86,106   |  
|Refundable income taxes                             |  |                      | 193     |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 193      |  
|Current deferred tax asset                          |  |                      | 8,796   |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 8,796    |  
|Other current assets                                |  |                      | 5,800   |   |                       |   | 7,673    |                          |  |   | 399          |   |  |              |         |   |  |   | 13,872   |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current assets                                |  |                      | 87,894  |   |                       |   | 212,843  |                          |  |   | (986         | ) |  |              | (300     | ) |  |   | 299,451  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PROPERTY, PLANT AND EQUIPMENT                       |  |                      | 12,213  |   |                       |   | 751,522  |                          |  |   | 21,539       |   |  |              |         |   |  |   | 785,274  |  
|Less accumulated depreciation                       |  |                      | (8,022  | ) |                       |   | (361,413 | )                        |  |   | (9,228       | ) |  |              |         |   |  |   | (378,663 | )
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Property, plant and equipment, net                  |  |                      | 4,191   |   |                       |   | 390,109  |                          |  |   | 12,311       |   |  |              |         |   |  |   | 406,611  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN CONSOLIDATED SUBSIDIARIES             |  |                      | 572,865 |   |                       |   | 131,669  |                          |  |   |             |   |  |              | (704,534 | ) |  |   |         |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|GOODWILL                                            |  |                      |        |   |                       |   | 179,628  |                          |  |   | 3,502        |   |  |              |         |   |  |   | 183,130  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|INVESTMENT IN UNCONSOLIDATED AFFILIATES             |  |                      | 54,955  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 54,955   |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER ASSETS                                        |  |                      | 19,254  |   |                       |   | 9,446    |                          |  |   | 232          |   |  |              |         |   |  |   | 28,932   |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                    |  | $                    | 739,159 |   |                       | $ | 923,695  |                          |  | $ | 15,059       |   |  | $            | (704,834 | ) |  | $ | 973,079  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|CURRENT LIABILITIES:                                |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Current maturities of debt                          |  | $                    | 75      |   |                       | $ | 31       |                          |  | $ |             |   |  | $            |         |   |  | $ | 106      |  
|Accounts payable                                    |  |                      | 13,407  |   |                       |   | 64,459   |                          |  |   | 3,087        |   |  |              |         |   |  |   | 80,953   |  
|Intercompany accounts payable                       |  |                      |        |   |                       |   | 142      |                          |  |   | 158          |   |  |              | (300     | ) |  |   |         |  
|Accrued interest                                    |  |                      | 19,994  |   |                       |   | 204      |                          |  |   |             |   |  |              |         |   |  |   | 20,198   |  
|Accrued compensation                                |  |                      | 555     |   |                       |   | 10,520   |                          |  |   | 258          |   |  |              |         |   |  |   | 11,333   |  
|Other accrued liabilities                           |  |                      | 7,216   |   |                       |   | 23,366   |                          |  |   | 1,322        |   |  |              |         |   |  |   | 31,904   |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total current liabilities                           |  |                      | 41,247  |   |                       |   | 98,722   |                          |  |   | 4,825        |   |  |              | (300     | ) |  |   | 144,494  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SENIOR CREDIT FACILITY                              |  |                      |        |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   |         |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LONG-TERM DEBT, less current maturities       |  |                      | 521,193 |   |                       |   | 8,245    |                          |  |   |             |   |  |              |         |   |  |   | 529,438  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED INCOME TAXES                               |  |                      | 43,053  |   |                       |   | 12,242   |                          |  |   | 1,451        |   |  |              |         |   |  |   | 56,746   |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|PENSION LIABILITY                                   |  |                      | 21,141  |   |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | 21,141   |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|DEFERRED COMPENSATION                               |  |                      | 1,508   |   |                       |   | 53       |                          |  |   |             |   |  |              |         |   |  |   | 1,561    |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|OTHER LIABILITIES                                   |  |                      | 51      |   |                       |   | 3,929    |                          |  |   | 200          |   |  |              |         |   |  |   | 4,180    |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|MINORITY INTEREST                                   |  |                      |        |   |                       |   |         |                          |  |   |             |   |  |              | 668      |   |  |   | 668      |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|SHAREHOLDERS EQUITY:                               |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Common stock                                        |  |                      | 2,730   |   |                       |   | 772      |                          |  |   | 523          |   |  |              | (1,181   | ) |  |   | 2,844    |  
|Additional paid-in capital                          |  |                      | 191,887 |   |                       |   | 671,229  |                          |  |   | 9,167        |   |  |              | (685,548 | ) |  |   | 186,735  |  
|Unearned compensation                               |  |                      | (1,825  | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (1,825   | )
|Retained (deficit) earnings                         |  |                      | (62,582 | ) |                       |   | 128,503  |                          |  |   | (1,690       | ) |  |              | (18,473  | ) |  |   | 45,758   |  
|Accumulated other comprehensive (loss) income:      |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Minimum pension liability adjustment                |  |                      | (19,244 | ) |                       |   |         |                          |  |   |             |   |  |              |         |   |  |   | (19,244  | )
|Foreign currency translation                        |  |                      |        |   |                       |   |         |                          |  |   | 583          |   |  |              |         |   |  |   | 583      |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total accumulated other comprehensive (loss) income |  |                      | (19,244 | ) |                       |   |         |                          |  |   | 583          |   |  |              |         |   |  |   | (18,661  | )
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|Total Shareholders equity                          |  |                      | 110,966 |   |                       |   | 800,504  |                          |  |   | 8,583        |   |  |              | (705,202 | ) |  |   | 214,851  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  
|                                                    |  | $                    | 739,159 |   |                       | $ | 923,695  |                          |  | $ | 15,059       |   |  | $            | (704,834 | ) |  | $ | 973,079  |  
|                                                    |  |                      |         |   |                       |   |          |                          |  |   |              |   |  |              |          |   |  |   |          |  



