CARAUSTAR INDUSTRIES, INC.

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 such 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. x

The aggregate market value of voting stock held by non-affiliates of the registrant as of March 15, 2002, computed by reference to the closing sale price on such date, was $280,553,772. For purposes of calculating this amount only, all directors and executive officers are treated as affiliates. This determination of affiliate status shall not be deemed conclusive for other purposes. As of the same date, 27,855,488 shares of Common Stock, $.10 par value, were outstanding.

The Registrant’s definitive Proxy Statement pertaining to the 2002 Annual Meeting of Shareholders (“the Proxy Statement”) and filed pursuant to Regulation 14A is incorporated herein by reference into Part III.

The purpose of this amendment on Form 10-K/A (this “Amendment”) to our Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 10-K”) is to amend and restate the financial statements included in Item 8 — Financial Statements and Supplemental Data, to include footnote 14, “Guarantor Condensed Consolidated Financial Statements.” This footnote discloses the Financial Information of our subsidiaries that guarantee our senior and senior subordinated indebtedness. In order to preserve the nature and character of the disclosures set forth in the 2001 10-K as originally filed, except as otherwise expressly stated herein, this amendment does not speak to, or reflect, events occurring after the original filing of our 2001 10-K on April 2, 2002.


	1. Item 3 — Legal Proceedings.

	2. Item 6 — Selected Financial Data.

	3. Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	Item 7A — Quantitative and Qualitative Disclosure About Market Risk.

	4. Item 8 — Financial Statements and Supplementary Data.

	5. Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

	6. Item 14 — Exhibits, Financial Statement Schedules and Reports on Form 8-K.

	7. Signatures.

	8. The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 have been added.

	9. The certifications required by Section 906 of the Sarbanes-Oxley Act of 2002 have been filed with the SEC as correspondence to this filing.

All information contained in the 2001 10-K, as amended hereby, shall be deemed updated or superseded, as applicable, by the reports (including any amendments to such reports) we have filed, and will file, with the SEC subsequent to the original filing of our 2001 10-K. You should read this amendment together with these subsequent reports, including our Annual Report on Form 10-K for the year ended December 31, 2002, for updated disclosures on matters discussed in our 2001 10-K.

Caraustar Industries, Inc. operated its business through 19 subsidiaries across the United States and in Mexico and the United Kingdom as of March 2002. As used herein, “we,” “our,” “us,” (or similar terms), the “Company” or “Caraustar” includes Caraustar Industries, Inc. and its subsidiaries, except that when used with reference to common shares or other securities described herein and in describing the positions held by management of the Company, the term includes only Caraustar Industries, Inc.

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain various “forward-looking statements,” within the meaning of 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 under the caption “Risk Factors” below and other factors discussed elsewhere in this Report and the

Company’s other filings with the Securities and Exchange Commission. These documents 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.

On May 9, 2001, we and Georgia-Pacific Corporation jointly announced a tentative settlement regarding the litigation over the terms of the long-term supply contract the parties entered in April 1996. The pending litigation relating to that contract has been previously reported in our annual report on Form 10-K for the year ended December 31, 2000 and in our previous quarterly reports on Form 10-Q. Under the terms of the tentative settlement, we and G-P Gypsum Corporation, a wholly-owned subsidiary of Georgia-Pacific, entered into a new ten-year agreement under which we would supply a minimum of 50,000 tons of gypsum facing paper per year to G-P Gypsum. Implementation of that new agreement, and settlement of the pending litigation over the 1996 agreement, was subject to satisfactory completion of a transition period, during which G-P Gypsum was to evaluate our gypsum facing paper for compliance with specifications and end-use suitability. The transition period initially was to expire no later than August 6, 2001, but ongoing discussions with G-P Gypsum led the parties to twice extend the outside expiration date of the transition period, eventually to April 1, 2002. These extensions were the result of Georgia-Pacific’s recent curtailment of a significant portion of its gypsum wallboard manufacturing capacity because of adverse market conditions. This curtailment, along with Georgia-Pacific’s stated reservations about committing to the minimum tonnage requirement under the new agreement in light of current market conditions, led the parties to agree to the extension of the transition period.

On March 26, 2002, we reached a final settlement of the dispute, by entering into a new five-year paperboard supply agreement with G-P Gypsum 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 described above 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.

We are involved in certain other litigation arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters (other than the litigation described above with Georgia-Pacific) will not have a material adverse effect on our financial condition or results of operations.

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

Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion of our own paperboard production, approximately 38% in 2001. The remaining 62% of our paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube, core and composite containers; folding cartons; gypsum wallboard facing paper and other specialty products. We are the only major manufacturer to serve all four end-use markets. As part of our strategy to maintain optimum levels of production capacity, we regularly purchase paperboard from other manufacturers in an effort to minimize the potential impact of demand declines on our own mill system. Additionally, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production between mills in response to customer or market demands.

Recovered fiber, which is derived from recycled paper stock, is our most significant raw material. Historically, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. For example, our average recovered fiber cost per ton of paperboard produced increased from $43 per ton in 1993 to $144 per ton in 1995, an increase of 235%, before dropping to $66 per ton in 1996. Same-mill recovered fiber cost per ton averaged $65 and $104 during 2001 and 2000, respectively.

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 2000, the average energy cost in our mill system was approximately $52 per ton. In 2001, energy costs increased 9.6% to approximately $57 per ton. The increase was due primarily to increases in natural gas and fuel oil costs. Until recently, our business had not been significantly affected by energy costs, and we historically have not passed increases in energy costs through to our customers. Consequently, we were not able to pass through to our customers all of the energy cost increases we incurred in 2000 and 2001. As a result, our operating margins were adversely affected. We continue to evaluate our energy costs and consider ways to factor energy costs into our pricing. However, we cannot assure you that our operating margins and results of operations will not continue to be adversely affected by rising energy costs.

Historically, we have grown our business, revenues and production capacity to a significant degree through acquisitions. Based on the difficult operating climate for our industry and our financial position, the pace of our acquisition activity, and accordingly, our revenue growth, has slowed as we have focused on conserving cash and maximizing the productivity of our existing facilities. We made no acquisitions in 2001.

We are a holding company that operates our business through 19 subsidiaries, as of December 31, 2002. We also own a 50% interest in two joint ventures with Temple-Inland, Inc. We have an additional joint venture with an unrelated entity of 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.

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 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 criteria (4) is based on management’s judgments regarding the collectibility of our accounts receivable.

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 over or under stated the reserve required for excess, obsolete or unsaleable inventory.

Impairment of Goodwill. We periodically evaluate acquired businesses for potential impairment indicators. 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 financial condition and results of operations.

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 us 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 materially impact our financial position and results of operations.

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 are described in Note 8 to the consolidated financial statements and 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.

The following table shows volume, gross paper margins and related data for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from our business segments, excluding tonnage produced or converted by our unconsolidated joint ventures, are combined and presented along end-use market lines. Additional financial information is reported by segment in Note 11 of the consolidated financial statements.

Sales. Our consolidated sales for the year ended December 31, 2001 decreased 9.9% to $913.7 million from $1,014.6 million in 2000. Acquisitions completed during 2000 accounted for $33.7 million of sales during 2001. These acquisitions included MilPak, Inc., Arrow Paper Products Company and Crane Carton Company, LLC. These acquisitions were accounted for using the purchase method of accounting, and their results of operations were included only from and after the date of the acquisition. Excluding acquisitions completed during 2000, sales decreased 13.3% during 2001. This decrease was due to lower selling prices and volume from the paperboard and the tube, core and composite container segments, partially attributable to the dispute with Georgia-Pacific (see “Georgia-Pacific Litigation” below), along with lower selling prices from the carton and custom packaging segment due to competitive pressures. The decline in volume from the tube, core and composite container segment was primarily attributable to the downturn in the textile industry.

Total paperboard tonnage for 2001 decreased 9.5% to 1,015.5 thousand tons from 1,121.5 thousand tons in 2000. Excluding acquisitions completed during 2000, total paperboard tonnage declined 11.3% to 994.3 thousand tons. This decrease was primarily due to lower shipments of unconverted paperboard to external customers combined with lower internal conversion by our converting operations in the other specialty products and the tube, core and composite container markets. The decrease in shipments of unconverted paperboard was due primarily to a decline in industry demand and partially attributable to the dispute with Georgia-Pacific. Excluding 2000 acquisitions, outside purchases decreased 16.5% to 101.9 thousand tons. Tons sold from paperboard mill production decreased 10.7% for 2001 to 892.4 thousand tons, compared with 999.1 thousand tons for 2000. Total tonnage converted decreased 7.5% for 2001 to 463.9 thousand tons compared to 501.4 thousand tons in 2000, and decreased 12.2% from 2000, excluding acquisitions. Excluding acquisitions completed during 2000, volumes in the folding carton and tube, core and composite container end-use markets decreased 8.3% and 7.8%, respectively.

Gross Margin. Gross margin for 2001 increased to 25.6% of sales from 25.1% in 2000. Excluding the $7.1 million reduction in reserves related to expiring unfavorable supply contracts at the Sprague paperboard mill, gross margin was 24.8% for 2001. This margin decrease was due primarily to lower margins in the carton and custom packaging and tube, core and composite container segments, partially offset by improved margins in the paperboard segment. Margins decreased in the carton and custom packaging segment due to lower selling prices resulting from competitive pressures. Margins in the tube, core and composite container segment decreased as a result of lower selling prices, higher paperboard costs and a decline in the textile industry. The improved margins in the paperboard segment were the result of cost-cutting efforts to reduce expenses

Restructuring and Other 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, we paid $1.2 million in severance and termination benefits and $597 thousand in other exit costs. The remaining other exit costs were paid by December 31, 2002. As of December 31, 2002, one employee remained to assist in the closing of the mill.

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. As of December 31, 2001, no employees remained at the plant.

In February 2000, we initiated a plan to close our paperboard mill located in Baltimore, Maryland and recorded a pretax charge to operations of approximately $6.9 million. We adopted the plan to close the mill in conjunction with our ongoing efforts to increase manufacturing efficiency and reduce costs in our mill system. The $6.9 million charge included a $5.7 million noncash asset impairment charge to write-down machinery and equipment to estimated net realizable value. The charge also included a $604 thousand accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613 thousand accrual for other exit costs. All exit costs were paid by December 31, 2000. As of December 31, 2002, one employee remained to assist in marketing the land and building. The property is currently held for sale mill closure did not have a material impact on our operations.

In September 2000, we initiated a plan to close our paperboard mill located in Camden, New Jersey and recorded a pretax charge to operations of approximately $8.6 million. The mill experienced a slowdown in gypsum facing paper shipments during the third quarter of 2000, and the shutdown was precipitated by the refusal of Georgia-Pacific, formerly our largest gypsum facing paper customer, to continue purchasing facing paper under a long-term supply agreement. The $8.6 million charge included a $7.0 million noncash asset impairment write-down of fixed assets to estimated net realizable value, a $558 thousand accrual for severance and termination benefits for 19 salaried and 46 hourly employees terminated in connection with this plan, and a $968 thousand accrual for other exit costs. During 2001 and 2000, we paid $178 thousand and $380 thousand, respectively, in severance and termination benefits and $548 thousand and $346 thousand, respectively, in other exit costs. The remaining other exit costs were paid as of June 30, 2002. As of December 31, 2002, no employees remained at the mill. We are currently marketing the property. This mill contributed sales and operating income of $12.4 million and $1.2 million, respectively, for the nine months ended September 30, 2000 and $20.5 million and $2.1 million, respectively, for the year ended December 31, 1999.

In December 2000, we recognized other costs of $1.3 million related to the settlement of a dispute over abandoned property.

Operating Income. Operating income for 2001 was $26.7 million, a decrease of $15.2 million, or 36.2% from 2000. Operating income excluding the Sprague reserve reduction, restructuring charges and 2000 acquisitions was $25.1 million for 2001, a decrease of $33.6 million, or 57.2%, from operating income of $58.6 million in 2000, excluding restructuring charges and other costs. This decline was due primarily to lower volume in the tube, core and composite container and paperboard segments, partially attributable to the dispute with Georgia-Pacific, and lower margins in the carton and custom packaging and tube, core and composite

Other Income (Expense). Interest expense increased 20.8% to $41.2 million for 2001 from $34.1 million in 2000. This increase was due to higher outstanding debt balances at higher interest rates, partially 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 loss from unconsolidated affiliates was $2.6 million in 2001, down $9.1 million from equity in income of $6.5 million in 2000. This decrease was primarily due to lower operating results for Standard Gypsum, L.P., our gypsum wallboard joint venture with Temple-Inland. The lower results were due primarily to significantly lower selling prices in 2001 compared to 2000 due to excess capacity in that market.

Net Income (Loss). Net loss was $14.6 million in 2001, or $0.52 net loss per common share on a diluted basis, compared with net income of $8.2 million, or $0.31 net income per common share on a diluted basis, in 2000. As discussed above, our results for 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 2001 was an extraordinary loss of $4.3 million related to the early extinguishment of debt ($2.7 million, net of tax benefit, or $0.10 per common share on a diluted basis). Partially offsetting these charges was the $7.1 million reduction in reserves related to expiring unfavorable supply contracts at the Sprague paperboard mill ($4.5 million, net of tax provision, or $0.16 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, 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.

The following tables show volume, gross paper margins and related data for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from our business segments, excluding tonnage produced or converted by our unconsolidated joint ventures, are combined and presented along end-use market lines. Additional financial information is reported by segment in Note 11 of the consolidated financial statements.

