##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




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FORM 10-Q

|           |  |                                                                                                                   
|---------- |  | ------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                   
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934                   
|           |  | For the quarterly period ended March 31,
    2002                                                                 
|           |  | OR                                                                                                                
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|           |  | For the transition period
    from                to                                                              

Commission File Number 0-20646



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Caraustar Industries, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|North Carolina                                                     |  | 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)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

Yes x                     No o

Indicate the number of shares outstanding of each
of issuers classes of common stock, as of the latest
practicable date, May 3, 2002.

|                             |  |              
|---------------------------- |  | -------------
|Common Stock, $.10 par value |  | 27,856,107   
|                             |  |              
|(Class)                      |  | (Outstanding)



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TABLE OF CONTENTS



|                                                                                                                 |                                          |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------- | ---------------------------------------- |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                                           
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                                                 
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED)                                 
|CARAUSTAR INDUSTRIES, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|CARAUSTAR INDUSTRIES, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                                                                                 | ITEM 1. LEGAL PROCEEDINGS               
|                                                                                                                 | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
|SIGNATURES                                                                                                      
|EXHIBIT INDEX                                                                                                   
|Computation of Earnings Per Share                                                                               



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002

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, 2002 and December 31, 2001                                                                                  |    |      | 3  | 
|              |  | Condensed Consolidated Statements of Operations
    for the three-month periods ended March 31, 2002 and
    March 31, 2001                                           |    |      | 4  | 
|              |  | Condensed Consolidated Statements of Cash Flows
    for the three-month periods ended March 31, 2002 and
    March 31, 2001                                           |    |      | 5  | 
|              |  | Notes to Condensed Consolidated Financial
    Statements                                                                                                              |    |      | 6  | 
|             
|Item 2.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations for the
    three-month periods ended March 31, 2002 and March 31,
    2001 |    |      | 14 | 
|             
|Item 3.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                                        |    |      | 30 | 
|             
|PART II      |  | OTHER INFORMATION                                                                                                                                                     |    |      |    | 
|             
|Item 1.       |  | Legal Proceedings                                                                                                                                                     |    |      | 31 | 
|             
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                                                                      |    |      | 31 | 
|Signatures    |  |                                                                                                                                                                       | 32 |     
|Exhibit Index |  |                                                                                                                                                                       | 33 |     

2



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002

PART I, ITEM 1.


CARAUSTAR INDUSTRIES, INC. AND
SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands, except share data)


|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |          |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------------ | ------- | - | ------- | -------- | ------- | 
|                                         |                                                                                                                                                                                       | March 31,                 |         | December 31,
|                                         |                                                                                                                                                                                       | 2002                      |         | 2001        
|                                         |                                                                                                                                                                                       |                           |         |             
|                                         |                                                                                                                                                                                       | (Unaudited)               |         |             
|ASSETS                                  
|CURRENT ASSETS:                          |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         | Cash and cash equivalents                                                                                                                                                             |                           | $       | 67,450       |         |   | $       | 64,244   |        
|                                         | Receivables, net of allowances                                                                                                                                                        |                           |         | 102,710      |         |   |         | 86,297   |        
|                                         | Inventories                                                                                                                                                                           |                           |         | 97,970       |         |   |         | 101,823  |        
|                                         | Refundable income taxes                                                                                                                                                               |                           |         | 17,563       |         |   |         | 17,949   |        
|                                         | Other current assets                                                                                                                                                                  |                           |         | 20,047       |         |   |         | 16,456   |        
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         |                                                                                                                                                                                       | Total current assets      |         |              | 305,740 |   |         |          | 286,769 | 
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|PROPERTY, PLANT AND EQUIPMENT:           |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         | Land                                                                                                                                                                                  |                           |         | 12,620       |         |   |         | 12,620   |        
|                                         | Buildings and improvements                                                                                                                                                            |                           |         | 137,438      |         |   |         | 135,727  |        
|                                         | Machinery and equipment                                                                                                                                                               |                           |         | 628,542      |         |   |         | 625,691  |        
|                                         | Furniture and fixtures                                                                                                                                                                |                           |         | 14,509       |         |   |         | 14,326   |        
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         |                                                                                                                                                                                       |                           | 793,109 |              |         |   | 788,364 |         
|                                         | Less accumulated depreciation                                                                                                                                                         |                           |         | (352,157     | )       |   |         | (337,988 | )      
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         | Property, plant and equipment, net                                                                                                                                                    |                           |         | 440,952      |         |   |         | 450,376  |        
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|GOODWILL, net                            |                                                                                                                                                                                       |                           | 146,465 |              |         |   | 146,465 |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|INVESTMENT IN UNCONSOLIDATED AFFILIATES  |                                                                                                                                                                                       |                           | 61,289  |              |         |   | 62,285  |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|OTHER ASSETS                             |                                                                                                                                                                                       |                           | 14,486  |              |         |   | 15,086  |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         |                                                                                                                                                                                       | $                         | 968,932 |              |         | $ | 960,981 |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|CURRENT LIABILITIES:                     |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         | Current maturities of debt                                                                                                                                                            |                           | $       | 48           |         |   | $       | 48       |        
|                                         | Accounts payable                                                                                                                                                                      |                           |         | 56,299       |         |   |         | 52,133   |        
|                                         | Accrued liabilities                                                                                                                                                                   |                           |         | 48,400       |         |   |         | 37,749   |        
|                                         | Dividends payable                                                                                                                                                                     |                           |         | 0            |         |   |         | 833      |        
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         |                                                                                                                                                                                       | Total current liabilities |         |              | 104,747 |   |         |          | 90,763  | 
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|LONG-TERM DEBT, less current maturities  |                                                                                                                                                                                       |                           | 497,848 |              |         |   | 508,691 |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|DEFERRED INCOME TAXES                    |                                                                                                                                                                                       |                           | 66,915  |              |         |   | 66,760  |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|DEFERRED COMPENSATION                    |                                                                                                                                                                                       |                           | 1,666   |              |         |   | 1,741   |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|OTHER LIABILITIES                        |                                                                                                                                                                                       |                           | 16,816  |              |         |   | 12,512  |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|MINORITY INTEREST                        |                                                                                                                                                                                       |                           | 913     |              |         |   | 935     |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|COMMITMENTS AND CONTINGENCIES            |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|SHAREHOLDERS EQUITY:                    |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         | Preferred stock, $.10 par value; 5,000,000 shares
    authorized, none issued                                                                                                         |                           |         | 0            |         |   |         | 0        |        
|                                         | Common stock, $.10 par value; 60,000,000 shares
    authorized, 27,856,839 and 27,853,897 shares issued and
    outstanding at March 31, 2002 and December 31, 2001,
    respectively |                           |         | 2,785        |         |   |         | 2,785    |        
|                                         | Additional paid-in capital                                                                                                                                                            |                           |         | 180,120      |         |   |         | 180,116  |        
|                                         | Retained earnings                                                                                                                                                                     |                           |         | 97,987       |         |   |         | 97,488   |        
|                                         | Accumulated other comprehensive loss                                                                                                                                                  |                           |         | (865         | )       |   |         | (810     | )      
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         |                                                                                                                                                                                       |                           | 280,027 |              |         |   | 279,579 |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         
|                                         |                                                                                                                                                                                       | $                         | 968,932 |              |         | $ | 960,981 |         
|                                         |                                                                                                                                                                                       |                           |         |              |         |   |         |         

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

3



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.


CARAUSTAR INDUSTRIES, INC. AND
SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


|                                                                                |                                                          |                         |         |        |        |   |         |        |        |  
|------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                |                                                          |                        
|                                                                                |                                                          | For the Three Months   
|                                                                                |                                                          | Ended March 31,        
|                                                                                |                                                          |                        
|                                                                                |                                                          | 2002                    |         | 2001  
|                                                                                |                                                          |                         |         |       
|                                                                                |                                                          |                        
|                                                                                |                                                          | (Unaudited)            
|SALES                                                                           |                                                          | $                       | 222,163 |        |        | $ | 233,088 |       
|COST OF SALES                                                                   |                                                          |                         | 165,480 |        |        |   | 178,407 |       
|                                                                                |                                                          |                         |         |        |        |   |         |       
|                                                                                |                                                          | Gross profit            |         |        | 56,683 |   |         |        | 54,681 |  
|FREIGHT COSTS                                                                   |                                                          |                         | 13,021  |        |        |   | 12,986  |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                    |                                                          |                         | 33,995  |        |        |   | 36,717  |       
|RESTRUCTURING COSTS                                                             |                                                          |                         | 0       |        |        |   | 7,083   |       
|                                                                                |                                                          |                         |         |        |        |   |         |       
|                                                                                |                                                          | Operating income (loss) |         |        | 9,667  |   |         |        | (2,105 | )
|OTHER (EXPENSE) INCOME:                                                         |                                                          |                         |         |        |        |   |         |       
|                                                                                | Interest expense                                         |                         |         | (9,302 | )      |   |         | (9,210 | )     
|                                                                                | Interest income                                          |                         |         | 376    |        |   |         | 88     |       
|                                                                                | Equity in income (loss) of unconsolidated
    affiliates |                         |         | 3      |        |   |         | (1,585 | )     
|                                                                                | Other, net                                               |                         |         | (32    | )      |   |         | 278    |       
|                                                                                |                                                          |                         |         |        |        |   |         |       
|                                                                                |                                                          |                         | (8,955  | )      |        |   | (10,429 | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|INCOME (LOSS) BEFORE MINORITY INTEREST,
    INCOME TAXES AND EXTRAORDINARY LOSS |                                                          |                         | 712     |        |        |   | (12,534 | )     
|MINORITY INTEREST                                                               |                                                          |                         | 23      |        |        |   | (28     | )     
|PROVISION (BENEFIT) FOR INCOME TAXES                                            |                                                          |                         | 236     |        |        |   | (4,431  | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|INCOME (LOSS) BEFORE EXTRAORDINARY LOSS                                         |                                                          |                         | 499     |        |        |   | (8,131  | )     
|EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
    DEBT, NET OF TAX BENEFIT    |                                                          |                         | 0       |        |        |   | (2,695  | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|NET INCOME (LOSS)                                                               |                                                          | $                       | 499     |        |        | $ | (10,826 | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|BASIC                                                                           |                                                          |                         |         |        |        |   |         |       
|INCOME (LOSS) PER COMMON SHARE BEFORE
    EXTRAORDINARY LOSS                    |                                                          | $                       | 0.02    |        |        | $ | (0.29   | )     
|EXTRAORDINARY LOSS PER COMMON SHARE                                             |                                                          | $                       | 0.00    |        |        | $ | (0.10   | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|NET INCOME (LOSS) PER COMMON SHARE                                              |                                                          | $                       | 0.02    |        |        | $ | (0.39   | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|Weighted average number of shares outstanding                                   |                                                          |                         | 27,857  |        |        |   | 27,815  |       
|                                                                                |                                                          |                         |         |        |        |   |         |       
|DILUTED                                                                         |                                                          |                         |         |        |        |   |         |       
|INCOME (LOSS) PER COMMON SHARE BEFORE
    EXTRAORDINARY LOSS                    |                                                          | $                       | 0.02    |        |        | $ | (0.29   | )     
|EXTRAORDINARY LOSS PER COMMON SHARE                                             |                                                          | $                       | 0.00    |        |        | $ | (0.10   | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|NET INCOME (LOSS) PER COMMON SHARE                                              |                                                          | $                       | 0.02    |        |        | $ | (0.39   | )     
|                                                                                |                                                          |                         |         |        |        |   |         |       
|Diluted weighted average number of shares
    outstanding                       |                                                          |                         | 27,888  |        |        |   | 27,815  |       
|                                                                                |                                                          |                         |         |        |        |   |         |       

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

4



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.