14



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE
SHEETS

(In thousands)



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



15



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##### Table of Contents

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                         |  | For the Three Months Ended March 31, 2004 |        
|                                                         |  | Parent                                    |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                    |  | $                                         |        |   |                       | $ | 313,790 |                          |  | $ | 9,568        |   |  | $            | (66,263 | ) |  | $ | 257,095 |  
|COST OF SALES                                            |  |                                           |        |   |                       |   | 274,526 |                          |  |   | 8,388        |   |  |              | (66,263 | ) |  |   | 216,651 |  
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                             |  |                                           |        |   |                       |   | 39,264  |                          |  |   | 1,180        |   |  |              |        |   |  |   | 40,444  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES             |  |                                           | 4,915   |   |                       |   | 33,307  |                          |  |   | 1,275        |   |  |              |        |   |  |   | 39,497  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                       |  |                                           | 800     |   |                       |   | 2,242   |                          |  |   |             |   |  |              |        |   |  |   | 3,042   |  
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                            |  |                                           | (5,715  | ) |                       |   | 3,715   |                          |  |   | (95          | ) |  |              |        |   |  |   | (2,095  | )
|OTHER (EXPENSE) INCOME:                                  |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                         |  |                                           | (10,776 | ) |                       |   | (81     | )                        |  |   | (101         | ) |  |              | 101     |   |  |   | (10,857 | )
|Interest income                                          |  |                                           | 441     |   |                       |   |        |                          |  |   |             |   |  |              | (101    | ) |  |   | 340     |  
|Equity in income of unconsolidated affiliates            |  |                                           | 2,682   |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 2,682   |  
|Other, net                                               |  |                                           | (47     | ) |                       |   | 51      |                          |  |   | (35          | ) |  |              |        |   |  |   | (31     | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                         |  |                                           | (7,700  | ) |                       |   | (30     | )                        |  |   | (136         | ) |  |              |        |   |  |   | (7,866  | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME BEFORE MINORITY INTERESTS AND INCOME TAXES |  |                                           | (13,415 | ) |                       |   | 3,685   |                          |  |   | (231         | ) |  |              |        |   |  |   | (9,961  | )
|MINORITY INTEREST IN INCOME                              |  |                                           |        |   |                       |   |        |                          |  |   |             |   |  |              | (164    | ) |  |   | (164    | )
|BENEFIT FOR INCOME TAXES                                 |  |                                           | (3,352  | ) |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | (3,352  | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                        |  | $                                         | (10,063 | ) |                       | $ | 3,685   |                          |  | $ | (231         | ) |  | $            | (164    | ) |  | $ | (6,773  | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF OPERATIONS

(In thousands)