Sales. Our consolidated sales for the year ended December 31, 2000 increased 8.3% to $1,014.6 million from $936.9 million in 1999. Acquisitions completed during 1999 and 2000 accounted for $104.9 million of sales during 2000. These acquisitions included MilPak, Inc., Arrow Paper Products Company and Crane Carton Company, LLC, all of which were completed in 2000. The acquisitions of Carolina Component Concepts, Inc., International Paper Company’s Sprague boxboard mill, Halifax Paperboard Co., Inc., Tenneco Packaging, Inc.’s folding carton division and Carolina Converting, Inc. were completed in 1999. These acquisitions were accounted for using the purchase method of accounting, and their results of operations were included only from and after the date of the acquisition. Excluding acquisitions completed during 1999 and 2000, sales decreased 2.9% during 2000. This decrease was due to lower volume and sales from the paperboard segment, partially attributable to the dispute with Georgia-Pacific, and lower sales from the carton and custom packaging segment, partially offset by higher sales from the tube, core and composite container segment.

Total paperboard tonnage for 2000 decreased 2.9% to 1,121.5 thousand tons from 1,155.5 thousand tons in 1999. Excluding acquisitions completed during 1999 and 2000, total paperboard tonnage declined 8.6% to 1,056.0 thousand tons. This decrease was primarily due to lower shipments of unconverted paperboard to external customers in the gypsum wallboard facing paper and folding carton markets. This decrease in shipments to gypsum wallboard facing paper customers was partially attributable to the dispute with Georgia-Pacific. Excluding acquisitions, outside purchases increased 10.3% to 99.9 thousand tons. Tons sold from paperboard mill production decreased 6.2% for 2000 to 999.1 thousand tons, compared with 1,064.9 thousand tons for 1999, and decreased 10.4% excluding acquisitions. Total tonnage converted increased 12.5% for 2000 to 501.4 thousand tons compared to 445.8 thousand tons in 1999, and increased 1.2% over 1999, excluding acquisitions. Excluding acquisitions completed during 1999 and 2000, volumes in the folding carton and other specialty end-use markets decreased 9.3% and increased 4.9%, respectively.

Gross Margin. Gross margin for 2000 decreased to 25.1% of sales from 27.0% in 1999. This margin decrease was due primarily to lower volume and higher energy costs in the paperboard segment, combined with lower margins in the carton and custom packaging and tube, core and composite container segments. Margins decreased in the carton and custom packaging segment due to lower selling prices resulting from competitive pressures. Margins in the tube, core and composite container segment decreased as a result of higher raw material costs and soft volume in the plastic core and composite container businesses.

Restructuring and Other Costs. In February 2000, we initiated a plan to close our paperboard mill located in Baltimore, Maryland and recorded a pretax charge to operations of approximately $6.9 million. We adopted the plan to close the mill in conjunction with our ongoing efforts to increase manufacturing efficiency and reduce costs in our mill system. The $6.9 million charge included a $5.7 million noncash asset impairment charge to write-down machinery and equipment to net realizable value. The charge also included a $604 thousand accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613 thousand accrual for other exit costs. All exit costs were paid by December 31, 2000. As of December 31, 2002, one employee remained to assist in marketing the land and building. We are currently marketing the property.

In September 2000, we initiated a plan to close our paperboard mill located in Camden, New Jersey and recorded a pretax charge to operations of approximately $8.6 million. The mill closing was the result of a slowdown in gypsum facing paper shipments during the third quarter of 2000 and a contract dispute with Georgia-Pacific. The $8.6 million charge included a $7.0 million noncash asset impairment write-down of fixed assets to net realizable value, a $558 thousand accrual for severance and termination benefits for 19 salaried and 46 hourly employees terminated in connection with this plan, and a $968 thousand accrual for other exit costs. During 2000, we paid $380 thousand in severance and termination benefits and $346 thousand in other exit costs. We are currently marketing the land and building. This mill contributed sales of $12.4 million and operating income of $1.2 million for the nine months ended September 30, 2000. It contributed sales of $20.5 million and operating income of $2.1 million for the year ended December 31, 1999.

In December 2000, we recognized a charge of $1.3 million related to the settlement of a dispute over abandoned property.

Operating Income. Operating income for 2000 was $41.9 million, a decrease of $38.7 million, or 48.0%, from 1999. Operating income for comparable facilities, excluding restructuring and other costs, declined $23.1 million, or 28.6%. This decline was due primarily to lower volume and higher energy costs in the paperboard segment, combined with lower margins in the carton and custom packaging and tube, core and composite container segments. Selling, general and administrative expenses increased by $19.5 million, or 15.5%, in 2000 compared to 1999. Acquisitions accounted for approximately $12.5 million of the increase and information technology costs accounted for approximately $3.2 million of the increase.

Other Income (Expense). Interest expense increased 33.8% to $34.1 million for 2000 from $25.5 million in 1999 due to higher average borrowings under our senior credit facility and the effect of a full year of interest expense attributable to our $200.0 million public debt securities offering in June 1999.

Equity in income from unconsolidated affiliates was $6.5 million, down $2.7 million, or 29.2%, from 1999 primarily due to lower operating results for Standard Gypsum, L.P., our gypsum wallboard joint venture with Temple-Inland, Inc. and start-up costs at Premier Boxboard Limited LLC, our containerboard mill joint venture with Temple-Inland.

Net Income. Net income decreased 80.0% to $8.2 million from $40.9 million in 1999. Diluted net income per common share decreased 81.0% to $0.31 for 2000 from $1.62 in 1999.

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. For example, in the difficult operating climate we experienced in 2001, we generated $25.5 million less cash from operations than we did in 2000. Factors that can affect our operating results are

discussed further in this Report under “Risk Factors” below. However, despite the lower operating cash flow in 2001, we managed to improve our 2001 year-end cash position by $55.3 million over 2000 due primarily to conservative cash management. We also 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. Additionally, we received a federal tax refund of approximately $16.0 million in April 2002. 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 December 31, 2000 and December 31, 2001, we were not in compliance with the leverage ratio and interest coverage ratio, respectively, under both our senior credit facility and our joint venture guarantees, but in each case were able to obtain appropriate amendments and waivers with respect to each instance of non-compliance (and with respect to any technical cross-default). In 2002 and 2003, we were required to obtain additional amendments and waivers under both our senior credit facility and our joint venture guarantees. See “Subsequent Events.” 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” below), we believe that it is unlikely that we will breach our covenants under our debt agreements or joint venture guarantees during the balance of 2003. 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 December 31, 2001 and 2000, 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):

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 includes the prepayment penalty and unamortized issuance costs of

$705 thousand, net of tax benefit of $1.6 million. The difference between issue price and principal amount at maturity of our 7 1/4% senior notes and 9 7/8% senior subordinated notes will be accreted each year as interest expense in our financial statements. These notes are unsecured, but are guaranteed, on a joint and several basis, by all of our domestic subsidiaries, other than one that is not wholly-owned.

Our credit facility provides for a revolving line of credit in the aggregate principal amount of $75.0 million for a term of three years, including subfacilities of $10.0 million for swingline loans and $15.0 million for letters of credit, usage of which reduces availability under the facility. No borrowings were outstanding under the facility as of December 31, 2001, versus $194.0 million outstanding on our former senior credit facility on December 31, 2000; however, an aggregate of $9.8 million in letter of credit obligations were outstanding on December 31, 2001. 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 December 31, 2001, 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 December 31, 2001.

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.

See “Subsequent Events” below, which details the third, fourth, fifth and sixth amendments to the senior credit facility.

On June 1, 1999, we issued $200.0 million in aggregate principal amount of our 7 3/8% senior notes due June 1, 2009. Our 7 3/8% senior notes were issued at a discount to yield an effective interest rate of 7.473%, are unsecured obligations of our company and pay interest semiannually. In connection with the offering of our 7 1/4% senior notes and 9 7/8% senior subordinated notes, our subsidiary guarantors also guaranteed our 7 3/8% senior notes.

As noted above, on March 29, 2001, we repaid in full all outstanding balances under our former senior credit facility and 7.74% senior notes. Our former senior credit facility was a $400.0 million, five-year senior credit facility with a scheduled maturity date in July 2002. Interest under the facility was computed using our

choice of: (a) the adjusted Eurodollar rate (as defined under the facility) plus a margin; or (b) the higher of (i) the federal funds rate plus one-half of 1% or (ii) the prime lending rate most recently announced by the administrative agent under the facility. At December 31, 2000 and March 29, 2001, the date we repaid and terminated our former senior credit facility, the interest margin above the adjusted Eurodollar rate was computed on the basis of our leverage ratio. For the three months ended March 31, 2001 and for the year ended December 31, 2000, the weighted average borrowings outstanding under our former senior credit facility during such periods bore interest at 6.95% and 7.18%, respectively. As of December 31, 2000, we were not in compliance with certain covenants under our former senior credit facility that the lenders waived through the first quarter of 2001.

Our 7.74% senior notes, which we originally issued on October 1, 1992 to an insurance company in an aggregate principal amount of $82.75 million, bore interest at a rate of 7.74% per annum, payable semiannually in April and October of each year. In connection with the repayment of our 7.74% senior notes, we incurred a prepayment penalty of approximately $3.6 million. As of December 31, 2000, we were not in compliance with certain covenants under our 7.74% senior notes that the lenders waived through the first quarter of 2001.

We have certain obligations and commitments to make future payments under contracts, such as debt and lease agreements. See Notes 5 and 6 of “Notes to Consolidated Financial Statements” which details these future obligations and commitments.

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 $3.8 million in 2001. 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 December 31, 2001, our swaps would reduce our interest expense by approximately $9.9 million in 2002 compared with $3.8 million in 2001, as mentioned above. If the three-month LIBOR increased 100 basis points, our savings on interest expense would be reduced by approximately $2.85 million.

The following table identifies the debt instrument hedged, the notional amount, the fixed spread and the three-month LIBOR at December 31, 2001 for each of our interest rate swaps. The December 31, 2001 three-month LIBOR is presented for informational purposes only and does not represent our actual effective rates in place at December 31, 2001.

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 current market conditions.

See “Subsequent Events” below, which describes additional interest rate swap transactions.

Joint Venture Financings. As noted above, we own a 50% interest in two joint ventures with Temple-Inland, Inc.: Standard Gypsum, L.P. and Premier Boxboard Limited LLC. Because we account for these interests in our joint ventures under the equity method of accounting, the indebtedness of these joint ventures is not reflected in the liabilities included on our consolidated balance sheets. As described below, we have guaranteed certain obligations of these joint ventures. A default under these guarantees also constitutes a default under the credit facilities of these joint ventures and our senior credit facility. The guarantees also contain independent financial maintenance covenants that are identical to the covenants under our senior credit facility. Accordingly, our default under one or more of these covenants would technically permit the lenders under the joint venture credit facilities and our joint venture partner’s respective guarantees of those facilities, as well as the lenders under our senior credit facility, if they so elected, to prohibit any future borrowings under these facilities and to accelerate all such outstanding obligations under these facilities. The resulting acceleration of our obligations could also cause further defaults and accelerations under our 9 7/8% senior subordinated notes, our 7 1/4% senior notes and our 7 3/8% senior notes. At December 31, 2000 and December 31, 2001, we were not in compliance with the leverage ratio and interest coverage ratio, respectively, under these guarantees, but in each case were able to obtain appropriate amendments and waivers with respect to this non-compliance and with respect to any technical cross-defaults.

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 December 31, 2001, 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 $40.0 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 December 31, 2001, 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. Additionally, 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 did not experience any material liquidity events resulting from either additional capital contributions or buy-sell contingencies with respect to our joint ventures during 2002. We cannot assure you, however, that these assumptions will prove accurate or that such liquidity events will not arise.

Cash from Operations. Cash generated from operations was $56.9 million for the year ended December 31, 2001, compared with $82.5 million in 2000. The decrease in 2001 compared to the same period in 2000 was due primarily to lower net income and a decrease in distributions from our joint ventures, partially offset by the receipt of a $10.0 million federal tax refund in 2001.

Capital Expenditures. Capital expenditures were $28.1 million in 2001 versus $58.3 million in 2000. Aggregate capital expenditures of approximately $22.5 million were made during 2002.

Acquisitions. In February 2000, we acquired all of the outstanding stock of MilPak, Inc. in exchange for 248,132 shares of our common stock valued at $4.7 million and $4.7 million in cash. MilPak operates a facility located in Pine Brook, New Jersey that provides blister packaging, cartoning and labeling, and other contract packaging services.

In September 2000, we acquired all of the outstanding stock of Arrow Paper Products Company in exchange for 342,743 shares of our common stock valued at $5.1 million. Arrow is located in Saginaw, Michigan and operates two tube and core converting facilities that serve customers in the automotive, film, housewares and other specialty tube and core markets.

In October 2000, we acquired 100% of the membership interests in Crane Carton Company, LLC in exchange for 1,659,790 shares of our common stock valued at $19.0 million plus $5.8 million of assumed debt, including industrial development bonds in the aggregate amount of $3.5 million. We issued 16,595 of the shares in 2000 and the balance in 2001. Crane operates a single folding carton manufacturing facility located in suburban Chicago, Illinois.

During the second quarter of 1999, we formed a joint venture with Temple-Inland, Inc. to own and operate Temple-Inland’s Newport, Indiana containerboard mill. The joint venture, Premier Boxboard Limited LLC, undertook a 14-month, $82.0 million project to modify the mill to enable it to produce a new, lightweight gypsum facing paper along with other containerboard grades. The mill began operations as modified at the beginning of the third quarter of 2000. Under the joint venture agreement, we contributed $50.0 million to the joint venture during the second quarter of 2000, and Temple-Inland contributed the net assets of the mill and received $50.0 million in notes issued by Premier Boxboard. Each partner has a 50% interest in the joint venture, and we account for our interest in this joint venture under the equity method. Our subsidiary, PBL Inc., manages the day-to-day operations of Premier Boxboard, pursuant to a management agreement with Temple-Inland.