CARAUSTAR INDUSTRIES, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                           |                                                  |                                                                                 |   |        |        |   |   |        |          |  
|-------------------------- | ------------------------------------------------ | ------------------------------------------------------------------------------- | - | ------ | ------ | - | - | ------ | -------- | -
|                           |                                                  |                                                                                
|                           |                                                  | For the Three Months                                                           
|                           |                                                  | Ended March 31,                                                                
|                           |                                                  |                                                                                
|                           |                                                  | 2002                                                                            |   | 2001  
|                           |                                                  |                                                                                 |   |       
|                           |                                                  |                                                                                
|                           |                                                  | (Unaudited)                                                                    
|Cash provided by (used in) |                                                  |                                                                                 |   |        |        |   |   |       
|                           | Operating activities:                            |                                                                                 |   |        |        |   |   |        |         
|                           |                                                  | Net income (loss)                                                               |   | $      | 499    |   |   | $      | (10,826  | )
|                           |                                                  | Extraordinary loss from early extinguishment of
    debt                        |   |        | 0      |   |   |        | 4,305    |  
|                           |                                                  | Depreciation and amortization                                                   |   |        | 15,492 |   |   |        | 15,398   |  
|                           |                                                  | Restructuring costs                                                             |   |        | 0      |   |   |        | 3,987    |  
|                           |                                                  | Other noncash adjustments                                                       |   |        | 189    |   |   |        | (6,320   | )
|                           |                                                  | Equity in income or loss of unconsolidated
    affiliates, net of distributions |   |        | 997    |   |   |        | 1,585    |  
|                           |                                                  | Changes in current assets and liabilities                                       |   |        | (1,145 | ) |   |        | (2,735   | )
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           |                                                  | Net cash provided by operating activities                                       |   |        | 16,032 |   |   |        | 5,394    |  
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           | Investing activities:                            |                                                                                 |   |        |        |   |   |        |         
|                           |                                                  | Purchases of property, plant and equipment                                      |   |        | (5,832 | ) |   |        | (11,826  | )
|                           |                                                  | Acquisition of businesses, net of cash acquired                                 |   |        | 0      |   |   |        | (34      | )
|                           |                                                  | Other                                                                           |   |        | 967    |   |   |        | (716     | )
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           |                                                  | Net cash used in investing activities                                           |   |        | (4,865 | ) |   |        | (12,576  | )
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           | Financing activities:                            |                                                                                 |   |        |        |   |   |        |         
|                           |                                                  | Proceeds from senior credit facility                                            |   |        | 0      |   |   |        | 18,000   |  
|                           |                                                  | Repayments of senior credit facility                                            |   |        | 0      |   |   |        | (212,000 | )
|                           |                                                  | Proceeds from the issuance of the 7 1/4% and
    9 7/8% notes                   |   |        | 0      |   |   |        | 291,200  |  
|                           |                                                  | Repayments of other long and short-term debt                                    |   |        | (6,581 | ) |   |        | (67,051  | )
|                           |                                                  | 7.74% senior notes prepayment penalty                                           |   |        | 0      |   |   |        | (3,565   | )
|                           |                                                  | Dividends paid                                                                  |   |        | (833   | ) |   |        | (4,698   | )
|                           |                                                  | Other                                                                           |   |        | (547   | ) |   |        | (1,375   | )
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           |                                                  | Net cash (used in) provided by financing
    activities                         |   |        | (7,961 | ) |   |        | 20,511   |  
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           | Net increase in cash and cash equivalents        |                                                                                 |   | 3,206  |        |   |   | 13,329 |         
|                           | Cash and cash equivalents at beginning of period |                                                                                 |   | 64,244 |        |   |   | 8,900  |         
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           | Cash and cash equivalents at end of period       |                                                                                 | $ | 67,450 |        |   | $ | 22,229 |         
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           | Supplemental Disclosures:                        |                                                                                 |   |        |        |   |   |        |         
|                           |                                                  | Cash payments for interest                                                      |   | $      | 3,167  |   |   | $      | 7,092    |  
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           |                                                  | Cash payments for income taxes                                                  |   | $      | 22     |   |   | $      | 628      |  
|                           |                                                  |                                                                                 |   |        |        |   |   |       
|                           |                                                  | Stock issued for acquisitions                                                   |   | $      | 0      |   |   | $      | 18,799   |  
|                           |                                                  |                                                                                 |   |        |        |   |   |       

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

5



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.







NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

MARCH 31, 2002


(UNAUDITED)




|         |                      
|-------- | ---------------------
|Note  1. | Basis of Presentation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial information included herein is
    unaudited; however, such information reflects all adjustments
    (consisting of normal recurring adjustments) which are, in the
    opinion of management, necessary for a fair statement of results
    for the interim periods. Certain notes and other information
    have been condensed or omitted from the interim financial
    statements, therefore, these financial statements should be read
    in conjunction with the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001.
    The results of operations for the three months ended
    March 31, 2002 are not necessarily indicative of the
    results to be expected for the full year.



|         |          
|-------- | ---------
|Note  2. | Inventory



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the second quarter of 2001, the Company
    completed a restructuring within the carton and custom packaging
    segment whereby certain subsidiaries were merged into an
    existing subsidiary in that segment. The restructuring was
    completed to simplify reporting and facilitate the management of
    segment operations. In connection with this restructuring, the
    Company changed, effective June 30, 2001, its inventory
    costing method of accounting for one of the merged subsidiaries
    from LIFO to FIFO in order to conform with the methodologies of
    the surviving subsidiary and all other Company-owned
    subsidiaries. The accompanying financial statements have been
    restated for this change. The effect of the change was to
    increase net assets as of March 31, 2001 by $776,000. The
    effect on net income for the three months ended March 31,
    2001 was $18,000.
|
| | Inventories are carried at the lower of cost or
    market. Cost includes materials, labor and overhead. Market,
    with respect to all inventories, is replacement cost or net
    realizable value. As described above, all inventories are valued
    using the first-in, first-out method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Inventories at March 31, 2002 and
    December 31, 2001 were as follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                   |  |           |        |              |  |   |         | 
|---------------------------------- |  | --------- | ------ | ------------ |  | - | ------- | 
|                                   |  | March 31, |        | December 31,
|                                   |  | 2002      |        | 2001        
|                                   |  |           |        |             
|Raw materials and supplies         |  | $         | 37,536 |              |  | $ | 40,357  | 
|Finished goods and work in process |  |           | 60,434 |              |  |   | 61,466  | 
|                                   |  |           |        |              |  |   |         | 
|Total inventory                    |  | $         | 97,970 |              |  | $ | 101,823 | 
|                                   |  |           |        |              |  |   |         | 



|         |                             
|-------- | ----------------------------
|Note  3. | Comprehensive Income or Loss



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Total comprehensive income or loss, consisting of
    net income or loss plus changes in foreign currency translation
    adjustment for the three months ended March 31, 2002 and
    2001 was income of $444,000 and a loss of $10,964,000,
    respectively.

6



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.




|         |                                                    
|-------- | ---------------------------------------------------
|Note  4. | Senior Credit Facility and Other Long Term
    Debt



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

|                                        |  |           |         |              |  |   |         |  
|--------------------------------------- |  | --------- | ------- | ------------ |  | - | ------- | -
|                                        |  | March 31, |         | December 31,
|                                        |  | 2002      |         | 2001        
|                                        |  |           |         |             
|Senior credit facility                  |  | $         |        |              |  | $ |        |  
|7 1/4 percent senior notes              |  |           | 25,520  |              |  |   | 25,449  |  
|7 3/8 percent senior notes              |  |           | 189,472 |              |  |   | 197,716 |  
|9 7/8 percent senior subordinated notes |  |           | 274,656 |              |  |   | 277,326 |  
|Other notes payable                     |  |           | 8,248   |              |  |   | 8,248   |  
|                                        |  |           |         |              |  |   |         |  
|Total debt                              |  |           | 497,896 |              |  |   | 508,739 |  
|Less current maturities                 |  |           | (48     | )            |  |   | (48     | )
|                                        |  |           |         |              |  |   |         |  
|Total long-term debt                    |  | $         | 497,848 |              |  | $ | 508,691 |  
|                                        |  |           |         |              |  |   |         |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 29, 2001, the Company obtained a
    credit facility that provides for a revolving line of credit in
    the aggregate principal amount of $75,000,000 for a term of
    three years, including subfacilities of $10,000,000 for
    swingline loans and $15,000,000 for letters of credit, usage of
    which reduces availability under the facility. No borrowings
    were outstanding under the facility as of March 31, 2002,
    although an aggregate of $10,000,000 in letter of credit
    obligations were outstanding. The Company intends to use the
    facility for working capital, capital expenditures and other
    general corporate purposes. Although the facility is unsecured,
    the Companys obligations under the facility are
    unconditionally guaranteed, on a joint and several basis, by all
    of its existing and subsequently acquired wholly-owned domestic
    subsidiaries.                                                                                      
|
| | Borrowings under the facility bear interest at a
    rate equal to, at the Companys option, either (1) the
    base rate (which is equal to the greater of the prime rate most
    recently announced by Bank of America, N.A., the
    administrative agent under the facility, or the federal funds
    rate plus one-half of 1 percent) or (2) the adjusted
    Eurodollar Interbank Offered Rate, in each case plus an
    applicable margin determined by reference to the Companys
    leverage ratio (which is defined under the facility as the ratio
    of the Companys total debt to its total capitalization).
    Based on the Companys leverage ratio at March 31,
    2002, the current margins are 2.0 percent for Eurodollar
    rate loans and 0.75 percent for base rate loans.
    Additionally, the undrawn portion of the facility is subject to
    a facility fee at an annual rate that is currently set at
    0.5 percent based on the Companys leverage ratio at
    March 31, 2002.
|
| | The facility contains covenants that restrict,
    among other things, the Companys ability and its
    subsidiaries ability to create liens, merge or
    consolidate, dispose of assets, incur indebtedness and
    guarantees, pay dividends, repurchase or redeem capital stock
    and indebtedness, make certain investments or acquisitions,
    enter into certain transactions with affiliates, make capital
    expenditures or change the nature of the Companys
    business. The facility also contains several financial
    maintenance covenants, including covenants establishing a
    maximum leverage ratio (as described above), minimum tangible
    net worth and a minimum interest coverage ratio.                                                                                                                                                                                                                                                                                       
|
| | The facility contains events of default
    including, but not limited to, nonpayment of principal or
    interest, violation of covenants, incorrectness of
    representations and warranties, cross-default to other
    indebtedness, bankruptcy and other insolvency events, material
    judgments, certain ERISA events, actual or asserted invalidity
    of loan documentation and certain changes of control of the
    Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