|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                         |  | For the Three Months Ended March 31, 2003 |        
|                                                         |  | Parent                                    |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|SALES                                                    |  | $                                         |        |   |                       | $ | 298,236 |                          |  | $ | 9,255        |   |  | $            | (54,589 | ) |  | $ | 252,902 |  
|COST OF SALES                                            |  |                                           |        |   |                       |   | 253,517 |                          |  |   | 7,418        |   |  |              | (54,589 | ) |  |   | 206,346 |  
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Gross profit                                             |  |                                           |        |   |                       |   | 44,719  |                          |  |   | 1,837        |   |  |              |        |   |  |   | 46,556  |  
|SELLING, GENERAL AND ADMINISTRATIVE                      |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|EXPENSES                                                 |  |                                           | 5,637   |   |                       |   | 36,061  |                          |  |   | 1,896        |   |  |              |        |   |  |   | 43,594  |  
|RESTRUCTURING AND IMPAIRMENT COSTS                       |  |                                           |        |   |                       |   | 4,332   |                          |  |   |             |   |  |              |        |   |  |   | 4,332   |  
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(Loss) income from operations                            |  |                                           | (5,637  | ) |                       |   | 4,326   |                          |  |   | (59          | ) |  |              |        |   |  |   | (1,370  | )
|OTHER (EXPENSE) INCOME:                                  |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense                                         |  |                                           | (10,257 | ) |                       |   | (76     | )                        |  |   | (104         | ) |  |              | 100     |   |  |   | (10,337 | )
|Interest income                                          |  |                                           | 301     |   |                       |   |        |                          |  |   |             |   |  |              | (100    | ) |  |   | 201     |  
|Equity in income of unconsolidated affiliates            |  |                                           | 20      |   |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | 20      |  
|Other, net                                               |  |                                           |        |   |                       |   | 51      |                          |  |   | 47           |   |  |              |        |   |  |   | 98      |  
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|                                                         |  |                                           | (9,936  | ) |                       |   | (25     | )                        |  |   | (57          | ) |  |              |        |   |  |   | (10,018 | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME BEFORE MINORITY INTERESTS AND INCOME TAXES |  |                                           | (15,573 | ) |                       |   | 4,301   |                          |  |   | (116         | ) |  |              |        |   |  |   | (11,388 | )
|MINORITY INTEREST IN INCOME                              |  |                                           |        |   |                       |   |        |                          |  |   |             |   |  |              | (5      | ) |  |   | (5      | )
|BENEFIT FOR INCOME TAXES                                 |  |                                           | (4,265  | ) |                       |   |        |                          |  |   |             |   |  |              |        |   |  |   | (4,265  | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                        |  | $                                         | (11,308 | ) |                       | $ | 4,301   |                          |  | $ | (116         | ) |  | $            | (5      | ) |  | $ | (7,128  | )
|                                                         |  |                                           |         |   |                       |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------------------------- | ------ | - | --------------------- | - | ------ | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                        |  | For the Three Months Ended March 31, 2004 |       
|                                                        |  | Parent                                    |        |   | GuarantorSubsidiaries |   |        | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash (used in) provided by operating activities     |  | $                                         | (2,270 | ) |                       | $ | 2,920  |                          |  | $ | (175         | ) |              | $ |  |  | $ | 475    |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Investing activities:                                   |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Purchases of property, plant and equipment              |  |                                           | (113   | ) |                       |   | (4,105 | )                        |  |   | (161         | ) |              |   |  |  |   | (4,379 | )
|Investment in unconsolidated affiliates                 |  |                                           | (150   | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (150   | )
|Proceeds from disposal of property, plant and equipment |  |                                           |       |   |                       |   | 1,351  |                          |  |   |             |   |              |   |  |  |   | 1,351  |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash used in investing activities                   |  |                                           | (263   | ) |                       |   | (2,754 | )                        |  |   | (161         | ) |              |   |  |  |   | (3,178 | )
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Financing activities:                                   |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Repayments of short and long-term debt                  |  |                                           | (3,500 | ) |                       |   | (9     | )                        |  |   |             |   |              |   |  |  |   | (3,509 | )
|Proceeds from swap agreement unwind                     |  |                                           | 380    |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 380    |  
|Issuances of stock, net of forfeitures                  |  |                                           | 1,658  |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 1,658  |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash used in financing activities                   |  |                                           | (1,462 | ) |                       |   | (9     | )                        |  |   |             |   |              |   |  |  |   | (1,471 | )
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net (decrease) increase in cash and cash equivalents    |  |                                           | (3,995 | ) |                       |   | 157    |                          |  |   | (336         | ) |              |   |  |  |   | (4,174 | )
|Cash and cash equivalents at beginning of period        |  |                                           | 84,303 |   |                       |   |       |                          |  |   | 1,248        |   |              |   |  |  |   | 85,551 |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Cash and cash equivalents at end of period              |  | $                                         | 80,308 |   |                       | $ | 157    |                          |  | $ | 912          |   |              | $ |  |  | $ | 81,377 |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  



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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS
OF CASH FLOWS

(In thousands)



|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------------------------- | ------ | - | --------------------- | - | ------ | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                        |  | For the Three Months Ended March 31, 2003 |       
|                                                        |  | Parent                                    |        |   | GuarantorSubsidiaries |   |        | NonguarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities     |  | $                                         | 9,870  |   |                       | $ | 6,248  |                          |  | $ | (23          | ) |              | $ |  |  | $ | 16,095 |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Investing activities:                                   |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Purchases of property, plant and equipment              |  |                                           | (277   | ) |                       |   | (5,675 | )                        |  |   | (338         | ) |              |   |  |  |   | (6,290 | )
|Acquisitions of businesses, net of cash acquired        |  |                                           |       |   |                       |   | (707   | )                        |  |   |             |   |              |   |  |  |   | (707   | )
|Proceeds from disposal of property, plant and equipment |  |                                           |       |   |                       |   | 134    |                          |  |   |             |   |              |   |  |  |   | 134    |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash used in investing activities                   |  |                                           | (277   | ) |                       |   | (6,248 | )                        |  |   | (338         | ) |              |   |  |  |   | (6,863 | )
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Financing activities:                                   |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Proceeds from swap agreement unwind                     |  |                                           | 4,264  |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 4,264  |  
|Deferred debt costs                                     |  |                                           | (809   | ) |                       |   |       |                          |  |   |             |   |              |   |  |  |   | (809   | )
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided by financing activities               |  |                                           | 3,455  |   |                       |   |       |                          |  |   |             |   |              |   |  |  |   | 3,455  |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net increase (decrease) in cash and cash equivalents    |  |                                           | 13,048 |   |                       |   |       |                          |  |   | (361         | ) |              |   |  |  |   | 12,687 |  
|Cash and cash equivalents at beginning of period        |  |                                           | 33,544 |   |                       |   |       |                          |  |   | 770          |   |              |   |  |  |   | 34,314 |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Cash and cash equivalents at end of period              |  | $                                         | 46,592 |   |                       | $ |       |                          |  | $ | 409          |   |              | $ |  |  | $ | 47,001 |  
|                                                        |  |                                           |        |   |                       |   |        |                          |  |   |              |   |              |   |   |  |   |        |  



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Note 14.Commitments and Contingencies



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



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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 42.0% in the first three months of 2004. The remaining 58.0% 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. These integration statistics do not include volume produced or converted by our 50% owned, unconsolidated, joint ventures Premier Boxboard Limited and Standard
Gypsum, LLP. As part of our strategy to optimize our operating efficiency, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production among mills in response to customer or market demands.