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 in 2000 and 2001. Sprague incurred operating losses of $17.2 million and $7.2 million in 2000 and 2001, respectively, including the reversal of reserves related to unfavorable supply contracts. The losses were attributable to a combination of unfavorable fixed price contracts, low capacity utilization, high energy costs and higher fiber costs that we were unable to pass through to our customers. 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.

Dividends. We paid cash dividends of $8.9 million in 2001 versus $18.5 million in 2000. In February 2001, we reduced our first quarter dividend from $0.18 to $0.09 per issued and outstanding common share. In June 2001, we reduced our second, third and fourth quarter dividend from $0.09 to $0.03 per issued and outstanding common share. As described below under “Subsequent Events”, we have temporarily suspended future payments of quarterly dividends, beginning in the first quarter of 2002. 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 and since March 2002 have precluded us from paying cash dividends.

Share Repurchases. We did not purchase any shares of our common stock during 1999, 2000 or 2001 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.

Raw material price changes have had, and continue to have, a material effect on our operations. Energy prices had a material effect on our operations in 2000 and 2001. We do not believe that general economic inflation is a significant determinant of our raw material price increases or that, except as it relates to energy prices, it has a material effect on our operations.

In January 2002, we completed a third amendment to our senior credit facility that 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.

Also in January 2002, we entered into agreements with the PBL and Standard Gypsum lenders that correspond to the amendments made in the third amendment to the senior credit facility, as described above, in order to avoid events of default under those guarantees resulting from a violation of the interest ratio coverage covenants.

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.

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

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

In September 2002, we acquired certain operating assets (excluding accounts receivable) of the Smurfit Industrial Packaging Group, a business unit of Jefferson Smurfit Corporation (U.S.), for approximately $67.1 million, and assumed $1.7 million of indebtedness outstanding under certain industrial revenue bonds. The acquisition was funded with cash on hand. Goodwill and intangible assets of approximately $40.6 million were recorded in conjunction with the Smurfit Industrial Packaging Group acquisition.

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

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

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

In November 2002, we unwound $50.0 million of our $185.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes, and received approximately $2.8 million from the bank counter-party. Simultaneously, we unwound $50.0 million of one of our interest rate swap agreements related to the 7 3/8% senior notes, and received approximately $3.4 million. The $6.2 million gain will be accreted to interest expense over the remaining term of the notes and will partially offset the increase in interest expense. The $2.8 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes from 10.0% to 9.8%. The $3.4 million gain lowered the effective interest rate of the 7 3/8% senior notes from 7.5% to 7.2%.

In December 2002, we completed a fifth amendment to our senior credit facility. This amendment modified the calculation of net worth for purposes of our leverage ratio and tangible net worth financial maintenance covenants to exclude adjustments to other comprehensive loss related to our defined benefit pension plan. This amendment also allows us to exclude from these financial maintenance covenant calculations any restructuring costs recorded in the fourth quarter of 2002 and first quarter of 2003 as long as the aggregate of these restructuring costs does not exceed $16.0 million, on an after tax basis.

In December 2002, we initiated a plan to restructure our carton plant in Ashland, Ohio to serve a smaller, more focused carton market and recorded a pretax charge to operations of approximately $2.4 million. The $2.4 million charge included a $1.2 million noncash write down of assets.

In December 2002, we initiated a plan to permanently close our Halifax paperboard mill located in Roanoke Rapids, North Carolina and recorded a pretax charge to operations of approximately $3.4 million. The $3.4 million charge included a $3.0 million noncash write down of assets.

In December 2002, we initiated a plan to consolidate our converting operations in Fayetteville, North Carolina into Carolina Component Concepts, also located in North Carolina, and recorded a pretax charge to

In January 2003, we effectively unwound $85.0 million of our $135.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes by assigning our rights and obligations under the swap to one of our lenders under the senior credit facility. In exchange, we received approximately $4.3 million. We will accrete this gain into interest expense over the remaining term of the notes, which will partially offset the increase in interest expense. The gain will lower the effective interest rate of the 9 7/8% senior subordinated notes from 9.8% to 9.5%.

In February 2003, we announced the indefinite idling of one of two coated recycled paperboard machines at our Rittman, Ohio paperboard mill. Recently completed upgrades in our mill system will facilitate the transfer of production from the idled machine to our other mills. The Rittman workforce will be indefinitely reduced by 80 hourly employees, and we will recognize a related expense of approximately $1.2 million.

On March 28, 2003, we completed a sixth amendment to our senior credit facility. This amendment increased our maximum permitted leverage ratio to 70.0% for the fiscal quarters ending September 30, 2003 and December 31, 2003 and 67.5% for each succeeding fiscal quarter, lowered our minimum fixed charge coverage ratio from 1.50:1.0 for all fiscal quarters to 0.95:1.0 for the fiscal quarter ending March 31, 2003, 0.85:1.0 for the fiscal quarters ending June 30, 2003 and September 30, 2003 and 1.05:1.0 for the fiscal quarter ending December 31, 2003, lowered our minimum tangible net worth covenant for all periods on and after the effective date of the amendment, and lowered our maximum permitted capital expenditures to $30.0 million per fiscal year. For purposes of calculating compliance with our leverage ratio and net worth covenants, this amendment also establishes a maximum of $30.0 million for aggregate adjustments to other comprehensive loss related to our defined benefit pension plan. This amendment also increases to $43.0 million our subfacility for the issuance of letters of credit under the facility, in order to permit us to obtain a letter of credit to replace our Standard Gypsum joint venture guarantee as described below. Finally, this amendment terminated the quarterly pricing increase established under the fourth amendment to the facility entered into in September 2002 and fixed our maximum interest margins at 3.25% for LIBOR loans and 2.00% for base rate loans. The financial covenant modifications were necessary to enable us to avoid possible violations of our leverage ratio covenant for the third and fourth quarters of 2003, our fixed charge coverage ratio covenant for all quarters during 2003 and our net worth covenant for the second quarter of 2003

In exchange for these modifications, our lenders required us to permanently reduce the aggregate commitments under the facility from $75.0 million to $47.0 million, to shorten the maturity of the facility from March 29, 2005 to April 1, 2004, and to pay a monthly fee beginning on July 1, 2002 equal to 1.0% of the aggregate commitments under the facility. Our lenders also required the establishment of a borrowing base that restricts availability under the facility based on monthly computations of eligible accounts receivable and inventory, reduced by our net hedging obligations owed to lenders under the facility and by the amount of our guarantee obligations under our joint venture guarantees that are not secured or replaced by letters of credit. Additionally, we will not be permitted to borrow or request the issuance of letters of credit under the facility unless we have less than $10.0 million in freely available cash and cash equivalents on our consolidated balance sheet both before and immediately after giving effect to the application of the proceeds of such borrowing. The amendment also requires us to repay outstanding loans under the facility and/or cash collateralize outstanding letters of credit with the net cash proceeds from any issuance of debt or equity or, to the extent not reinvested in similar assets, from any sale of assets or insurance or condemnation award. The amendment further requires us to provide consolidated financial statements and joint venture financial statements to the lenders on a monthly basis. Finally, the amendment prohibits us from incurring capital leases or other indebtedness, making acquisitions or other investments, or prepaying other indebtedness unless our fixed charge coverage ratio for the most recently reported fiscal quarter exceeds 1.50:1.0 (calculated on a pro forma basis with regard to acquisitions), and completely eliminates our ability to pay dividends or repurchase shares of our stock.

In connection with this amendment, we were also required to amend our security agreement to provide for a springing lien on our machinery and equipment that will become effective on July 1, 2003.

We intend to refinance our senior credit facility with a new revolving credit facility, which we expect would be an asset-based credit facility secured by substantially all of our assets. We expect to complete this refinancing by the end of the second quarter of 2003. In connection with this refinancing, we also intend to refinance our joint venture credit facilities and our credit support of such facilities. However, we cannot give assurance that we will be able to complete a new credit facility on terms that are acceptable to us, or that we will be able to refinance our joint venture credit facilities and related credit support as part of or in connection with any such new credit facility.

Prior to this amendment to our senior credit facility, our Standard Gypsum joint venture guarantee contained financial maintenance covenants that were identical to those contained in our senior credit facility. However, the lenders to Standard Gypsum were unwilling to agree to the modifications that we made under the amendment to the senior credit facility. In order to avoid an event of default under that guarantee, we obtained a letter of credit under our senior credit facility in the face amount of $28.4 million. This letter of credit is issued in favor of the Standard Gypsum lenders and replaces our guarantee obligations. In exchange for this letter of credit, the Standard Gypsum lenders terminated our guarantee agreement and released their security interests in our accounts receivable and inventory. We must also pay a fee on October 28, 2003 in the amount of 2% of the full amount of this letter of credit in the event the letter of credit remains outstanding on that date. The letter of credit is renewable annually and my be drawn in the event of a default under the Standard Gypsum credit facility. However, in the event we are in default under our senior credit facility or have insufficient availability under the facility, we may not be able to obtain an extension or renewal of this letter of credit, which could result in an event of default under our Standard Gypsum credit facility. Further, if we are not able to refinance our existing senior credit facility prior to April 1, 2005, we may not be able to obtain an alternate letter of credit in favor of the Standard Gypsum lenders, which could result in an event of default under our Standard Gypsum credit facility.

Concurrently with the amendments to our senior credit facility and the issuance of the letter of credit to the Standard Gypsum lenders as described above, we entered into an amendment of our Premier Boxboard guarantee that made changes to the financial covenants corresponding to those made in the sixth amendment to our senior credit facility. In exchange for this amendment, the Premier Boxboard lenders required that the maturity of the Premier Boxboard credit facility be shortened from June 26, 2005 to January 5, 2004 and that the aggregate commitments under the facility be reduced to equal the amount of outstanding loans and letters of credit of $20.3 million. Any reductions of outstanding loans under the facility may not be reborrowed and will permanently reduce the commitments, thereby effectively requiring us to fund Premier Boxboard’s operations from its internal cash flow and from any cash contributions that we and our joint venture partner are permitted to make. In additions, we will be required to pay a fee to the Premier Boxboard lenders of $100,000 on July 1, 2003 and on the first day of each month thereafter until the facility is terminated and all outstandings under the facility are fully paid. The reduction of the commitments under this credit facility eliminates availability for borrowings unless we are able to reduce outstandings under the facility. If we are not able fund Premier Boxboard’s operations in this manner, its performance could be adversely affected. Further, if we are unable to refinance this facility prior to January 5, 2004, the entire facility would become immediately due and payable and we would be required to satisfy our guarantee of 50% of the obligations under the facility. Any acceleration of the obligations under either or both of our joint venture facilities could also cause further defaults and acceleration under our 9 7/8% senior subordinated notes, our 7 1/4% senior notes and our 7 3/8% senior notes.

In March 2003, we announced the permanent closure of our Buffalo Paperboard mill located in Lockport, New York. We expect to record a restructuring charge of approximately $5.0 million in connection with this closure. Our Buffalo mill had an annual production capacity of approximately 72 thousand tons. In 2002, the mill operated at approximately 50% of capacity and recorded approximately $9.0 million in trade sales. Buffalo sales will be transferred to our other mills.

litigation relating to that contract has been previously reported in our annual report on Form 10-K for the year ended December 31, 2000 and in our previous quarterly reports on Form 10-Q. Under the terms of the tentative settlement, we and G-P Gypsum Corporation, a wholly-owned subsidiary of Georgia-Pacific, entered into a new ten-year agreement under which we would supply a minimum of 50,000 tons of gypsum facing paper per year to G-P Gypsum. Implementation of that new agreement, and settlement of the pending litigation over the 1996 agreement, was subject to satisfactory completion of a transition period, during which G-P Gypsum was to evaluate our gypsum facing paper for compliance with specifications and end-use suitability. The transition period initially was to expire no later than August 6, 2001, but ongoing discussions with G-P Gypsum led the parties to twice extend the outside expiration date of the transition period, eventually to April 1, 2002. These extensions were the result of Georgia-Pacific’s recent curtailment of a significant portion of its gypsum wallboard manufacturing capacity because of adverse market conditions. This curtailment, along with Georgia-Pacific’s stated reservations about committing to the minimum tonnage requirement under the new agreement in light of current market conditions, led the parties to agree to the extension of the transition period.

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement 133.” This pronouncement deferred the effective date of SFAS No. 133 until the fiscal year ending December 31, 2001. In June 2000, the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities (an Amendment of FASB No. 133).” This pronouncement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. We adopted SFAS No. 133, as amended, on January 1, 2001. This pronouncement did not have a material impact on our consolidated financial statements upon adoption.

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.

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

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

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

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

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 in the first quarter 2001 before showing some improvement by the end of 2001. In 2000, the average energy cost in our mill system was approximately $52 per ton. In 2001, energy costs increased by 9.6% to $57 per ton. This was due primarily to increases 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 in 2000 and 2001. 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 impacted, which would cause our business to be adversely affected.

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

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

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. Sprague incurred operating losses of $17.2 million and $7.2 million in 2000 and 2001, respectively, including the reversal of reserves related to unfavorable supply contracts. 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.


	•	assumption of unanticipated liabilities and contingencies;

	•	diversion of management’s attention; and

	•	possible reduction of our reported earnings because of:


	•	increased goodwill write-offs;

	•	increased interest costs;

	•	issuances of additional securities or debt; and

	•	difficulties in integrating acquired businesses.


	•	use the increased production capacity of any new or improved facilities;

	•	identify suitable acquisition candidates;

	•	complete additional acquisitions; or

	•	integrate acquired businesses into our operations.

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

Without additional capital, we may have to curtail any acquisition and expansion plans or forego other significant corporate opportunities that may be vital to our long-term success. Although we expect to 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 “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplemental Data” included in Part II of 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 lowered our interest expense in 2001, and we expect these agreements to continue to positively impact our interest expense. If, however, 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 conviction of our former independent auditors, Arthur Andersen LLP, on federal obstruction of justice charges may adversely affect Arthur Andersen LLP’s ability to satisfy any claims arising from the provision of auditing services to us, impede our access to the capital markets and increase our costs of complying with accounting regulations.