7



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the third and fourth quarters of 2001 and
    the first quarter of 2002, the Company completed three
    amendments to its senior credit facility agreement. The first
    amendment, dated September 10, 2001, allows the Company to
    acquire up to $30,000,000 of its senior subordinated notes so
    long as no default or event of default exists on the date of the
    transaction, or will result from the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | The second amendment, dated November 30,
    2001, provides for the issuance of letters of credit under the
    senior credit facility having an original expiration date more
    than one year from the date of issuance, if required under
    related industrial revenue bond documents and agreed to by the
    issuing lender.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | The third amendment was completed on
    January 22, 2002 with an effective date of
    September 30, 2001. The Company obtained this amendment in
    order to avoid the occurrence of an event of default under its
    senior credit facility agreement resulting from a violation of
    the interest coverage ratio covenant contained in this
    agreement. This amendment modified the definitions of
    Interest Expense, Premier Boxboard Interest
    Expense and Standard Gypsum Interest Expense
    to include interest income and the benefit or expense derived
    from interest rate swap agreements or other interest hedge
    agreements. Additionally, the amendment lowered the minimum
    allowable interest coverage ratio for the fourth quarter of 2001
    from 2.5:1.0 to 2.25:1.0, the first quarter of 2002 from
    2.75:1.0 to 2.25:1.0, and the second quarter of 2002 from
    2.75:1.0 to 2.50:1.0.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | On March 22, 2001, the Company obtained
    commitments and executed an agreement for the issuance of
    $285,000,000 of 9 7/8 percent senior subordinated
    notes due April 1, 2011 and $29,000,000 of
    7 1/4 percent senior notes due May 1, 2010. These
    senior subordinated notes and senior notes were issued at a
    discount to yield effective interest rates of 10.5 percent
    and 9.4 percent, respectively. Under the terms of the
    agreement, the Company received aggregate proceeds, net of
    issuance costs, of approximately $291,200,000 on March 29,
    2001. These proceeds were used to repay borrowings outstanding
    under the Companys former senior credit facility and its
    7.74 percent senior notes. In connection with the repayment
    of the 7.74 percent senior notes, the Company incurred a
    prepayment penalty of approximately $3,600,000. The Company
    recorded an extraordinary loss of $2,695,000, which included the
    prepayment penalty and unamortized issuance costs of $705,000,
    net of tax benefit of $1,610,000. The difference between issue
    price and principal amount at maturity of the Companys
    7 1/4 percent senior and 9 7/8 percent
    senior subordinated notes will be accreted each year as interest
    expense in its financial statements. These notes are unsecured,
    but are guaranteed, on a joint and several basis, by all of the
    Companys domestic subsidiaries, other than one that is not
    wholly-owned. Management considers this nonguarantor domestic
    subsidiary immaterial to investors, therefore, separate
    financial statements are not presented.
|
| | During 1998, the Company registered with the
    Securities and Exchange Commission a total of $300,000,000 in
    public debt securities for issuance in one or more series and
    with such specific terms as to be determined from time to time.
    On June 1, 1999, the Company issued $200,000,000 in
    aggregate principal amount of its 7 3/8 percent notes
    due June 1, 2009. The 7 3/8 percent notes were
    issued at a discount to yield an effective interest rate of
    7.473 percent and pay interest semiannually. The
    7 3/8 percent notes are unsecured obligations of the
    Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | During the second and third quarters of 2001, the
    Company entered into four interest rate swap agreements in
    notional amounts totaling $285,000,000. The agreements, which
    have payment and expiration dates that correspond to the terms
    of the note obligations they cover, effectively converted
    $185,000,000 of the Companys fixed rate
    9 7/8 percent senior subordinated notes and
    $100,000,000 of the Companys fixed rate
    7 3/8 percent senior notes into variable rate
    obligations. The variable rates are based on the three-month
    LIBOR plus a fixed margin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The following table identifies the debt
    instrument hedged, the notional amount, the fixed spread and the
    three-month LIBOR at March 31, 2002 for each of the
    Companys interest rate swaps. The                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

8



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.




| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | March 31, 2002 three-month LIBOR is
    presented for informational purposes only and does not represent
    the Companys actual effective rates in place at
    March 31, 2002.

|                                        |  |          |         |        |  |             |       |               |  |  |       |   |  |  |       |  
|--------------------------------------- |  | -------- | ------- | ------ |  | ----------- | ----- | ------------- |  |  | ----- | - |  |  | ----- | -
|                                        |  |          |         |        |  | Three-Month |       |              
|                                        |  | Notional |         |        |  | LIBOR at    |       |              
|                                        |  | Amount   |         | Fixed  |  | March 31,   |       | Total        
|Debt Instrument                         |  | (000s)  |         | Spread |  | 2002        |       | Variable Rate
|                                        |  |          |         |        |  |             |       |              
|7 3/8 percent senior notes              |  | $        | 50,000  |        |  |             | 2.365 | %             |  |  | 2.031 | % |  |  | 4.396 | %
|7 3/8 percent senior notes              |  |          | 25,000  |        |  |             | 1.445 |               |  |  | 2.031 |   |  |  | 3.476 |  
|7 3/8 percent senior notes              |  |          | 25,000  |        |  |             | 1.775 |               |  |  | 2.031 |   |  |  | 3.806 |  
|9 7/8 percent senior subordinated notes |  |          | 185,000 |        |  |             | 4.400 |               |  |  | 2.031 |   |  |  | 6.431 |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In October 2001, the Company unwound its
    $185,000,000 interest rate swap agreement related to the
    9 7/8 percent senior subordinated notes and received
    $9,093,000 from the bank counter-party. Simultaneously, the
    Company executed a new swap agreement with a fixed margin that
    was 85 basis points higher than the original swap
    agreement. The new swap agreement is the same notional amount,
    has the same terms and covers the same notes as the original
    agreement. The $9,093,000 gain, which is 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 Company executed these transactions in
    order to take advantage of market conditions.
|
| | Under the provisions of SFAS No. 133, the
    Company has designated and accounted for its interest rate swap
    agreements as fair value hedges. The Company has assumed no
    ineffectiveness with regard to these agreements as they qualify
    for the short-cut method of accounting for fair value hedges of
    debt obligations, as prescribed by SFAS No. 133. The
    aggregate fair value of the swap agreements of approximately
    $11,669,000 as of March 31, 2002 and $7,418,000 as of
    December 31, 2001 are classified as a component of other
    long-term liabilities.                                                                                                                                                                                                               



|        |                              
|------- | -----------------------------
|Note 5. | New Accounting Pronouncements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the FASB issued SFAS No. 141,
    Business Combinations (SFAS
    No. 141) and SFAS No. 142, Goodwill and
    Other Intangible Assets (SFAS No. 142).
    SFAS No. 141 supercedes Accounting Principles Board
    (APB) Opinion No. 16 Business
    Combinations and SFAS No. 38, Accounting for
    Preacquisition Contingencies for Purchased Enterprises.
    SFAS No. 141 prescribes the accounting principles for
    business combinations and requires that all business
    combinations be accounted for using the purchase method of
    accounting. This pronouncement is effective for all business
    combinations after June 30, 2001.                                                                                                  
|
| | SFAS No. 142 supercedes APB Opinion
    No. 17, Intangible Assets. This pronouncement
    prescribes the accounting practices for goodwill and other
    intangible assets. Under this pronouncement, goodwill will no
    longer be amortized to earnings, but instead will be reviewed
    periodically (at least annually) for impairment. The Company
    adopted this pronouncement effective January 1, 2002. The
    Company is required to complete the initial impairment test
    within six months of adoption of SFAS 142. The Company has
    completed its initial impairment test and has determined that no
    impairment of goodwill exists.                                                                                                                   
|
| | In July 2001, the FASB issued SFAS No. 143,
    Accounting for Asset Retirement Obligations
    (SFAS no. 143). This pronouncement requires
    entities to record the fair value of a liability for an asset
    retirement obligation in the period in which it is incurred.
    When the liability is initially recorded, the entity capitalizes
    the cost by increasing the carrying amount of the related
    long-lived asset. Over time, the liability is accreted to its
    present value each period and the capitalized cost is
    depreciated over the useful life of the related asset. Upon
    settlement of the liability, the entity either settles the
    obligation for the amount recorded or incurs a gain or loss.
    SFAS No. 143 is effective for

9



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.




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



|        |                    
|------- | -------------------
|Note 6. | Segment Information



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates principally in three
    business segments based on its products. The paperboard segment
    consists of facilities that manufacture 100 percent
    recycled uncoated and clay-coated paperboard and facilities that
    collect recycled paper and broker recycled paper and other paper
    rolls. The tube, core, and composite container segment is
    principally made up of facilities that produce spiral and
    convolute-wound tubes, cores, and cans. The carton and custom
    packaging segment consists of facilities that produce printed
    and unprinted folding and set-up cartons and facilities that
    provide contract manufacturing and contract packaging services.
    Intersegment sales are recorded at prices which approximate
    market prices.
|
| | Operating income includes all costs and expenses
    directly related to the segment involved. Corporate expenses
    include corporate, general, administrative, and unallocated
    information systems expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | The following table presents certain business
    segment information for the periods indicated (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                            |                                     |                 |   |        |         |  |   |        |         | 
|--------------------------- | ----------------------------------- | --------------- | - | ------ | ------- |  | - | ------ | ------- | 
|                            |                                     |                
|                            |                                     | Three Months   
|                            |                                     | Ended March 31,
|                            |                                     |                
|                            |                                     | 2002            |   | 2001  
|                            |                                     |                 |   |       
|Sales (external customers): |                                     |                 |   |        |         |  |   |       
|                            | Paperboard                          |                 | $ | 77,829 |         |  | $ | 82,798 |        
|                            | Tube, core, and composite container |                 |   | 64,858 |         |  |   | 68,146 |        
|                            | Carton and custom packaging         |                 |   | 79,476 |         |  |   | 82,144 |        
|                            |                                     |                 |   |        |         |  |   |       
|                            |                                     | Total           |   | $      | 222,163 |  |   | $      | 233,088 | 
|                            |                                     |                 |   |        |         |  |   |       
|Sales (intersegment):       |                                     |                 |   |        |         |  |   |       
|                            | Paperboard                          |                 | $ | 32,258 |         |  | $ | 35,643 |        
|                            | Tube, core, and composite container |                 |   | 879    |         |  |   | 1,002  |        
|                            | Carton and custom packaging         |                 |   | 157    |         |  |   | 135    |        
|                            |                                     |                 |   |        |         |  |   |       
|                            |                                     | Total           |   | $      | 33,294  |  |   | $      | 36,780  | 
|                            |                                     |                 |   |        |         |  |   |       

10



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.


|                                                                                |                                     |                 |        |       |        |   |         |       |       | 
|------------------------------------------------------------------------------- | ----------------------------------- | --------------- | ------ | ----- | ------ | - | ------- | ----- | ----- | 
|                                                                                |                                     |                
|                                                                                |                                     | Three Months   
|                                                                                |                                     | Ended March 31,
|                                                                                |                                     |                
|                                                                                |                                     | 2002            |        | 2001 
|                                                                                |                                     |                 |        |      
|Operating income (loss):                                                        |                                     |                 |        |       |        |   |         |      
|                                                                                | Paperboard(A)                       |                 | $      | 9,291 |        |   | $       | (212  | )    
|                                                                                | Tube, core, and composite container |                 |        | 3,273 |        |   |         | 3,028 |      
|                                                                                | Carton and custom packaging(B)      |                 |        | 1,092 |        |   |         | (978  | )    
|                                                                                |                                     |                 |        |       |        |   |         |      
|                                                                                |                                     | Total           |        |       | 13,656 |   |         |       | 1,838 | 
|Corporate expense                                                               |                                     |                 | (3,989 | )     |        |   | (3,943  | )    
|                                                                                |                                     |                 |        |       |        |   |         |      
|Operating income (loss)                                                         |                                     |                 | 9,667  |       |        |   | (2,105  | )    
|Interest expense                                                                |                                     |                 | (9,302 | )     |        |   | (9,210  | )    
|Interest income                                                                 |                                     |                 | 376    |       |        |   | 88      |      
|Equity in income (loss) of unconsolidated
    affiliates                        |                                     |                 | 3      |       |        |   | (1,585  | )    
|Other, net                                                                      |                                     |                 | (32    | )     |        |   | 278     |      
|                                                                                |                                     |                 |        |       |        |   |         |      
|Income (loss) before income taxes, minority
    interest and extraordinary loss |                                     | $               | 712    |       |        | $ | (12,534 | )    
|                                                                                |                                     |                 |        |       |        |   |         |      





| |     |                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) | Results for 2001 include a charge to operations
    of $4,447,000 for restructuring costs related to the closing of
    the Chicago, Illinois paperboard mill. This charge was related
    to the paperboard segment and is reflected in the segments
    operating income. (Note 8)



| |     |                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (B) | Results for 2001 include a charge to operations
    of $2,636,000 related to the consolidation of the operations of
    the Salt Lake City, Utah carton plant into the Denver, Colorado
    carton plant. This charge was related to the carton and custom
    packaging segment and is reflected in the segments
    operating income. (Note 8)



|        |                    
|------- | -------------------
|Note 7. | Goodwill Accounting



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2002, the Company
    adopted SFAS No. 142, Goodwill and Other Intangible
    Assets. SFAS No. 142 requires that goodwill no longer
    be amortized, but instead tested for impairment at least
    annually. The Company has completed the required transitional
    impairment test as of January 1, 2002 and found no
    impairment of goodwill. On an ongoing basis (absent any
    impairment indicators), the Company expects to perform its
    impairment tests during the fourth quarter.