Recovered fiber, which is derived from recycled paper stock,
is our most significant raw material. During the past five years, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. For example, our average recovered fiber cost per ton of paperboard produced increased
$26 per ton or 33% from 1999 to 2000, and decreased $39 per ton or 38% from 2000 to 2001 and then increased again $20 per ton or 31% from 2001 to 2002. Recovered fiber cost per ton averaged $88 during 2003 and $100 during the first three months of
2004.



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 due to supply and demand in the industry, 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 cost increases due to customary time lags in implementing our price increases. We cannot give assurance that we will be able to recover any future increases in the cost of
recovered fiber 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 raw materials and 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 converting machinery. In 2003 energy costs averaged
$61 per ton. During the first three months of 2004, energy costs were $59 per ton compared with $66 per ton in the first three months of 2003, a 10.6% decrease. The decrease was due primarily to a decrease in natural gas costs and an increased usage
of lower cost energy sources, primarily coal. Until the last few years, our business had not been significantly affected by energy cost increases, and we historically have not passed increases in energy costs through to our customers. Consequently,
we have not been able to pass through to our customers all of the energy cost increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor
energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs.



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



We are
a holding company that currently operates our business through 26 subsidiaries as of March 31, 2004. We also own a 50% interest in two joint ventures with Temple-Inland, Inc. We have an additional joint venture with an unrelated entity in which our
investment and share of earnings are immaterial. We account for these interests in our joint ventures under the equity method of accounting. See Liquidity and Capital Resources below.



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##### Table of Contents

Critical Accounting Policies



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



Three Months Ended March 31, 2004 and 2003



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



|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|--------------------------------------------------------- |  | --------------------------- | ----- | ------ | - | ----- | ------- | - | ----- | - |  | ----- | --
|                                                          |  | Three Months EndedMarch 31, |       | Change |   |       | %Change |  
|                                                          |  | 2004                        |       | 2003   |   |      
|Production source of paperboard tons sold (in thousands): |  |                             |       |        |   |       |         |   |       |   |  |       |   
|From paperboard mill production                           |  |                             | 245.9 |        |   | 256.1 |         |   | (10.2 | ) |  | (4.0  | )%
|Outside purchases                                         |  |                             | 35.7  |        |   | 28.7  |         |   | 7.0   |   |  | 24.4  | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Total paperboard tonnage                                  |  |                             | 281.6 |        |   | 284.8 |         |   | (3.2  | ) |  | (1.1  | )%
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Tons sold by market (in thousands):                       |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Tube, core and composite container volume                 |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Paperboard (internal)                                     |  |                             | 60.4  |        |   | 62.3  |         |   | (1.9  | ) |  | (3.0  | )%
|Outside purchases                                         |  |                             | 10.7  |        |   | 5.6   |         |   | 5.1   |   |  | 91.1  | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Tube, core and composite container converted products     |  |                             | 71.1  |        |   | 67.9  |         |   | 3.2   |   |  | 4.7   | % 
|Unconverted paperboard                                    |  |                             | 13.4  |        |   | 12.4  |         |   | 1.0   |   |  | 8.1   | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Tube, core and composite container volume                 |  |                             | 84.5  |        |   | 80.3  |         |   | 4.2   |   |  | 5.2   | % 
|Folding carton volume                                     |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Paperboard (internal)                                     |  |                             | 24.7  |        |   | 25.9  |         |   | (1.2  | ) |  | (4.6  | )%
|Outside purchases                                         |  |                             | 22.9  |        |   | 18.3  |         |   | 4.6   |   |  | 25.1  | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Folding carton converted products                         |  |                             | 47.6  |        |   | 44.2  |         |   | 3.4   |   |  | 7.7   | % 
|Unconverted paperboard                                    |  |                             | 61.6  |        |   | 75.4  |         |   | (13.8 | ) |  | (18.3 | )%
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Folding carton volume                                     |  |                             | 109.2 |        |   | 119.6 |         |   | (10.4 | ) |  | (8.7  | )%
|Gypsum wallboard facing paper volume                      |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Unconverted paperboard                                    |  |                             | 25.7  |        |   | 29.3  |         |   | (3.6  | ) |  | (12.3 | )%
|Other specialty products volume                           |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Paperboard (internal)                                     |  |                             | 18.3  |        |   | 16.2  |         |   | 2.1   |   |  | 13.0  | % 
|Outside purchases                                         |  |                             | 2.1   |        |   | 4.8   |         |   | (2.7  | ) |  | (56.3 | )%
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Other specialty converted products                        |  |                             | 20.4  |        |   | 21.0  |         |   | (0.6  | ) |  | (2.9  | )%
|Unconverted paperboard                                    |  |                             | 41.8  |        |   | 34.6  |         |   | 7.2   |   |  | 20.8  | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Other specialty products volume                           |  |                             | 62.2  |        |   | 55.6  |         |   | 6.6   |   |  | 11.9  | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Total paperboard tonnage                                  |  |                             | 281.6 |        |   | 284.8 |         |   | (3.2  | ) |  | (1.1  | )%
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Gross paper margins ($/ton):                              |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Paperboard mill:                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Average net selling price                                 |  | $                           | 417   |        | $ | 412   |         | $ | 5     |   |  | 1.2   | % 
|Average recovered fiber cost                              |  |                             | 100   |        |   | 82    |         |   | 18    |   |  | 22.0  | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Paperboard mill gross paper margin                        |  | $                           | 317   |        | $ | 330   |         | $ | (13   | ) |  | (3.9  | )%
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Tube and core:                                            |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Average net selling price                                 |  | $                           | 821   |        | $ | 807   |         | $ | 14    |   |  | 1.7   | % 
|Average paperboard cost                                   |  |                             | 468   |        |   | 464   |         |   | 4     |   |  | 0.9   | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   
|Tube and core gross paper margin                          |  | $                           | 353   |        | $ | 343   |         | $ | 10    |   |  | 2.9   | % 
|                                                          |  |                             |       |        |   |       |         |   |       |   |  |       |   