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

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

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

At December 31, 2001, we had outstanding borrowings of approximately $514.0 million related to the issuance of debt securities registered with the SEC. In June of 1999, we issued $200.0 million of 7 3/8% senior notes at a discount to yield an effective interest rate of 7.473%. The 7 3/8% senior notes pay interest semiannually, and are our unsecured obligations. In March of 2001, we issued $285.0 million of 9 7/8% senior subordinated notes and $29.0 million of 7 1/4% senior notes. These notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. These 9 7/8% senior subordinated notes and the 7 1/4% senior notes pay interest semiannually, and are unsecured, but are guaranteed, on a joint and several basis, by all of our domestic subsidiaries, other than one that is not wholly-owned. As of December 31, 2001, we had a senior credit facility that 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. Interest is computed using our choice of either (a) the greater of the prime rate or the federal funds rate plus one-half of 1 percent or (b) the adjusted Eurodollar Interbank Offered Rate, in each case plus an applicable margin determined by reference to our leverage ratio. Additionally, the undrawn portion of the facility is subject to a facility fee at an annual rate that is also based on our leverage ratio. No borrowings were outstanding under the facility as of December 31, 2001, although approximately $9.8 million in letter of credit obligations were outstanding.

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.

Our senior management establishes parameters, which are approved by the board of directors, for our financial risk. We do not utilize derivatives for speculative purposes. We adopted SFAS 133, “Accounting for

The table below provides information about the Company’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related effective interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on the fixed spread plus the contractual three-month LIBOR in effect at December 31, 2001.


(1)	See Note 5 to the consolidated financial statements.
(2)	The average receive rate represents the actual rates in effect at December 31, 2001.

The accompanying notes are an integral part of these consolidated balance sheets.

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

The accompanying notes are an integral part of these consolidated statements of shareholders’ equity.

Caraustar Industries, Inc. (the “Parent Company”) and subsidiaries (collectively, the “Company”) are engaged in manufacturing, converting, and marketing paperboard and related products.

The consolidated financial statements include the accounts of the Parent Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The Company considers cash on deposit and investments with an original maturity of three months or less to be cash equivalents.

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 June 30, 2001 and December 31, 2000 by $794,000 and $758,000, respectively. The effect on net income for the years ended December 31, 2001, 2000 and 1999, was $36,000, $33,000 and ($122,000), respectively.

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.

Property, plant and equipment are stated at cost. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Expenditures for repairs and maintenance not considered to substantially lengthen the asset lives or increase capacity or efficiency are charged to expense as incurred.

For financial reporting purposes, depreciation is computed using the straight-line method over the following estimated useful lives of the assets:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant management judgment is required in determining: the credit worthiness of customers and collectibility of accounts receivable; excess, obsolete or unsaleable inventory reserves; the potential impairment of goodwill; the accounting for income taxes; the liability for self-insured claims; and the Company’s obligation and expense for pension and other postretirement benefits. Actual results could differ from the Company’s estimates.

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” (“SAB 101”) issued by the Securities and Exchange Commission. The Company recognizes revenue when the following four criteria are met: (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 criteria (4) is based on management’s judgments regarding the collectibility of the Company’s accounts receivable.

The Company is self-insured for the majority of its workers’ compensation costs and group health insurance costs, subject to specific retention levels. Consulting actuaries and administrators assist the Company in determining its liability for self-insured claims, and such liabilities are not discounted.

The financial statements of the Company’s non-U.S. subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation.” Net assets of the non-U.S. subsidiaries are translated at current rates of exchange. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded in accumulated other comprehensive loss. Certain other translation adjustments and transaction gains and losses continue to be reported in net income and were not material in any year.

Goodwill is amortized using the straight-line method over periods ranging up to 40 years. The Company has periodically evaluated goodwill for impairment. In completing this evaluation, the Company estimated the future undiscounted cash flows of the businesses to which goodwill related in order to determine whether the carrying amount of goodwill had been impaired.

Effective January 1, 2002, the Company adopted SFAS No. 142, “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 computes basic and diluted earnings or loss per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income or loss per share excludes dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income or loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of stock options outstanding during 2000 and 1999 added 9,000 and 121,000, respectively, to the weighted average shares outstanding for purposes of calculating diluted income per share. There was no dilutive effect of stock options outstanding during 2001.

Total comprehensive loss or income, consisting of net loss or income plus other nonowner changes in equity for the years ended December 31, 2001, 2000 and 1999, was a loss of $14,659,000 and income of $7,956,000 and $43,738,000, respectively. Accumulated other comprehensive loss at December 31, 2001 and 2000 consisted of foreign currency translation adjustments of $810,000 and $753,000, respectively.

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement 133.” This pronouncement deferred the effective date of SFAS No. 133 until the fiscal year ending December 31, 2001. In June 2000, the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities (an Amendment of FASB No. 133).” This pronouncement amended the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The Company adopted SFAS No. 133, as amended, on January 1, 2001. This pronouncement did not have a material impact on the Company’s consolidated financial statements upon adoption.

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. As of December 31, 2001, the Company had $146,465,000 of recorded net goodwill, which will be subject to this new pronouncement. During fiscal year 2001, the Company recorded $2,996,000 of goodwill amortization expense, net of taxes. The Company adopted this pronouncement effective January 1, 2002 and the adoption did not have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating this pronouncement using an external advisor and will determine the impact on its consolidated financial statements in accordance with the timing provisions under this pronouncement.

In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS no. 143”). This pronouncement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its

present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company 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. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

The Company has authorized 5,000,000 shares of $0.10 par value preferred stock. The preferred stock is issuable from time to time in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the board of directors of the Company. The board of directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption, and liquidation preferences pertaining to each such series. No shares of preferred stock have been issued by the Company.

The Company has cumulatively purchased 3,169,000 shares of its common stock since January 1996 pursuant to a plan authorized and approved by its board of directors allowing purchases of up to 4,000,000 common shares. The Company’s board of directors has authorized purchases of up to 831,000 additional shares. There were no stock purchases in 2001, 2000 or 1999. The Company’s 9 7/8% senior subordinated notes and its senior credit facility limit its ability to repurchase its common stock.

Each of the following acquisitions were accounted for under the purchase method of accounting, applying the provisions of Accounting Principles Board (“APB”) Opinion No. 16. As a result, the Company recorded the assets and liabilities of the acquired companies at their estimated fair value with the excess of the purchase price over these amounts recorded as goodwill. The financial statements for the years ended December 31, 2001, 2000 and 1999 reflect the operations of the acquired businesses for the periods after their respective dates of acquisition.

In February 2000, the Company acquired all of the outstanding stock of MilPak, Inc. in exchange for cash of $4,700,000 and 248,132 shares of the Company’s common stock valued at $4,700,000. MilPak operates a facility located in Pine Brook, New Jersey, that provides blister packaging, cartoning and labeling and other contract packaging services. Goodwill of approximately $6,100,000 was recorded in connection with the acquisition.

In September 2000, the Company acquired all of the outstanding stock of Arrow Paper Products Company in exchange for 342,743 shares of the Company’s common stock valued at $5,100,000. Arrow is located in Saginaw, Michigan and operates two tube and core converting facilities that serve customers in the automotive, film, housewares and other specialty tube and core markets. Goodwill of approximately $4,100,000 was recorded in connection with the acquisition.

In October 2000, the Company acquired 100 percent of the membership interests in Crane Carton Company, LLC in exchange for 1,659,790 shares of the Company’s common stock valued at $19,000,000 plus $5,800,000 of assumed debt. The Company issued 16,595 of the shares in 2000 and the balance in 2001. Crane operates a single folding carton manufacturing facility located in suburban Chicago, Illinois. Goodwill of approximately $4,700,000 was recorded in connection with the acquisition.

The following unaudited pro forma financial information assumes that the above acquisitions occurred on January 1, 2000. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have resulted had the acquisitions occurred on January 1, 2000 or the results that may occur in the future (in thousands, except per share data):

On April 1, 1996, the Company transferred substantially all of the operating assets and liabilities of its wholly-owned subsidiary, Standard Gypsum Corporation, a producer of gypsum wallboard, to a newly formed limited liability company, Standard Gypsum, L.P. (“Standard”). Simultaneous with the formation of Standard, the Company sold a 50 percent interest in Standard to Temple-Inland Forest Products Corporation (“Temple”), an unrelated third party, for $10,800,000 in cash. Standard is operated as a joint venture managed by Temple. The Company accounts for its interest in Standard under the equity method of accounting. The Company’s equity interest in the (loss)/earnings of Standard for the years ended December 31, 2001, 2000 and 1999 was ($946,000), $7,358,000 and $9,064,000, respectively. The Company received distributions based on its equity interest in Standard of $1,000,000, $13,500,000 and $1,000,000 in 2001, 2000 and 1999, respectively.

During April 1998, Standard entered into a loan agreement with a financial institution for a credit facility in an amount not to exceed $61,000,000. Proceeds of the new credit facility were used to fund the construction of a green field gypsum wallboard plant in Cumberland City, Tennessee, which began operation in the fourth quarter of 1999. During 1999, Standard received financing from two industrial revenue bond issuances by Stewart County, Tennessee, totaling $56,200,000. The proceeds of the bond issuances were used to repay the borrowings under the credit facility and fund the remaining construction of the plant. In addition, the Company guarantees one-half of Standard’s credit facility. At December 31, 2001 and 2000, the Company’s portion of this guaranteed debt totaled approximately $28,100,000. The Company’s guarantee of the Standard credit facility contains financial maintenance covenants, as amended in the first quarter of 2001, and both the Standard credit facility and the Company’s senior credit facility contain a cross-default to these covenants. In January 2002, the Company obtained an amendment under the guarantee to lower the minimum allowable interest coverage ratio for the fourth quarter of 2001 through the second quarter of 2002 in order to avoid an event of default resulting from a violation of the interest coverage ratio covenant. After giving effect to this amendment, the Company was in compliance with all financial maintenance covenants under the guarantee at December 31, 2001 and Standard was in compliance with all covenants under its credit facility.

Summarized financial information for Standard at December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999, respectively, is as follows (in thousands):

During 1999, the Company formed a joint venture with Temple to own and operate a containerboard mill located in Newport, Indiana. Upon formation, the joint venture, Premier Boxboard Limited LLC (“PBL”), undertook an $82,000,000 project to modify the mill to enable it to produce a new lightweight gypsum facing paper along with other containerboard grades. PBL is operated as a joint venture managed by the Company. The modified mill began operations on June 27, 2000. The Company and Temple each have a 50 percent interest in the joint venture, which is being accounted for under the equity method of accounting. There were no distributions in 2001 and 2000. Expenses related to the joint venture were not material in 1999. The Company’s equity interest in the net loss of PBL for 2001 and 2000 was approximately $1,892,000 and $881,000, respectively.

Under the joint venture agreement, the Company contributed $50,000,000 to the joint venture during the second quarter of 2000 and Temple contributed the net assets of the mill valued at approximately $98,000,000, and received $50,000,000 in notes issued by PBL. In addition, the Company has guaranteed one-half of a revolving line of credit obtained by PBL. At December 31, 2001 and 2000, the Company’s portion of this guaranteed debt totaled approximately $10,100,000 and $15,000,000, respectively. The Company’s guarantee of PBL’s revolving line of credit contains financial maintenance covenants, as amended in the first quarter of 2001, and both PBL’s revolving line of credit and the Company’s senior credit facility contain a cross-default to these covenants. In January 2002, the Company obtained an amendment under the guarantee to lower the minimum allowable interest coverage ratio for the fourth quarter of 2001 through the second quarter of 2002 in order to avoid an event of default resulting from a violation of the interest coverage ratio covenant. After giving effect to this amendment, the Company was in compliance with all financial maintenance covenants under the guarantee at December 31, 2001 and PBL was in compliance with all covenants under its line of credit.

See the “Subsequent Events” footnote for additional amendments related to the Company’s joint venture debt agreements and the senior credit facility.

Summarized financial information for PBL at December 31, 2001 and 2000 and for the years then ended is as follows (in thousands):

The Company has an additional joint venture with an unrelated entity which is accounted for under the equity method of accounting. The Company’s investment and share of earnings of this venture are not material to the Company.

At December 31, 2001 and 2000, total long-term debt consisted of the following (in thousands):

The amounts of total debt outstanding at December 31, 2001 maturing during the next five years and thereafter are as follows (in thousands):

The Company had a $400,000,000 five-year bank senior credit facility (“former senior credit facility”) as of December 31, 2000. Interest under the former senior credit facility was computed using the Company’s choice of (a) the Eurodollar rate plus a margin or (b) the higher of (i) the federal funds rate plus a margin or (ii) the bank’s prime lending rate. As of December 31, 2000, borrowings of $194,000,000 were outstanding under the former senior credit facility at a weighted average interest rate of 7.27 percent. As of December 31, 2000, the Company was not in compliance with certain covenants under the former senior credit facility that the lenders waived through the first quarter of 2001.

On March 29, 2001, the Company obtained a new 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 December 31, 2001, although an aggregate of $9,849,000 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 December 31, 2001, 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 December 31, 2001.

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.

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.

See the “Subsequent Events” note, which details the third, fourth and fifth and sixth amendments to the senior credit facility.

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. As of December 31, 2000, the Company was not in compliance with certain covenants under its former senior credit facility and its 7.74 percent senior notes that the lenders waived through the first quarter of 2001. 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 includes 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.

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 December 31, 2001 for each of the Company’s interest rate swaps. The December 31,

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 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 current market conditions.

See the “Subsequent Events” footnote regarding additional interest rate swap transactions.