11



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.




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

|                                |                                         |                                         |   |                |         |         |   |       |       |   |   |       |       |  
|------------------------------- | --------------------------------------- | --------------------------------------- | - | -------------- | ------- | ------- | - | ----- | ----- | - | - | ----- | ----- | -
|                                |                                         |                                         |   |               
|                                |                                         | Three Months                            |   | Loss Per Share
|                                |                                         | Ended                                   |   |               
|                                |                                         | March 31, 2001                          |   | Basic          |         | Diluted
|                                |                                         |                                         |   |                |         |        
|Loss before extraordinary item: |                                         |                                         |   |                |         |         |   |       |       |   |   |      
|                                | Reported loss before extraordinary item |                                         | $ | (8,131         | )       |         | $ | (0.29 | )     |   | $ | (0.29 | )    
|                                | Goodwill amortization                   |                                         |   | 702            |         |         |   | 0.02  |       |   |   | 0.02  |      
|                                |                                         |                                         |   |                |         |         |   |       |       |   |   |      
|                                |                                         | Adjusted loss before extraordinary item |   | $              | (7,429  | )       |   | $     | (0.27 | ) |   | $     | (0.27 | )
|                                |                                         |                                         |   |                |         |         |   |       |       |   |   |      
|Net loss:                       |                                         |                                         |   |                |         |         |   |       |       |   |   |      
|                                | Reported net loss                       |                                         | $ | (10,826        | )       |         | $ | (0.39 | )     |   | $ | (0.39 | )    
|                                | Goodwill amortization                   |                                         |   | 702            |         |         |   | 0.02  |       |   |   | 0.02  |      
|                                |                                         |                                         |   |                |         |         |   |       |       |   |   |      
|                                |                                         | Adjusted net loss                       |   | $              | (10,124 | )       |   | $     | (0.37 | ) |   | $     | (0.37 | )
|                                |                                         |                                         |   |                |         |         |   |       |       |   |   |      



| |                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of January 1, 2002, goodwill of
    $146,500,000 (net of $20,500,000 of amortization) was
    attributable to the Companys segments as follows:
    $77,700,000 for Paperboard, $25,600,000 for Tube, Core and
    Composite Container and $43,200,000 for Carton and Custom
    Packaging. During the first quarter of 2002, no goodwill was
    acquired, impaired or written off.



|         |                    
|-------- | -------------------
|Note  8. | Restructuring Costs



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

|                                 |         |            |       |               |  |            |        |       |  |   |      |     |  |   |        |       | 
|-------------------------------- | ------- | ---------- | ----- | ------------- |  | ---------- | ------ | ----- |  | - | ---- | --- |  | - | ------ | ----- | 
|                                 |         |            |       | Severance and |  |            |        |      
|                                 |         |            |       | Other         |  |            |        |      
|                                 |         | Asset      |       | Termination   |  | Other Exit |        |      
|                                 |         | Impairment |       | Benefits      |  | Costs      |        | Total
|                                 |         |            |       |               |  |            |        |      
|2001 provision                   |         | $          | 2,237 |               |  | $          | 1,221  |       |  | $ | 989  |     |  | $ | 4,447  |      
|                                 | Noncash |            |       | 2,237         |  |            |        |      |  |   |      |    |  |   |        | 2,237 | 
|                                 |         |            |       |               |  |            |        |       |  |   |      |     |  |   |        |      
|                                 | Cash    |            |       |              |  |            |        | 1,221 |  |   |      | 989 |  |   |        | 2,210 | 
|2001 cash activity               |         |            |      |               |  |            | (1,221 | )     |  |   | (597 | )   |  |   | (1,818 | )    
|                                 |         |            |       |               |  |            |        |       |  |   |      |     |  |   |        |      
|Balance as of December 31, 2001  |         |            |      |               |  |            |       |       |  |   | 392  |     |  |   | 392    |      
|First quarter 2002 cash activity |         |            |      |               |  |            |       |       |  |   | (177 | )   |  |   | (177   | )    
|                                 |         |            |       |               |  |            |        |       |  |   |      |     |  |   |        |      
|Balance as of March 31, 2002     |         | $          |      |               |  | $          |       |       |  | $ | 215  |     |  | $ | 215    |      
|                                 |         |            |       |               |  |            |        |       |  |   |      |     |  |   |        |      



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2001, the Company initiated a plan to
    consolidate the operations of the Salt Lake City, Utah carton
    plant into the Denver, Colorado carton plant and recorded a
    pretax charge to operations

12



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | of approximately $2,636,000. The $2,636,000
    charge included a $1,750,000 noncash asset impairment write down
    of fixed assets to estimated net realizable value and a $464,000
    accrual for severance and termination benefits for 5 salaried
    and 31 hourly employees terminated in connection with this plan
    as well as a $422,000 accrual for other exit costs. All exit
    costs were paid as of December 31, 2001, and the exit plan
    was completed.



|         |           
|-------- | ----------
|Note  9. | Litigation



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



|          |                        
|--------- | -----------------------
|Note  10. | Income (Loss) Per Share



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

|                                                                           |  |           |        |      |  |   |        |  
|-------------------------------------------------------------------------- |  | --------- | ------ | ---- |  | - | ------ | -
|                                                                           |  |          
|                                                                           |  | March 31,
|                                                                           |  |          
|                                                                           |  | 2002      |        | 2001
|                                                                           |  |           |        |     
|Calculation of Basic Income (Loss) Per Share:                              |  |           |        |      |  |   |        |  
|Income (loss) before extraordinary item                                    |  | $         | 499    |      |  | $ | (8,131 | )
|Weighted average number of common shares
    outstanding                   |  |           | 27,857 |      |  |   | 27,815 |  
|                                                                           |  |           |        |      |  |   |        |  
|Basic income (loss) per share                                              |  | $         | 0.02   |      |  | $ | (0.29  | )
|                                                                           |  |           |        |      |  |   |        |  
|Calculation of Diluted Income (Loss) Per Share:                            |  |           |        |      |  |   |        |  
|Income (loss) before extraordinary item                                    |  | $         | 499    |      |  | $ | (8,131 | )
|Weighted average number of common shares
    outstanding                   |  |           | 27,857 |      |  |   | 27,815 |  
|Effect of dilutive stock options                                           |  |           | 31     |      |  |   | 0      |  
|                                                                           |  |           |        |      |  |   |        |  
|Weighted average number of common shares
    outstanding assuming dilution |  |           | 27,888 |      |  |   | 27,815 |  
|                                                                           |  |           |        |      |  |   |        |  
|Diluted income (loss) per share                                            |  | $         | 0.02   |      |  | $ | (0.29  | )
|                                                                           |  |           |        |      |  |   |        |  



| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Approximately 1,756,000 and 1,771,000 common
    stock equivalents are excluded from the three month periods
    ended March 31, 2002 and 2001, respectively, diluted income
    (loss) per common share calculation because such are
    anti-dilutive.

13



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 1.


FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002

PART I, ITEM 2.





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 and
set-up cartons 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
37% in the first three months of 2002. The remaining 63% of our
paperboard production is sold to external customers in any of
the four recycled paperboard end-use markets: tube, core and
composite containers; folding cartons; gypsum wallboard facing
paper and other specialty products. We are the only major
manufacturer to serve all four end-use markets. As part of our
strategy to maintain optimum levels of production capacity, we
regularly purchase paperboard from other manufacturers in an
effort to minimize the potential impact of demand declines on
our own mill system. Additionally, each of our mills can produce
recycled paperboard for more than one end-use market. This
allows us to shift production between mills in response to
customer or market demands.

Recovered fiber, which is derived from recycled
paper stock, is our most significant raw material. Historically,
the cost of recovered fiber has fluctuated significantly due to
market and industry conditions. For example, our average
recovered fiber cost per ton of paperboard produced increased
from $43 per ton in 1993 to $144 per ton in 1995, an increase of
235%, before dropping to $66 per ton in 1996. Same-mill
recovered fiber cost per ton averaged $65 during 2001 and $60
during the first three months of 2002.

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

Excluding labor, energy is our most significant
manufacturing cost. Energy is used to generate steam used in the
paper making process and to operate our paperboard machines and
all of our other converting machinery. Our energy costs
increased steadily throughout 2000 and the first quarter of 2001
before showing some improvement by the end of 2001. In 2001, the
average energy cost in our mill system was approximately $57 per
ton. During the first three months of 2002, energy costs
decreased 14.0% to approximately $49 per ton. The decrease was
due primarily to decreases in natural gas and fuel oil costs.
Until recently, our business had not been significantly affected
by energy costs, and we historically have not passed increases
in energy costs through to our customers. Consequently, we were
not able to pass through to our customers all of the energy cost
increases we incurred. As a result, our operating margins were
adversely affected. We continue to evaluate our energy costs and
consider ways to factor energy costs into our pricing. However,
we cannot assure you that

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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


our operating margins and results of operations
will not continue to be adversely affected by rising energy
costs.

Historically, we have grown our business,
revenues and production capacity to a significant degree through
acquisitions. Based on the difficult operating climate for our
industry and our financial position, the pace of our acquisition
activity, and accordingly, our revenue growth, has slowed as we
have focused on maximizing the productivity of our existing
facilities. We made no acquisitions during the first three
months of 2002.

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

Critical Accounting Policies

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

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

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

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

Impairment of Long-Lived Assets and
Goodwill.We periodically evaluate
acquired businesses for potential impairment indicators.
Effective January 1, 2002 we adopted SFAS No. 142,
Goodwill and Other Intangible Assets. This
pronouncement requires us to perform a goodwill impairment test
at least annually. See Note 7

15



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


of Notes to Consolidated Financial
Statements for additional information regarding our
goodwill accounting. Our judgments regarding the existence of
impairment indicators are based on legal factors, market
conditions and operational performance of our acquired
businesses. Future events could cause us to conclude that
impairment indicators exist and that goodwill associated with
our acquired businesses is impaired. Evaluating the impairment
of goodwill also requires us to estimate future operating
results and cash flows, which also require judgment by
management. Any resulting impairment loss could have a material
adverse impact on our net income and our balance sheet.