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Paperboard tonnage. Total paperboard tonnage for the first quarter of 2004 decreased 1.1% to 281.6
thousand tons from 284.8 in the first quarter of 2003. Likewise, tons sold from paperboard mill production decreased 4.0% in the first quarter of 2004 compared to the same period last year. Total tonnage converted increased 4.6% during the first
quarter of 2004.



The decreases in paperboard tonnage during
first quarter 2004 were primarily related to:



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



| |  | A decrease in sales of unconverted paperboard to the gypsum wallboard facing paper end-use market. This decrease was primarily due to the transfer of volume from our Buffalo
paperboard mill, which was closed in March 2003, to our 50% owned, unconsolidated, Premier Boxboard joint venture. Including the volume from Premier Boxboard, gypsum volume increased 17.6% to 52.2 thousand tons in the first quarter of 2004 compared
with 44.4 thousand tons for the same period in 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These decreases were partially offset by:



| |  | An increase in sales of unconverted paperboard to the other specialty end-use market.
| | - | -------------------------------------------------------------------------------------



| |  | An increase in internal conversion by our folding carton and tube and core operations.
| | - | --------------------------------------------------------------------------------------



Sales. Our consolidated sales for the three months ended March 31, 2004 increased 1.7% to $257.1 million from $252.9
million in the same period of 2003. The following table presents sales by business segment (in thousands):



|                                   |  |                             |         |         |   |         |         |   |       |   |  |      |   
|---------------------------------- |  | --------------------------- | ------- | ------- | - | ------- | ------- | - | ----- | - |  | ---- | --
|                                   |  | Three Months EndedMarch 31, |         | $Change |   |         | %Change |  
|                                   |  | 2004                        |         | 2003    |   |        
|Paperboard                         |  | $                           | 87,859  |         | $ | 83,903  |         | $ | 3,956 |   |  | 4.7  | % 
|Tube, core and composite container |  |                             | 94,223  |         |   | 94,958  |         |   | (735  | ) |  | (0.8 | )%
|Carton and custom packaging        |  |                             | 75,013  |         |   | 74,041  |         |   | 972   |   |  | 1.3  | % 
|                                   |  |                             |         |         |   |         |         |   |       |   |  |      |   
|Total                              |  | $                           | 257,095 |         | $ | 252,902 |         | $ | 4,193 |   |  | 1.7  | % 
|                                   |  |                             |         |         |   |         |         |   |       |   |  |      |   



Paperboard Segment



Sales for the paperboard segment increased primarily due to higher sales
from our recovered fiber and converting operations and higher selling prices for paperboard. These increases were partially offset by lower paperboard volume.



Tube, Core and Composite Container Segment



Sales for the tube, core and composite container segment decreased primarily due to lower sales in the plastics operations, partially offset by higher
selling prices in the tube and core operations.



Carton and Custom Packaging
Segment



Sales for the carton and custom packaging segment
increased due to an increase in contract packaging sales and higher carton volume, partially offset by lower selling prices.



Gross Profit Margin. Gross profit margin for the first quarter of 2004 decreased to 15.7% of sales from 18.4% in 2003. This margin decrease was due
primarily to the following:



| |  | Lower gross paper margins in the paperboard segment.
| | - | ----------------------------------------------------



| |  | Lower margins in the carton and custom packaging segment.
| | - | ---------------------------------------------------------



| |  | A $2.1 million reserve for inventory related to the potential bankruptcy of a specific customer.
| | - | ------------------------------------------------------------------------------------------------



These factors were partially offset by lower energy costs in the paperboard segment and higher margins in the tube, core and
composite container segment.



Selling, General and
Administrative Expenses. Selling, general and administrative expenses were $39.5 million in the first quarter of 2004, a decrease of 9.4% from the first quarter of 2003. The decrease in selling, general and administrative expenses was the result
of the following:



| |  | Reductions through saving initiatives, including closed and consolidated facilities.
| | - | ------------------------------------------------------------------------------------



23



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| |  | Severance costs associated with idling one of two coated recycled paperboard machines at our Rittman, Ohio facility during the first quarter of 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



These factors were partially offset by:



| |  | A $1.3 million reserve for of uncollectible accounts receivable related to the potential bankruptcy of a specific customer.
| | - | ---------------------------------------------------------------------------------------------------------------------------



Restructuring and Impairment Costs. In March 2003, we announced the permanent closure
of our Buffalo Paperboard mill located in Lockport, New York. We recorded a charge of approximately $4.3 million in connection with this closure. The majority of the Buffalo mills sales were transferred to our other paperboard mills and
our Premier Boxboard joint venture.