The Company has assumed no ineffectiveness with respect to its four interest rate swap agreements, as it believes that the conditions for such an assumption are met under the guidelines of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The fair value of the swap agreements of approximately $7,418,000 as of December 31, 2001 has been reflected in other long-term liabilities and long-term debt in the accompanying balance sheet.

The Company leases certain buildings, machinery, and transportation equipment under operating lease agreements expiring at various dates through 2022. Certain rental payments for transportation equipment are based on a fixed rate plus an additional contingent amount for mileage. Rental expense on operating leases for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands):

The following is a schedule of future minimum rental payments required under leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 (in thousands):

On May 9, 2001, the Company and a significant customer jointly announced a tentative settlement regarding the litigation over the terms of the long-term supply contract the parties entered in April 1996. The pending litigation relating to that contract has been previously reported in the Company’s annual report on Form 10-K for the year ended December 31, 2000 and in the previous quarterly reports on Form 10-Q. Under the terms of the tentative settlement, the Company and a wholly-owned subsidiary of the customer have entered into a new ten-year agreement under which the Company would supply a minimum of 50,000 tons of gypsum facing paper per year to the customer. Implementation of the new agreement, and settlement of the pending litigation over the 1996 agreement, is subject to satisfactory completion of a transition period. The transition period initially was to expire no later than August 6, 2001. As described below, however, the parties have twice agreed to extend the outside termination date of the transition period, most recently to April 1, 2002. During the transition period, the Company is supplying the customer with such facing paper as it requests to enable it to evaluate the paper’s compliance with its specifications for quality and end-use suitability. Once the customer is satisfied with the paper, it is to notify the Company that the transition period has ended, and at that time the term of the new agreement, including the annual minimum quantity requirement described above, is to commence. If and when the new agreement commences, the parties will dismiss all pending litigation relating to the 1996 agreement. Under the terms of the tentative settlement, either party may terminate its obligations under the new agreement during the transition period without cause and without liability to the other party.

During the second quarter of 2001, ongoing discussions with the customer led to a mutual agreement to extend the outside expiration date of the transition period initially to December 31, 2001. The extension was the result of the customer’s recent curtailment of a significant portion of its gypsum wallboard manufacturing capacity because of adverse market conditions. This curtailment, along with the customer’s stated reservations about committing to the minimum tonnage requirement under the new agreement in light of current market conditions, led the parties to agree to the extension of the transition period. Continued

On March 26, 2002, the Company reached a final settlement with Georgia-Pacific Corporation concerning the dispute regarding the terms of the long-term supply agreement that had been the subject of our previously reported litigation with Georgia-Pacific. The Company 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 the Company 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, the Company’s previously filed suit against Georgia-Pacific in the General Court of Justice, Superior Court Division of Mecklenburg County, North Carolina (Case No. 00-CVS-12302), and Georgia-Pacific’s previously reported separate action filed in the Superior Court of Fulton County, Georgia (Case No. 2000-CV-27684), were each dismissed with prejudice on April 1 and 2, 2002, respectively.

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

During 1996, the Company’s board of directors approved a director equity plan. Under the plan, directors who are not employees or former employees of the Company (“Eligible Directors”) are paid a portion of their fees in the Company’s common stock. Additionally, each Eligible Director is annually granted an option to purchase 1,000 shares of the Company’s common stock at an option price equal to the fair market value at the date of grant. These options are immediately exercisable and expire ten years following the grant. A maximum of 100,000 shares of common stock may be granted under this plan. During 2001, 2000 and 1999, 8,339, 4,171

During 1992, the Company’s board of directors approved a qualified incentive stock option and bonus plan (the “1993 Plan”), which became effective January 1, 1993 and terminated December 31, 1997. Under the provisions of the 1993 Plan, selected members of management received one share of common stock (“bonus share”) for each two shares purchased at market value. In addition, the 1993 Plan provided for the issuance of options at prices not less than market value at the date of grant. The options and bonus shares awarded under the 1993 Plan are subject to four-year and five-year respective vesting periods and the options expire after eight years. The Company’s board of directors authorized 1,400,000 common shares for grant under the 1993 Plan. Compensation expense of approximately $186,000, $246,000 and $336,000 related to bonus shares was recorded in 2001, 2000 and 1999, respectively.

During 1998, the Company’s board of directors approved a qualified incentive stock option and bonus plan (the “1998 Plan”), which became effective March 10, 1998. Under the provisions of the 1998 Plan, selected members of management may receive the right to acquire one share of restricted stock contingent upon the direct purchase of two shares of unrestricted common stock at market value. In addition, the 1998 Plan provides for the issuance of both traditional and performance stock options at market price and 120 percent of market price, respectively. Restricted stock and options awarded under the 1998 Plan are subject to five-year vesting periods and the options expire after ten years. The Company’s board of directors authorized 3,800,000 common shares for grant under the 1998 Plan. During 2001, 2000 and 1999, the Company issued 108,323, 784,621 and 363,728 options, respectively, under the 1998 Plan. During 2001, 2000 and 1999, the Company issued 759, 10,699 and 9,374 shares, respectively, of restricted stock. The Company recorded approximately $82,000, $105,000 and $20,000 of compensation expense related to the issuance of restricted stock during 2001, 2000 and 1999, respectively.

A summary of stock option activity for the years ended December 31, 2001, 2000 and 1999 is as follows:

Summary information about the Company’s stock options outstanding at December 31, 2001 is as follows:

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for the director equity plan and the incentive stock option and bonus plans under APB Opinion No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 2001, 2000 and 1999 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions for grants in 2001, 2000 and 1999:

The total values of the options granted during the years ended December 31, 2001, 2000 and 1999 were computed to be approximately $470,000, $3,681,000 and $2,600,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS No. 123, the Company’s reported and pro forma net (loss) income and net (loss) income per share for the years ended December 31, 2001, 2000 and 1999 would have been as follows (in thousands, except per share data):

The Parent Company and certain of its subsidiaries have deferred compensation plans for several of their present and former officers and key employees. These plans provide for retirement, involuntary termination, and death benefits. The involuntary termination and retirement benefits are accrued over the period of active employment from the execution dates of the plans to the normal retirement dates (age 65) of the employees covered. Deferred compensation expense applicable to the plans was approximately $226,000, $227,000 and $292,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Accruals of approximately $1,687,000 and $2,096,000 related to these plans are included in deferred compensation in the accompanying balance sheets at December 31, 2001 and 2000, respectively.

Substantially all of the Company’s employees participate in a noncontributory defined benefit pension plan (the “Pension Plan”). The Pension Plan calls for benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plan’s assets consist of shares held in collective investment funds and group annuity contracts. The Company’s policy is to fund benefits attributed to employees’ service to date as well as service expected to be earned in the future. Contributions to the Pension Plan totaled approximately $8,313,000, $5,116,000 and $5,526,000 in 2001, 2000 and 1999, respectively.

Effective December 31, 1998, the Company adopted SFAS No. 132, “Employers’ Disclosures About Pensions and Other Postretirement Benefits.” The provisions of SFAS No. 132 revise employers’ disclosures about pension and other postretirement benefit plans. SFAS No. 132 does not change the measurement or recognition of these plans. It standardizes the disclosure requirements for pensions and other postretirement benefits.

During 1996, the Company adopted a supplemental executive retirement plan (“SERP”), which provides benefits to participants based on average compensation. The SERP covers certain executives of the Company commencing upon retirement. The SERP is unfunded at December 31, 2001.

Pension expense for the Pension Plan and the SERP includes the following components for the years ended December 31, 2001, 2000 and 1999 (in thousands):

The table below represents a reconciliation of the funded status of the SERP and the Pension Plan to (accrued) prepaid pension cost as of December 31, 2001 and 2000 (in thousands):

In accordance with SFAS No. 87, the Company has recorded an additional minimum pension liability related to its SERP plan representing the excess of unfunded accumulated benefit obligations over previously recorded pension liabilities. The cumulative additional liability totaled $675,000 and $1,130,000 at December 31, 2001 and 2000, respectively, and has been offset by intangible assets to the extent of previously unrecognized prior service costs.

Net pension expense and projected benefit obligations are calculated using assumptions of weighted average discount rates, future compensation levels, and expected long-term rates of return on assets. The weighted average discount rate used to measure the projected benefit obligation at December 31, 2001 and 2000 is 7.5 percent and 7.75 percent, respectively, including adjustments for specific attributes of the Company’s pension plan (e.g. duration of payments) made in consultation with the Company’s actuaries. The rate of increase in future compensation levels is 3.0 percent at December 31, 2001 and 2000, and the expected long-term rate of return on assets is 9.5 percent.

The Company provides postretirement medical benefits at certain of its subsidiaries. The Company accounts for these postretirement medical benefits in accordance with SFAS No. 132.

Net periodic postretirement benefit cost for the years ended December 31, 2001, 2000 and 1999 included the following components (in thousands):

Postretirement benefits totaling $650,000, $683,000 and $550,000 were paid during 2001, 2000 and 1999, respectively.

The accrued postretirement benefit cost as of December 31, 2001 and 2000 consists of the following (in thousands):

The accumulated postretirement benefit obligations at December 31, 2001 and 2000 were determined using a weighted average discount rate of 7.5 percent and 7.75 percent, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 9.0 percent in 2001, decreasing 0.5 percent each year to 4.5 percent by the year 2010. Increasing the assumed health care costs trend rate by one percentage point would increase the accumulated postretirement benefit obligation as of December 31, 2001 by approximately $692,000 and would increase net periodic postretirement benefit cost by approximately $61,000 for the year ended December 31, 2001.

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the use of the liability method of accounting for deferred income taxes.

The provision for income taxes for the years ended December 31, 2001, 2000 and 1999 consisted of the following (in thousands):

The principal differences between the federal statutory tax rate and the provision for income taxes for the years ended December 31, 2001, 2000 and 1999 are as follows:

Significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2001 and 2000 are summarized as follows (in thousands):

At December 31, 2001, the Company has state net operating losses of $9,339,000 which will expire in varying amounts between 2004 and 2021. The Company has a valuation allowance of $3,356,000 at December 31, 2001 for estimated future impairment related to the state net operating losses. The Company also has state tax credit carryforwards of approximately $2,595,000 which will expire in varying amounts between 2004 and 2016. The Company recorded a valuation allowance of $2,438,000 at December 31, 2001 for estimated future impairment related to the state tax credit carryforwards. During 2001 the Company recorded a $1,486,000 valuation allowance which was recorded as a component of deferred tax expense.

The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share data):

The Company operates principally in three business segments organized by 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. Sales to external customers located in foreign countries accounted for approximately 7.3 percent of the Company’s sales for 2001 and 6.4 percent for 2000 and 1999.

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

Identifiable assets are accumulated by facility within each business segment. Corporate assets consist primarily of cash and cash equivalents; refundable income taxes; property, plant, and equipment; and investments in unconsolidated affiliates.

The following table presents certain business segment information for the years ended December 31, 2001, 2000 and 1999 (in thousands):


(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. Results for 2001 also include a $7,100,000 reduction in reserves relating to expiring unfavorable supply contracts at the Sprague paperboard mill. Results for 2000 include charges to operations of $6,913,000 and $8,564,000 for restructuring costs related to the closing of the Baltimore, Maryland and Camden, New Jersey paperboard mills, respectively. These were related to the paperboard segment and are reflected in the segment’s operating income. (Note 12)

(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 12)

(C)	Results for 2000 include a nonrecurring charge of $1,300,000 related to the settlement of a dispute over abandoned property.

In February 2000, the Company initiated a plan to close its paperboard mill located in Baltimore, Maryland and recorded a charge to operations of approximately $6,913,000. The plan to close the mill was adopted in conjunction with the Company’s ongoing efforts to increase manufacturing efficiency and reduce costs in its mill system. The $6,913,000 charge included a $5,696,000 noncash asset impairment charge to write-down machinery and equipment to estimated net realizable value. The charge also included a $604,000 accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613,000 accrual for other exit costs. All exit costs were paid as of December 31, 2000. One employee remains to assist in marketing the land and building.

In September 2000, the Company initiated a plan to close its paperboard mill located in Camden, New Jersey and recorded a pretax charge to operations of approximately $8,564,000. The mill experienced a slowdown in gypsum facing paper shipments during the third quarter of 2000, and the shut down was precipitated by the refusal of the Company’s largest gypsum facing paper customer to continue purchasing facing paper under a long-term supply agreement. The $8,564,000 charge included a $7,038,000 noncash asset impairment write down of fixed assets to estimated net realizable value and a $558,000 accrual for severance

and termination benefits for 19 salaried and 46 hourly employees terminated in connection with this plan as well as a $968,000 accrual for other exit costs. As of December 31, 2001, no employees remained at the mill. The Company is currently marketing the property. This mill contributed sales and operating income of $12,400,000 and $1,200,000, respectively, for the nine months ended September 30, 2000 and $20,500,000 and $2,100,000, respectively, for the year ended December 31, 1999.

The following is a summary of restructuring activity from plan adoption to December 31, 2001:

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 were paid by December 31, 2002. As of December 31, 2002, one employee remains to assist in the closing of the mill. The Company is currently marketing the property.

The following is a summary of restructuring activity from plan adoption to December 31, 2001:

In March 2001, the Company initiated a plan to consolidate the operations of the Salt Lake City, Utah carton plant into the Denver, Colorado carton plant and recorded a pretax charge to operations of approximately $2,636,000. The $2,636,000 charge included a $1,750,000 noncash asset impairment write down of fixed assets to estimated net realizable value and a $464,000 accrual for severance and termination benefits for 5 salaried and 31 hourly employees terminated in connection with this plan as well as a $422,000 accrual for other exit costs. All exit costs were paid as of December 31, 2001 and no employees remained at the plant.

The following is a summary of restructuring activity from plan adoption to December 31, 2001:

In December 2000, the Company recognized nonrecurring costs of $1,300,000 related to the settlement of a dispute over abandoned property.