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

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

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

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

Three Months Ended March 31, 2002 and
2001

The following table shows volume, gross paper
margins and related data for the periods indicated. The volume
information shown below includes shipments of unconverted
paperboard and converted paperboard products. Tonnage volumes
from our business segments, excluding tonnage produced or
converted by our unconsoli-

16



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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


dated joint ventures, are combined and presented
along end-use market lines. Additional financial information is
reported by segment in Note 6 of the consolidated financial
statements.

|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |       |       |      |  
|------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------ | -------------------------------------- | ----------------------------------------- | ---- | ------ | ----- | ------ | ---- | --- | ----- | ---- | ---- | --- | ---- | ----- | ----- | ----- | ---- | -
|                                                              |                                                           |                                |                                        |                                           |      |       
|                                                              |                                                           | Three Months Ended             |                                        |                                           |      |       
|                                                              |                                                           | March 31,                      |                                        |                                           |      |       
|                                                              |                                                           |                                |                                        |                                           |      | %     
|                                                              |                                                           | 2002                           |                                        | 2001                                      |      | Change |       | Change
|                                                              |                                                           |                                |                                        |                                           |      |        |       |       
|Production source of paperboard tons sold (in
    thousands): |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              | From paperboard mill production                           |                                |                                        | 227.0                                     |      |        |       | 217.9  |      |     |       | 9.1  |      |     |      | 4.2   | %    
|                                                              | Outside purchases                                         |                                |                                        | 32.0                                      |      |        |       | 31.7   |      |     |       | 0.3  |      |     |      | 0.9   | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Total paperboard tonnage                  |      |        | 259.0 |        |      |     | 249.6 |      |      |     | 9.4  |       |       |       | 3.8  | %
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              | Tons sold by market (in thousands):                       |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |      
|                                                              | Tube, core and composite container volume                 |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |      
|                                                              |                                                           | Paperboard (internal)          |                                        |                                           | 44.4 |        |       |        | 46.7 |     |       |      | (2.3 | )   |      |       | -4.9  | %    
|                                                              |                                                           | Outside purchases              |                                        |                                           | 5.6  |        |       |        | 6.7  |     |       |      | (1.1 | )   |      |       | -16.4 | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              | Tube, core and composite container converted
    products |                                |                                        | 50.0                                      |      |        |       | 53.4   |      |     |       | (3.4 | )    |     |      | -6.4  | %    
|                                                              | Unconverted paperboard                                    |                                |                                        | 8.4                                       |      |        |       | 7.5    |      |     |       | 0.9  |      |     |      | 12.0  | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Tube, core and composite container volume |      |        | 58.4  |        |      |     | 60.9  |      |      |     | (2.5 | )     |       |       | -4.1 | %
|                                                              | Folding carton volume                                     |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |      
|                                                              |                                                           | Paperboard (internal)          |                                        |                                           | 22.9 |        |       |        | 20.0 |     |       |      | 2.9  |     |      |       | 14.5  | %    
|                                                              |                                                           | Outside purchases              |                                        |                                           | 25.0 |        |       |        | 23.4 |     |       |      | 1.6  |     |      |       | 6.8   | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              | Folding carton converted products                         |                                |                                        | 47.9                                      |      |        |       | 43.4   |      |     |       | 4.5  |      |     |      | 10.4  | %    
|                                                              | Unconverted paperboard                                    |                                |                                        | 58.7                                      |      |        |       | 54.9   |      |     |       | 3.8  |      |     |      | 6.9   | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Folding carton volume                     |      |        | 106.6 |        |      |     | 98.3  |      |      |     | 8.3  |       |       |       | 8.4  | %
|                                                              | Gypsum wallboard facing paper volume                      |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |      
|                                                              |                                                           | Unconverted paperboard         |                                        |                                           | 39.7 |        |       |        | 35.1 |     |       |      | 4.6  |     |      |       | 13.1  | %    
|                                                              |                                                           | Outside purchases (for resale) |                                        |                                           |     |        |       |        |     |     |       |      |     |     |      |       |      |      
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Gypsum wallboard facing paper volume      |      |        | 39.7  |        |      |     | 35.1  |      |      |     | 4.6  |       |       |       | 13.1 | %
|                                                              | Other specialty products volume                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |      
|                                                              |                                                           | Paperboard (internal)          |                                        |                                           | 16.4 |        |       |        | 18.7 |     |       |      | (2.3 | )   |      |       | -12.3 | %    
|                                                              |                                                           | Outside purchases              |                                        |                                           | 1.4  |        |       |        | 1.6  |     |       |      | (0.2 | )   |      |       | -12.5 | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              | Other specialty converted products                        |                                |                                        | 17.8                                      |      |        |       | 20.3   |      |     |       | (2.5 | )    |     |      | -12.3 | %    
|                                                              | Unconverted paperboard                                    |                                |                                        | 36.5                                      |      |        |       | 35.0   |      |     |       | 1.5  |      |     |      | 4.3   | %    
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Other specialty products volume           |      |        | 54.3  |        |      |     | 55.3  |      |      |     | (1.0 | )     |       |       | -1.8 | %
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Total paperboard tonnage                  |      |        | 259.0 |        |      |     | 249.6 |      |      |     | 9.4  |       |       |       | 3.8  | %
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|Gross paper margins ($/ton):                                  |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           | Paperboard mill:               |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |       |      
|                                                              |                                                           |                                | Average same-mill net selling price    |                                           | $    | 394    |       |        | $    | 422 |       |      | $    | (28 | )    |       |       | -6.6  | %   
|                                                              |                                                           |                                | Average same-mill recovered fiber cost |                                           |      | 60     |       |        |      | 69  |       |      |      | (9  | )    |       |       | -13.0 | %   
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Paperboard mill gross paper margin        |      | $      | 334   |        |      | $   | 353   |      |      | $   | (19  | )     |       |       | -5.4 | %
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           | Tube and core:                 |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |       |       |      
|                                                              |                                                           |                                | Average net selling price              |                                           | $    | 771    |       |        | $    | 797 |       |      | $    | (26 | )    |       |       | -3.3  | %   
|                                                              |                                                           |                                | Average paperboard cost                |                                           |      | 434    |       |        |      | 453 |       |      |      | (19 | )    |       |       | -4.2  | %   
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      
|                                                              |                                                           |                                |                                        | Tube and core gross paper margin          |      | $      | 337   |        |      | $   | 344   |      |      | $   | (7   | )     |       |       | -2.0 | %
|                                                              |                                                           |                                |                                        |                                           |      |        |       |        |      |     |       |      |      |     |      |      

Sales.Our
consolidated sales for the three months ended March 31,
2002 were $222.2 million, a decrease of 4.7% from
$233.1 million in the same period of 2001. This decline was
due primarily to a decrease in selling prices in all segments,
partially offset by increased volume in the paperboard segment.

Total paperboard tonnage for the first quarter of
2002 increased 3.8% to 259.0 thousand tons compared to 249.6
thousand tons in the first quarter of 2001. This increase was
primarily due to higher shipments of

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MARCH 31, 2002


PART I, ITEM 2.


unconverted paperboard to external customers in
the gypsum wallboard facing paper and the folding carton
markets. First quarter 2002 outside purchases increased 0.9% to
32.0 thousand tons. Tons sold from paperboard mill production
increased 4.2% for the first three months of 2002 to 227.0
thousand tons, compared with 217.9 thousand tons for the same
period last year. Total tonnage converted decreased 1.2% for the
first quarter of 2002 to 115.7 thousand tons compared to 117.1
thousand tons in the first quarter of 2001.

Gross Margin.Gross
margin for the first three months of 2002 increased to 25.5% of
sales from 23.5% in the same period in 2001. This margin
increase was due primarily to improved margins in the paperboard
segment. Despite lower selling prices in the paperboard segment,
margins increased due to higher volume, a decline in recovered
fiber and energy costs and cost-cutting efforts that resulted in
reduced manufacturing expenses.

Restructuring and Other Nonrecurring
Costs.In January 2001, we initiated a
plan to close our paperboard mill located in Chicago, Illinois
and recorded a pretax charge to operations of approximately
$4.4 million. The mill was profitable through 1998, but
declining sales resulted in losses of approximately
$2.6 million and $1.5 million in 1999 and 2000,
respectively. We expect the proceeds from the sale of the real
estate to more than offset the pretax charge. The
$4.4 million charge included a $2.2 million noncash
asset impairment write down of fixed assets to estimated net
realizable value, a $1.2 million accrual for severance and
termination benefits for 16 salaried and 59 hourly employees
terminated in connection with this plan and a $989 thousand
accrual for other exit costs. During 2001 and the first quarter
of 2002, we paid $1.2 million in severance and termination
benefits and $774 thousand in other exit costs. The remaining
other exit costs will be paid by December 31, 2002. As of
March 31, 2002, one employee remained to assist in the
closing of the mill. We are marketing the property and will
complete the exit plan upon the sale of the property, which we
anticipate will occur prior to December 31, 2002.

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

Operating Income.Operating income for the first three
months of 2002 was $9.7 million, an improvement of
$11.8 million from a $2.1 million loss for the same
period last year. Included in the first quarter 2001 operating
loss was $7.1 million in restructuring charges. Excluding first
quarter 2001 restructuring charges, first quarter 2002 operating
income increased $4.7 million, or 94.2%, over first quarter
2001 operating income of $5.0 million. We adopted SFAS No.
142 effective January 1, 2002. This new accounting standard
discontinues the amortization of acquisition-related goodwill
and other intangible assets with indefinite lives and
establishes new methods for testing the impairment of such
assets. Excluding goodwill amortization expense and
restructuring charges, first quarter 2001 operating income was
$6.1 million. The increase in operating income in the first
three months of 2002 over the same period last year was
primarily due to higher volume in the paperboard segment,
combined with lower energy costs, partially offset by lower
margins in the carton and custom packaging segment. The lower
margins in the carton and custom packaging segment were due to
lower selling prices resulting from intense competition in that
market.

Selling, general and administrative expenses
decreased by $2.7 million, or 7.4%, in the first quarter of 2002
compared to the first quarter of 2001. This decrease was
attributable primarily to the discontinuation of goodwill
amortization expense in the first quarter of 2002, as described
above, combined with decreased expenses in the paperboard
segment due to cost-cutting efforts.

In April 1999, we purchased International Paper
Companys Sprague boxboard mill located in Versailles,
Connecticut. This acquisition has had a significant impact on
our earnings since that time. Sprague incurred an operating loss
of $1.4 million in the first three months of 2002, which is
an improvement of $3.7 million over first quarter of 2001
operating loss of $5.1 million. The first quarter 2001 loss
was attributable to a

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MARCH 31, 2002


PART I, ITEM 2.


combination of unfavorable fixed price contracts
and low capacity utilization. Our primary objectives at Sprague
have been to improve quality, reduce costs and increase sales
volume. We have made significant progress in quality and cost
and are beginning to realize the benefits. Based on improvements
we have made since the acquisition, we now believe Sprague is
competitive in terms of cost and quality, and we expect
Spragues financial performance to improve with increases
in sales volume. Although we expect losses at Sprague to
continue to decline, in light of current difficult industry
conditions, we do not expect Sprague to be profitable until at
least the second half of 2002.

Other Income (Expense).Interest expense for the first three
months of 2002 was $9.3 million versus $9.2 million in
the same period of 2001. This slight increase was due to higher
outstanding debt balances at higher interest rates, which were
offset by savings from interest rate swap agreements which
effectively converted portions of our fixed rate notes into
variable rate obligations. See Liquidity and Capital
Resources for additional information regarding our debt,
interest expense and interest rate swap agreements.

Equity in income from unconsolidated affiliates
was $3 thousand in the first quarter of 2002, an improvement of
$1.6 million from equity in loss of $1.6 million in the
first quarter of 2001. This increase was primarily due to
improved operating results for Standard Gypsum, L.P., our gypsum
wallboard joint venture, partially offset by lower operating
results for Premier Boxboard Limited LLC, our paper mill joint
venture. Standard Gypsums operating results improved
primarily due to increased volume and selling prices in the
gypsum wallboard market, while Premier Boxboard Limiteds
operating results declined primarily due to lower volume. Both
of these joint ventures are with Temple-Inland.

Net Income (Loss).Net income for the first three months
of 2002 was $499 thousand, or $0.02 net income per common share
on a diluted basis, compared to a net loss of
$10.8 million, or $0.39 net loss per common share on a
diluted basis, for the same period last year. As discussed
above, our results for the first three months of 2001 included
restructuring charges recorded in conjunction with the closing
of our Chicago, Illinois paperboard mill and the consolidation
of operations of our Salt Lake City, Utah carton plant into our
Denver, Colorado carton plant. These charges were
$7.1 million in the aggregate ($4.4 million, net of
tax benefit, or $0.16 per common share on a diluted basis). Also
included in the results for the first three months of 2001 was
an extraordinary loss of $4.3 million related to the early
extinguishment of debt ($2.7 million, net of tax benefit,
or $0.10 per common share on a diluted basis). Net loss before
extraordinary loss and excluding restructuring charges for the
first quarter of 2001 was $3.7 million, or $0.13 net loss
per common share on a diluted basis, and, after further
excluding amortization of goodwill for the first quarter of
2001, net loss was $3.0 million, or $0.11 net loss per
common share on a diluted basis.