In June 2003, we initiated
a plan to permanently close our Ashland, Ohio carton facility. We recorded a charge of $6.7 million in connection with this closure. We restructured this facility in 2002; however, due to severe margin pressure and excess industry capacity, the
aggressive downsizing undertaken in December 2002 was unsuccessful so the facility was permanently closed. Substantially all of Ashlands carton sales were transferred to our other carton manufacturing facilities. During the first quarter of
2004, we recorded an additional $429 thousand charge for impairment of assets and $495 thousand for other exit costs related to this restructuring activity.



In January 2004, we announced the permanent closure of our Cedartown Paperboard mill located in Cedartown, Georgia. We recorded a charge of approximately
$1.0 million in connection with this closure including a $500 thousand impairment charge for assets. All of the paperboard produced at this facility had been consumed internally by our converting operations. The paperboard production was
transitioned to our other paperboard mills. This closure is not expected to have a significant impact on our operations and is expected to improve operating results and capacity utilization.



In January 2004, we initiated a plan to centralize the accounting and finance
operations to our headquarters located in Austell, Georgia. This action was initiated to enhance the control environment and reduce costs. We recorded a charge of approximately $800 thousand in connection with this plan. This plan is expected to be
completed by the second quarter of 2004.



During 2001 and 2002,
we initiated restructuring activities to consolidate our Carolina Converting Inc. operation with our Carolina Components operation, to close the Chicago paperboard mill, and to close the Halifax paperboard mill. During the first quarter of 2004, we
incurred an additional $246 thousand charge for impairment of assets related to these restructuring activities. All of these restructuring activities are substantially complete except for selling the real estate or fulfilling our obligation under a
real estate lease.



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



Income (loss) from operations. Loss from operations for the first quarter of 2004 was $2.1 million, an increase of $725 thousand over the operating loss of $1.4 million for the same period last year. The
following table presents income (loss) from operations by business segment (in thousands):



|                                   |  |                             |        |   |          |   |        |          |  |   |        |   |  |       |  
|---------------------------------- |  | --------------------------- | ------ | - | -------- | - | ------ | -------- |  | - | ------ | - |  | ----- | -
|                                   |  | Three Months EndedMarch 31, |        |   | $ Change |   |        | % Change | 
|                                   |  | 2004                        |        |   | 2003     |   |        |         
|Paperboard                         |  | $                           | 4,820  |   |          | $ | 1,880  |          |  | $ | 2,940  |   |  | 156.4 | %
|Tube, core and composite container |  |                             | 3,279  |   |          |   | 2,334  |          |  |   | 945    |   |  | 40.5  | %
|Carton and custom packaging        |  |                             | (4,536 | ) |          |   | (81    | )        |  |   | (4,455 | ) |  | 5,500 | %
|Corporate expense                  |  |                             | (5,658 | ) |          |   | (5,503 | )        |  |   | (155   | ) |  | 2.8   | %
|                                   |  |                             |        |   |          |   |        |          |  |   |        |   |  |       |  
|Total                              |  | $                           | (2,095 | ) |          | $ | (1,370 | )        |  | $ | (725   | ) |  | 52.9  | %
|                                   |  |                             |        |   |          |   |        |          |  |   |        |   |  |       |  



Paperboard Segment



The increase in income from operations was a result of the following:



| |  | Lower restructuring costs.
| | - | --------------------------



| |  | Savings from closing and consolidating operations.
| | - | --------------------------------------------------



| |  | Cost of idling one of the two coated recycled paperboard machines at our Rittman, Ohio facility during the first quarter of 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | Lower energy costs.
| | - | -------------------



24



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##### Table of Contents

These factors were partially offset by:



| |  | Lower gross paper margins.
| | - | --------------------------



| |  | Lower paperboard volume.
| | - | ------------------------



Tube, Core and Composite Container Segment



The increase in income from operations is the result of savings generated by consolidating operations and higher margins in the tube and core operations.



Carton and Custom Packaging Segment



The decline in operating results is the result of:



| |  | A $3.4 million reserve for inventory and accounts receivable related to the potential bankruptcy of a specific customer.
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | Restructuring and impairment costs.
| | - | -----------------------------------



| |  | Higher paperboard costs.
| | - | ------------------------



| |  | Lower sales volume.
| | - | -------------------



These factors were partially offset by lower selling, general and administrative expenses.



Other Income (Expense). Interest expense increased 5.0 % to $10.9 million for the first quarter of 2004 from $10.3
million in the same period of 2003. This increase was due to the unwinding of fixed to floating interest rate swaps. See Liquidity and Capital Resources for additional information regarding our debt, interest expense and interest
rate swap agreements.



Equity in income from unconsolidated
affiliates was $2.7 million in the first quarter of 2004, an improvement of $2.7 million over equity in income from unconsolidated affiliated of $20 thousand in the first quarter of 2003. This increase was primarily due to a significant improvement
in operating results for Standard Gypsum, our gypsum wallboard joint venture with Temple-Inland. The improved results were due primarily to an increase in selling prices and volume. Premier Boxboards results improved slightly in 2004 compared
to 2003, primarily due to increased volume and higher selling prices.



Benefit for income taxes.The effective rate of income tax benefit for the three months ended March 31, 2004 was 33.7% compared to 37.5% for the same period last year. The effective rates for both periods are different from the
statutory rates due to permanent tax adjustments. In addition, the income tax provision for the three months ended March 31, 2004 included tax expense relating to an estimated future impairment of state net operating losses.



Net Loss. Due to the factors discussed above, net loss for the first
quarter of 2004 was $6.8 million, or $0.24 net loss per common share, compared to net loss of $7.1 million, or $0.26 net loss per common share, for the same period last year.