See the “Subsequent Events” footnote regarding additional restructuring costs.

The following table sets forth the fair values and carrying amounts of the Company’s significant financial instruments where the carrying amount differs from the fair value. The carrying amount of cash and cash equivalents, short-term debt and long-term variable-rate debt approximates fair value. The fair value of long-term debt is based on quoted market prices.


(1)	The carrying amount excludes the $7,418,000 adjustment for the fair value of the interest rate swap agreements discussed in Note 5.

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

In January 2002, the Company completed a third amendment to its senior credit facility that 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.

Also in January 2002, the Company entered into agreements with the PBL and Standard Gypsum lenders that correspond to the amendments made in the third amendment to the senior credit facility described above, in order to avoid events of default under those guarantees resulting from a violation of the interest ratio coverage covenants.

In June 2002, the Company recorded a $985 thousand noncash, pretax restructuring charge related to the permanent closure of the Company’s Camden and Chicago paperboard mills, which were shut down in 2000 and 2001, respectively. The $985 thousand charge represents a revised estimate of fixed asset disposals at these mills. The Chicago mill recorded a $1.5 million additional provision while the Camden mill overestimated the fixed asset write-off and recorded a credit of $500 thousand.

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

On September 30, 2002, the Company acquired certain operating assets (excluding accounts receivable) of the Smurfit Industrial Packaging Group, a business unit of Jefferson Smurfit Corporation (U.S.), for approximately $67.1 million, and assumed $1.7 million of indebtedness outstanding under certain industrial revenue bonds. The acquisition was funded with cash on hand. Goodwill of approximately $31.9 million and intangible assets of approximately $8.7 million were recorded in conjunction with the Smurfit Industrial Packaging Group acquisition. The intangible asset is associated with the value of acquired customer relationships and will be amortized over 15 years.

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

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

In November 2002, the Company unwound $50.0 million of its $185.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes, and received approximately $2.8 million from the bank counter-party. Simultaneously, the Company unwound $50.0 million of one of its interest rate swap agreement, related to the 7 3/8% senior notes, and received approximately $3.4 million. The $6.2 million gain will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $2.8 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes from 10.0% to 9.8%. The $3.4 million gain lowered the effective interest rate of the 7 3/8% senior subordinated notes from 7.5% to 7.2%.

On December 27, 2002, the Company completed a fifth amendment to its senior credit facility. This amendment modified the calculation of net worth for purposes of our leverage ratio and tangible net worth financial maintenance covenants to exclude adjustments to other comprehensive loss related to the Company’s defined benefit pension plan. The amendment also allows the Company to exclude from these financial maintenance covenant calculations any restructuring costs recorded in the fourth quarter of 2002 and first quarter of 2003 as long as the aggregate of these restructuring costs does not exceed $16.0 million, on an after tax basis.

In December 2002, the Company initiated a plan to permanently close its Halifax paperboard mill located in Roanoke Rapids, North Carolina. This mill was idled in June 2001 and the Company planned to restart it when industry demand improved. The Company made the decision to permanently close and dismantle the mill based on the current and foreseeable conditions of paperboard demand. In connection with this plan, the Company recorded a pretax charge to operations of approximately $3.4 million. The $3.4 million charge included a $3.0 million noncash write down of assets to estimated net realizable value and a $370 thousand accrual for other exit costs.

In December 2002, the Company initiated a plan to consolidate its Carolina Converting, Inc. facility in Fayetteville, North Carolina into its Carolina Component Concepts facility located in Mooresville, North Carolina and recorded a pretax charge to operations of approximately $6.0 million. The decision to consolidate these facilities was initiated by the loss of a significant customer, combined with a significant decline in demand in other specialty converted products. The $6.0 million charge included an accrual for a $2.4 million noncash write down of assets to estimated net realizable value and a $3.6 million accrual for other exit costs.

In December 2002, the Company initiated a plan to restructure its carton plant in Ashland, Ohio to serve a smaller, more focused carton market and recorded a pretax charge to operations of approximately $2.4 million. The $2.4 million charge included an accrual for a $1.2 million noncash write down of assets to estimated net realizable value, a $494 thousand accrual for severance and termination benefits for 18 hourly and 8 salaried employees terminated in connection with this plan, as well as a $688 thousand accrual for other exit costs.

In January 2003, the company effectively unwound $85.0 million of its $135.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes by assigning the Company’s rights and obligations under the swap to one of the Company’s lenders under the senior credit facility. In exchange, the Company received approximately $4.3 million. The Company will accrete this gain into interest expense over the remaining term of the notes, which will partially offset the increase in interest expense. The gain will lower the effective interest rate of the 9 7/8% senior subordinated notes from 9.8% to 9.5%.

In February 2003, the Company announced the indefinite idling of one of two coated recycled paperboard machines at its Rittman, Ohio paperboard mill. Recently completed upgrades in the Company’s mill system will facilitate the transfer of production from the idled machine to the Company’s other mills, including Rittman’s other machine. The Rittman workforce will be indefinitely reduced by 80 hourly employees, and the Company will recognize a related expense of approximately $1.2 million.

On March 28, 2003, the Company completed a sixth amendment to its senior credit facility. This amendment increased the Company’s maximum permitted leverage ratio to 70.0% for the fiscal quarters ending September 30, 2003 and December 31, 2003 and 67.5% for each succeeding fiscal quarter, lowered the Company’s minimum fixed charge coverage ratio from 1.50:1.0 for all fiscal quarters to 0.95:1.0 for the fiscal

quarter ending March 31, 2003, 0.85:1.0 for the fiscal quarters ending June 30, 2003 and September 30, 2003 and 1.05:1.0 for the fiscal quarter ending December 31, 2003, lowered the Company’s minimum tangible net worth covenant for all periods on and after the effective date of the amendment, and lowered the Company’s maximum permitted capital expenditures to $30.0 million per fiscal year. For purposes of calculating compliance with the Company’s leverage ratio and net worth covenants, this amendment also establishes a maximum of $30.0 million for aggregate adjustments to other comprehensive loss related to the Company’s defined benefit pension plan. This amendment also increases to $43.0 million the Company’s subfacility for the issuance of letters of credit under the facility, in order to permit the Company to obtain a letter of credit to replace our Standard Gypsum joint venture guarantee as described below. Finally, this amendment terminated the quarterly pricing increase established under the fourth amendment to the facility entered into in September 2002 and fixed the Company’s maximum interest margins at 3.25% for LIBOR loans and 2.00% for base rate loans. The financial covenant modifications were necessary to enable the Company to avoid possible violations of its leverage ratio covenant for the third and fourth quarters of 2003, its fixed charge coverage ratio covenant for all quarters during 2003 and its net worth covenant for the second quarter of 2003.

In exchange for these modifications, the Company’s lenders required it to permanently reduce the aggregate commitments under the facility from $75.0 million to $47.0 million, to shorten the maturity of the facility from March 29, 2005 to April 1, 2004, and to pay a monthly fee beginning on July 1, 2002 equal to 1.0% of the aggregate commitments under the facility. The Company’s lenders also required the establishment of a borrowing base that restricts availability under the facility based on monthly computations of eligible accounts receivable and inventory, reduced by the Company’s net hedging obligations owed to lenders under the facility and by the amount of the Company’s guarantee obligations under its joint venture guarantees that are not secured or replaced by letters of credit. Additionally, the Company will not be permitted to borrow or request the issuance of letters of credit under the facility unless the Company has less than $10.0 million in freely available cash and cash equivalents on its consolidated balance sheet both before and immediately after giving effect to the application of the proceeds of such borrowing. The amendment also requires the Company to prepay outstanding loans under the facility and/or cash collateralize outstanding letters of credit with the net cash proceeds from any issuance of debt or equity or, to the extent not reinvested in similar assets, from any sale of assets or insurance or condemnation award. The amendment further requires the Company to provide consolidated financial statements and joint venture financial statements to the lenders on a monthly basis. Finally, the amendment prohibits it from incurring capital leases or other indebtedness, making acquisitions or other investments, or prepaying other indebtedness unless the Company’s fixed charge coverage ratio for the most recently reported fiscal quarter exceeds 1.50:1.0 (calculated on a pro forma basis with regard to acquisitions), and completely eliminates the Company’s ability to pay dividends or repurchase shares of its stock.

In connection with this amendment, the Company was also required to amend its security agreement to provide for a springing lien on its machinery and equipment that will become effective on July 1, 2003.

Prior to this amendment to the Company’s senior credit facility, its Standard Gypsum joint venture guarantee contained financial maintenance covenants that were identical to those contained in its senior credit facility. However, the lenders to Standard Gypsum were unwilling to agree to the modifications that the Company made under the amendment to the senior credit facility. In order to avoid an event of default under that guarantee, the Company obtained a letter of credit under its senior credit facility in the face amount of $28.4 million. This letter of credit is issued in favor of the Standard Gypsum lenders and replaces the Company’s guarantee obligations. In exchange for this letter of credit, the Standard Gypsum lenders terminated the Company’s guarantee agreement and released its security interests in the Company’s accounts receivable and inventory. The Company must also pay a fee on October 28, 2003 in the amount of 2% of the full amount of this letter of credit in the event the letter of credit remains outstanding on that date. The letter of credit is renewable annually and may be drawn in the event of a default under the Standard Gypsum credit facility.

Concurrently with the amendments to the Company’s senior credit facility and the issuance of the letter of credit to the Standard Gypsum lenders as described above, the Company entered into an amendment of its Premier Boxboard guarantee that made changes to the financial covenants corresponding to those made in the

sixth amendment to the Company’s senior credit facility. In exchange for this amendment, the Premier Boxboard lenders required that the maturity of the Premier Boxboard credit facility be shortened from June 26, 2005 to January 5, 2004 and that the aggregate commitments under the facility be reduced to equal the amount of outstanding loans and letters of credit of $20.3 million. Any reductions of outstanding loans under the facility may not be reborrowed and will permanently reduce the commitments, thereby effectively requiring the Company to fund Premier Boxboard’s operations from its internal cash flow and from any cash contributions that the Company and its joint venture partner are permitted to make. In addition, the Company will be required to pay a fee to the Premier Boxboard lenders of $100,000 on July 1, 2003 and on the first day of each month thereafter until the facility is terminated and all outstandings under the facility are fully paid. If the Company is not able fund Premier Boxboard’s operations in this manner, its performance could be adversely affected. Further, if the Company is unable to refinance this facility prior to January 5, 2004, the entire facility would become immediately due and payable and the Company would be required to satisfy its guarantee of 50% of the obligations under the facility. Any acceleration of the obligations under either or both of the Company’s joint venture facilities could also cause further defaults and acceleration under the Company’s 9 7/8% senior subordinated notes, its 7 1/4% senior notes and its 7 3/8% senior notes.

In March 2003, the Company announced the permanent closure of its Buffalo Paperboard mill located in Lockport, New York. The Company expects to record a restructuring charge of approximately $5.0 million in connection with this closure. The Buffalo mill had an annual production capacity of approximately 72 thousand tons. In 2002, the mill operated at approximately 50% of capacity and recorded approximately $9.0 million in trade sales. Buffalo sales will be transferred to the Company’s other mills.

We have audited the accompanying consolidated balance sheet of Caraustar Industries, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statement of operations, shareholders’ equity, and cash flows for the year then ended. Our audit also included the consolidated financial statement schedule for the year ended December 31, 2001 listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 2001 financial statements and financial statement schedule based on our audit. The financial statements and financial statement schedule of the Company as of December 31, 2000, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and stated that such 2000 and 1999 financial statement schedules, when considered in relation to the 2000 and 1999 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their reports dated February 5, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated 2001 financial statements present fairly, in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries as of December 31, 2001 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2001 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

The following reports of Arthur Andersen LLP (“Andersen”) are copies (which have not been manually signed) of the reports previously issued by Andersen on February 5, 2002. The reports of Andersen are included in this annual report on Form 10-K/A pursuant to Rule 2-02(e) of Regulation S-X. The Company has not been able to obtain reissued reports from Andersen. Andersen has not consented to the inclusion of its reports in this annual report on Form 10-K/A. Because Andersen has not consented to the inclusion of its reports in this annual report, it may be difficult to seek remedies against Andersen, and the ability to seek relief against Andersen may be impaired. See Note to Exhibit 23.01 in the Exhibit Index following the signature page.

We have audited the accompanying consolidated balance sheet of CARAUSTAR INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as of December 31, 2001 and 2000 and the related

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with generally accepted accounting principles in the United States.

We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of CARAUSTAR INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 included in this Form 10-K and have issued our report thereon dated February 5, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14a.(2) is the responsibility of the Company’s management, presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

On April 8, 2002, the Company filed a current report on Form 8-K to report certain information with respect to the changes in its independent public accountants from Arthur Andersen LLP to Deloitte & Touche LLP. Otherwise, the Company has had no change in, or disagreements on accounting or financial disclosure matters with, its independent public accountants to report under this Item 9.


	(1) The following financial statements of the Company and Independent Auditors’ Report are included in Part II, Item 8 above.


	Consolidated Balance Sheets as of December 31, 2001 and 2000

	Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999

	Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2001, 2000 and 1999

	Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999


	(2) Independent Auditors’ Reports of Deloitte & Touche LLP for the consolidated financials statements and consolidated financial statement schedule as of December 31, 2001 and for the year then ended and the Report of Independent Public Accountants of Arthur Andersen LLP as of December 31, 2001 and 2000 and the three years then ended.


	All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements.

	(3) Exhibits:

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


	We filed two current reports on Form 8-K and furnished Regulation FD disclosure in one current report during the quarter ending December 31, 2001. The first report, filed on October 10, 2001, incorporated by reference the contents of our press release announcing our expected financial results for the period ended September 30, 2001.

	The second report, dated November 7, 2001, furnished excerpts from a management presentation under Item 9 of Form 8-K.