Events of September 11, 2001.The horrific terrorist attacks against
the United States and their aftermath did not, during 2001 or
the first three months of 2002, and are not currently expected
to, have a direct material effect on our operations. However, to
the extent that those events, other terrorist activities, the
U.S. military response and the resulting uncertainties have
adversely affected, or will continue to adversely affect, the
United States economy in general, sectors on which we depend in
particular, and the U.S. capital markets, our results of
operations, financial condition and stock price have been, and
could continue to be, adversely affected.

Liquidity and Capital Resources

Liquidity Sources and Risks.Our primary sources of liquidity are
cash from operations and borrowings under the various debt
facilities described below. Downturns in operations can
significantly affect our ability to generate cash. Factors that
can affect our operating results are discussed further in this
Report under Risk Factors. We generated
$16.0 million in cash from operations in the first quarter
of 2002 and increased our cash balance by $3.2 million. We
believe that our existing cash and liquidity position will be
further strengthened through the sale of the real estate at our
Baltimore, Maryland, Camden, New Jersey and Chicago, Illinois
paperboard mills, which we anticipate will occur in 2002.
Additionally, we received a federal

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MARCH 31, 2002


PART I, ITEM 2.


tax refund of approximately $16.0 million in
April of 2002 from the carryback of the 2001 net operating loss.
If, however, we were to face unexpected liquidity needs, we
could require additional funds from external sources such as our
senior credit facility.

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

At March 31, 2002, we were in compliance
with the leverage ratio and interest coverage ratio,
respectively, under both our senior credit facility and our
joint venture guarantees. Absent further material deterioration
of the U.S. economy as a whole or the specific sectors on which
our business depends (see Risk Factors  Our
business and financial performance may be adversely affected by
downturns in industrial production, housing and construction and
the consumption of durable and nondurable goods), we
believe it is unlikely that we will breach our covenants under
our debt agreements or joint venture guarantees during 2002. We
also believe that in the event of such a breach due to a further
deterioration in economic or industry conditions, our lenders
would provide us with the necessary waivers and amendments.
However, we cannot assure you that we will achieve our expected
future operating results or continued compliance with our debt
covenants, or that, in such event, necessary waivers and
amendments would be available at all or on acceptable terms. If
our debt or that of our joint ventures were placed in default,
or if we were called upon to satisfy our joint venture
guarantees, our liquidity and financial condition would be
materially and adversely affected.

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

|                                 |  |           |         |              |  |      |         |  |  |   |         | 
|-------------------------------- |  | --------- | ------- | ------------ |  | ---- | ------- |  |  | - | ------- | 
|                                 |  |           |         |             
|                                 |  | March 31, |         |             
|                                 |  |           |         | December 31,
|                                 |  | 2002      |         | 2001         |  | 2001
|                                 |  |           |         |              |  |     
|Senior credit facility           |  | $         |        |              |  | $    |        |  |  | $ |        | 
|7 1/4% senior notes              |  |           | 25,520  |              |  |      | 25,243  |  |  |   | 25,449  | 
|7 3/8% senior notes              |  |           | 189,472 |              |  |      | 198,817 |  |  |   | 197,716 | 
|9 7/8% senior subordinated notes |  |           | 274,656 |              |  |      | 274,128 |  |  |   | 277,326 | 
|Other notes payable              |  |           | 8,248   |              |  |      | 8,306   |  |  |   | 8,248   | 
|                                 |  |           |         |              |  |      |         |  |  |   |         | 
|Total debt                       |  | $         | 497,896 |              |  | $    | 506,494 |  |  | $ | 508,739 | 
|                                 |  |           |         |              |  |      |         |  |  |   |         | 

On March 29, 2001, we completed a series of
financing transactions pursuant to which we (i) issued
$29.0 million in aggregate principal amount of 7 1/4%
senior notes due May 1, 2010 and $285.0 million in
aggregate principal amount of 9 7/8% senior subordinated
notes due April 1, 2011, (ii) used the proceeds from
these notes to repay in full our former senior credit facility
and 7.74% senior notes, and (iii) obtained a new
$75.0 million senior credit facility. The 7 1/4%
senior notes and 9 7/8% senior subordinated notes were
issued at a discount to yield effective interest rates of 9.4%
and 10.5%, respectively. Aggregate proceeds from the sale of
these notes, net of issuance costs, was approximately
$291.2 million. In connection with the repayment of the
7.74% senior notes, we incurred a prepayment penalty of
approximately $3.6 million. We recorded an extraordinary
loss of $2.7 million, which included the prepayment penalty
and unamortized issuance costs of $705 thousand, net of tax
benefit of $1.6 million. The difference between issue price
and principal amount at maturity of our 7 1/4% senior notes
and 9 7/8% senior subordinated notes will be accreted each
year as interest expense in our financial statements. These
notes are unsecured, but are guaranteed, on a joint and several

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MARCH 31, 2002


PART I, ITEM 2.


basis, by all of our domestic subsidiaries, other
than one that is not wholly-owned. Management considers this
nonguarantor domestic subsidiary immaterial to investors,
therefore, separate financial statements are not presented.

Our credit facility provides for a revolving line
of credit in the aggregate principal amount of
$75.0 million for a term of three years, including
subfacilities of $10.0 million for swingline loans and
$15.0 million for letters of credit, usage of which reduces
availability under the facility. No borrowings were outstanding
under the facility as of March 31, 2002 or March 31, 2001;
however, an aggregate of $10.0 million in letter of credit
obligations were outstanding on March 31, 2002. We intend
to use the facility for working capital, capital expenditures
and other general corporate purposes. Although the facility is
unsecured, our obligations under the facility are
unconditionally guaranteed, on a joint and several basis, by all
of our existing and subsequently acquired wholly-owned domestic
subsidiaries.

Borrowings under the facility bear interest at a
rate equal to, at our option, either (1) the base rate
(which is equal to the greater of the prime rate most recently
announced by Bank of America, N.A., the administrative agent
under the facility, or the federal funds rate plus one-half of
1%) or (2) the adjusted Eurodollar Interbank Offered Rate,
in each case plus an applicable margin determined by reference
to our leverage ratio (which is defined under the facility as
the ratio of our total debt to our total capitalization). Based
on our leverage ratio at March 31, 2002, the current
margins are 2.0% for Eurodollar rate loans and 0.75% for base
rate loans. Additionally, the undrawn portion of the facility is
subject to a facility fee at an annual rate that is currently
set at 0.5% based on our leverage ratio at March 31, 2002.

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

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

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

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

The third amendment was completed on
January 22, 2002 with an effective date of
September 30, 2001. We obtained this amendment in order to
avoid the occurrence of an event of default under our senior
credit facility agreement resulting from a violation of the
interest coverage ratio covenant contained in the agreement.
This amendment modified the definitions of Interest
Expense, Premier Boxboard Interest Expense and
Standard Gypsum Interest Expense to include interest
income and the benefit or expense derived from interest rate
swap agreements or other interest hedge agreements.
Additionally, the amendment lowered the minimum allowable
interest coverage ratio for the fourth quarter of 2001 from
2.5:1.0 to 2.25:1.0, the first quarter of 2002 from 2.75:1.0 to
2.25:1.0, and the second quarter of 2002 from 2.75:1.0 to
2.50:1.0.

In 1998, we registered with the SEC a total of
$300.0 million in public debt securities for issuance in
one or more series and with such specific terms as determined
from time to time. On June 1, 1999, we issued

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PART I, ITEM 2.


$200.0 million in aggregate principal amount
of our 7 3/8% senior notes due June 1, 2009. Our
7 3/8% senior notes were issued at a discount to yield an
effective interest rate of 7.473%, are unsecured obligations of
our company and pay interest semiannually. In connection with
the offering of our 7 1/4% senior notes and 9 7/8%
senior subordinated notes, our subsidiary guarantors also
guaranteed our 7 3/8% senior notes. On February 5,
2002, we purchased $6.75 million in principal amount of our
7 3/8% senior notes on the open market. This purchase will
lower our interest expense by approximately $500 thousand
annually.

Interest Rate Swaps.During the second and third quarters of 2001, we entered into
four interest rate swap agreements in notional amounts totaling
$285.0 million. The agreements, which have payment and
expiration dates that correspond to the terms of the note
obligations they cover, effectively converted
$185.0 million of our fixed rate 9 7/8% senior
subordinated notes and $100.0 million of our fixed rate
7 3/8% senior notes into variable rate obligations. The
variable rates are based on the three-month LIBOR plus a fixed
margin. These swap agreements decreased interest expense by
$2.5 million in the first three months of 2002. We expect
our swap agreements to continue to lower our interest expense;
however, if the three-month LIBOR increases significantly, our
interest expense could be adversely affected. Based on the
three-month LIBOR at March 31, 2002, our swaps would reduce
our interest expense by approximately $9.6 million for 2002
compared with $3.8 million in 2001. If the three-month
LIBOR increases 100 basis points, our savings on interest
expense would be reduced by approximately $2.85 million
annually.

The following table identifies the debt
instrument hedged, the notional amount, the fixed spread and the
three-month LIBOR at March 31, 2002 for each of our
interest rate swaps. The March 31, 2002 three-month LIBOR
is presented for informational purposes only and does not
represent our actual effective rates in place at March 31,
2002.

|                                 |  |          |         |        |  |             |       |          |  |  |       |   |  |  |       |  
|-------------------------------- |  | -------- | ------- | ------ |  | ----------- | ----- | -------- |  |  | ----- | - |  |  | ----- | -
|                                 |  |          |         |        |  | Three-Month |       |         
|                                 |  | Notional |         |        |  | LIBOR at    |       | Total   
|                                 |  | Amount   |         | Fixed  |  | March 31,   |       | Variable
|Debt Instrument                  |  | (000s)  |         | Spread |  | 2002        |       | Rate    
|                                 |  |          |         |        |  |             |       |         
|7 3/8% senior notes              |  | $        | 50,000  |        |  |             | 2.365 | %        |  |  | 2.031 | % |  |  | 4.396 | %
|7 3/8% senior notes              |  |          | 25,000  |        |  |             | 1.445 |          |  |  | 2.031 |   |  |  | 3.476 |  
|7 3/8% senior notes              |  |          | 25,000  |        |  |             | 1.775 |          |  |  | 2.031 |   |  |  | 3.806 |  
|9 7/8% senior subordinated notes |  |          | 185,000 |        |  |             | 4.400 |          |  |  | 2.031 |   |  |  | 6.431 |  

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

Joint Venture
Financings.As noted above, we own a
50% interest in two joint ventures with Temple-Inland, Inc.:
Standard Gypsum, L.P. and Premier Boxboard Limited LLC. Because
we account for these interests in our joint ventures under the
equity method of accounting, the indebtedness of these joint
ventures is not reflected in the liabilities included on our
consolidated balance sheets. As described below, we have
guaranteed certain obligations of these joint ventures. A
default under these guarantees also constitutes a default under
the credit facilities of these joint ventures and our senior
credit facility. The guarantees also contain independent
financial maintenance covenants that are identical to the
covenants under our senior credit facility. Accordingly, our
default under one or more of these covenants would technically
permit the lenders under the joint venture credit facilities and
our joint venture partners respective guarantees of those
facilities, as well as the lenders under our senior credit
facility, if they so elected, to prohibit any future borrowings
under these facilities and to accelerate all such outstanding
obligations under these facilities. The resulting acceleration
of our obligations could also cause further defaults and
accelerations under our 9 7/8%

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MARCH 31, 2002


PART I, ITEM 2.


senior subordinated notes, our 7 1/4% senior
notes and our 7 3/8% senior notes. In January 2002, we
entered into agreements with the Premier Boxboard Limited and
Standard Gypsum lenders that correspond to the amendments made
in the third amendment to the senior credit facility, as
described above. At March 31, 2002, we were in compliance
with all covenants under these guarantees.