Liquidity and Capital Resources



Liquidity Sources and Risks. Our primary sources of liquidity are cash from operations and borrowings under our senior credit facility, described
below. Downturns in operations can significantly affect our ability to generate cash. In the first quarter of 2004, we generated $475 thousand in cash from operations, which is $15.6 million lower than the first quarter of 2003. See Cash
from Operations below. Although the timing or certainty of the following events cannot be assured, we believe that our existing cash and liquidity position will be strengthened through the sale of the real estate at our Chicago, Illinois and
Baltimore, Maryland paperboard mills and internal cost reduction initiatives. We believe that our cash on hand at March 31, 2004 of $81.4 million and borrowing availability under our senior credit facility will be sufficient to meet our cash
requirements for the year ended December 31, 2004 and the foreseeable future. Additionally, based on our historical ability to generate cash, we believe we will be able to meet our long-term cash requirements. However, if we are unable to generate
cash at historic levels our ability to generate cash sufficient to meet long-term requirements is uncertain. The following are factors that could affect our future ability to generate cash from operations:



| |  | Continued contraction in domestic demand for recycled paperboard and related packaging products that our industry experienced in 2000, 2001 and 2002.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Substitution of paperboard packaging products by alternative products such as flexible packaging and plastics.
| | - | --------------------------------------------------------------------------------------------------------------



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



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



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



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



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



|                                                 |  |               |         |                  |   |         |  
|------------------------------------------------ |  | ------------- | ------- | ---------------- | - | ------- | -
|                                                 |  | March 31,2004 |         | December 31,2003 |  
|Senior credit facility                           |  | $             |        |                  | $ |        |  
|97/8%
senior subordinated notes                  |  |               | 285,000 |                  |   | 285,000 |  
|73/8%
senior notes                               |  |               | 189,750 |                  |   | 193,250 |  
|71/4%
senior notes                               |  |               | 29,000  |                  |   | 29,000  |  
|Other notes payable                              |  |               | 9,886   |                  |   | 9,895   |  
|Mark-to-market value of interest swap agreements |  |               | 1,042   |                  |   | (1,145  | )
|Realized interest rate swap gains (1)            |  |               | 14,866  |                  |   | 15,107  |  
|                                                 |  |               |         |                  |   |         |  
|Total debt                                       |  | $             | 529,544 |                  | $ | 531,107 |  
|                                                 |  |               |         |                  |   |         |  

---

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



Our senior credit facility provides for a revolving line of credit of $75.0
million and is secured primarily by a first priority security interest in our accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts
receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of March 31, 2004, no borrowings were outstanding under the facility; however, an
aggregate of $40.5 million in letter of credit obligations were outstanding. Availability under the facility at March 31, 2004 was limited to $24.5 million after taking into consideration outstanding letter of credit obligations and minimum
borrowing availability requirements.



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



The facility contains covenants that
restrict, among other things, our ability and our subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make
certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of our business. The facility also contains a fixed charge coverage ratio
covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less
reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at
March 31, 2004. Based on levels of accounts receivable and inventory and liquidity at March 31, 2004 and expectations for the remainder of 2004, we do not expect to be required to measure the fixed charge ratio covenant in 2004.



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



26



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



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



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



In May 2003, we unwound the remaining $50.0 million of our $50.0 million
interest rate swap agreement related to the 97/8% senior subordinated notes, and received approximately $4.6
million from the bank counter-party. We will accrete the $4.6 million gain into interest expense over the life of the notes, and it will partially offset the increase in interest expense. The $4.6 million gain lowered the effective interest rate of
the 97/8% senior subordinated notes by approximately 30 basis points.



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



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



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



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



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



Since December 31, 2003, there has been no material change in our obligations with respect to the letter of credit obligations of these joint ventures, or
in the additional contingencies related to buy-sell agreements for our interests in the joint ventures. For more information about these obligations and contingencies, see Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources  Off-Balance Sheet Arrangements in our Annual Report on Form 10-K for the year ended December 31, 2003.



Cash from Operations. Cash generated from operations was $475 thousand for the three-month period ended March 31,
2004, compared with $16.1 million for the same period of 2003. The decrease in 2004 compared to the same period in 2003 was due primarily to a federal tax refund of $17.2 million received in the first quarter of 2003 combined with lower operating
results, partially offset by a reduction in working capital.



27



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##### Table of Contents

Capital Expenditures. Capital expenditures were $4.4 million for the first quarter of 2004 versus
$6.3 million in the first quarter of 2003. Aggregate capital expenditures of approximately $24.0 million are anticipated for 2004. To conserve cash, we intend to limit capital expenditures for 2004 to cost reduction, productivity improvement and
replacement projects.