	The third report, filed on December 20, 2001, incorporated by reference the contents of our press release announcing our expected financial results for the fourth quarter of 2001.

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


	By:	/s/ RONALD J. DOMANICO



	Ronald J. Domanico
	Vice President and Chief Financial Officer

	Date: March 28, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities indicated on .

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

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

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


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

	(b) evaluated the effectiveness of Caraustar’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

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

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


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

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

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


	By:	/s/ THOMAS V. BROWN



	Thomas V. Brown
	President and Chief Executive Officer

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


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

	(b) evaluated the effectiveness of Caraustar’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

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


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

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


	By:	/s/ RONALD J. DOMANICO



	Ronald J. Domanico
	Vice President and
	Chief Financial Officer


†	Filed herewith
*	Management contract or compensatory plan required to be filed under Item 14(c) of Form 10-K and Item 601 of Regulation S-K of the Securities and Exchange Commission.
#	This Exhibit is substantially identical to Change in Control Severance Agreements for the following individuals: Thomas V. Brown, Michael J. Keough, James L. Walden, Jimmy A. Russell, H. Lee Thrash, III, John R. Foster and William A. Nix, III, except the agreement is dated March 1, 2002, for these individuals.

Because the Company has not been able to obtain, after reasonable efforts, the written consent of Arthur Andersen LLP to the inclusion of their reports dated February 5, 2002 in this 10-K (copies of which have been reproduced in this 10-K) and to the incorporation by reference of such reports into any of the Company’s previously filed registration statements, the Company has dispensed with the filing of their consent in reliance on Rule 437a under the Securities Act. Because Arthur Andersen LLP has not consented to the inclusion of their reports in this Report on Form 10-K or in such registration statements, you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act, or under other rules or theories of liability under federal or state securities laws, based on any untrue statement of a material fact contained in the Company’s financial statements audited by Arthur Andersen LLP or any omission to state a material fact required to be stated in those financial statements. Additional information regarding the risks associated with the Company’s former engagement of Arthur Andersen LLP as its independent auditors is contained in this Report under “Risk Factors — The conviction of our former independent auditors, Arthur Andersen, LLP on federal obstruction of justice charges may adversely after Arthur Andersen LLP’s ability to satisfy any claims arising from the provision of auditing service to us and may impede our access to the capital markets” and in the Company’s periodic reports filed with the Securities and Exchange Commission.


***	Pursuant to interim guidance provided in SEC Release No. 33-8212, this certification accompanies, but shall not be deemed filed as part of, this Annual Report on Form 10-K/A.






(Mark One)





[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2001
		OR




[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to






North Carolina (State or other jurisdiction of incorporation or organization)		581388387 (I.R.S. Employer Identification No.)





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



	Year Ended December 31,(A)

	2001			2000			1999			1998			1997


	(In thousands, except per share data and ratios)




Summary of Operations




Sales	$	913,686		$	1,014,615		$	936,928		$	774,312		$	696,093




Cost of sales		680,172			759,521			683,772			536,890			483,164

Gross profit		233,514			255,094			253,156			237,422			212,929




Freight costs		52,806			51,184			46,839			37,454			27,955




Selling, general and administrative expenses		146,934			145,268			125,784			105,052			88,978




Restructuring and other costs		7,083			16,777			—			—			—

Operating income		26,691			41,865			80,533			94,916			95,996




Other (expense) income:




Interest expense		(41,153	)		(34,063	)		(25,456	)		(16,072	)		(14,111	)




Interest income		986			412			603			334			312




Equity in (loss) income of unconsolidated affiliates		(2,610	)		6,533			9,224			4,308			1,665




Other, net		(1,904	)		(918	)		(459	)		(433	)		(674	)

		(44,681	)		(28,036	)		(16,088	)		(11,863	)		(12,808	)

(Loss) income before minority interest, income taxes and extraordinary items		(17,990	)		13,829			64,445			83,053			83,188




Minority interest		180			(169	)		(356	)		(730	)		(1,721	)




Tax (benefit) provision		(5,903	)		5,485			23,142			30,483			30,468

(Loss) income from continuing operations before extraordinary items		(11,907	)		8,175			40,947			51,840			50,999

Net (loss) income	$	(14,602	)	$	8,175		$	40,947		$	51,840		$	50,999

Diluted weighted average shares outstanding		27,845			26,301			25,199			25,423			25,216

Per Share Data




Diluted (loss) income from continuing operations before extraordinary items	$	(0.42	)	$	0.31		$	1.62		$	2.04		$	2.02




Diluted net (loss) income		(0.52	)		0.31			1.62			2.04			2.02




Cash dividends declared		0.18			0.72			0.72			0.66			0.58




Market price on December 31.		6.93			9.38			24.00			28.56			34.25




Shares outstanding December 31		27,854			26,205			25,488			24,681			25,331




Total Market Value of Common Stock	$	193,028		$	245,803		$	611,712		$	704,889		$	867,587




Balance Sheet Data




Cash and cash equivalents	$	64,244		$	8,900		$	18,771		$	2,610		$	1,391




Property, plant and equipment, net		450,376			483,309			479,856			324,470			291,036




Depreciation and amortization expense		63,323			60,858			52,741			38,705			33,661




Capital expenditures		28,059			58,306			35,696			40,716			36,275




Total assets		960,981			934,097			879,880			620,156			551,414




Current maturities of long-term debt		48			1,259			16,615			26,103			9




Revolving credit loans		—			194,000			140,000			147,000			129,000




Long-term debt, less current maturities		508,691			272,813			269,739			82,881			83,129




Shareholders’ equity		279,579			279,808			279,184			234,221			214,756




Total shareholders’ equity and debt	$	788,318		$	747,880		$	705,538		$	490,205		$	426,894



				Years Ended
				December 31,
											%
				2000		2001		Change			Change

Production source of paperboard tons sold (in thousands):




	From paperboard mill production				999.1		892.4		(106.7	)		-10.7	%




	Outside purchases				122.4		123.1		0.7			0.6	%

			Total paperboard tonnage		1,121.5		1,015.5		(106.0	)		-9.5	%

Tons sold by market (in thousands):
	Tube, core and composite container volume




		Paperboard (internal)			202.9		187.6		(15.3	)		-7.5	%




		Outside purchases			25.9		25.9		—			0.0	%

	Tube, core and composite container converted products				228.8		213.5		(15.3	)		-6.7	%




	Unconverted paperboard				37.6		32.7		(4.9	)		-13.0	%

			Tube, core and composite container volume		266.4		246.2		(20.2	)		-7.6	%
	Folding carton volume




		Paperboard (internal)			67.9		85.2		17.3			25.5	%




		Outside purchases			86.8		92.2		5.4			6.2	%

	Folding carton converted products				154.7		177.4		22.7			14.7	%




	Unconverted paperboard				270.2		232.4		(37.8	)		-14.0	%

			Folding carton volume		424.9		409.8		(15.1	)		-3.6	%
	Gypsum wallboard facing paper volume




		Unconverted paperboard			196.1		151.5		(44.6	)		-22.7	%




		Outside purchases (for resale)			0.5		—		(0.5	)		-100.0	%

			Gypsum wallboard facing paper volume		196.6		151.5		(45.1	)		-22.9	%



				Years Ended
				December 31,
											%
				2000		2001		Change			Change

	Other specialty products volume




		Paperboard (internal)			108.7		68.0		(40.7	)		-37.4	%




		Outside purchases			9.2		5.0		(4.2	)		-45.7	%

	Other specialty converted products				117.9		73.0		(44.9	)		-38.1	%




	Unconverted paperboard				115.7		135.0		19.3			16.7	%

			Other specialty products volume		233.6		208.0		(25.6	)		-11.0	%

			Total paperboard tonnage		1,121.5		1,015.5		(106.0	)		-9.5	%

Gross paper margins ($/ton):




	Paperboard mill:




		Average same-mill net selling price		$	445	$	413	$	(32	)		-7.2	%




		Average same-mill recovered fiber cost			104		65		(39	)		-37.5	%

			Paperboard mill gross paper margin	$	341	$	348	$	7			2.1	%

	Tube and core:




		Average net selling price		$	786	$	783	$	(3	)		-0.4	%




		Average paperboard cost			441		447		6			1.4	%

			Tube and core gross paper margin	$	345	$	336	$	(9	)		-2.6	%


(A)		Restated to reflect the change in inventory costing method of accounting from LIFO to FIFO at one of the Company’s subsidiaries. See Note 1 in the accompanying financial statements for additional information.


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


	2001		2000

Senior credit facility	$	—	$	194,000




9 7/8% senior subordinated notes		277,326		—




7 1/4% senior notes		25,449		—




7 3/8% senior notes		197,716		198,791




7.74% senior notes		—		66,200




Other notes payable		8,248		9,081

Total debt	$	508,739	$	468,072


	Notional					LIBOR at
	Amount		Fixed			December 31,			Total
Debt Instrument	(000’s)		Spread			2001			Variable Rate

9 7/8% senior subordinated notes	$	185,000		4.400	%		1.881	%		6.281	%




7 3/8% senior notes		50,000		2.365			1.881			4.246




7 3/8% senior notes		25,000		1.445			1.881			3.326




7 3/8% senior notes		25,000		1.775			1.881			3.656


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



		Contractual Maturity Dates

		2002		2003		2004		2005		Thereafter			Total


		(In thousands)




Debt Obligations




9 7/8% Senior Subordinated Notes(1)			—		—		—		—	$	285,000		$	285,000




	Average interest rate		—		—		—		—		10.5	%		10.5	%




7 1/4% Senior Notes(1)			—		—		—		—	$	29,000		$	29,000




	Average interest rate		—		—		—		—		9.4	%		9.4	%




7 3/8% Senior Notes(1)			—		—		—		—	$	200,000		$	200,000




	Average interest rate		—		—		—		—		7.47	%		7.47	%




Interest Rate Derivatives




Fixed to Variable(1)			—		—		—		—	$	285,000		$	285,000




	Average pay rate		—		—		—		—		8.998	%		8.998	%




	Average receive rate(2)		—		—		—		—		5.862	%		5.862	%



				For the Years Ended December 31,

				2001			2000			1999


				(In thousands, except per share data)




SALES				$	913,686		$	1,014,615		$	936,928




COST OF SALES					680,172			759,521			683,772

			Gross profit		233,514			255,094			253,156




FREIGHT COSTS					52,806			51,184			46,839




SELLING, GENERAL AND ADMINISTRATIVE EXPENSES					146,934			145,268			125,784




RESTRUCTURING AND OTHER COSTS (Note 12)					7,083			16,777			—

			Operating income		26,691			41,865			80,533




OTHER (EXPENSE) INCOME:




	Interest expense				(41,153	)		(34,063	)		(25,456	)




	Interest income				986			412			603




	Equity in (loss) income of unconsolidated affiliates				(2,610	)		6,533			9,224




	Other, net				(1,904	)		(918	)		(459	)

					(44,681	)		(28,036	)		(16,088	)

(LOSS) INCOME BEFORE MINORITY INTEREST, INCOME TAXES AND EXTRAORDINARY LOSS					(17,990	)		13,829			64,445




MINORITY INTEREST IN LOSSES (INCOME)					180			(169	)		(356	)




(BENEFIT) PROVISION FOR INCOME TAXES					(5,903	)		5,485			23,142

(LOSS) INCOME BEFORE EXTRAORDINARY LOSS					(11,907	)		8,175			40,947




EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAX BENEFIT					(2,695	)		—			—

NET (LOSS) INCOME				$	(14,602	)	$	8,175		$	40,947

BASIC




(LOSS) INCOME PER COMMON SHARE BEFORE EXTRAORDINARY LOSS				$	(0.42	)	$	0.31		$	1.63




EXTRAORDINARY LOSS PER COMMON SHARE					(0.10	)		0.00			0.00

(LOSS) INCOME PER COMMON SHARE				$	(0.52	)	$	0.31		$	1.63

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING					27,845			26,292			25,078

DILUTED
(LOSS) INCOME PER COMMON SHARE BEFORE




		EXTRAORDINARY LOSS		$	(0.42	)	$	0.31		$	1.62




EXTRAORDINARY LOSS PER COMMON SHARE					(0.10	)		—			—

(LOSS) INCOME PER COMMON SHARE				$	(0.52	)	$	0.31		$	1.62

DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING					27,845			26,301			25,199


													Accumulated
													Other
		Common Stock						Additional					Comprehensive
								Paid-In		Retained			(Loss)
		Shares			Amount			Capital		Earnings			Income			Total

BALANCE, December 31, 1998			24,681,358		$	2,468		$	130,240	$	104,838		$	(3,325	)	$	234,221




	Net income		—			—			—		40,947			—			40,947




	Issuance of common stock for acquisitions		739,565			74			17,889		—			—			17,963




	Issuance of common stock under nonqualified stock option plan		19,000			2			252		—			—			254




	Issuance of common stock under 1993 stock purchase plan		21,828			3			679		—			—			682




	Issuance of common stock under 1998 stock purchase plan		20,371			2			302		—			—			304




	Issuance of common stock under director equity plan		2,930			—			77		—			—			77




	Pension liability adjustment		—			—			—		—			2,877			2,877




	Foreign currency translation adjustment		—			—			—		—			(86	)		(86	)




	Dividends declared of $.72 per share		3,228			—			70		(18,125	)		—			(18,055	)

BALANCE, December 31, 1999			25,488,280			2,549			149,509		127,660			(534	)		279,184




	Net income		—			—			—		8,175			—			8,175




	Issuance of common stock for acquisitions		635,306			64			10,659		—			—			10,723




	Issuance of common stock under nonqualified stock option plan		61,989			6			208		—			—			214




	Issuance of common stock under 1993 stock purchase plan		338			—			254		—			—			254




	Issuance of common stock under 1998 stock purchase plan		10,699			1			59		—			—			60