Standard Gypsum is the obligor under
reimbursement agreements pursuant to which direct-pay letters of
credit in the aggregate original amount of approximately
$56.2 million have been issued for its account in support
of industrial development bond obligations. We have severally
and unconditionally guaranteed 50% of Standard Gypsums
obligations for reimbursement of letter of credit drawings,
interest, fees and other amounts. The other Standard Gypsum
partner, Temple-Inland, has similarly guaranteed 50% of Standard
Gypsums obligations. As of March 31, 2002, the
outstanding letters of credit totaled approximately
$56.2 million, of which one-half (approximately
$28.1 million) is guaranteed by us.

Premier Boxboard is the borrower under a credit
facility providing for up to $30.0 million in revolving
loans (with a subfacility for up to $1.0 million in letters
of credit). The credit facility was originally entered into in
July 1999 and matures in June 2005. We have severally and
unconditionally guaranteed 50% of Premier Boxboards
obligations under the credit facility for principal (including
reimbursement of letter of credit drawings), interest, fees and
other amounts. Temple-Inland has similarly guaranteed 50% of
Premier Boxboards obligations. As of March 31, 2002,
the outstanding principal amount of borrowings under the
facility (including outstanding letters of credit) was
approximately $20.2 million, of which one-half
(approximately $10.1 million) is guaranteed by us.

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

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

We generally consider our relationship with
Temple-Inland to be good with respect to both of our joint
ventures and do not anticipate experiencing material liquidity
events resulting from either additional capital

23



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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


contributions or buy-sell contingencies with
respect to our joint ventures during 2002. We cannot assure you,
however, that these assumptions will prove accurate or that such
liquidity events will not arise.

Cash from
Operations.Cash generated from
operations was $16.0 million for the three month period
ended March 31, 2002, compared with $5.4 million in
the same period of 2001. The increase was due primarily to
improved operating results, a distribution from one of our joint
ventures and favorable changes in working capital.

Capital
Expenditures.Capital expenditures
were $5.8 million in the first quarter of 2002 versus
$11.8 million in the first quarter of 2001. Aggregate
capital expenditures of approximately $23.4 million are
anticipated for 2002. To conserve cash, we intend to limit
capital expenditures for 2002 to cost reduction, productivity
improvement and replacement projects.

Dividends.We paid
cash dividends of $833 thousand in the first quarter of 2002
versus $4.7 million in the first quarter of 2001. Since
February 2001, we have reduced our dividend payments from $0.18
per issued and outstanding common share to $0.03. Then, in
February 2002, we announced that we would suspend future
dividend payments on our common stock until our earnings
performance exceeds the dividend limitation provision of our
senior subordinated notes. We made these decisions to reduce the
quarterly dividends to preserve our financial flexibility in
light of difficult industry conditions and due to the
limitations on dividend payments in our financial covenants.
Although our former debt agreements contained no specific
limitations on the payment of dividends, our current debt
agreements contain certain limitations on the payment of future
dividends. We intend to continue assessing our ability to pay
quarterly dividends in light of difficult industry conditions,
our need to preserve financial flexibility and the limitations
on dividends included in our financial covenants.

Share Repurchases.We did not purchase any shares of our common stock during the
first three months of 2002 under our common stock purchase plan.
We have cumulatively purchased 3,169,000 shares since January
1996. Our board of directors has authorized purchases of up to
831,000 additional shares. However, our 9 7/8% senior
subordinated notes and our senior credit facility limit our
ability to purchase our common stock.

Georgia-Pacific Litigation

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

New Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinations (SFAS No. 141) and
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 141
supercedes Accounting Principles Board (APB) Opinion
No. 16 Business Combinations and SFAS No. 38,
Accounting for Preacquisition Contingencies for Purchased
Enterprises. SFAS No. 141 prescribes the accounting
principles

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##### Table of Contents



FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


for business combinations and requires that all
business combinations be accounted for using the purchase method
of accounting. This pronouncement is effective for all business
combinations after June 30, 2001.

SFAS No. 142 supercedes APB Opinion
No. 17, Intangible Assets. This pronouncement
prescribes the accounting practices for goodwill and other
intangible assets. Under this pronouncement, goodwill will no
longer be amortized to earnings, but instead will be reviewed
periodically (at least annually) for impairment. We adopted this
pronouncement effective January 1, 2002. We have completed
our initial impairment test, which was required to be completed
by June 30, 2002, and have determined that no impairment of
goodwill exists. See Note 7 of Notes to Consolidated
Financial Statements for additional information regarding
goodwill accounting.

In July 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS No. 143). This pronouncement requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred.
When the liability is initially recorded, the entity capitalizes
the cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its
present value each period and the capitalized cost is
depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the
obligation for the amount recorded or incurs a gain or loss.
SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We do not expect the adoption of this
pronouncement to have a material impact on our consolidated
financial statements.

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

Forward-Looking Information

This Quarterly Report on Form 10-Q,
including Managements Discussion and Analysis of
Financial Condition and Results of Operations, may contain
various forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, that
are based on our beliefs and assumptions, as well as information
currently available to us. When used in this document, the words
believe, anticipate,
estimate, expect, intend,
should, would, could, or
may and similar expressions may identify
forward-looking statements. These statements involve risks and
uncertainties that could cause our actual results to differ
materially depending on a variety of important factors,
including, but not limited to, those identified below under
Risk Factors and other factors discussed elsewhere
in this Report and our other filings with the Securities and
Exchange Commission. With respect to such forward-looking
statements, we claim protection under the Private Securities
Litigation Reform Act of 1995. The documents that we file with
the Securities and Exchange Commission are available from us,
and also may be examined at public reference facilities
maintained by the Securities and Exchange Commission or, to the
extent filed via EDGAR, accessed through the Web Site of the
Securities and Exchange Commission (http://www.sec.gov). We do
not undertake any obligation to update any forward-looking
statements we make.

Risk Factors

Investors should consider the following risk
factors, in addition to the other information presented in this
Report and the other reports and registration statements we file
from time to time with the Securities and Exchange Commission,
in evaluating us, our business and an investment in our
securities. Any of the following risks, as well as other risks
and uncertainties, could harm our business and financial results
and cause the value of our securities to decline, which in turn
could cause investors to lose all or part of their investment in
our

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


company. The risks below are not the only ones
facing our company. Additional risks not currently known to us
or that we currently deem immaterial also may impair our
business.

Our Business and Financial Performance May Be
Harmed By Future Increases In Raw Material Costs.

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

Our Operating Margins May Be Adversely
Affected By Rising Energy Costs.

Excluding labor, energy is our most significant
manufacturing cost. We use energy to generate steam used in the
paper making process and to operate our paperboard machines and
all of our other converting machinery. Our energy costs
increased steadily throughout 2000 and the first quarter of 2001
before showing some improvement by the end of 2001. In 2001, the
average energy cost in our mill system was approximately $57 per
ton. During the first three months of 2002, energy costs
decreased to approximately $49 per ton. The decrease was due
primarily to decreases in natural gas and fuel oil costs. Until
recently, our business had not been significantly affected by
energy costs, and we historically have not passed energy costs
through to our customers. We have not been able to pass through
to our customers all of the energy cost increases we incurred
and as a result, our operating margins have been adversely
affected. We continue to evaluate our energy costs and consider
ways to factor energy costs into our pricing. However, we cannot
assure you that our operating margins and results of operations
will not continue to be adversely affected by rising energy
costs.

Our Business and Financial Performance May Be
Adversely Affected By Downturns In Industrial Production,
Housing and Construction and the Consumption of Nondurable and
Durable Goods.

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



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

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

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

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


We Are Adversely Affected By the Cycles,
Conditions and Problems Inherent In Our Industry.

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

Our Business May Suffer From Risks Associated
With Growth and Acquisitions.

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

Acquisitions also involve specific risks. Some of
these risks include:



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



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

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



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

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


If We Cannot Raise the Necessary Capital For,
Or Use Our Stock To Finance, Acquisitions, Expansion Plans Or
Other Significant Corporate Opportunities, Our Growth May Be
Impaired.

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

Our Substantial Indebtedness Could Adversely
Affect Our Cash Flow and Our Ability to Fulfill Our Obligations
Under Our Indebtedness.

We have a substantial amount of outstanding
indebtedness. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the unaudited financial statements included in this Report.
In addition, as described in Managements Discussion
and Analysis of Financial Condition and Results of
Operations, we have guaranteed indebtedness of our joint
ventures for which we could also be liable. Our substantial
level of indebtedness increases the possibility that we may be
unable to generate cash sufficient to pay when due the principal
of, interest on or other amounts due in respect of our
indebtedness. We may also obtain additional long-term debt,
increasing the risks discussed below. Our substantial leverage
could have significant consequences to holders of our debt and
equity securities. For example, it could:



|  |                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | make it more difficult for us to satisfy our
    obligations with respect to our indebtedness;                                                                                                                                                                        
| 
| | increase our vulnerability to general adverse
    economic and industry conditions;                                                                                                                                                                                   
| 
| | limit our ability to obtain additional financing;                                                                                                                                                                                                                     
| 
| | require us to dedicate a substantial portion of
    our cash flow from operations to payments on our indebtedness,
    reducing the amount of our cash flow available for other
    purposes, including capital expenditures and other general
    corporate purposes;
| 
| | require us to sell debt or equity securities or
    to sell some of our core assets, possibly on unfavorable terms,
    to meet payment obligations;                                                                                                                  
| 
| | restrict us from making strategic acquisitions,
    introducing new technologies or exploiting business
    opportunities;                                                                                                                                            
| 
| | limit our flexibility in planning for, or
    reacting to, changes in our business and our industry;                                                                                                                                                                  
| 
| | place us at a possible competitive disadvantage
    compared to our competitors that have less debt; and                                                                                                                                                              
| 
| | adversely affect the value of our common stock.                                                                                                                                                                                                                       

Our Interest Expense Could Be Adversely
Affected By Risks Associated With Our Interest Rate Swap
Agreements.

Interest rate swap agreements carry a certain
inherent element of interest rate risk. During 2001, we entered
into several interest rate swap agreements in order to take
advantage of the current market conditions. These agreements
converted a significant portion of our fixed rate 9 7/8%
senior subordinated notes and our fixed rate 7 3/8% senior
notes into variable rate obligations. The variable rates are
based on the three-month LIBOR plus a fixed margin. These swap
agreements have lowered our interest expense, and we expect
these agreements to

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002


PART I, ITEM 2.


continue to positively affect our interest
expense. If, however, the three-month LIBOR increases
significantly, our interest expense could be adversely affected.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations for additional
information on our swap agreements.

We Are Subject To Many Environmental Laws and
Regulations That Require Significant Expenditures For Compliance
and Remediation Efforts, and Changes In the Law Could Increase
Those Expenses and Adversely Affect Our Operations.

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

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

Arthur Andersen LLP, which audited our financial
statements for the years ended December 31, 2001, 2000 and
1999, was indicted in March 2002 on federal obstruction of
justice charges arising from the governments investigation
of Enron Corporation and is currently on trial for such charges.
Arthur Andersen LLP has indicated that it intends to contest the
indictment vigorously. The Securities and Exchange Commission,
or SEC, stated that it will continue accepting financial
statements audited by Arthur Andersen LLP so long as Arthur
Andersen LLP is able to make specified representations to us. It
is possible that events arising out of the indictment may
adversely affect the ability of Arthur Andersen LLP to satisfy
any claims arising from its provision of auditing services to
us, including claims that could arise out of Arthur Andersen
LLPs audit of our financial statements included in our
periodic reports, prospectuses or registration statements filed
with the SEC.

Should we seek to access the public capital
markets, SEC rules will require us to include or incorporate by
reference in any prospectus three years of audited financial
statements. The SECs current rules would require us to
present audited financial statements for one or more fiscal
years audited by Arthur Andersen LLP and obtain their consent
and representations until our audited financial statements for
the fiscal year ending December 31, 2004 become available
in the first quarter of 2005. If prior to that time the SEC
ceases accepting financial statements audited by Arthur Anderson
LLP or if Arthur Andersen LLP becomes unable to make the
representations to us required by the SEC, it is possible that
our available audited financial statements for the years ended
December  31, 2001, 2000 and 1999 might not satisfy the
SECs requirements. In that case, we would be unable to
access the public capital markets unless Deloitte & Touche
LLP, our current independent accounting firm, or another
independent accounting firm, is able to audit the financial
statements originally audited by Arthur Anderson LLP. Any delay
or inability to access the public capital markets caused by
these circumstances could have a material adverse effect on our
business, profitability and growth prospects.