Acquisitions. In January 2003, we
acquired our venture partners 50% interest in the equity of Caraustar Northwest, LLC, located in Tacoma, WA, for approximately $695 thousand. The Tacoma facility, which manufactures tubes, cores and edge protectors and performs custom slitting
for customers on the West coast, became a part of the tube, core and composite container segment



Inflation



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





New Accounting Pronouncements



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



Contractual Obligations



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



Forward-Looking Information



This quarterly report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that represent our expectations, anticipations or beliefs about future events, operating results or financial condition. For this purpose, any statements that are
not statements of historical fact may be deemed to be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially depending on a variety of important factors, including, but not
limited to, fluctuations in raw material prices and energy costs, increases in pension and insurance costs, downturns in industrial production, housing and construction and the consumption of durable and nondurable goods, the degree and nature of
competition, demand for our products, the degree of success achieved by our new product initiatives, changes in government regulations, our ability to complete acquisitions and successfully integrate the operations of acquired businesses (including
specifically the acquired Smurfit-Stone industrial packaging operations), our ability to service our substantial indebtedness and unforeseen difficulties with the consolidation and relocation of our accounting and control operations and the
integration of our IT systems.Additional relevant risk factors that could cause actual results to differ materially are discussed in our most recent Annual Report on Form 10-K and in our other filings with the Securities and Exchange
Commission. With respect to such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be examined at public reference facilities maintained by
the Securities and Exchange Commission or, to the extent filed via EDGAR, accessed through the Web Site of the Securities and Exchange Commission (http://www.sec.gov). We do not undertake any obligation to update any forward-looking
statements and are not responsible for any changes made to this 10-Q by wire or Internet services.



Risk Factors



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



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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004



PART I



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For a discussion of certain market risks related to us, see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. There have been no significant developments with respect to our exposure to interest rate market risk. See Note 6 to the condensed consolidated financial statements for
additional information about our interest rate swap agreements and transactions since December 31, 2003.



ITEM 4. CONTROLS AND PROCEDURES



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



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



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



In conjunction with its 2002 audit of our financial
statements, our independent accountants, Deloitte & Touche LLP, identified certain items they described as reportable conditions, relating primarily to the decentralized nature of our Company and the inconsistent application of
certain written policies. In 2003, the Company undertook a process of implementing improvements to its policies and engaged PricewaterhouseCoopers LLP to do an extensive evaluation of the Companys internal controls, both to prepare our Company
to comply with the new annual certification regarding internal control over financial reporting that will be required as of December 31, 2004 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rulemaking, as well as to assist
the Company in conforming to certain best practices recommendations with respect to internal controls generally. In 2003, Deloitte & Touche did not identify any reportable conditions in connection with the audit of the
Companys financial statements. Our efforts to implement improvements in these areas continue, and further improvements will be necessary, in order for our Company to comply with the upcoming internal controls certification requirement mandated
by Section 404. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, in Managements Discussion and Analysis of Financial Condition and Results of Operations  Risk Factors  Our business is subject to
changing regulation of corporate governance and public disclosure that has increased both our costs and the risk of noncompliance, for more information regarding these matters.



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



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



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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004



PART II. OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES



The following table sets forth all purchases made by or on behalf of the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3)
under the Exchange Act, of shares of the Companys common stock during each month in the first quarter of 2004.



|                               |  |                                                  |  |                                          |       |                                                                                                |   |                                                                                                                            |  
|------------------------------ |  | ------------------------------------------------ |  | ---------------------------------------- | ----- | ---------------------------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------- | -
|Period                         |  | (a) Total Numberof Shares (orUnits) Purchased(1) |  | (b) Average PricePaid per Share(or Unit) |       | (c) Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or Programs(1) |   | (d) Maximum Number (orApproximate Dollar Value) ofShares (or Units)that May Yet Be PurchasedUnder the Plans or
Programs(1)
|January 1  January 31, 2004   |  | 260                                              |  | $                                        | 14.07 |                                                                                                |  |                                                                                                                            | 
|February 1  February 29, 2004 |  | 574                                              |  | $                                        | 13.99 |                                                                                                |  |                                                                                                                            | 
|March 1  March 31, 2004       |  | 311                                              |  | $                                        | 11.58 |                                                                                                |  |                                                                                                                            | 
|                               |  |                                                  |  |                                          |       |                                                                                                |   |                                                                                                                            |  
|Total                          |  | 1,145                                            |  | $                                        | 13.21 |                                                                                                |  |                                                                                                                            | 

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|(1) | These shares were surrendered by employees to satisfy the employees minimum tax withholding obligations in connection with the vesting of restricted common stock issued by the
Company. The Company does not consider the purchase of shares from employees in this context to be pursuant to a publicly announced plan or program. The table excludes shares withheld from employees in cashless exercises to satisfy
minimum tax withholding requirements and to pay the exercise price of options.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



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



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



We furnished three current reports on Form 8-K during the quarter ended March 31, 2004. The first report, furnished on February 10, 2004, attached excerpts from a management presentation.



The second report, furnished on February 10, 2004, attached our press release announcing our
financial results for the year ended December 31, 2003.



The third report, an
amended report on Form 8K/A, furnished on March 23, 2004, attached revised excerpts from a management presentation.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



CARAUSTAR INDUSTRIES, INC.By:

/s/ Ronald J. DomanicoRonald J. DomanicoVice President and Chief Financial Officer




Date: May 10, 2004



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EXHIBIT INDEX



|            |  |   |  |                                                                                                                                                                       
|----------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                           
|3.01        |  |  |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference  Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No.
0-20646])
|            |  |  
|3.02        |  |  |  | Third Amended and Restated Bylaws of the Company (Incorporated by reference  Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])             
|            |  |  
|31.01      |  |  |  | Certification of CEO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                     
|            |  |  
|31.02      |  |  |  | Certification of CFO  Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                     
|            |  |  
|32.01      |  |  |  | Certification of CEO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                       
|            |  |  
|32.02      |  |  |  | Certification of CFO  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                       

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



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