	Issuance of common stock under director equity plan		4,171			—			77		—			—			77




	Foreign currency translation adjustment		—			—			—		—			(219	)		(219	)




	Dividends declared of $.72 per share		3,784			—			58		(18,718	)		—			(18,660	)

BALANCE, December 31, 2000			26,204,567			2,620			160,824		117,117			(753	)		279,808




	Net loss		—			—			—		(14,602	)		—			(14,602	)




	Issuance of common stock for acquisitions		1,643,192			165			18,634		—			—			18,799




	Benefit from issuance of common stock under nonqualified stock option plan		—			—			408		—			—			408




	Forfeiture of common stock under 1993 stock purchase plan		(5,526	)		(1	)		70		—			—			69




	Issuance of common stock under 1998 stock purchase plan		451			—			80		—			—			80




	Issuance of common stock under director equity plan		8,339			1			75		—			—			76




	Foreign currency translation adjustment		—			—			—		—			(57	)		(57	)




	Dividends declared of $.18 per share		2,874			—			25		(5,027	)		—			(5,002	)

BALANCE, December 31, 2001			27,853,897		$	2,785		$	180,116	$	97,488		$	(810	)	$	279,579


	2001		2000

Raw materials and supplies	$	40,357	$	44,240




Finished goods and work in process		61,466		67,320

Total inventory	$	101,823	$	111,560






Buildings and improvements			10-45 years




Machinery and equipment			3-20 years




Furniture and fixtures			5-10 years


	2001		2000

Current assets	$	13,237	$	14,753




Noncurrent assets		70,763		74,655




Current liabilities		4,623		6,148




Noncurrent liabilities		56,217		56,208


	2001			2000		1999

Sales	$	71,297		$	96,338	$	58,973




Gross profit		18,665			36,630		28,405




Operating income		292			18,176		19,337




Net (loss) income		(1,892	)		14,716		18,128


	2001			2000

Current assets	$	10,579		$	11,124




Noncurrent assets		160,956			174,676




Current liabilities		5,879			6,360




Noncurrent liabilities		70,000			80,000




Sales		75,171			40,207




Gross profit		16,463			8,553




Operating income		1,640			682




Net loss		(3,784	)		(1,761	)


	2001		2000		1999

Minimum rentals	$	14,312	$	13,026	$	11,698




Contingent rentals		507		347		377

Total	$	14,819	$	13,373	$	12,075






2002	$	48




2003		—




2004		—




2005		—




2006		—




Thereafter		508,691

Total debt	$	508,739






2002	$	13,410




2003		9,827




2004		7,207




2005		4,792




2006		4,046




Thereafter		12,642

Total	$	51,924


					Weighted Average
		Shares			Exercise Price

Outstanding at December 31, 1998			921,623		$	23.57




	Granted		369,728			27.18




	Forfeited		(22,450	)		31.20




	Exercised		(45,756	)		11.98

Outstanding at December 31, 1999			1,223,145			24.95




	Granted		790,621			17.06




	Forfeited		(46,853	)		26.26




	Exercised		(90,420	)		4.76

Outstanding at December 31, 2000			1,876,493			22.57




	Granted		114,323			10.00




	Forfeited		(196,575	)		21.39




	Exercised		—			—

Outstanding at December 31, 2001			1,794,241		$	21.89

Options exercisable at:




	December 31, 2001		989,897		$	22.22




	December 31, 2000		833,579			20.96




	December 31, 1999		566,867			19.55


		Outstanding at						Exercisable at
		December 31,		Weighted Average		Weighted Average		December 31,		Weighted Average
Range of Exercise Price		2001		Remaining Life		Exercise Price		2001		Exercise Price

				(In Years)
	$ 7.34 — $16.88		368,646		7.5	$	10.88		248,401	$	11.13
	17.75 — 23.75		739,835		6.3		19.54		317,711		19.52
	24.44 — 29.75		249,299		6.8		25.83		114,420		25.88
	30.13 — 40.80		436,461		5.3		32.94		309,365		32.53

	$ 7.34 — $40.80		1,794,241		6.4	$	21.89		989,897	$	22.22



			SERP						Pension Plan

			2001			2000			2001			2000

Change in benefit obligation:




	Projected benefit obligation at end of prior year		$	3,450		$	2,814		$	59,236		$	52,354




		Service cost		138			133			3,878			3,495




		Interest cost		254			236			4,378			4,187




		Actuarial (gain) loss		(209	)		267			(351	)		2,510




		Plan amendments		157			—			91			—




		Benefits paid		—			—			(3,575	)		(3,310	)

	Projected benefit obligation at end of year			3,790			3,450			63,657			59,236

Change in plan assets:




	Fair value of plan assets at end of prior year			—			—			56,068			55,106




		Actual return on plan assets		—			—			(311	)		(844	)




		Employer contributions		—			—			8,313			5,116




		Benefits paid		—			—			(3,575	)		(3,310	)

	Fair value of plan assets at end of year			—			—			60,495			56,068

Funded status of the plans				(3,790	)		(3,450	)		(3,162	)		(3,168	)




Unrecognized transition obligation				1,138			1,252			—			—




Unrecognized prior service cost				143			—			913			913


			2001			2000

Deferred income tax assets:




	Deferred employee benefits		$	1,078		$	1,258




	Postretirement benefits other than pension			810			879




	Accounts receivable			554			602




	Insurance			1,259			2,121




	Tax loss carryforwards and credits			11,934			15,484




	Inventories			2,261			1,498




	Other			3,348			3,006

		Total deferred income tax assets		21,244			24,848

Deferred income tax liabilities:




	Depreciation and amortization			(69,018	)		(63,866	)




	Asset revaluation			(3,846	)		(3,846	)




	Postemployment benefits			(5,060	)		(2,190	)




	Losses on contractual sales commitments			(4,244	)		(1,578	)




	Other			(42	)		(9	)

		Total deferred income tax liabilities		(82,210	)		(71,489	)

Valuation allowance				(5,794	)		(4,308	)

			$	(66,760	)	$	(50,949	)


		First			Second		Third			Fourth
		Quarter			Quarter		Quarter			Quarter

2001:




Sales		$	233,088		$	229,759	$	234,851		$	215,988




	Gross profit		54,681			64,144		62,044			52,645




	Net (loss) income		(10,826	)		376		955			(5,107	)




	Diluted (loss) income per common share	$	(0.38	)	$	0.01	$	0.03		$	(0.18	)




2000:




	Sales	$	260,850		$	268,631	$	249,592		$	235,542




	Gross profit		66,464			70,378		60,713			57,539




	Net income (loss)		2,161			9,486		(2,542	)		(930	)




	Diluted income (loss) per common share	$	0.07		$	0.37	$	(0.10	)	$	(0.03	)


				Severance and
				Other
		Asset		Termination			Other Exit
		Impairment		Benefits			Costs			Total

2000 provision		$	7,038,000	$	558,000		$	968,000		$	8,564,000




	Noncash		7,038,000		—			—			7,038,000

	Cash		—		558,000			968,000			1,526,000




2000 cash activity			—		(380,000	)		(346,000	)		(726,000	)

Balance as of December 31, 2000			—		178,000			622,000			800,000




2001 cash activity			—		(178,000	)		(548,000	)		(726,000	)

Balance as of December 31, 2001		$	—	$	—		$	74,000		$	74,000


	Fair		Carrying
	Value		Amount(1)

9 7/8 percent senior subordinated notes	$	299,250	$	283,563




7 1/4 percent senior notes		28,130		25,449




7 3/8 percent senior notes		196,000		198,897

	$	523,380	$	507,909



				As of December 31, 2001

							Guarantor			Nonguarantor
				Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated


				(In thousands)




ASSETS




CURRENT ASSETS:




	Cash and cash equivalents			$	63,277		$	432		$	535		$	—		$	64,244




	Intercompany funding				139,496			(132,948	)		(6,548	)		—			—




	Receivables, net of allowances				1,817			81,669			2,811			—			86,297




	Intercompany accounts receivable				—			270			288			(558	)		—




	Inventories				—			98,063			3,760			—			101,823




	Refundable income taxes				17,689			140			120			—			17,949




	Prepaid pension				10,036			—			—			—			10,036




	Other current assets				2,132			3,648			640			—			6,420

			Total current assets		234,447			51,274			1,606			(558	)		286,769

PROPERTY, PLANT, AND EQUIPMENT					9,830			753,133			25,401			—			788,364




		Less accumulated depreciation			(4,523	)		(318,010	)		(15,455	)		—			(337,988	)

		Property, plant, and equipment, net			5,307			435,123			9,946			—			450,376

INVESTMENT IN CONSOLIDATED SUBSIDIARIES					522,958			126,774			—			(649,732	)		—

GOODWILL, net					—			145,515			950			—			146,465

INVESTMENT IN UNCONSOLIDATED AFFILIATES					60,134			2,151			—			—			62,285

OTHER ASSETS					12,289			2,754			43			—			15,086

				$	835,135		$	763,591		$	12,545		$	(650,290	)	$	960,981





LIABILITIES AND SHAREHOLDER’S EQUITY




CURRENT LIABILITIES:




	Current maturities of debt			$	—		$	48		$	—		$	—		$	48




	Accounts payable				16,861			32,866			2,406			—			52,133




	Accrued liabilities				8,371			28,596			782			—			37,749




	Intercompany accounts payable				—			288			270			(558	)		—




	Dividends payable				833			—			—			—			833

			Total current liabilities		26,065			61,798			3,458			(558	)		90,763

SENIOR CREDIT FACILITY					—			—			—			—			—

LONG-TERM DEBT, less current maturities					500,491			8,200			—			—			508,691

DEFERRED INCOME TAXES					53,366			12,244			1,150			—			66,760

DEFERRED COMPENSATION					1,687			54			—			—			1,741

OTHER LIABILITIES					8,475			4,037			—			—			12,512

MINORITY INTEREST					—			—			—			935			935

SHAREHOLDER’S EQUITY




	Common stock				2,738			883			142			(978	)		2,785




	Additional paid-in capital				207,241			598,597			5,227			(630,949	)		180,116




	Retained earnings (deficit)				35,072			77,778			3,378			(18,740	)		97,488




	Accumulated other comprehensive loss				—			—			(810	)		—			(810	)

					245,051			677,258			7,937			(650,667	)		279,579

				$	835,135		$	763,591		$	12,545		$	(650,290	)	$	960,981



		For the Year Ended December 31, 2001

					Guarantor			Nonguarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated


		(In thousands)




SALES		$	—		$	1,044,442		$	22,453		$	(153,209	)	$	913,686




COST OF SALES			(7,308	)		823,058			17,631			(153,209	)		680,172

	Gross profit		7,308			221,384			4,822			—			233,514




FREIGHT COSTS			—			51,968			838			—			52,806
SELLING, GENERAL AND ADMINISTRATIVE




	EXPENSES		14,386			126,910			5,638			—			146,934




RESTRUCTURING COSTS			—			7,083			—			—			7,083

	Operating (loss) income		(7,078	)		35,423			(1,654	)		—			26,691




OTHER (EXPENSE) INCOME:




Interest expense			(40,773	)		(857	)		(370	)		847			(41,153	)




Interest income			1,773			42			18			(847	)		986




Equity in loss of unconsolidated affiliates			(2,525	)		(85	)		—			—			(2,610	)




Other, net			—			(1,836	)		(68	)		—			(1,904	)

			(41,525	)		(2,736	)		(420	)		—			(44,681	)

(LOSS) INCOME BEFORE MINORITY INTEREST, INCOME TAXES AND EXTRAORDINARY LOSS			(48,603	)		32,687			(2,074	)		—			(17,990	)




MINORITY INTEREST IN LOSSES			—			—			—			180			180




BENEFIT FOR INCOME TAXES			(5,903	)		—			—			—			(5,903	)

(LOSS) INCOME BEFORE EXTRAORDINARY LOSS			(42,700	)		32,687			(2,074	)		180			(11,907	)




EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAX			(2,695	)		—			—			—			(2,695	)

NET (LOSS) INCOME		$	(45,395	)	$	32,687		$	(2,074	)	$	180		$	(14,602	)


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


		Balance at		Charged to
		Beginning		Costs and					Balance at
		of Year		Expenses		Deductions*			End of Year

1999:	Allowances for doubtful accounts receivable, returns and discounts	$	1,069	$	4,866	$	(3,517	)	$	2,418




2000:	Allowances for doubtful accounts receivable, returns and discounts	$	2,418	$	10,723	$	(9,809	)	$	3,332




2001:	Allowances for doubtful accounts receivable, returns and discounts	$	3,332	$	9,091	$	(8,173	)	$	4,250


*	Principally charges for which reserves were provided, net of recoveries.


Signature

/s/ THOMAS V. BROWN Thomas V. Brown, President and Chief Executive Officer (Principal Executive Officer); Director
/s/ MICHAEL J. KEOUGH Michael J. Keough, Vice President and Chief Operating Officer (Principal Operating Officer); Director
/s/ RONALD J. DOMANICO Ronald J. Domanico, Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ WILLIAM A. NIX, III William A. Nix, III, Vice President, Treasurer and Controller (Principal Accounting Officer)
/s/ RUSSELL M. ROBINSON, II Russell M. Robinson, II, Chairman of the Board
/s/ RALPH M. HOLT, JR. Ralph M. Holt, Jr., Director
/s/ JAMES E. ROGERS James E. Rogers, Director


Exhibit
No.			Description

	3.01	—	Amended and Restated Articles of Incorporation of the Company (Incorporated by reference — Exhibit 3.01 to report on Form 10-K for the year ended December 31, 1992 [SEC File No. 0-20646])
	3.02	—	Third Amended and Restated Bylaws of the Company (Incorporated by reference — Exhibit 3.02 to report on Form 10-K for the year ended December 31, 2001 [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. 0-20646])
	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])