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002

PART I, ITEM 3.





CARAUSTAR INDUSTRIES, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

For a discussion of certain market risks related
to us, see Part II, Item 7A, Quantitative and
Qualitative Disclosures about Market Risk, in our Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001. There have been no significant
developments with respect to our exposure to interest rate
market risk.

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002

PART II, ITEM 1.


PART II. OTHER INFORMATION




ITEM 1.     LEGAL
PROCEEDINGS

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




ITEM 6.     EXHIBITS
AND REPORTS ON FORM 8-K

(a) Exhibits

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

(b) Reports on Form 8-K

We filed no current reports on Form 8-K
during the quarter ended March 31, 2002.

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FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2002







SIGNATURES

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



| |                           
| | --------------------------
| | CARAUSTAR INDUSTRIES, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ H. LEE THRASH, III

| |                                               
| | ----------------------------------------------
| |                                               
| | H. Lee Thrash, III                            
| | Vice President and Chief Financial
    Officer
| | (Principal Financial Officer)                 

Date: May 14, 2002

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EXHIBIT INDEX

|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | -- | --- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|No.     |    |     |  | Description
|        |    |     |  |            
|        | 3  | .01 |  |            |  | Amended and Restated Articles of Incorporation of
    the Company (Incorporated by reference 
    Exhibit 3.01 to Annual Report for 1992 on Form 10-K
    [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                                                                                                    
|        | 3  | .02 |  |            |  | Third Amended and Restated Bylaws of the Company
    (Incorporated by reference  Exhibit 3.02 to
    Annual Report for 2001 on Form 10-K [SEC File
    No. 0-20646])                                                                                                                                                                                                                                                                                                                                                                                 
|        | 4  | .01 |  |            |  | Specimen Common Stock Certificate (Incorporated
    by reference  Exhibit 4.01 to Registration
    Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 4  | .02 |  |            |  | Articles 3 and 4 of the Companys Amended
    and Restated Articles of Incorporation (included in
    Exhibit 3.01)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4  | .03 |  |            |  | Article II of the Companys Third
    Amended and Restated Bylaws (included in Exhibit 3.02)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 4  | .04 |  |            |  | Amended and Restated Rights Agreement, dated as
    of May 24, 1999, between Caraustar Industries, Inc. and The Bank
    of New York as Rights Agent (Incorporated by reference
    Exhibit 10.1 to current report on Form 8-K dated
    June 1, 1999 [SEC File No. 020646])                                                                                                                                                                                                                                                                          
|        | 4  | .05 |  |            |  | Indenture, dated as of June 1, 1999, between
    Caraustar Industries, Inc. and The Bank of New York, as Trustee,
    regarding The Companys 7 3/8% Notes due 2009
    (Incorporated by reference  Exhibit 4.05 to
    report on Form 10-Q for the quarter ended June 30,
    1999 [SEC File No. 0-20646])                                                                                                                                                                                                                                          
|        | 4  | .06 |  |            |  | First Supplemental Indenture, dated as of
    June 1, 1999, between Caraustar Industries, Inc. and The
    Bank of New York, as Trustee (Incorporated by
    reference  Exhibit 4.06 to report on
    Form 10-Q for the quarter ended June 30, 1999 [SEC
    File No. 0-20646])                                                                                                                                                                                                                                                                      
|        | 4  | .07 |  |            |  | Second Supplemental Indenture, dated as of
    March 29, 2001, between the Company, the Subsidiary
    Guarantors and The Bank of New York, as Trustee, regarding the
    Companys 7 3/8% Notes due 2009 (Incorporated by
    reference  Exhibit 4.07 to report on
    Form 10-K for the year ended December 31, 2000 [SEC
    File No. 0-20646])                                                                                                                                                                                                   
|        | 10 | .01 |  |            |  | Indenture, dated as of March 29, 2001,
    between the Company, the Guarantors and The Bank of New York, as
    Trustee, regarding the Companys 7 1/4% Senior Notes
    due 2010 (Incorporated by reference 
    Exhibit 10.01 to report on Form 10-K for the year
    ended December 31, 2000 [SEC File No. 0-20646])                                                                                                                                                                                                                              
|        | 10 | .02 |  |            |  | Indenture, dated as of March 29, 2001,
    between the Company, the Guarantors and The Bank of New York, as
    Trustee, regarding the Companys 9 7/8% Senior
    Subordinated Notes due 2011 (Incorporated by
    reference  Exhibit 10.02 to report on
    Form 10-K for the year ended December 31, 2000 [SEC
    File No. 0-20646])                                                                                                                                                                                                             
|        | 10 | .03 |  |            |  | Credit Agreement, dated as of March 29,
    2001, among the Company, certain subsidiaries of the Company,
    various lenders, Bank of America, N.A., as Administrative Agent,
    Banc of America Securities LLC and Deutsche Banc Alex. Brown
    Inc. as Joint Lead Arrangers and Joint Book Managers and Credit
    Suisse, First Boston and Credit Lyonnais New York Branch as
    Co-Documentation Agents (Incorporated by reference 
    Exhibit 10.03 to report on Form 10-K for the year
    ended December 31, 2000 [SEC File No. 0-20646])
|        | 10 | .04 |  |            |  | Amendment No. 1 to Credit Agreement, dated
    as of September 10, 2001, by and among the Company, as
    borrower, certain subsidiaries of the Company identified as
    guarantors listed therein, the banks listed therein, and Bank of
    America, N.A., as Administrative Agent (Incorporated by
    Reference  Exhibit 10.04 to report on
    Form 10-Q for the quarter ended September 30, 2001
    [SEC File No. 0-20646]                                                                                                                   
|        | 10 | .05 |  |            |  | Amendment No. 2 to Credit Agreement, dated
    as of November 30, 2001, by and among the Company, as borrower,
    certain subsidiaries of the Company identified as guarantors
    listed therein, the banks listed therein, and Bank of America,
    N.A., as Administrative Agent (Incorporated by
    reference  Exhibit 10.05 to report on
    Form 10-K for the year ended December 31, 2001 [SEC
    File No. 0-20646])                                                                                                                       
|        | 10 | .06 |  |            |  | Amendment No. 3 to Credit Agreement, dated
    as of January 22, 2002, by and among the Company, as
    borrower, certain subsidiaries of the Company identified as
    guarantors listed therein, the banks listed therein, and Bank of
    America, N.A., as Administrative Agent (Incorporated by
    reference  Exhibit 10.06 to report on
    Form 10-K for the year ended December 31, 2001 [SEC
    File No. 0-20646])                                                                                                                        

33



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ---- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|No.     |    |      |  | Description
|        |    |      |  |            
|        | 10 | .07  |  |            |  | Purchase Agreement, dated as of March 22,
    2001, between the Company and Credit Suisse First Boston
    Corporation, Banc of America Securities LLC, Deutsche Banc Alex.
    Brown Inc. and SunTrust Equitable Securities Corporation
    (Incorporated by reference  Exhibit 10.04 to
    report on Form 10-K for the year ended December 31,
    2000 [SEC File No. 0-20646])                                                    
|        | 10 | .08  |  |            |  | Registration Rights Agreement, dated as of
    March 22, 2001, between the Company, certain subsidiaries
    of the Company and Credit Suisse First Boston Corporation, Banc
    of America Securities LLC, Deutsche Banc Alex. Brown Inc. and
    SunTrust Equitable Securities Corporation (Incorporated by
    reference  Exhibit 10.05 to report on
    Form 10-K for the year ended December 31, 2000 [SEC
    File No. 0-20646])
|        | 10 | .09  |  |            |  | Employment Agreement, dated December 31,
    1990, between the Company and Thomas V. Brown (Incorporated by
    reference  Exhibit 10.06 to Registration Statement on
    Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                           
|        | 10 | .10  |  |            |  | Deferred Compensation Plan, together with copies
    of existing individual deferred compensation agreements
    (Incorporated by reference  Exhibit 10.08 to
    Registration Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                         
|        | 10 | .11  |  |            |  | 1987 Executive Stock Option Plan (Incorporated by
    reference  Exhibit 10.09 to Registration
    Statement on Form S-1 [SEC File No. 33-50582])                                                                                                                                                                                                                                                                                     
|        | 10 | .12  |  |            |  | 1993 Key Employees Share Ownership Plan
    (Incorporated by reference  Exhibit 10.10 to
    Registration Statement on Form S-1 [SEC File
    No. 33-50582])                                                                                                                                                                                                                                                                         
|        | 10 | .13  |  |            |  | Incentive Bonus Plan of the Company (Incorporated
    by reference  Exhibit 10.10 to Annual Report for
    1993 on Form 10-K [SEC File No. 0-20646])                                                                                                                                                                                                                                                                                  
|        | 10 | .14  |  |            |  | 1996 Director Equity Plan of the Company
    (Incorporated by reference  Exhibit 10.12 to
    report on Form 10-Q for the quarter ended March 31,
    1996 [SEC File No. 0-20646])                                                                                                                                                                                                                                                    
|        | 10 | .15  |  |            |  | Amendment No. 1 to the Companys 1996
    Director Equity Plan, dated July 16, 1998 (Incorporated by
    reference  Exhibit 10.2 to Current Report on
    Form 8-K dated June 1, 1999 [SEC File
    No. 0-20646])                                                                                                                                                                                                                     
|        | 10 | .16  |  |            |  | Second Amended and Restated 1998 Key Employee
    Incentive Compensation Plan (Incorporated by
    reference  Exhibit 10.13 to report on Form 10-Q
    for the quarter ended March 31, 2001 [SEC File No. 0-20646])                                                                                                                                                                                                                   
|        | 10 | .17  |  |            |  | Asset Purchase Agreement between Caraustar
    Industries, Inc., Sprague Paperboard, Inc. and International
    Paper Company, dated as of March 4, 1999 (Incorporated by
    reference  Exhibit 10.17 to report on
    Form 10-Q for the quarter ended March 31, 1999 [SEC
    File No. 0-20646])                                                                                                                                    
|        | 10 | .18  |  |            |  | Paperboard Agreement, dated as of April 10,
    1996 between the Company and Georgia-Pacific Corporation
    (Incorporated by reference  Exhibit 10.06 to
    report on Form 10-Q for the quarter ended
    September 30, 2000 [SEC File No. 0-20646])                                                                                                                                                                                
|        | 10 | .19  |  |            |  | Guaranty Agreement, dated as of July 30,
    1999, as amended of the Company in favor of SunTrust Bank
    Atlanta (Incorporated by reference 
    Exhibit 10.19 to report on Form 10-K for the year
    ended December 31, 2001 [SEC File No. 0-20646])                                                                                                                                                                              
|        | 10 | .20  |  |            |  | Second Amended and Restated Parent Guaranty,
    dated as of August 1, 1999, as amended, of the Company in
    favor of Toronto-Dominion (Texas), Inc., as Administrative Agent
    (Incorporated by reference  Exhibit 10.20 to
    report on Form 10-K for the year ended December 31,
    2001 [SEC File No. 0-20646])                                                                                                             
|        | 10 | .21  |  |            |  | Partnership Agreement of Standard Gypsum L.P.
    (Incorporated by reference  Exhibit 10.21 to
    report on Form 10-K for the year ended December 31,
    2001 [SEC File No. 0-20646])                                                                                                                                                                                                                                               
|        | 10 | .22  |  |            |  | Operating Agreement of Premier Boxboard Limited
    LLC (Incorporated by reference  Exhibit 10.22 to
    report on Form 10-K for the year ended December 31,
    2001 [SEC File No. 0-20646])                                                                                                                                                                                                                                         
|        | 11 | .01 |  |            |  | Computation of Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                      



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

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